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2019 (4) TMI 1177 - HC - Income TaxScope of Section 44BB - Reference to full bench - Whether the amount reimbursed to the assessee by ONGC, representing the service tax paid by the assessee to the Government of India, should be included in computing the aggregate amount referred to in subsection (2) of Section 44BB of Act ? HELD THAT - SCOPE OF SECTION 44BB(1) (2) - On its literal construction, Section 44BB(2) would only be the amount paid by the ONGC to the assessee on account of (i) provision of services in connection with or (ii) supply of plant and machinery on hire used in, the prospecting, extraction and production of mineral oils. As the amount reimbursed by the ONGC, towards the service tax paid by assessee earlier to the Government, is not an amount paid to the assessee towards the services provided by the latter in connection with the prospecting, extraction or production of mineral oils, it is not required to be included in the amounts specified in clauses (a) and (b) of Section 44BB(2). CAN SERVICE TAX BE PASSED ON TO THE SERVICE RECIPIENT - Service tax is levied, under the Finance Act, 1994, on services. Service tax is, therefore, a tax on service , and does not form part of the consideration paid for the services rendered, much less services rendered in connection with the prospecting, extraction or production of mineral oils. Reimbursement of service tax by the service recipient to the service provider, representing the amount of tax already paid by the service provider to the Government, would not constitute a part of the amount received for the services rendered by the service provider-assessee to the service recipient-ONGC, much less a part of the amount received for services rendered by the assessee in the prospecting for or the extraction or production of mineral oils. SCOPE OF SECTION 44BB(3) - Section 44BB(3) of the Act also contains a non-obstante clause, and would prevail notwithstanding anything to the contrary in Section 44BB(1) of the Act. Section 44BB(3) enables an assessee to claim a lower income under the head profits and gains, than the deemed income specified in Section 44BB(1) and (2), if it keeps and maintains such books of accounts, and other documents, as are required under Section 44AA(2), and gets its accounts audited and furnishes a report of such audit as is required under Section 44AB. In case an assessee complies with these requirements, the assessing officer is, thereafter, required to proceed to make an assessment of the total income or loss of the assessee, under sub-section (3) of Section 143, and determine the sum payable by, or refundable to, the assessee. CIRCULARS ISSUED BY THE CBDT ITS EFFECT - Tax is required to be deducted at source, under Section 194-I of the Act, with respect to income paid by way of rent. Likewise tax is required to be deducted at source under Section 194-J by the service recipient when fees are paid towards professional or technical services rendered by the service provider. It is only because service tax, on such payment, was not income has the CBDT, in its Circulars dated 28.04.2008 and 13.01.2014, directed that tax should be deducted at source only on the net amount, paid towards rent or as fees for services rendered by the service provider, i.e. the total amount paid less service tax. The Circulars issues by the CBDT reflect its understanding that service tax paid by the assessee is not income . While it is true that, unlike income computed in terms of Sections 28 to 43D under Chapter IV of the Act, Section 44BB(2) is a special provision and requires ten percent of the gross receipts to be treated as income, the amount so determined is nonetheless the presumptive income of the assessee and should be deemed to be its income in terms of Sections 4, 5 and 9 of the Act. The circulars issued by the CBDT does support the submission, urged on behalf of the assessee, that service tax would not form part of the amounts referred to in clauses (a) and (b) of Section 44BB(2) of the Act. FAILURE OF THE DEPARTMENT TO PREFER AN APPEAL AGAINST THE JUDGMENT OF THE DELHI HIGH COURT ITS CONSEQUENCES - Except to state that the said judgment needs re-consideration, no justifiable cause has been shown as to why this Court should take a view different from that of the Delhi High Court, in Mitchell Drilling International Pvt. Ltd. 2015 (10) TMI 259 - DELHI HIGH COURT , more so when the Division Bench of the Delhi High Court has taken a view similar to that of a Division Bench of this Court in M/s Schlumberger Asia Services Ltd. 2009 (7) TMI 51 - UTTARAKHAND HIGH COURT . As the revenue has not been able to show just cause for this Court to take a different view, we see no reason to differ with the Division Bench judgment of the Delhi High Court that reimbursement of service tax is not an amount paid to the assessee on account of providing services and facilities in connection with the prospecting for, or extraction or production of, mineral oils in India. CONCLUSION - We answer the reference in favour of the assessee, and against the Revenue, holding that the amount reimbursed to the assessee (service provider) by the ONGC (service recipient), representing the service tax paid earlier by the assessee to the Government of India, would not form part of the aggregate amount referred to in clauses (a) and (b) of sub-section(2) of Section 44BB of the Act.
Issues Involved
1. Scope and interpretation of Section 44BB(1) & (2) of the Income Tax Act. 2. Whether service tax can be passed on to the service recipient. 3. Scope of Section 44BB(3) of the Income Tax Act. 4. Effect of Circulars issued by the CBDT. 5. Consequences of the Department's failure to appeal against the judgment of the Delhi High Court. 6. Other contentions regarding consistency in interpretation of central laws. Detailed Analysis (I) Section 44BB(1) & (2): Its Scope The court examined whether the reimbursement of service tax paid by the assessee to the Government, and reimbursed by ONGC, should be included in the aggregate amount referred to in Section 44BB(2). The court noted that Section 44BB is a special provision for computing profits and gains in connection with the business of exploration of mineral oils, and it simplifies the computation by deeming 10% of the aggregate amount specified in sub-section (2) as the profits and gains of such business. The court held that the phrase "on account of" in Section 44BB(2) has a wide connotation, but reimbursement of service tax does not fall within this scope as it is not an amount paid for the services provided. Thus, reimbursement of service tax should not be included in the aggregate amount for computing profits under Section 44BB. (II) Can Service Tax Be Passed on to the Service Recipient The court discussed that service tax is an indirect tax levied on services provided by the service provider, who can pass it on to the service recipient. The amount collected as service tax is not income but is held in trust for the Government. Therefore, reimbursement of service tax by ONGC to the assessee does not form part of the gross receipts for the purposes of Section 44BB. (III) Section 44BB(3): Its Scope Section 44BB(3) allows an assessee to claim lower profits and gains than the deemed income specified in Section 44BB(1) if it maintains proper books of accounts and gets them audited. The court held that if the assessee opts for this provision, it can claim deduction for service tax paid under Section 43B(a). However, reimbursement of service tax cannot be deemed as presumptive income under Section 44BB. (IV) Circulars Issued by the CBDT: Its Effect The court referred to CBDT Circulars No. 4/2008 and No. 1/2014, which clarify that service tax should not be included in the amount on which tax is deducted at source under Sections 194-I and 194-J of the Act. These circulars support the view that service tax is not part of the income and should not be included in the aggregate amount for computing profits under Section 44BB. (V) Failure of the Department to Prefer an Appeal Against the Judgment of the Delhi High Court: Its Consequences The court noted that the Revenue did not appeal against the Delhi High Court's judgment in Mitchell Drilling International Pvt. Ltd., which held that service tax does not form part of the gross receipts for computing presumptive income under Section 44BB. The court held that without just cause, the Revenue cannot challenge the correctness of this decision in another case. The court found no just cause to differ from the Delhi High Court's view. (VI) Other Contentions The court did not find it necessary to address the argument regarding consistency in the interpretation of central laws, as the decision was already in favor of the assessee. Conclusion The court answered the reference in favor of the assessee, holding that the amount reimbursed by ONGC to the assessee, representing the service tax paid earlier by the assessee to the Government, should not be included in the aggregate amount referred to in Section 44BB(2). The appeals were directed to be listed before the Division Bench for disposal in terms of this order.
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