Service Tax paid by the assesee cannot form part of amount for the purpose of deemed profits under section 44BB

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI ‘G’ BENCH

BEFORE HON’BLE VICE PRESIDENT SHRI G.C. GUPTA AND

HON’BLE ACCOUNTANT MEMBER SHRI A.N. PAHUJA

ITA no.5284/Del. /2011

Assessment year: 2008-09

M/s Sedco Forex Internat ional

Drilling Inc., C/o Nangia &

Co., CA, Suite no. 4A, Plaza

M-6, Jasola, New Delhi

(Appellant)

Vs.

 Additional DIT, Internat ional

Taxation,Subhash Road,

Dehradun

(PAN AACCS 9208 D)

 (Respondent)

Assessee by S/Shri Amit Arora &

Ashutosh Jain, ARs

Revenue by Shri Sanjay Bahadur, DR

Date of hearing 07-06-2012

Date of pronouncement 29-06-2012

O R D E R

A.N.Pahuja:-

This appeal filed on 28.11.2011 by the assessee against an order dated 18.10.2011 of the Addl. DIT, International Taxation, Dehradun read with order dated 02.09.2011 of the Dispute Resolution Panel-II, Delhi[DRP in short], raises the following grounds:-

1) “That the Assessing Officer erred on facts and in law in completing assessment u/s 144C/143(3) of the Income-tax Act, 1961, (‘the Act’) at an income of ``304,474,660/- as against the income of ``282,441,512/- returned by the appellant.

2) That the Assessing Officer erred on facts and in law in adding a sum of ``123,163,495/- to the gross receipts of the appellant to be taxed u/s 44BB without appreciating that the said amount represented reimbursement of actual expenses incurred by the appellant.

3) That the Assessing Officer erred on facts and in law in adding a sum of ``97,167,971/- to the gross receipts of the appellant to be taxed u/s 44BB without appreciating that the said amount represented service tax.

Levy of Interest

1. That the assessing officer erred on facts and in law in levying interest under section 234B of the Act especially when there was no liability on the assessee to pay advance tax under section 209(1)(d) of the Income-tax Act,1961.

The appellant craves leave to add to, alter, amend or vary from the above grounds of appeal at or before the time of hearing.”

2. Adverting first to ground no.1 in the appeal , facts, in brief, as per relevant orders are that e-return declaring income of ``28,24,41,510/- filed on 29.09.2008 by the assessee, a foreign company having permanent establishment in India, was selected for scrutiny with the service of a notice u/s 143(2) of the Income-tax Act, 1961 (hereinafter referred to as the Act), issued on 31st August, 2009. During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed that the assessee reflected income u/s 44BB of the Act in terms of two contracts with ONGC. While referring to memorandum of understanding entered in to between Transocean Offshore Deepwater Drilling Inc. and Sedco Forex International Drilling Inc. offering additional services on an integrated basis, along with the Jack-up- Rig “Trident II” to ONGC Ltd. for their drilling campaign in offshore India, the AO observed that the integrated services on the rig are not intricately linked to the hired rig while equipments and personnel were not part of the rig , but acquired from other NRC’s. Since the assessee was not found to be the owner of equipments and integrated services, the AO was of the opinion that the receipts could not be brought to tax u/s 44BB of the Act and have to be treated as fee for technical services u/s 9(1)(vii) of the Act. Further, while referring to decisions in CIT Vs. Halliburton Offshore Service

Inc.,300 ITR 265(Uttarakhand); CIT Vs. Schlumberger Asia Services Ltd. (317 ITR 156); CIT & another & Atwood Oceanics Pacific Ltd. ,2010-TII-12-HCUkhand- Intl dated May 19, 2010; CIT Vs. R & B Falcon Drilling Co.,2009-TII-20- HC-Ukhand-INTL dated April 24, 2009; CIT Vs. M/s Sundowner Offshore International Burmuda Ltd.,2009-TII-07-Ukhand-INTL dated February 16, 2009; CIT Vs. M/s B.J. Service Co.,2007-TII-05-HC-Ukhand-Intl dated October 8, 2007; CIT Vs. Trans Ocean Offshore Incorporation,2007-TII-13-HC-Ukhand-Intl dated October 8, 2007; M/s Sedco Forex International Inc. Vs. CIT, 2007-TII-02-HCUkhand- Intl dated September 28, 2007; and CIT Vs. M/s Halliburton Offshore Service Inc.,2007-TII-04-HC-Ukhand-Intl dated September 20, 2007, the AO bought to tax reimbursement of fuel recharge and service tax, aggregating to `220,331,466/- in terms of provisions of sec. 44BB of the Act vide draft order dated 28.12.2010.

