Deep Drilling 1 Pte. Ltd.
Assistant Director of Income-tax (International Taxation)
IT APPEAL NO. 9038 (MUM.) OF 2010
[ASSESSMENT YEAR 2007-08]
APRIL 2, 2012
R.S. Syal, Accountant Member – This appeal by the assessee arises out of the order passed by the Assessing Officer u/s 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 on 25.10.2010, in relation to the assessment year 2007-2008.
2. The first ground is against the taxability of mobilization fee received outside India for the voyage carried out outside India amounting to Rs. 1,46,95,980 u/s 44BB of the Act.
3. Briefly stated the facts of this ground are that the assessee, a non-resident foreign company, received mobilization fee of US$ 36,52,758.36 from Hardy Exploration and Production (India) Inc. (hereinafter called Hardy) towards mobilization of rig from Singapore to India. The total distance traveled by the rig from Singapore to India was 1646 Nautical Miles, out of which 207 Nautical Miles covered the distance within India and 1439 Nautical Miles to voyage of the rig outside the territorial waters of India. The assessee offered mobilization charges in relation to 207 Nautical Miles to tax by contending that mobilization charges in respect of 1439 Nautical Miles relating to territorial waters outside India were not liable to be considered in the amount referred to in section 44BB of the Act. In support of its view point, the assessee relied on the case of Saipem S.P.A. v. Dy. CIT  88 ITD 213 (Delhi) (TM)]. The Assessing Officer rejected the assessee’s contention by relying on the judgment of the Hon’ble Uttarakhand High Court in the case of Sedco Forex International Inc. v. CIT  299 ITR 238. He, therefore, held that the mobilization fee Rs. 14,69,59,807 equivalent of US$ 31,93,390 in relation to the distance traveled outside the territorial waters of India, was also liable to be taxed.
4. We have heard the rival submissions and perused the relevant material on record. The assessee has mainly relied on the case of Saipem S.P.A. (supra), before the AO in which it has been held by a majority view that the mobilization charges received by the non-resident assessee outside India attributable to the transportation of rig outside the territorial waters of India are not chargeable to tax u/s 44BB read with section 5(2) of the Act. The minority view in that case was that section 44BB is a special provision not controlled by the provisions of section 5(2), which section itself is “subject to the provisions of this Act” and hence section 5(2) cannot restrict or expand the scope of section 44BB. It was, therefore, held by the minority view that the amount liable to be considered for sub-section (2) of section 44BB would be the one which is received or receivable on account of supply of machinery, including the hire charges as relatable to the territorial waters outside India. Recently the Hon’ble Uttarakhand High Court in the case of CIT v. Sundowner Offshore International (Burmuda) Ltd.  338 ITR 147/ 183 Taxman 365 considered a similar case in which the Tribunal, following the Third Member order in the case of Saipem S.P.A. (supra), had held that the mobilization charges received by the non-resident company outside India attributed to the transportation of rig outside the territorial waters of India, were not chargeable to tax u/s 44BB. Reversing such order of the tribunal, the Hon’ble High Court has held that the mobilization charges received by the assessee attributable to transportation of rig from outside India have to be taken into account for the purpose of computing income u/s 44BB. In view of the said judgment of the Hon’ble Uttarakhand High Court, it is vivid that the amount of Rs. 14.69 crore is liable to be considered for the purpose of section 44BB of the Act. No contrary judgment has been brought to our notice by the learned AR, who has only made a submission that he wants to keep the issue alive. In view of the above discussed legal position, we uphold the impugned order by dismissing ground no.1.
5. Ground no.2 is against treating disputed, unrealized and unpaid service tax of Rs. 98,41,201 as income of the assessee taxable u/s 44BB of the Act.
6. The facts apropos this ground are that the assessee raised invoice of US$ 5288490 on Hardy pertaining to service tax. This amount was not included in the gross receipts for the purpose of section 44BB on the ground that the same was not collected and the amount was disputed and unrealized. On being show caused as to why this amount be not included, the assessee submitted that there was dispute with Hardy who had refused to make such payment and it was eventually in August 2007 that a final settlement was reached under which Hardy paid US$ 3.96 million in full and final settlement of all the pending claims in this regard. As the settlement was reached in the subsequent year, the assessee received money and offered it for taxation in the previous year relevant to assessment year 2008-2009. Copy of the computation of income for the said succeeding year was also submitted. The A.O. observed that the assessee had offered US$ 3.01 million pertaining to service tax in the succeeding year. Remaining amount of US$ 2.27 million was held to be taxable in the instant year. This resulted into addition of Rs. 98,41,201 in the total income of the assessee.
