02Direct Tax

April, 2019 – Volume 114

NEWSFLASH

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Larger Bench of theHon’ble High Court ofUttarakhand holdsthat ‘service taxreimbursements’made by customer, isnot includible in‘gross receipts’ whilecomputing taxableincome of non-resident serviceproviders u/s 44BB ofthe Income Tax Act,1961

Brief facts:

❖ Hearing before Larger Bench of Hon’bleHigh Court of Uttarakhand took place in abatch of appeals in cases of various non-resident Assessees, all of them beingservice providers engaged in providingservices/ facilities/ equipment on hire inconnection with exploration, extraction orproduction of mineral oil.

❖ The Assessees entered into agreementswith M/s Oil and Natural Gas Corporation(hereinafter referred to as ‘ONGC’/‘Customer’) for providing such services/facilities/ equipment on hire in connectionwith exploration, extraction or productionof mineral oil in India.

❖ The Assessees filed their return of incomedeclaring income u/s 44BB in respect oftheir revenues from providing services/facilities/ charter hire of the rig / plant andmachinery to be used in extraction orproduction of, mineral oils in India. Whilecomputing taxable income under section44BB of the Act, amounts received byAssessees towards reimbursement ofservice tax (paid by non-resident Assesseesto the Government of India and recoveredfrom ONGC) was excluded.

❖ During course of assessment proceedings,the Assessing Officer held that the amountof service tax received by the non-residentAssessees should be included in grossreceipts u/s 44BB of the Act. Accordingly,additions were made to taxable income ofnon-resident Assessees.

❖ Travelling through the Appellate route, thematter reached before the Hon’ble DelhiTribunal, wherein in maximum cases,following decision of Hon’ble Delhi HighCourt in case of Mitchell Drilling InternationalPvt. Ltd. (2016) 380 ITR 130 (Delhi), theTribunal decided the issue in favour ofAssessees. However, in some of the cases,the Tribunal had earlier decided in favour ofIncome tax department.

❖ The matter finally reached before High Courtof Uttarakhand in various appeals filed by theIncome tax department and also byAssessees in some cases, where Hon’ble HighCourt of Uttarakhand decided to form aLarger Bench of 3 judges, to decide the issue.

Assessee’s Submissions before the High Court

❖ The service tax collected by the assessee didnot have any element of income and,therefore, could not form part of grossreceipts for the purpose of computing‘presumptive income’ of the assessee undersection 44BB of the act.

❖ It is a statutory duty imposed on the assesseewhich it collects from the ONGC and pay it tothe government, it does not fall within the“amount for provision of services/ facilities”stipulated in Section 44BB(1) of the Act.

❖ Even the Income Tax Departmentacknowledged and accepted that ‘service tax’could not form part of ‘taxable income’, andtherefore it issued various circulars for TDSpurposes, wherein Assessees were requiredto deduct TDS only on service fee/contractual payments/ rent, excluding‘service tax’.

September 16- October 15, 2018

NEWSFLASHApril, 2019 – Volume 114

Larger Bench of the Hon’ble High Court of Uttarakhand holdsthat ‘service tax reimbursements’ made by customer, is notincludible in ‘gross receipts’ while computing taxable income ofnon-resident service providers u/s 44BB of the Income Tax Act,1961

❖ The Tribunal did not commit any error infollowing decision of Hon’ble Delhi HighCourt in case of Mitchell Drilling (supra),which was a jurisdictional High Court forDelhi Tribunal and its decision was bindingon Delhi Tribunal.

❖ The income tax department did notchallenge decision of Hon’ble Delhi HighCourt in case of Mitchell Drilling (supra) onthe same issue, and it was not open to theDepartment to challenge the correctness ofthis decision before another High Court, inthe case of another Assessee, without justcause.

Revenue’s Submissions

❖ The phrase used in Section 44BB(2) is “onaccount of”; this phrase has a much widerconnotation as it includes, within its ambit,‘any amount’ received by the assessee byreason of, or as a consequence of, theservices rendered by it.

❖ That payment of service tax by the servicerecipient to the service provider is not astatutory obligation, but it is purelycontractual payment. If the service providerdoes not receive/ charge service tax from hiscustomer, it cannot say that it would not payservice tax to the Government and theservice provider is obligated to pay servicetax irrespective of whether or not it ischarged from customers.

Judgment of Hon’ble High Court

❖ The Larger Bench of Hon’ble High Court, in adetailed judgment, concurred with thearguments placed on behalf of the Assesseesand held that ‘service tax reimbursements’will not form part of gross receipts for thepurpose of computing taxable income undersection 44BB of the Act.

❖ The High Court held that Service tax leviedunder the Finance Act, 1994, is a tax on“service”, and does not form part of theconsideration paid for the services rendered,

September 16- October 15, 2018

much less services rendered in connection withthe prospecting, extraction or production ofmineral oils.

❖ The High Court further held that ‘a provisionin a fiscal statute, such as Section 44BB,should be literally construed, and no otheraid of interpretation can be resorted to. Itmust interpret the Statute as it stands and, incase of doubt, in a manner favourable to thetaxpayer and not the one that imposes aburden on him’.

❖ Finally, the High Court held that the amountreimbursed by the ONGC, towards servicetax paid by Assessees to the Government, isnot an amount paid to the Assessees towardsservices provided by the Assessees inconnection with the prospecting, extractionor production of mineral oils. Therefore, it isnot required to be included in the amountsspecified in clauses (a) and (b) of Section44BB(2).

NANGIA’S TAKE

This is landmark decision, where, afterconsidering relevant statutory provisions underthe Service tax laws, specific provisions ofSection 44BB of the Act, various CBDT circularson TDS and various other decisions of Hon’bleSupreme Court and various High Courts, theHon’ble Larger Bench has held that ‘service taxreimbursements’ will not form part of grossreceipts for the purpose of computing taxableincome under section 44BB of the Act. This willprovide relief to a large number of Assesseesfacing similar addition made by the Income taxauthorities in their cases.

Further, while discussing the binding nature ofdecision of Hon’ble Delhi High Court in case ofMitchell Drilling (supra), the Hon’ble LargerBench has also upheld an important principlethat if the income tax department did notchallenge decision of one High Court on thesame issue, and it was not open to theDepartment to challenge the correctness of thisdecision before another High Court, in the caseof another Assessee, without just cause.

NEWSFLASHApril, 2019 – Volume 114

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