2022 (2) TMI 1423 - AT - Income Tax

Computation of profits under the presumptive provisions of section 44BB - Receipts on account of VAT Service tax - AO held that the receipts on account of service tax and VAT are in the nature of royalty/FTS u/s 9(1)(vi)/9(1)(vii) - HELD THAT - As examined the issue of inclusion of service tax and VAT with reference to the provisions of Section 44BB in the light of the judgment of Mitchell Drilling International Pvt. Ltd 2015 (10) TMI 259 - DELHI HIGH COURT as held that the purposes of computing the presumptive income of the assessee for the purposes of Section 44BB the service tax collected by the asses see on the amount paid to it for rendering services was not to be included in the gross receipts in terms of Section 44BB(2) read with Section 44BB(1). The service tax is not an amount paid or payable or received or deemed to be received by the assessee for the services rendered by it. CIT (A) has not erred in holding that receipts on account of VAT Service tax are not includible in gross revenue of the assessee for the purpose of computation of profits under the presumptive provisions of section 44BB of the I.T. Act 1961. Interest Income taxability - AO taxed the interest on Income Tax Return @40% whereas the assessee pleaded that it should be taxed @15% in terms of Article 11 of Indo-USA DTAA - HELD THAT - Interest income need not be necessarily business income in nature for establishing the effective connection with the PE because that would render provision contained in paragraph 4 of Article XI redundant Thus there may be cases where interest may be taxable under the Act under the residuary head and yet be effectively connected with the PE. The bank interest in this case is an example of effective connection between the PE and the income as the indebtedness is closely connected with the funds of the PE. On going through Article of Indo-US DTAA with regard to interest it can be concluded that interest on income tax refund is not effectively connected with the PE either on the basis of asset-test or activity-test. Hence it is taxable as per the provisions in the Para No. 2 of Article 11 of Indo-US DTAA.

Summary

Issues involved:
1. Inclusion of receipts on account of VAT & Service tax in gross revenue for computing profits under section 44BB of the Income Tax Act, 1961.
2. Taxation of interest income on income tax refund at a specific rate under the Indo-USA DTAA.

Issue 1: Inclusion of VAT & Service Tax u/s 44BB:
The Revenue appealed against the order of the ld. CIT(A) regarding the inclusion of receipts on account of VAT & Service tax in the gross revenue for computing profits under section 44BB of the Income Tax Act, 1961. The AO contended that these receipts should be included as part of the gross receipts. However, the Tribunal referred to the judgment of the Hon'ble Delhi High Court in the case of Pr. CIT Vs. Mitchell Drilling International Pvt. Ltd. which held that service tax collected by the assessee should not be included in gross receipts for the purpose of Section 44BB. The Tribunal upheld the decision of the ld. CIT(A) based on established jurisprudence, stating that the service tax and VAT should not be included in the gross receipts under section 44BB.

Issue 2: Taxation of Interest Income under Indo-USA DTAA:
The assessee received interest income on an income tax refund and contended that it should be taxed at 15% under Article 11 of the Indo-USA DTAA, while the AO taxed it at 40%. The Tribunal analyzed the provisions of Sec 90(2) and the relevant articles of the DTAA. It concluded that the interest income on the income tax refund was not effectively connected with the Permanent Establishment (PE) and should be taxed as per the provisions of the DTAA. The Tribunal emphasized that the interest income was not business income and should be taxed under the DTAA, as it was more beneficial to the assessee. The Tribunal clarified that interest income need not be business income to establish an effective connection with the PE, and in this case, the interest was closely connected with the funds of the PE. Therefore, the Tribunal allowed the Cross Objection of the assessee and dismissed the appeal of the Revenue, directing the taxation of interest income as per the provisions of the DTAA at 15%.

In summary, the Appellate Tribunal ITAT DEHRADUN addressed the issues of including VAT & Service tax in gross revenue for computing profits under section 44BB and the taxation of interest income under the Indo-USA DTAA. The Tribunal upheld the decision of the ld. CIT(A) regarding the exclusion of service tax and VAT from gross receipts under section 44BB based on established jurisprudence. Additionally, the Tribunal ruled in favor of the assessee, allowing the Cross Objection and directing the taxation of interest income at 15% under the DTAA, as it was more beneficial to the assessee.