7. We have heard the rival submissions and perused the relevant material on record. The learned Counsel for the assessee contended that the amount of Rs. 98.41 lac was not liable to be included for two reasons. Firstly, the provisions of section 44BB do not encompass items of such nature within its purview and secondly, the amount in question did not accrue to the assessee. In support of first contention he relied on an order passed by the Mumbai Bench of the Tribunal in Islamic Republic of Iran Shipping Lines v. Dy. CIT  46 SOT 101 (URO)/11 taxmann.com 349 holding that the amount of service tax, which is a statutory liability, cannot be included in the total receipts for determining the presumptive income u/s 44B of the Act because there is no element of profit in it. He also invited our attention towards the judgment of the Hon’ble Uttarakhand High Court in the case of DIT v. Schlumberger Asia Services Ltd.  317 ITR 156/ 186 Taxman 436 (Uttarakhand) holding that the reimbursement of custom duty paid by the assessee being statutory in nature cannot form part of amount for the purpose of deemed profit u/s 44BB unlike the other amounts received towards reimbursement. The learned AR contended that the Mumbai Bench of the Tribunal in the aforenoted case of Islamic Republic of Iran Shipping Lines (supra) also considered this judgment of the Hon’ble Uttarakhand High Court supporting the assessee’s contention.
8. On the second aspect it was submitted that in fact there was no accrual of income in the current year to the extent of Rs. 98.41 lakh because the invoice raised by the assessee on Hardy was not accepted by the latter and it remained unrealized. It was submitted that only when a settlement was reached in the subsequent year by which the assessee received US$ 3.01 million pertaining to the service tax that the same was promptly offered for taxation. He relied on certain judgments to contend that the income in such circumstances cannot be said to have accrued at all in the current year relevant to the assessment year under consideration.
9. The learned Departmental Representative supported the impugned order by relying on an order passed by the Delhi Bench of the Tribunal in the case of Dy. DIT (International Taxation) v. Technip Offshore Contracting BV  29 SOT 33 in which it has been categorically held that the income from service tax collected by the assessee is directly in connection with the services and facilities provided by it and the same is includible in the receipts for the purposes of determination of profit as spelt out in section 44BB of the Act. The learned Departmental Representative submitted that the Mumbai Bench of the Tribunal was not justified in taking a contrary view from the one taken by the Delhi Bench of the Tribunal in the case of Technip Offshore Contracting BV (supra), which case was promptly brought by the Revenue to the notice of the Mumbai Bench and such fact is verifiable from the said order itself. The learned Departmental Representative contended that the decision in the case of Islamic Republic of Iran Shipping Lines (supra) has emerged in assessee’s favour by relying on the Hon’ble Uttarakhand High Court in the case of Schlumberger Asia Services Ltd. (supra) which decided an altogether different aspect of the matter. He submitted that in the case of Schlumberger Asia Services Ltd. (supra) the question was about the reimbursement of customs duty paid by the assessee on equipment which was to be utilized for rendering of services as specified in the section. Taking us through the language of section 44BB, the learned Departmental Representative contended that this section is a special provision for computing profits and gains in connection with the business of exploration etc. of mineral oils. In the opinion of the learned Departmental Representative, the custom duty paid by the assessee in the case of Schlumberger Asia Services Ltd. (supra) on the import of ships or other equipments was rightly not includible within the ambit of section 44BB which talks of 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 provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction of production of, mineral oils in India’. Coming back to the facts of the instant case, he submitted that the payment of service tax can have no separate identification from the amount received by the assessee on account of provision of services. Thus he summed up his argument by submitting that the service tax is an integral part of “the amount paid or payable……..on account of the provision of services and facilities’ and as such is liable to be included within the scope of section 44BB.
