SERVICE TAX SHOULD NOT BE INCLUDED IN BASE AMOUNT IN CASE OF PRESUMPTIVE TAXATION – however Tribunal took a different view and included service tax for computing taxable income u/s 44B- a fit case for rectification and appeal both.

[CA DEV KUMAR KOTHARI]

SERVICE TAX SHOULD NOT BE INCLUDED IN BASE AMOUNT IN CASE OF PRESUMPTIVE TAXATION – however Tribunal took a different view and included service tax for computing taxable income u/s 44B- a fit case for rectification and appeal both.

References and links:

The Income-tax Act, 1961 (ITA) - Preamble, sections 3 and 44B.

The Constitution of India Union List and article 366.

China Shipping Container Lines (Hong Kong) Co. Ltd. v. Assistant Director of Income-tax (International Taxation) 1(2), 2013 (10) TMI 743 - ITAT MUMBAI

Case laws:

DIT (International Taxation) v. NGC Network Asia LLC 2009 (1) TMI 174 - BOMBAY HIGH COURT followed by Tribunal.

Case laws relied on and referred by parties:

Union of India v. Gosalia Shipping (P.) Ltd. 1978 (5) TMI 1 - SUPREME Court,

Islamic Republic of Iran Shipping Lines v. Dy. CIT (International Taxation) 2011 (4) TMI 637 - ITAT MUMBAI

CIT v. Sudarshan Chemicals Industries Ltd. 2000 (8) TMI 73 - BOMBAY High Court (para 4)

Orient Overseas Container Line Ltd. v. Addl. DIT (International Taxation) 2013 (10) TMI 742 - ITAT MUMBAI

Dy. DIT(International Taxation) v. Technip offshore Contracting B.V. 2009 (1) TMI 533 - ITAT DELHI

Sedco Forex International Inc. v. CIT, 2007 (9) TMI 196 - UTTARAKHAND HIGH COURT

CIT v. Trans Ocean Offshore Inc. 2007 (10) TMI 175 - UTTARAKHAND HIGH COURT

CIT v. B.J. Services Co. Middle East 2007 (10) TMI 219 - UTTARAKHAND HIGH COURT

G&T Resources (Europe) Ltd. v. Dy. DIT (International Taxation) 2011 (3) TMI 479 - ITAT, Delhi

Chowringhee Sales Bureau (P.) Ltd. v. CIT 1972 (10) TMI 4 - SUPREME Court

CIT v. T. Naggi Reddy 1993 (3) TMI 6 - SUPREME Court

McDowell & Co. Ltd. v. CTO 1985 (4) TMI 64 - SUPREME Court

Jagdish Prasad Nagam v. CIT 1996 (8) TMI 35 - ALLAHABAD High Court

DIT (International Taxation) v. NGC Network Asia LLC 2009 (1) TMI 174 - BOMBAY HIGH COURT

Section 44B- history:

This section was inserted by the Finance Act, 1975, w.e.f. 1-4-1976. Thereafter this section was amended only once by the Finance Act, 1997, for insertion of an Explanation and the said Explanation was inserted w.r.e.f. 1-4-1976, that is since inception of the section.

When the Explanation was inserted by the Finance Act, 1997, there was no service tax leviable on transportation charges for goods or passengers by ships.

Before referring to any judgment it is desirable to briefly refer to and analyze the relevant provision of the Constitution of India (COI) , preamble to Income-tax Act, 1961 (ITA) , charging section, relevant heading of concerned chapter , sub-chapter in which Section 44B falls and Section 44B. For this purpose the same are reproduced below with highlights added by author:       

From the COI:

Union List:

Entry No. 82 – Tax on Income other than agriculture income.

Entry No. 85 – Corporation tax

Entry No. 97 – Any other matter not included in List II, List III and any tax not mentioned in List II or List III.

Article 366 in The Constitution Of India 1949

366. Definition In this Constitution, unless the context otherwise requires, the following expressions have, the meanings hereby respectively assigned to them, that is to say (28) taxation includes the imposition of any tax or impost, whether general or local or special, and tax shall be construed accordingly; (29) tax on income includes a tax in the nature of an excess profits tax;

FROM ITA:   PREAMBLE, CHARGING SECTION AND SECTION 44B.

             INCOME-TAX ACT, 1961 [43 OF 1961]

An Act to consolidate and amend the law relating to income-tax and super-tax

Chapter II   - Basis of charge

Charge of income-tax.

Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and [subject to the provisions (including provisions for the levy of additional income-tax) of, this Act] in respect of the total income of the previous year ²[* * *] of every person :……..

Chapter IV   Computation of total income

Heads of income

 D.—Profits and gains of business or profession

1[Special provision for computing profits and gains of shipping business in the case of non-residents.

44B. (1) Notwithstanding anything to the contrary contained in sections 28 to 43A, in the case of an assessee, being a non-resident, engaged in the business of operation of ships, a sum equal to seven and a half per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession".

(2) The amounts referred to in sub-section (1) shall be the following, namely:—

 (i)  the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; and

(ii)  the amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods shipped at any port outside India.]

2 [Explanation.—For the purposes of this sub-section, the amount referred to in clause (i) or clause (ii) shall include the amount paid or payable or received or deemed to be received, as the case may be, by way of demurrage charges or handling charges or any other amount of similar nature.]

An over view:

From reading of the above provisions of the COI it is clear that a tax or impost in nature of tax on income, (other than agricultural income) , tax in the nature of an excess profits tax , and corporation tax can be imposed by the UOI.

As per name and preamble of the ITA the enactment is “an act to consolidate and amend the law relating to income-tax and super-tax”.

This is within the power conferred on UOI under the COI as it is to consolidate and amend the law relating to income tax (that is tax on income other than agricultural income as per words used in the COI) and super-tax ( that is tax in the nature of an excess profits tax as per words used in the COI).

As per charging section that is section 3 of the ITA tax and additional tax is to be levied in respect of the total income of the previous year of every person.

Section 44B is in the Chapter relating to ‘computation of total income’, and placed under sub-chapter ‘D’ which is under the head ‘profits and gains of business or profession’.

This also shows that the provision is to compute ‘total income’, the use of word ‘profits’ in head also shows that it is in relation to profits of business or profession.

From the section we find the following crucial words in summarized manner:

“… on account of the carriage of passengers, livestock, mail or goods shipped at any port in India / at any port outside India.

On reading of section including explanation we find that the following sums will form the basis for computation of presumptive income or tax thereon:

1. Amount received on account of carriage of … ( carriage charges is a part of gross revenue or receipt)
2. Amount received on account of demurrage. (this is in nature of damages for goods etc. remaining with shipper for a duration longer than agreed period, therefore this is also a part of gross revenue or receipt)
3. Handling charges. (this is also a part of gross revenue or receipt)

any other amount of similar nature.( the sums should be similar in nature of carriage charges, demurrage charges, handling charges – this means that amount should be in nature of certain charges or damages for doing any work or damages payable by customer for his fault in contractual obligations in relation to basic contract for carriage of passengers, livestock, mail or goods shipped at any port in India / at any port outside India.

Service tax is not a charge of similar nature:

Service tax is not charged for any services or facilities provided or damages for default of customer. It is also not in nature of any additional consideration or damages for delayed up-lifting of goods by customer/ client.

Service tax is charged as per law and not as per contract.

Tax invoice: in a tax invoice, levies like service tax, VAT, Works Contract Tax, etc. are to be shown separately. In some situations a Tax Invoice may include different type of charges which may or may not attract one or other tax. For example an invoice may include some sums leviable with VAT. Some with Service Tax, and some not chargeable with any of such tax.

Thus charge of tax in an invoice will be as per law and has to be charged separately.

Even in case of consolidated charges ( which is rare), where supplier or service provider undertake to pay all such taxes himself, the amount of invoice is required to be split, for determination of different taxes.  

Therefore, merely because service tax, VAT or any other such tax on supply or service is included in invoice it does not become a receipt of the nature of sales or service charges or fees etc. in context of S.44B such tax does not become a charges for carrying goods or passengers, handling charges, demurrage or similar other sum or charges for service provided or as damages for any defaults of customer.

Amendment in 1997- furthermore, service tax was not levied on transport of goods, passengers and animals and other charges referred to in section 44B at the time when the Explanation was inserted. Therefore, it cannot be assumed that service tax was considered as part of any other charges of similar nature.

Government levies cannot be income if they are payable to government:

Government levies which are collected for and on behalf of government cannot be included in income. the amount so collected is a liability and is diverted at source by way of overriding title. Therefore, such amount cannot be included in gross receipts for ascertaining taxable income. Only in a situation when such amount is collected and is not at all payable to government or returnable to customers, then such amount can assume character of income of recipient.

