2017 (1) TMI 1379 - AT - Income Tax

Tribunal rules on tax treatment of non-PSC contracts, interest income, and reimbursements.

The Tribunal ruled in favor of the appellant regarding the application of section 44BB(1) to non-PSC contracts. The issue of including VAT and Service Tax ... Entitlement to benefit of section 44BB(1) on the income from contracts of non-PSC companies or such receipts would be taxable u/s. 115A/44DA as per normal provisions of the Act - Held that:- This issue is squarely covered by the order of ITAT, Delhi Bench in the case of SBS Marine Ltd. vs. ADIT (Intl. Taxation) [2015 (3) TMI 147 - ITAT DELHI ]in favour of the assessee wherein held that the revenue’s reliance on section 9(1)(vi) to categorize the assessee’s income for hire of vessels as ‘royalty’ is also not correct since clause (iva) of section 9(1)(vi) excludes amounts referred to in section 44BB. The other arguments, decisions relied on by the learned DR including the one on ‘Base erosion profit shifting’ are also not relevant in the factual matrix of the present case and considering what we have already held. In view of the above, we hold that the income of the assessee for the year under consideration is to be computed in accordance with section 44BB of the Act.- Decided in favour of assessee. Inclusion of Service Tax and Vat in gross amount for the purpose of deeming profit @ 10% u/s 44BB - Held that:- The service tax and VAT are statutory dues which are paid to the Government as liability of the assessee. A perusal of the record as well as the assessment order nowhere reveals that the Service Tax and VAT have been separately charged by the appellant company on the bills. The record further does not reveal whether the assessee has separately accounted for the amounts of Service Tax and VAT so charged, in the books of account. The assessment order also does not whisper anything as to whether the Service tax and VAT have been charged by the appellant company in terms and conditions of the agreements. These aspects, in our opinion, need proper examination and verification at the stage of Assessing Officer before deciding the question whether the Service Tax and VAT charged by the assessee would form part of the receipts or not. We, therefore, direct the AO to examine – (i) the procedure for collecting the Service Tax and VAT; (ii) whether the assessee has issued bills for charging Service Tax & VAT and if yes, whether the Service Tax and VAT have been separately charged in the bills or not and (iii) whether the Service Tax and VAT have been separately accounted for and have been accordingly paid to the Government. Accordingly, this issue is restored to the file of Assessing Officer for deciding the same afresh Interest received on Income-tax Refund - should be taxed @ 15% under Article 12 of DTAA, treaty with UK or should be taxed @ 40% as per normal provision of the Act - Held that:- This issue is covered against the assessee by the decision of Uttaranchal High Court in the case of assessee itself [2015 (5) TMI 1036 - UTTARAKHAND HIGH COURT ] wherein it has been held that interest on Income-tax Refund is taxable @ 40%. Taxability on reimbursement of expenses - Held that:- This issue is covered against the assessee and in favour of the Revenue by the decision of Hon’ble Uttarakhand High Court in the case of CIT vs. Halliburton Offshore Services Inc. [2007 (9) TMI 230 - UTTARAKHAND HIGH COURT] wherein held 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 Issues Involved:1. Entitlement to benefit of section 44BB(1) for income from contracts with non-PSC companies.2. Inclusion of VAT and Service Tax in total receipts for taxation purposes.3. Tax rate on interest received on Income-tax Refund under Article 12 of DTAA.4. Taxability of reimbursement of actual expenditure as Fees for Technical Services (FTS).Detailed Analysis:1. Entitlement to Benefit of Section 44BB(1):The appellant company argued that income from contracts with non-PSC companies should be taxed under section 44BB(1) rather than sections 115A/44DA. The Tribunal referred to several precedents, including the ITAT Delhi Bench decision in SBS Marine Ltd. vs. ADIT and the Supreme Court ruling in ONGC vs. CIT. The Tribunal concluded that the benefit of section 44BB(1) applies even if the contracts are with non-PSC companies, as long as the services are connected with the prospecting, extraction, or production of mineral oils. Consequently, the Tribunal ruled in favor of the appellant, allowing the benefit of section 44BB(1) for income from non-PSC contracts.2. Inclusion of VAT and Service Tax in Total Receipts:The appellant contended that VAT and Service Tax should not be included in the total receipts for taxation under section 44BB. The Tribunal cited the Delhi High Court's decision in Mitchell Drilling International Pty. Ltd., which held that service tax being a statutory levy should not form part of gross receipts under section 44BB. The Tribunal directed the AO to examine whether VAT and Service Tax were separately charged and accounted for in the bills. If separately charged, these should not form part of the receipts; otherwise, they should be included. This issue was remanded to the AO for further examination and decision.3. Tax Rate on Interest Received on Income-tax Refund:The appellant argued that interest on Income-tax Refund should be taxed at 15% under Article 12 of the DTAA between India and the UK. However, the Tribunal referred to the Uttaranchal High Court's decision in the appellant's own case, which held that such interest should be taxed at 40% as per the normal provisions of the Act. Consequently, the Tribunal dismissed the appellant's contention and upheld the 40% tax rate.4. Taxability of Reimbursement of Actual Expenditure:The appellant conceded that the issue of taxability on reimbursement of expenses is covered against them by the Uttarakhand High Court's decision in CIT vs. Halliburton Offshore Services Inc. The High Court held that all amounts paid or payable, including reimbursements, form part of the aggregate amount for determining deemed profits under section 44BB. Consequently, the Tribunal dismissed the appellant's grounds related to this issue.Conclusion:The Tribunal ruled in favor of the appellant on the issue of applying section 44BB(1) to non-PSC contracts and remanded the issue of VAT and Service Tax inclusion for further examination. The Tribunal upheld the Revenue's stance on the tax rate for interest on Income-tax Refund and the taxability of reimbursement of expenses. The appeals were partly allowed for statistical purposes.