10. On the second aspect, the learned Departmental Representative submitted that the assessee was following mercantile system of accounting in which the income arises when a right to receive an income is acquired. He argued that by raising an invoice on Hardy, the assessee received such right to receive the income in the year under consideration and hence it was liable to be considered for the purpose of inclusion u/s 44BB of the Act.
11. We have heard the rival submissions in extenso and perused the relevant material in the light of precedents cited before us. The undisputed facts on this issue are that the assessee raised invoice of US$ 5.28 million on Hardy towards service tax in connection with its income which is otherwise includible u/s 44BB of the Act. Hardy did not accept the liability arising pursuant to such invoice and disputed the same. The amount remained unrealized. It is only in the subsequent year that a settlement was reached between the parties whereby the assessee received US$ 3.01 million in full and final settlement of its invoice for US$ 5.28 million and offered it for taxation. We have perused the Computation of total income of the assessee for assessment year 2008-2009 from which it can be seen that the income of US$ 3.14 million from Hardy has been included. We have also gone through the assessee’s return of income for the said subsequent year which divulges the total income shown in the computation of total income at Rs. 303271630. It indicates that the assessee included Indian equivalent of US$ 3.14 million in its income for the succeeding year on the settlement of dispute. The Assessing Officer has also acknowledged this fact on page 4 of the assessment order. That is the reason for which he proceeded to make addition for the balance amount of US$ 2.27 millions.
12. The main plank of the submissions of the learned Departmental Representative in this regard has been that the assessee was following mercantile system of accounting and as such the raising of invoice led to the accrual of income. It is noted that under the mercantile system of accounting, deduction for expenses is allowed when liability to pay such expenses is incurred irrespective of the fact whether such an amount has been paid or remained unpaid at the end of the year. In the like manner, income, under such a method of accounting, is recognized on accrual basis. In other words, only when the assessee finally acquires a right to receive such income, that it is charged to tax. Actual receipt of such amount, whether before or after accrual, is of no consequence. The material thing is the time of its accrual. Once an income has accrued, it is liable to taxed, notwithstanding the fact that it was not received during the year. In the same manner, if some amount has been received, which does not represent the income accrued during the year, the same shall not be charged to tax and will continue to retain the character of liability till the time of its accrual. Only when such amount accrues as income, the hitherto liability will get converted into income. Thus what is relevant to magnetize tax under the mercantile system of accounting is the fact of accrual of income during the year and not the receipt of any amount or non-receipt of income. Unless an income has actually accrued there can be no question of its inclusion in the total income.
13. It is trite that a mere claim of income without any enforceable right does not result into any income. In the like manner there does not arise any liability to pay against whom such a claim is made. Thus at the stage of making such a claim which has no contractual or legal force, it cannot be said that any income has accrued to the person making such a claim or any liability for expenditure has been incurred in the hands of a person on whom such a claim is made. If it remains a mere claim without the force of any enforceable right to receive, practically there can be no accrual of income. In the case of Godhra Electricity Co. v. CIT  225 ITR 746/91 Taxman 351 (SC) the assessee electricity company, after enhancing tariff, was restrained from realizing the enhanced rate. Having never been able to receive the enhanced tariff, it was taken over by the State Electricity Board. The Revenue took the stand that since the assessee had issued the bills in respect of the enhanced tariff, such amount accrued to it and hence became taxable. Repelling such contention, the Hon’ble Supreme Court held that no real income accrued to the assessee and nothing on that count could be added even though the assessee followed mercantile system. Thus it is manifest that only when some enforceable right to receive the amount vests in the claimant simultaneous with or after making a claim, that the income accrues. In the absence of any such enforceable right, it does not lead to accrual of any income. The concept of “real income” thus gives a pragmatic and rational meaning to the concept of “accrual of income”. Rather the former supplements the latter so as to give a true colour and meaning to the definition of “income” liable to tax.