Liability to deposit service tax:

A service provider like a shipping company is also required to remit the amount of service tax collected to the Government account and the service tax is not charges for carriage of goods etc. Service tax can be charged in bill when it is payable and not when service or the service provider is not taxable. Even if service tax is not leviable and payable, but has been wrongly collected or collected excessively, the service provider has to mandatorily deposit the service tax so collected in the Government Account in accordance with the following provisions :

Chapter V of Finance Act, 1994

Section 73A. Service Tax Collected from any person to be deposited with Central Government

(1) Any person who is liable to pay service tax under the provisions of this Chapter or the rules made thereunder, and has collected any amount in excess of the service tax assessed or determined and paid on any taxable service under the provisions of this Chapter or the rules made thereunder from the recipient of taxable service in any manner as representing service tax, shall forthwith pay the amount so collected to the credit of the Central Government.

(2) Where any person who has collected any amount, which is not required to be collected, from any other person, in any manner as representing service tax, such person shall forthwith pay the amount so collected to the credit of the Central Government.

(3) Where any amount is required to be paid to the credit of the Central Government under sub-section (1) or sub-section (2) and the same has not been so paid, the Central Excise Officer shall serve, on the person liable to pay such amount, a notice requiring him to show cause why the said amount, as specified in the notice, should not be paid by him to the credit of the Central Government.

(4) The Central Excise Officer shall, after considering the representation, if any, made by the person on whom the notice is served under sub-section (3), determine the amount due from such person, not being in excess of the amount specified in the notice, and thereupon such person shall pay the amount so determined.

(5) The amount paid to the credit of the Central Government under sub-section (1) or sub- section (2) or sub-section (4), shall be adjusted against the service tax payable by the person on finalisation of assessment or any other proceeding for determination of service tax relating to the taxable service referred to in sub-section (1).

(6) Where any surplus amount is left after the adjustment under sub-section (5), such amount shall either be credited to the Consumer Welfare Fund referred to in section 12C of the Central Excise Act, 1944 or, as the case may be, refunded to the person who has borne the incidence of such amount, in accordance with the provisions of section 11B of the said  Act and such person may make an application under that section in such cases within six months from the date of the public notice to be issued by the Central Excise Officer for the refund of such surplus amount.”

Observations of author on provisions of Section 73A:

On reading of Section 73A we find that if a person who has collected as service tax, any amount excessively or which he is not required to charge, is also duty bound as such person shall forthwith pay the amount so collected to the credit of the Central Government. The amount so deposited shall be adjusted against liability of service tax and excess if any shall be credited to the Consumer Welfare Fund. Refund from such fund can only be claimed by person who had borne the tax that is service receiver who paid the service tax to service provider.

Therefore, service tax collected by service provider, is diverted in favor of the Central Government. It has to be remitted to the Government. It cannot be retained by service provider and cannot be claimed back also. Accordingly there is diversion by way of over riding title and it cannot be regarded as fees.

Such provision was not considered by the Supreme court:

In case of Chowringhee Sales Bureau (P.) Ltd. v. CIT 1972 (10) TMI 4 - SUPREME Court the honorable Supreme court had not considered any such statutory provision which require that tax collected has to be deposited with government. In that case, the fact was that sales tax was collected excessively, and it was not payable to the government and it was also not payable to customers. In that context the Supreme Court held that such amount of sales tax was income.

However, this ruling is not applicable when the service tax or any similar levy is to be paid to concerned authorities and it cannot be retained by service provider or dealer who collected such sum.

The aspect of what is not at all income need to be considered:

While computing income under any method of accounting or tax provisions relating to tax on income the concept of ‘what is not at all income’ is required to be considered. A receipt cannot be regarded as “not income at all” for various reasons. Few example of situations when a receipt is ‘not income at all’ are given below:

1. When what is received is not at all income for example an advance money received from customer which may be refunded if contract is not executed,
2. When it is a capital receipt,
3. When it is not received on own account and has been received on account of someone else, to whom it is payable in such situation the sum received is a liability or money received and held under trust or other obligation,
4. When it is diverted at source in favor of others.
5. Even contingent receipts, disputed receipts or receivable, which may become refundable, or may not be recovered at all, cannot be included in income.

Base amount in case of presumptive taxation:

In any scheme of presumptive taxation, the base amount can only be what belongs to assessee as his gross receipt on own account. If a receipt does not belong to the assessee, then it cannot be included in the base amount on which tax can be computed.

