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2018 (4) TMI 1363 - AT - Income TaxReceipt from non-PSC partners - nature of Fee for Technical Services and royalty - AO taxed the same @25% as were effectively engaged with the PE - scope of section 44BB in view of the proviso in section 44BB/44DA/115A declined - extraction or production of mineral oil - as per revenue VAT and Service Tax reimbursements necessarily form part of the gross receipts and the same should be taxed - Held that - Case of the assessee is also supported by the judgment in the case of SBS Marine Ltd. vs. ADIT 2015 (8) TMI 1253 - UTTARAKHAND HIGH COURT and ONGC vs. CIT (2015 (7) TMI 91 - SUPREME COURT). As held where the pith and substance of each of the contracts/agreements is inextricably connected with prospecting, extraction or production of mineral oil and where the dominant purpose of each of such agreement is for prospecting, extraction or production of mineral oils, though there may be certain ancillary works contemplated there under, the payments received under the said contracts would be more appropriately assessable under the provisions of section 44BB and not Section 44D of the Act. For includibility of Service Tax/VAT reimbursement in the gross receipts is concerned, it is seen that the issue is squarely covered by the judgment of the Hon ble Delhi High Court in the case of Mitchell Drilling International Pty. Limited (2015 (10) TMI 259 - DELHI HIGH COURT) wherein held that service tax being statutory levy should not form part of gross receipts as per provisions of section 44BB of the Act - Decided against revenue
Issues Involved:
1. Taxability of receipts from non-Production Sharing Contract (non-PSC) partners. 2. Inclusion of Service Tax and VAT reimbursements in gross receipts for tax computation. Detailed Analysis: Issue 1: Taxability of Receipts from Non-PSC Partners The primary dispute revolves around whether the receipts from non-PSC partners should be taxed under Section 44BB or under Section 44DA of the Income Tax Act, 1961. The Assessing Officer (AO) treated these receipts as Fee for Technical Services (FTS) or royalty, taxable at 25% under Section 44DA, arguing they were effectively connected to the Permanent Establishment (PE). However, the Ld. Commissioner of Income Tax (Appeals) disagreed, holding that these receipts should be treated under the presumptive provisions of Section 44BB, which is more favorable to the assessee. The Income Tax Appellate Tribunal (ITAT) upheld the decision of the Ld. Commissioner of Income Tax (Appeals), referencing prior Tribunal orders for assessment years 2007-08 to 2010-11, and judgments from the Hon’ble Uttarakhand High Court and the Hon’ble Apex Court in the case of ONGC vs. CIT. The Apex Court had ruled that payments received under contracts inextricably connected with the prospecting, extraction, or production of mineral oil should be assessed under Section 44BB, not Section 44D. Consequently, the ITAT found no reason to interfere with the Ld. Commissioner of Income Tax (Appeals)’s findings and dismissed the grounds raised by the department. Issue 2: Inclusion of Service Tax and VAT Reimbursements in Gross Receipts The second issue concerned whether Service Tax and VAT reimbursements should be included in the gross receipts for tax computation under Section 44BB. The AO included these reimbursements in the gross receipts, but the Ld. Commissioner of Income Tax (Appeals) excluded them. The ITAT supported the Ld. Commissioner of Income Tax (Appeals)’s decision, citing the judgment of the Hon’ble Delhi High Court in the case of Mitchell Drilling International Pty. Limited. The High Court had held that service tax, being a statutory levy, should not form part of gross receipts under Section 44BB. The rationale was that service tax collected by the assessee and passed on to the government does not constitute income. The ITAT also referenced CBDT Circulars No. 4/2008 and No. 1/2014, which clarified that service tax should not be included in the computation of income for tax purposes. The ITAT concluded that the service tax and VAT reimbursements should not be included in the gross receipts for the purposes of Section 44BB, thus dismissing the related grounds of appeal by the department. Conclusion: The ITAT dismissed the appeal of the revenue, upholding the decision of the Ld. Commissioner of Income Tax (Appeals) on both issues: 1. Receipts from non-PSC partners should be taxed under Section 44BB, not Section 44DA. 2. Service Tax and VAT reimbursements should not be included in gross receipts for tax computation under Section 44BB. The order was pronounced in the open court on 20th April, 2018.
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