3. Thereafter, the assessee approached DRP and raised a number of objections.. After considering the objections of the assessee, the DRP vide their order dated 2nd September, 2011 concluded on the issue of inclusion of reimbursements towards fuel recharge & service tax , as under :-

“3. Objection No.3: This objection relates to the proposal to tax the reimbursement of fuel recharge and service tax aggregating to `22,031,466/- under the provisions of section 44BB. It is submitted that under clause 4.4 of the contract ONGC is required to reimburse the expenditure incurred on actual usage of diesel which is termed as fuel recharge in computation of income. This expenditure was incurred by the assessee on behalf of ONGC and it was later reimbursed by ONGC to the assessee. The Assessing Officer proposed to tax these receipts u/s 44BB. The assessee has made detailed submissions and cited a number of decisions to support the argument that fuel recharge and service tax reimbursement have no element of income.

3.2 The Panel has considered the submissions made. It is noted that this issue has been decided in favour of the department by the Jurisdictional High Court in the case of Halliburton Offshore Service Inc. (300 ITR 265) wherein it has been held that reimbursement of expenditure is includible in the taxable income u/s 44BB. It has been stated by the assessee that subsequent to the above decision the Uttarkhand High Court has decided the mater in favour of the assessee in the case of Schlumberger Asia Services Ltd. (317 ITR 156). However, as the appeals of the assessee and department are pending in above cases before the Supreme Court this Panel is of the view that it would not interfere on this issue at this stage. The Assessing Officer is therefore directed to make the addition as proposed by her in the draft order.”

4. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A).At the outset, the ld. AR on behalf of the assessee conceded that reimbursement of fuel recharge to the extent of ``123,163,493/- has rightly been taxed u/s 44BB in view of the decision of Hon’ble Jurisdictional High Court in the case of CIT Vs. Halliburton Offshore Services Inc.,300 ITR 265(Uttarakhand). Regarding reimbursement of service tax, the ld. AR pointed out that though the ITAT Delhi Bench in their decision in the case of DDIT (International Taxation) Vs. Technip Offshore Contracting BV,29 SOT 33(Delhi) concluded that service tax collected by the assessee being directly in connection with services or facilities or supply specified u/s 44BB of the Act provided by the assessee to ONGC, have to be included in the total receipts for the purpose of determination of presumptive profit u/s 44BB, subsequently, Hon’ble Uttarakhand High Court decision dated 24th July, 2009 in the case of DIT & Anr. Vs. Schlumberger Asia Services Ltd. ,317 ITR 156(Uttarakhand) concluded that reimbursement of custom duty paid by the assessee could not form part of amount for the purpose of deemed profits u/s 44BB unlike the other amounts received towards reimbursement. Following the view in this decision, Mumbai Bench in their decision dated 20.4.2011 in I.T.A. no.8845/Mum/2010 in the case of Islamic Republic of Iran Shipping Lines Vs. DCIT,2011-TII-77-MUM-INTL, held that service tax being a statutory liability, would not involve any element of profit and a service provider having collected the amount on behalf of the Government, accordingly, the same could not be included in the total receipts for determining the presumptive income, the ld. AR added. On the other hand, the ld. DR supported the findings of the AO.

5. We have heard both the parties and gone through the facts of the case as also the aforesaid decisions relied upon by the ld. AR.. We find that Hon’ble jurisdictional High Court in their aforesaid decision Halliburton Offshore Services Inc. (supra) while adjudicating an identical issue relating to reimbursement of freight & transport charges in respect of equipment, concluded as under:-

“5. Sec. 44BB provides that the deemed profits and gains under sub-s. (1) shall be @ 10 per cent of the aggregate amount specified in sub-s. (2). We proceed to analyze sub-s. (2). Clause (a) of sub-s. (2) refers to the amounts, (A) paid to the assessee (whether in or out of India) on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India, and (B) payable to the assessee (whether in or out of India) on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India. Clause (b) of sub-s. (2) refers to the amounts, (A) received by assessee in India on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India, and (B) deemed to be received by the assessee in India on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of mineral oils outside India.