Case of China Shipping and others:

In case of China Shipping Container Lines (Hong Kong) Co. Ltd. Versus Assistant Director of Income-tax (International Taxation) 2013 (10) TMI 743 - ITAT MUMBAI and other cases relied on by revenue and applied by Tribunal to contend and hold that service tax is to be included for computation of income under section 44B, it seems that many of above contentions were not raised or considered. Reference to the provisions of section 73A of the Finance Act, 1994 is conspicuously absent.

A fit case for rectification of mistake apparent from records:

On reading of the judgment we find that the following mistakes have been crept and therefore the decision deserves a rectification:

1. Provisions of section 73A of the Finance Act, 1994, as discussed above have not been considered by the Tribunal. It appears that the same were not referred to also by the counsels. However, as matter relates to non-consideration of a statutory provision, which mandates that service tax is to be deposited with government, and the fact is that service tax has been charged as per law, therefore, there is a mistake apparent from records while holding that service tax is an amount of similar nature like demurrage charges and handling charges.
2. Service tax is not an item of income, so income tax cannot be levied on service tax in view of the COI; purposes, charging section and section 44B of the ITA . A levy of income- tax on service tax will be ultravirse the COI and ITA, and an interpretation which is apparently in conflict with COI and purposes of ITA is definitely a mistake apparent from records.
3. The Tribunal has wrongly considered that demurrage charges and handling charges also does not have a profit element. These charges are in nature of revenue of shipping company and there is an element of profit (except in case of case of exact reimbursement).
4. In CBDT Vs. Chowgule & Co. Ltd 1991 (6) TMI 53 - KARNATAKA High Court and V.M. Salgaokar And Brothers Ltd Vs. Deputy Controller 1990 (7) TMI 73 - KARNATAKA High Court the nature of demurrage was considered and it was held that it is not in connection with carriage of goods etc. Demurrage can be extended voyage charges, additional freight, or damages for delay in taking delivery of goods etc. So the demurrage is an item of revenue.
5. It is worth to note that in case of Chowgule (supra) the claim was that demurrage charges was not for carriage of goods so section 44B was claimed to be not applicable and the Court allowed the claim. It was not a case that there was no profit element in demurrage charges. The court held that demurrage is not covered by charges for carriage of goods etc. therefore, S. 44B is not applicable. Thereafter amendment was made by insertion of the Explanation.
6. Thus holding that demurrage and handling charges also does not have a profit element and therefore service tax is an amount similar to demurrage or handling charges is wrong. This can only be considered as a mistake apparent from record. The Tribunal noted in para 10 as follows:

 “It is pertinent to note that if the element of profit is the only criteria for inclusion or exclusion of any amount then the demurrage charges or handling charges should not have been included in the aggregate amount for the purpose of determining the presumptive income because the demurrage charges and handling charges also not having any element of profit”.

In view of the author this is definitely a mistake apparent from records.

1. Section 44B is not at all concerned by concepts like gross receipts or turnover. As discussed above the section concerns with specifically with charges on account or the carriage of …, or demurrages charges or handling charges or any other amount of similar nature- this means that it should be a charge for services or damages or compensation for default of customer. This cannot include a tax, duty, fees or other statutory levy which cannot be called an amount of similar nature.
2. The Tribunal has noted that when amendment was made in 1997, there was no service tax, therefore it is not specifically included in the Explanation inserted by the amendment. This is also wrong inference drawn by the Tribunal. While making the amendment, by insertion of Explanation, any amount in nature of any tax, duty, cess or fees, has not been included in the Explanation. On applying common sense amount similar to demurrage charges or handling charges can only be a charge and not a statutory levy. The amount of any tax is not an amount similar to charges for carriage of goods, demurrage or handling charges. The service tax is levied because the law imposes a tax and not because of contract between parties. It is not for any supply of goods or for rendering any services.
3. Illustrations to explain:
   1. Old shipping is in business and has crossed exempted amount. New shipping has just started business in India and has earned revenue below taxable amount or say it is exempted for any other reason. Both have raised an invoice for exactly similar services and at similar charges for carriage of goods. Their invoice is for the following sums:

Nature of charges	Old Shipping – a service tax liable entity	New Shipping – not liable to service tax (exempted for any reasons)
Charges for carriage	8,00,000	8,00,000
Service tax	98,880,	0
Total charges	8,98,880	8,00,000
[email protected]% of amount Including service tax, if any.	67416	60,000

We find that in case of Old Shipping income determined is higher than in case of New Shipping.

