IT/ILT: Service tax collected by assessee would form part and partial of aggregate amount for purpose of determining presumptive profit and gain under section 44B
IT/ILT: Where duty was cast on payer to deduct tax at source, then on failure of payer to do so, no interest could be charged from payee under section 234
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[2013] 38 taxmann.com 2 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'L'
China Shipping Container Lines (Hong Kong) Co. Ltd.
v.
Assistant Director of Income-tax (International Taxation) 1(2), Mumbai*
B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND VIJAY PAL RAO, JUDICIAL MEMBER
AND VIJAY PAL RAO, JUDICIAL MEMBER
IT APPEAL NO. 8516 (MUM.) OF 2010
[ASSESSMENT YEAR 2007-08]
[ASSESSMENT YEAR 2007-08]
AUGUST 23, 2013
Section 44B of the Income-tax Act, 1961 - Non-resident - Shipping business of [Computation of income] - Assessment year 2007-08 - Assessee, a non-resident company, was engaged in business of operation of ships in international waters - Assessing Officer included service tax collected by assessee in gross receipt of assessee for determination of taxable income under section 44B - Whether since service tax was incidental to transactions of carriage of passengers and goods shipped, amount received by assessee on account of service tax was very much part of business receipt - Held, yes - Whether therefore, service tax collected by assessee would form part and partial of aggregate amount for purpose of determining presumptive profit and gain under section 44B - Held, yes [Paras 11 & 12] [In favour of revenue]
Section 234B of the Income-tax Act, 1961 - Interest, chargeable as [Chargeability of] - Assessment year 2007-08 - Whether where duty was cast on payer to deduct tax at source then on his failure of payer to do so, no interest could be charged from payee under section 234B - Held, yes [Para 14] [In favour of assessee]
FACTS
| ■ | The assessee was a company incorporated in Hong Kong and was engaged in the business of operations of ships in international waters. The assessee had computed the total income at the rate of 7.5 per cent of total collection as per the provisions of section 44B. | |
| ■ | The Assessing Officer included the service tax amount of Rs. 2.72 crores collected by the assessee in the gross receipt for the purpose of taxation under section 44B. | |
| ■ | The assessee raised objection before the DRP. The DRP however, confirmed the order of the Assessing Officer. | |
| ■ | On appeal before the Tribunal: |
HELD
| ■ | 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 per cent 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 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 at the rate of 7.5 per cent 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. [Para 10] | |
| ■ | 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 under section 44B. [Para 11] | |
| ■ | It is held 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. [Para 12] |
CASE REVIEW
DIT (International Taxation) v. NGC Network Asia LLC [2009] 313 ITR 187 (Bom.) (para 14) followed.
CASES REFERRED TO
Union of India v. Gosalia Shipping (P.) Ltd. [1978] 113 ITR 307 (SC) (para 4), Islamic Republic of Iran Shipping Lines v. Dy. CIT (International Taxation) [2011] 46 SOT 101 (URO)/11 taxmann.com 349 (Mum.) (para 4), CIT v. Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769/112 Taxman 511 (Bom.) (para 4), Orient Overseas Container Line Ltd. v. Addl. DIT (International Taxation) [2013] 35 taxmann.com 342 (Mum.) (para 4), Dy. DIT(International Taxation) v. Technip offshore Contracting B.V. [2009] 29 SOT 33 (Delhi) (para 5),Sedco Forex International Inc. v. CIT [2008] 170 Taxman 459 (Uttarakhand) (para 5), CIT v. Trans Ocean Offshore Inc. [2008] 299 ITR 248/173 Taxman 429 (Uttarakhand) (para 5), CIT v. B.J. Services Co. Middle East [2008] 300 ITR 392/170 Taxman 286 (Uttarakhand) (para 5), G&T Resources (Europe) Ltd. v. Dy. DIT (International Taxation) [2011] 45 SOT 135 (URO)/11 taxmann.com 229 (Delhi) (para 5), Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC) (para 6), CIT v. T. Naggi Reddy [1993] 202 ITR 253 (SC) (para 6), McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxman 11 (SC) (para 6), Jagdish Prasad Nagam v. CIT [1997] 228 ITR 112 (All.) (para 6) and DIT (International Taxation) v. NGC Network Asia LLC [2009] 313 ITR 187 (Bom.) (para 14).
Jiger Saiya for the Appellant. Narender Kumar for the Respondent.
ORDER
Vijay Pal Rao, Judicial Member - This appeal by the assessee is directed against the assessment order dated 20.10.2010 passed u/s 143(3) r.w.s 144C(13) in pursuant to the directions of DRP dated 29.9.2010 u/s 144C(5) of Income Tax Act for the assessment year 2007-08.
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. On the facts and circumstances of the case and in law, the learned DDIT has erred in levying interest of Rs. 10,30,721 under section 234B of the IT Act despite the fact that the assessee was not liable to pay any advance tax on the basis of the fact that the income of the appellant was anyway tax deductible at source."
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] 113 ITR 307 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] 46 SOT 101 (URO)/11 taxmann.com 349 (Mum.) 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] 245 ITR 769/112 Taxman 511 (Bom.) 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] 35 taxmann.com 342 (Mum.) 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. CIT (International Taxation) v. Technip Offshore Contracting B.V. [2009] 29 SOT 33, 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 [2008] 170 Taxman 459. He has also relied upon the decision of Hon'ble Uttarakhand High Court in case of CIT v. Trans Ocean Offshore Inc. [2008] 299 ITR 248/173 Taxman 429, 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 [2008] 300 ITR 392/170 Taxman 286 (Uttarakhand)/G&T Resources (Europe) Ltd. v. Dy. DIT (International Taxation) [2011] 45 SOT 135 (URO)/11 taxmann.com 229 (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 [1973] 87 ITR 542 (SC) | |
| ♦ | CIT v. T. Naggi Reddy [1993] 202 ITR 253 (SC) | |
| ♦ | McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxman 11 (SC) | |
| ♦ | Jagdish Prasad Nagam v. CIT [1997] 228 ITR 112 (All.) |
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 Punjab Distilling Industries Ltd. vs. CIT (1959) 35 ITR 519 (SC). 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.
13. Ground No. 2 in view of our finding regarding Ground No. 1 and further when the profit and gain are estimated without having regard to the any element of profit in the receipts we do not find any merit in the Ground No. 2.
14. Ground No. 3 regarding levy of interest u/s 234B. We have considered the rival submissions and relevant material on record. This issue is covered by the decision of Hon'ble Jurisdiction High Court in case of DIT (International Taxation) v. NGC Network Asia LLC [2009] 313 ITR 187 (Bom.) in which the Hon'ble High Court has held that when a duty is cast on the payer to deduct tax at source then on failure of the payer to do so, no interest can be charges from the payee u/s 234. Following the decision of the Hon'ble High Court we decide this issue in favour of the assessee.
15. In the result, the appeal of the assessee is partly allowed.
RITESHRegards
Prarthana Jalan
__._,_.___
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