6. Thus, it is clear from the perusal of s. 44BB that all the amounts either paid or payable (whether in India or outside India) or received or deemed to be received (whether in India or outside India) are mutually inclusive. This amount is the basis of determination of deemed profits and gains of the assessee @ 10 per cent. Therefore, in our view, the Tribunal fell into error in not appreciating the difference between the amount and the income. Amount paid or received refers to the total payment to the assessee or payable to the assessee or deemed to be received by the assessee, whereas income has been defined under s. 2(24) of the IT Act and s. 5 and s. 9 deal with the income and accrued income and deemed income. Sec. 4 is the charging section of the IT Act and definition as well as the incomes referred in ss. 5 and 9 are for the purpose of imposing the income-tax under s. 143 (3). Sec. 44BB is a complete code in itself. It provides by a legal fiction to be the profits and gains of the non-resident assessee engaged in the business of oil exploration @ 10 per cent of the aggregate amount specified in sub-s. (2). It is not in dispute that the amount has been received by the assessee company. Therefore, the AO added the said amount which was received by the non-resident company rendering services as per provisions of s. 44BB to the ONGC and imposed the income-tax thereon.

5.1 In the light of view taken by the Hon’ble jurisdictional High Court in their aforesaid decision, especially when the ld. AR accepted the position that the issue is squarely covered by the aforesaid decision while no other contrary decision was brought to our notice nor the ld. AR placed any material before us, controvert the aforesaid findings of the DRP and the AO, we have no hesitation in upholding the findings of the AO in the light of directions of the DRP in para 3.2 of their order dated 2nd September, 2011 in respect of reimbursement of amount on account of fuel recharge. In view thereof, ground no. 2 in the appeal is dismissed.

6. As regards reimbursement of amount in respect of service tax, as pointed out by by the ld. AR, the ITAT Delhi Bench in their decision in Technip Offshore Contracting BV(supra) concluded that service tax collected by the assessee being directly in connection with services or facilities or supply specified u/s 44BB of the Act provided by the assessee to ONGC, have to be included in the total receipts for the purpose of determination of presumptive profit u/s 44BB of the Act. It is well established that section 44BB of the Act is a special provision, treating 10 per cent of the aggregate amount specified in sub-s. (2) of s. 44BB as deemed profits and gains of such non-resident assessee who is engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on higher used, or to be used, in the prospecting for, or extraction or production of, mineral oils. The amount referred in sub-s. (2) of s. 44BB are the amounts (a) paid to the assessee (whether in or out of India) on account of the provision of services and facilities in connection with, or supply of plant and machinery on higher used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India, (b) payable to the assessee (whether in or out of India) on account of the provision of services and facilities in connection with, or supply of plant and machinery on higher used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India, (c) received by the assessee in India on account of the provision of services and facilities in connection with, or supply of plant and machinery on higher used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India and (d) deemed to be received by the assessee in India on account of the provision of services and facilities in connection with, or supply of plant and machinery on higher used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India. The service tax is a statutory liability like custom duty. Hon’ble Uttarakhand High Court in their decision in Schlumberger Asia Services Ltd.(supra) concluded that reimbursement of custom duty paid by the assessee could not form part of amount for the purpose of deemed profits u/s 44BB unlike the other amounts received towards reimbursement. Following the view in this decision, Mumbai Bench in their decision in Islamic Republic of Iran Shipping Lines(supra)held that service tax being a statutory liability, would not involve any element of profit and accordingly, the same could not be included in the total receipts for determining the presumptive income. In the light of view taken by the Mumbai Bench, especially when the ld. DR did not place any material before us ,controverting the aforesaid findings of the ld. CIT(A) so as to enable us to take a different view in the matter nor brought to our notice any contrary decision, we are of the opinion that service tax paid by the assessee could not form part of amount for the purpose of deemed profits u/s 44BB unlike the other amounts received towards reimbursement. Therefore, ground no.3 in the appeal is allowed.

7. Ground relating to levy of interest u/s 234B of the Act was not pressed before us while ground no.1 in the appeal being general in nature, does not require any separate adjudication nor any submissions were made before us on this ground, accordingly, both these grounds are dismissed.

8. No other plea or argument was made before us.

9. In the result, appeal is partly allowed.

Order pronounced in open Court

                                                          Sd/-                             Sd/-

                                                (G.C. GUPTA)         (A.N. PAHUJA)

                                          VICE PRESIDENT ACCOUNTANT MEMBER

NS

Copy of the Order forwarded to:-

1. Assessee

2. Addl. DIT, Internat ional Taxat ion, Subhash Road, Dehradun

3. DRP-II, Delhi

4. CIT concerned.

5. DR, ITAT,’G’ Bench, New Delhi

6. Guard File.

By Order,

Deputy/Asstt.Registrar

ITAT, Delhi