14. Adverting to the facts of the instant case it is noticed that the assessee lodged a claim of US$ 5.28 million towards service tax on Hardy, which was disputed and not accepted by the other party. Naturally, the claimed amount was not realized as well. In that sense of the matter, it remained just a claim not backed by any right to receive the income. It is only in the subsequent year that when the dispute was finalized that a settlement was reached under which Hardy agreed to pay and the assessee agreed to receive US$ 3.14 million towards outstanding service tax dues in full and final settlement of the claim of US$5.28 million. On such acknowledgement of liability by Hardy to the tune of US$ 3.01 million, it can be said that the assessee acquired a right to receive the amount and that too when such liability was acknowledged by Hardy. This event took place in the subsequent year. The assessee very rightly offered US$ 3.01 million in the subsequent year, which has been correctly assessed by the AO in such later year. There is absolutely no question of adding the remaining amount in the current year by holding that the assessee acquired any right to receive the amount. In fact, there was no accrual of income on this count in the current year. The situation would have been different if Hardy had accepted the liability of US$ 5.28 million or US$ 3.01 million in the previous year relevant to the assessment year under consideration and the amount had remained unpaid. In that case the income would have accrued to the assessee in the instant year. Since the raising of invoice on Hardy in the current year was only a one-sided claim not accepted by Hardy, the same in our considered opinion did not bestow any right on the assessee to receive the income in the current year. In view of the foregoing discussion it is clear that the assessee did not acquire any right to receive the balance amount of US$ 2.27 million in the current year which has been included by the Assessing Officer in the total income of the assessee. Neither such amount accrued to the assessee nor it was ever realized. In that view of the matter, we accept the argument advanced by the ld. AR in this regard.
15. Insofar as the submissions made by both the sides on the inclusion or otherwise of the amount of service tax in the aggregate amount u/s 44BB of the Act is concerned, it is found that the Mumbai Bench on the one hand and Delhi Bench on the other in the cases discussed above have expressed diagonally opposite views. Whereas the Delhi Bench in the case of Technip Offshore Contracting BV (supra) has categorically held that the service tax collected by that assessee was directly in connection with the services and facilities provided by it to the ONGC and the same was includible in the receipts for the purpose of determination of profits as per section 44BB of the Act, the Mumbai Bench of the Tribunal in the case of Islamic Republic of Iran Shipping Lines (supra) has held that the amount of service tax was not includible in the total receipts for determining the presumptive income u/s 44B of the Act as it did not involve any element of profit. In the backdrop of such conflicting decisions, we would have ordinarily referred the matter to the Hon’ble President for constitution of Special Bench for resolving the conflict in the views. We are not making any such reference for the reason that the amount in question has not accrued to the assessee at all and as such there can be no question of considering this amount for the purpose of section 44BB of the Act. It is only when at the first stage there is receipt or accrual of income, that the question of the second stage, being its inclusion or otherwise within the purview of section 44BB, can arise. As we have held above that the assessee had not acquired any right to receive US$ 2.27 million on account of service tax, being the first step, we, therefore need not embark upon the second step, being its inclusion or otherwise in the receipts for the purposes of section 44BB. As such we desist from giving any finding on the inclusion or exclusion of the amount of service tax in the income of the assessee for the purpose of section 44BB of the Act. This issue is, therefore, left open to be decided in an appropriate case.
16. This ground is, therefore, allowed by holding that the unpaid service tax of Rs. 98.41 lakh did not accrue to the assessee. Hence it is not available for inclusion in the amount as referred to in section 44BB of the Act.
17. Ground no.3 is against charging of interest u/s 234B.
18. Having heard the rival submissions and perused the relevant material on record we find that the issue of charging of interest u/s 234B in the present case is no more res integra in view of the judgment of the Hon’ble jurisdictional High Court in the case of DIT (International Taxation) v. NGC Network Asia LLC  313 ITR 187 (Bom.) in which it has been held that when the duty is cast on the payer to deduct tax at source, on failure of the payer to do so, no interest can be charged from the payee assessee u/s 234B. The same view has been reiterated in DIT (IT) v. Krupp UDHE GmbH  38 DTR 251 (Bom.). As the assessee before us is a non-resident, naturally any amount payable to it which is chargeable to tax under the Act, is otherwise liable for deduction of tax at source. In that view of the matter and respectfully following the above precedents, we hold that no interest can be charged u/s 234B of the Act. This ground is allowed.
19. In the result, the appeal is partly allowed.