Court rules service tax reimbursement not included in profits under Income Tax Act

The court ruled in favor of the assessee, holding that the reimbursement of service tax paid by the assessee to the Government, and reimbursed by ONGC, should not be included in the aggregate amount for computing profits under Section 44BB of the Income Tax Act. The court emphasized that service tax is not part of the gross receipts and should not be considered in the computation of profits under Section 44BB. The decision was in line with the Delhi High Court's judgment and circulars issued by the CBDT.

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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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