1. Suppose service tax rate is reduced to 5%:

Nature of charges	Old Shipping – a service tax liable entity	New Shipping – not liable to service tax (exempted for any reasons)
Charges for carriage	8,00,000	8,00,000
Service tax	40,000	0
Total charges	8,40,000	8,00,000
[email protected]% of amount Including service tax, if any.	63,000	60,000

We find that in case of Old Shipping income determined is now lower because rate of service tax is reduced. In case of New Shipping there is no change because there is no levy of service tax.

1. Disputed levies: Suppose service tax was not leviable as per judgment of High Court, however, the appeal of revenue was pending before the Supreme Court. Therefore, service provider had made a provisional collection as “deposit on account of disputed levies” which is refundable if ultimately service tax is not payable.

Suppose the Supreme Court held that service tax is payable. Then the amount provisionally collected from customers will be deposited with government. The amount will be deposited with government.

If the Supreme Court confirms judgment of High Court, and held that the service tax is not leviable, then the amount will be refunded to customers.  

In such situation the amount provisionally collected on account of disputed dues of service tax will not be revenue, gross receipt, fees, or charges in connection with carriage of …, or demurrage or handling charges etc.

From the above illustrations we can clearly observe that service tax in not charged or received in connection with carriage of goods… etc. and inclusion of service tax in base amount for computation of income goes against basic principal of income or profit. In case of presumptive taxation, such inclusion will imposes excessive tax in nature of income tax.

As discussed above inclusion of service tax for computation of element of taxable income is a mistake apparent from records. There cannot be levy of tax on element of service tax. The assessee can file a rectification petition, however to save limitations and avoid difficulties in case rectification is not allowed an appeal should also be filed.  

From the judgment portion related to S.44B is reproduced below with highlights added by author:

“2. The assessee has raised the following grounds in this appeal:

"1 (a) On the facts and in the circumstances of the case and in law, the learned Assistant Director of Income-tax (International Taxation) - 1(1), Mumbai ('ADIT') has erred in including the amount of service tax collected of Rs. 2,72,30,136, as part of gross receipts for determining the taxable income of the appellant.

1 (b) The learned ADIT ought to have appreciated that service tax is a statutory levy and the appellant only acts as agent on behalf of Government for collection and deposit of service tax into the treasury and therefore, the amount so collected should not form part of gross freight for computing the taxable income.

1 (c) The learned ADIT further erred in not appreciating that service tax is neither a collection 'on account of carriage of goods' nor in the nature of 'demurrage charges or handling charges or any other amount of similar nature' to fall within the purview of section 44B of the IT Act.

2. Without prejudice to above, the ADIT erred in not appreciating that since the Indian agent of the appellant has been remunerated with a commission at arm's length, no further attribution can be made in the hands of the appellant since its tax liability gets extinguished.

3. Ground No. 1(a) to (c) regarding inclusion of service tax in the gross receipts for the determination of taxable income as per the provisions of section 44B. The assessee is a company incorporated in Hong Kong and engaged in the business of operations of ships in international waters. The assessee has computed the total income @ 7.5% of total collection as per the provisions of section 44B r.w.s. 172 of Income Tax Act. The AO found that the assessee has not included the service tax collected by it in the gross receipt for the purpose of collection of income u/s 44B of the Act. Accordingly, the AO asked the assessee to show-cause as to why the service tax collected by the assessee should not be considered as part of gross receipts for the purpose of computation of income u/s 44B of the Income Tax Act. In response the assessee submitted that the service tax amounting to Rs. 2,72,30,136/- has been collected during the relevant assessment year but the same cannot be included in the presumptive income. The AO did not accept the contention of the assessee and included the service tax amount of Rs. 2,72,30,136/- collected by the assessee in the gross receipt of the assessee for the purpose of taxation as per the provisions of section 44B. The AO issued a draft assessment order dated 13.12.2009 against which the assessee filed objection before Dispute Resolution Panel (DRP). The DRP has confirmed the inclusion of service tax collected by the assessee in the amount of gross receipt for determination of the taxable income as per the provisions of section 44B. Consequently the AO has framed the assessment order dated 20.10.2010 in pursuant to the DRP direction and included the service tax collected by the assessee in the gross receipts for the purpose of determination of the income u/s 44B of the Act.

