Case Law Details
Recently Mumbai Bench of the Income-tax Appellate in the case of Islamic Republic of Iran Shipping Lines Vs. DCIT [I.T.A. No. 8845/Mum/2010 dated 20 April, 2011] held that service tax collected from customers on behalf of the Government cannot be included in the total receipts while determining its presumptive income under section 44B of the Income-tax Act, 1961.
Facts
• Islamic Republic of Iran Shipping Lines (“the assessee”), engaged in operation of ships, had filed its tax return for assessment year 2007-08, offering income as per the provisions of section 44B read with section 172 of the Act. It had also received certain sum as service tax collected from its customers which it did not include in the receipts while determining its presumptive income under section 44B of the Act.
• During the course of the assessment proceedings, the assessing officer denied the benefit of section 44B of the Act to the assessee for lack of evidence to substantiate its claim that it is engaged in the business of operation of ships and accordingly, invoked rule 10 of the Income-tax Rules, 1962, assessing the income of the assessee on a presumptive basis at ten percent of the gross receipts. Further, he proposed to include the service tax collected in the gross receipts for determining the presumptive income.
• Against the aforesaid draft order, the assessee filed its objections before the Dispute Resolution Panel (“DRP”). The DRP confirmed the action of the assessing officer regarding denial of the benefit of section 44B of the Act. Further, relying on the decision in the case of DDIT (IT) v. Technip Offshore Contracting BV [2009] 29 SOT 33 (Del), the DRP also confirmed inclusion of the amount of service tax collected in the gross receipts.
Note: With regard to the applicability of section 44B of the Act, the Tribunal remanded the matter to the assessing officer for examining the factual details and hence the same has not been discussed in detail. We have discussed here under the issue in relation to the inclusion of the amount of service tax collected in the gross receipts.
Assessee’s contentions
• Service tax is a statutory levy and no profit can be made on the same as it is being collected on behalf of the Government and is being deposited with the Government
• Furthermore, the assessee relied on the decision in the case of CIT v. Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769(Bom), where it was held that the excise duty and sales tax could not be included in the total turnover for the purpose of computation of deduction under section 8oHHC of the Act, as there is no element of profit involved.
• As regards the decision in the case of Technip Offshore Contracting BV (above), it was contended that the decision in the case of Sudarshan Chemicals Industries (above) was not considered, and hence, the same cannot be followed.
• The assessee also relied on the decision in the case of DIT (IT) v. Schlumberger Asia Services Ltd. [2009] 317 ITR 156 (Uttarakhand), where it was held that reimbursement towards customs duty cannot form part of the gross amount for the purpose of computing deemed profits under section 44BB of the Act.
Revenue’s contentions :- The decision in the case of Schlumberger Asia Services (above) was rendered in the context of customs duty and hence would not apply to the facts of the case under consideration. It also emphasized on the direct decision in the matter of service tax in the case of Technip Offshore Contracting BV (above), where it was held that service tax collected by the assessee should be included in the total receipts for the purpose of determining presumptive income under section 44BB of the Act.
Tribunal – Observation and Ruling – The Tribunal relied on the decision in the case of Sudarshan Chemicals Industries Ltd. (above) and held that the principle laid down by the Court in the context of the tax ability of excise duty and sales tax would equally apply to service tax as well. The Tribunal dissented from the decision in the case of Technip Offshore Contacting BV (above), on the ground that the decision in the case of Sudarshan Chemicals Industries Ltd. (above) was not considered in that case. Considering the above, the Tribunal held that service tax, being a statutory liability, does not involve any element of profit and the assessee is merely collecting the same from its customers on behalf of the Government. Accordingly, the amount of service tax cannot be included in the total receipts for determining the presumptive income.
Conclusion:- This decision has come as a welcome relief for foreign shipping companies offering their income under presumptive taxation, as the tax department has been relying heavily on the decision in the case of Technip Offshore Contacting BV (above) to tax the statutory levies collected by them.
