Service tax paid by tenant doesn't partake nature of "income" of landlord, HC

Facts in Brief:

1. The assessee is a non-resident company incorporated under the laws of Australia. During the year under consideration, it had offered revenues to taxation on account of ongoing contract dated 12.12.2006 entered with ONGC Ltd. for charter hire of a jack up rig. The operations of the assessee consisted of performing the drilling operations through provision of rig and I.T.A. No. 1048/Del/2014 Assessment Year 2010-11 integrated services.

2. The assessee, in its return of income, had claimed that the taxable revenues were to be computed in terms of section 44BB of the Income Tax Act, 1961 (hereinafter called 'the Act'). During the course of scrutiny assessment proceedings, the Assessing Officer came to know that an amount of Rs.114,351,759/- received on account of service tax had not been added to the gross revenue chargeable to tax u/s 44BB of the Act.

3. It was the assessee's contention that statutory charges cannot form part of the amount for the purpose of deemed profit u/s 44BB of the Act. As per the assessee, service tax was in the nature of reimbursement and hence not includible in gross receipts for the purpose of taxation.

4. The assessee contended that it had acted only as a collection agency for the Government for collection of service tax and as such, the collections on account of service tax could not be considered as income generating receipts in the hands of the assessee. It was further contended before the Assessing Officer that any receipt unconnected with the business of exploration, exploitation of oil etc. could not form part of the taxable receipts u/s 44BB of the Act.

5. However, the Assessing Officer was of the opinion that for the purpose of presumptive determination of the assessee's profit, the quantum I.T.A. No. 1048/Del/2014 Assessment Year 2010-11 of amount received from the customers against its service tax obligation had to be essentially considered as part of the receipt and, accordingly, a sum of Rs. 114,351,759/- was added back for the purpose of calculating the gross receipts on which the presumptive tax rate had to be applied. Apart from this, the Assessing Officer also added back Rs. 225,347,824/- to the gross receipts on account of reimbursement received.

6. In the first appeal, the assessee challenged the additions as well as levy of interest u/s levy of interest u/s 234B and 234C of the Act. The Ld. CIT (A) in the impugned order allowed the assessee's grounds relating to service tax and levy of interest u/s 234B and 234C but dismissed its ground relating to reimbursement receipts. Now the Department is in appeal and has raised the following grounds of appeal:-

"1. Whether on the facts and in the circumstances of the case and in law, the Ld CIT(Appeals) has erred holding that receipts on account of services tax are not includible in gross revenue of the assessee for the propose of computation of profits under the presumptive provisions u/s 44BB of the income Tax Act, 1961 ("The Act").

1.1 Whether the Ld.CIT (A) has erred in not appreciating the fact that the provisions of section 44BB of the Act are a self- contained code providing for computation of profits at a fixed percentage of gross receipts of the assessee and all the deductions and exclusions from income are deemed to have been allowed to the assessee.

I.T.A. No. 1048/Del/2014 Assessment Year 2010-11 1.2 Whether the Ld.CIT (A) has erred in not appreciating the fact that once the receipts are offered to tax u/s 44BB of the Act which provides for computation of profits on gross basis, there is no scope for computing or re-computing the profits by excluding any element of the receipts from the total turnover as the same would amount to defeating the very purpose of providing for a scheme of simpler mode of computation of profits u/s 44BB of the Act and obviating the need for accounting for individual receipts and payments etc.

1.3 Whether the Ld.CIT (A) has erred in ignoring the ratio of the judgment in the case of M/s Chowringhee Sales Bureau (P) Limited (82 ITR 542, SC) wherein the Hon'ble Apex Court has held that the Sales Tax collected by an assessee in the ordinary course of its business forms part of its business receipts. Owing to the inherent similarity in the nature if the sales tax and service tax, the ratio of the judgment in the said case is directly applicable in the facts of the instant case.

2. Whether on the facts and in the circumstances of the case and in law, the L( CIT(A) has erred in holding that the assessee is not liable to pay interest u/s 234B of the Act and in observing that the issue is covered in favour of the assessee by decision in tl case of M/s Maersk [334 ITR 79, Uttarakhand].

On appeal HC held as under,

3. for the purposes of computing the 'presumptive income' of the assessee for the purposes of Section 44 BB of the Act, the service tax collected by the Assessee on the amount paid t it for rendering services is not to be included in the gross receipts in terms of Section 44 BB (2) read with Section 44 BB (1). The service tax is not an amount paid or payable, or received or deemed to be received by the Assessee for the services rendered by it. The Assessee is only collecting the service tax for passing it on to the government.

4. The Court further notes that the position has been made explicit by the CBDT itself in two of its circulars. In Circular No. 4/2008 dated 28th April 2008 it was clarified that "Service tax paid by the tenant doesn't partake the nature of "income" of the landlord. The landlord only acts as a collecting agency for Government for collection of Service Tax. Therefore, it has been decided that tax deduction at source) under sections 194-I of Income Tax Act would be required to be made on the amount of rent paid/payable without including the service tax.' In Circular No. 1/2014 dated 13th January 2014, it has been clarified that service tax is not to be included in the fees for professional services or technical services and no TDS is required to be made on the service tax component under Section 194J of the Act.

5. The question framed, is therefore, answered in the negative i.e. favour of the Assessee and against the Revenue."

6. Therefore, respectfully following the ratio of the judgment as laid down by the Hon'ble Delhi High Court, we dismiss ground nos. 1, 1.1, 1.2 and 1.3 of the Revenue.

7. On the issue of levy of interest u/s 234B/234 C of the Act, we restore the issue to the file of the Assessing Officer to examine the liability of the assessee in light of the fact that all receipts are to be assessed u/s 44BB of the Act after giving effect to relief confirmed for the assessee in this appeal. Accordingly, ground nos. 2, 2.1 and 2.2 are allowed for statistical purposes.

8. In the result, the appeal of the Department is partly allowed for statistical purposes. 

Case Reference - R & B Falcon (A) Pty Ltd., Dehradun vs Department Of Income Tax.