4. Before us the Ld. AR of the assessee has submitted that the service tax cannot be part of the amount of gross receipts for the purpose of computation of income u/s 44B. He has referred section 44B and submitted that it is a deeming provision under which the income of the assessee is determined as a sum equal to 7.5% of the aggregate amount paid or payable to the assessee on account of carriage of passengers, livestock, mail or goods shipped at any port in India as well as any port outside India. The Ld. AR has contended that the service tax collected by the assessee on behalf of the Government cannot be treated as amount paid or payable to the assessee on account of carriage of passengers, livestock, mail or goods etc. He has further submitted that the service tax is paid on the consideration for services and therefore, the amount of service tax itself cannot be included in the consideration of services. For the purpose of section 44B only the gross amount paid or payable to the assessee on account of carriage of passengers, livestock, mail or goods as to be taken into consideration and nothing else. He has referred the decision of Hon'ble Supreme Court in case of Union of India v. Gosalia Shipping (P.) Ltd. 1978 (5) TMI 1 - SUPREME Court and submitted that the consideration for carriage of goods is the amount which the charters had agreed to make to the owners of the ship and therefore the amount of service tax which is collected by the assessee on behalf of the Government cannot be considered a part of consideration. He has also relied upon the decision of this Tribunal in case of Islamic Republic of Iran Shipping Lines v. Dy. CIT (International Taxation) 2011 (4) TMI 637 - ITAT MUMBAI and submitted that the Tribunal has considered and decided an identical issue by holding that service tax which is statutory liability without any involved of the element of profit and accordingly the same cannot be included in the total receipts for determining the presumptive income u/s 44B. The Ld. AR has further submitted that though there are decisions of the Tribunal against the assessee however, in the case of Islamic Republic of Iran Shipping Lines (supra) the Tribunal has decided the issue by relying upon the decision of Hon'ble Jurisdiction High Court as in case of CIT v. Sudarshan Chemicals Industries Ltd. 2000 (8) TMI 73 - BOMBAY High Court therefore, the said decision of the Tribunal has to be followed. He has also relied upon the decision of this Tribunal in case of Orient Overseas Container Line Ltd. v. Addl. DIT (International Taxation) 2013 (10) TMI 742 - ITAT MUMBAI and submitted that the decision in case of Islamic Republic of Iran Shipping Lines (supra) has been followed in this case.

5. On the other hand, the Ld. DR has submitted that section 44B of the Act is special provision and any deduction u/s 28 to 43A would not be considered for the purpose of determination of income u/s 44B. He has further contended that under the provisions of section 44B what is to be considered is the amount received or payable to the assessee and not the net income. The Ld. DR has forcefully contended that the amount received includes all the amounts received or receivable by the assessee including the service tax. The service tax is an integral part of receipts and cannot be treated as separate receipts as it is included in the invoices. He has relied upon the decision of Delhi Benches of Tribunal in case of Dy. DIT(International Taxation) v. Technip offshore Contracting B.V. 2009 (1) TMI 533 - ITAT DELHI and submitted that the Tribunal has held that the service tax would be a part of the gross receipts for the purpose of determining the income u/s 44B. The Ld. DR has pointed out that the Tribunal while deciding the issue in case of Technip Offshore Contracting B.V. (supra) has relied upon the decision of Hon'ble Uttarakhand High Court in case of Sedco Forex International Inc. v. CIT, 2007 (9) TMI 196 - UTTARAKHAND HIGH COURT. He has also relied upon the decision of Hon'ble Uttarakhand High Court in case of CIT v. Trans Ocean Offshore Inc. 2007 (10) TMI 175 - UTTARAKHAND HIGH COURT, and submitted that the Hon'ble High Court has held that the mobilization charges received by the assessee should be taxed as per the provisions of section 44BB. The Ld. DR has also relied upon the following decision CIT v. B.J. Services Co. Middle East 2007 (10) TMI 219 - UTTARAKHAND HIGH COURT/ G&T Resources (Europe) Ltd. v. Dy. DIT (International Taxation) 2011 (3) TMI 479 - ITAT, Delhi.

6. The Ld. DR has further contended that in case of Sudarshan Chemicals Industries Ltd. (supra) the Hon'ble High Court has held that the sales tax and Excise Duty cannot be part of the turnover for the purpose of section 80HHC wherein the definition of turnover has been provided and therefore, the said decision cannot be applied for the purpose of determination of the income as u/s 44B. The aggregate amount has to be considered for determining of income and not the profit element in the receipts. Thus, the Ld. DR has submitted that in view of the various decisions of Hon'ble Supreme Court as well as High Court the Excise Duty, sales tax has been treated as trading receipts and service tax which is similar to sales tax would also the part of the trading receipt and therefore would be included in the aggregate amount paid or payable to the assessee for the purpose of computation of income as per the provisions of section 44B. On this point the Ld. DR has relied upon the following decisions:

Chowringhee Sales Bureau (P) Ltd. v. CIT 1972 (10) TMI 4 - SUPREME Court

CIT v. T. Naggi Reddy 1993 (3) TMI 6 - SUPREME Court

McDowell & Co. Ltd. v. CTO 1985 (4) TMI 64 - SUPREME Court

Jagdish Prasad Nagam v. CIT 1996 (8) TMI 35 - ALLAHABAD High Court

7. In rejoinder the Ld. AR has submitted that the service tax is statutory levy collected from shippers for and on behalf of the Government. Therefore, the assessee is acting as an agent on behalf of the Government and the said amount cannot be treated as receipt on account of carriage of passengers, livestock, goods etc. He has further contended that apart form the consideration against the carriage of passengers, livestock, goods etc what can be included is only the demurrage charges or handling charges as per the explanation to section 44B and service tax is neither in the nature of demurrage charges nor handling charges or any amount similar nature cannot be included in the gross receipts for the purpose of taxation as under the provisions of section 44B.

8. We have considered the rival submissions and carefully gone through the relevant material on record as well as the various decisions relied upon by either of the parties. With a view to simplify and rationalise the assessment and computation of profit and gain of shipping business in the case of non-resident the Finance Act 1975 has made special provision in section 44B of the Income Tax Act. Under this provision, profits and gain of non-resident from the business of operation of ships will not be calculated in accordance with the provisions of section 28 to 43A of the Income Tax Act but the same will be taken as 7.5% of the aggregate of the amounts paid or payable to the assessee or to any persons on his behalf on account of carriage of passengers, livestock, mail or goods, shipped at any port in India as well the amount received or deemed to be received in India on account of carriage of passengers, livestock etc. at any port outside India. Thus, for the purpose of determination of the income u/s 44B it is the gross amount which is aggregate of the amount paid or payable within or outside India on account of carriage or shipped at any port in India plus any amount received or deemed to received in India on account of carriage or shipped at any port outside India. There are two components of the amounts one which is paid or payable to the assessee in respect of the carriage or shipped at port in India and another the amount received or deemed to receive in India in respect of carriage or shipped at any port outside India. It is pertinent to note that section 44B over rides the provisions of section 28 to 43A, however, the other provisions of the Act are applicable apart from the provision of section 44B for computation of income of non-resident engaged in the business of shipping. It is pertinent to note that the sales tax receipt by any assessee is treated as trading or business receipt though the sales tax is collected by the assessee on behalf of the Government as held by Hon'ble Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. (supra) in para 9 as under:

"9. The fact that the appellant credited the amount received as sales-tax under the head "sales-tax collection account" would not, in our opinion, make any material difference. It is the true nature and the quality of the receipt and not the head under which it is entered in the account books as would prove decisive. If a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as trading receipt. We may in this context refer to the case of 1958 (11) TMI 4 - SUPREME Court. In that case certain amounts received by the assessee were described as security deposits. This Court found that those amounts were an integral part of the commercial transaction of the sale of liquor and were the assessee's trading receipt. In dealing with the contention that those amounts were entered in a separate ledger termed "empty bottles return security deposit account", this Court observed."

9. It is clear from the decision of Hon'ble Supreme Court that this issue of the amount received as Sales Tax is treated as trading receipt of the assessee is settled. A similar view has been taken by the Hon'ble Supreme Court in case of T. Naggi Reddy (supra) as well as in case of McDowell & Co. Ltd. (supra). The assessee has heavily relied upon the decision of this Tribunal in case of Islamic Republic of Iran Shipping Lines (supra) wherein this Tribunal has relied upon the decision of Hon'ble High Court in case of Sudarshan Chemicals Industries Ltd. (supra) and held that service tax is statutory liability and would not involved any element of profit and accordingly the same cannot be included in the total receipt for determining the presumptive income. On the other hand, the Ld. DR has relied upon the decision of this Tribunal in case of Technip off Shore Contracting B.V. (Supra) wherein the Tribunal has relied upon the decision of Hon'ble Uttarakhand High Court in case of Sedco Forex International Inc. (supra) and held that service tax collected by the assessee in connection with the services specified u/s 44BB of the Act will be included in the total receipt for the purpose of determining the presumptive profit u/s 44BB. There are other similar decisions of Hon'ble Uttarakhand High Court wherein it has been held that the handling charges received by the assessee will be included in the total receipt for the purpose of determination of presumptive profits u/s 44BB. Thus, it is clear that there are decisions of this Tribunal taking divergent view. The decision in case of Sudarshan Chemicals Industries Ltd. (supra) is in respect of turnover for the purpose of section 80HHC. It is pertinent to note that section 80HHC of Income Tax Act itself has provided the definition of export turnover as well as total turnover and the Hon'ble High Court has held that the Excise Duty and sales tax cannot be taken into account into turnover as they do not have any element of profit. This view has been taken by the Hon'ble High Court by drawing analogy from the definition of turnover provided u/s 80HHC itself wherein as per the clause (b) of explanation of section 80HHC export turnover is define by excluding freight and insurance charges. Therefore, on the similar analogy the Hon'ble High Court has held that the Excise Duty and Sales Tax also have no element of profit similar to that of freight and insurance. However no such exclusion from the aggregate of amounts provided under sub-section 2 of section 44B has been permitted while computing the profits and gains of the shipping business in case of non-resident as per section 44B. We quote section 44B as under:

"44B. Special provision for computing profits and gains of shipping business in the case of non-residents— (1) Notwithstanding anything to the contrary contained in sections 28 to 43A in the case of an assessee, being a non-resident, engaged in the business of operation of ships, a sum equal to seven and a half per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession".

(i)		the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; and
(ii)		the amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods shipped at any port outside India.

Explanation— For the purposes of this sub-section, the amount referred to in clause (i) or clause (ii) shall include the amount paid or payable or received or deemed to be received, as the case may be, by way of demurrage charges or handling charges or any other amount of similar nature."

10. As we have already mentioned that the provisions of section 44B has been brought into statute to simplify the determination of taxable income of the non-resident who are in the business of shipping. The presumptive profits and gain of such business chargeable to tax under the provisions of section 44B are determined as a sum equal to 7.5% of the aggregate amounts paid or payable to the assessee on account of carriage of passengers etc. or goods shipped at any port in India as well as amount received or deemed to be received in India on account of carriage of passengers or goods shipped at any port outside India. There is no dispute that the service tax received/collected by the assessee is in respect of the services provided on account of carriage of passengers or goods shipped either any port in India or any port outside India. Therefore, the said amount of service tax is a part of the invoices/bills raised in respect of shipping business. The exclusion of the said amount only on the ground that it has no element of profit in our view is not consistent with the intention of the legislature when the amount received or deemed to be received by way of demurrage charges or handling charges or any other amount of similar nature has to be included to the aggregate amount as per sub-section 2 of section 44B. The legislature has made it clear by inserting the explanation that the demurrage charges or handling charges or any other similar amount would be part of the aggregate amount for the purpose of determining the presumptive profits @ 7.5% of such amount. It is pertinent to note that if the element of profit is the only criteria for inclusion or exclusion of any amount then the demurrage charges or handling charges should not have been included in the aggregate amount for the purpose of determining the presumptive income because the demurrage charges and handling charges also not having any element of profit. Since the service tax Act has been came into force subsequent to the insertion of the explanation therefore, there was no reason/occasion for including the service tax along with the demurrage charges and handling charges in the explanation however when any other amount of similar nature is required to be included then the service tax as far as on the aspect of having no element of profit is similar in nature to that of demurrage charges or handling charges.

11. Further the term turnover is not relevant for estimation of profit and gain u/s 44B and therefore, when the demurrage charges and handling charges are specifically included in the aggregate amount as prescribed under sub-section 2 then whatever amount received or receivable/paid or payable to the assessee on account of carriage of passengers etc. or goods shipped would be part of such amount for computation of profit and gains u/s 44B. Thus, the theory of element of profit would not apply to the aggregate amount as specified in sub-section (2) of section 44B. Moreover service tax is incidental to the transactions of carriage of passengers etc. and goods shipped and the amount paid or payable to and received or receivable by the assessee on account of service tax is very much part of the amount received on account of the business of shipping. According to the normal commercial practice, levy of tax on sale of goods or service is reflected in the bills either as merged in the price or being shown separately. Therefore, the amount received on account of service tax as part of the price of carriage/shipped service is very much a trading/business receipt and would be part of the aggregate amount for presumptive profit and gain to be determined u/s 44B.

12. In view of the above discussion we hold that the service tax collected by the assessee would form part and partial of the aggregate amount as specified under sub-section 2 of section 44B for the purpose of determining the profit and gain under this section. Accordingly, we upheld the orders of the authorities below qua this issue.