What is the meaning of excise duties

The Federal Court had to consider the distinction between the duty of excise and a tax on sale in Province of Madras vs. B. Paidanna and Sons, 1942 F. C. R. 90. It is there observed as follows:

“Plainly, a tax levied on the first sale must, in the nature of things, be a tax on the sale by the manufacturer or producer; but it is levied upon him qua seller and not qua manufacturer or producer. It may well be that a manufacturer or producer is sometimes doubtly hit……….. If the tax payer who pays a sales tax is also a manufacturer or producer of commodities subject to a central duty of excise, there may no doubt be overlapping in one sense, but them is no overlapping in law. The two taxes which he is called on to pay are economically two separate and distinct imposts. There is, in theory, nothing to prevent the Central Legislature from imposing a duty of excise on a commodity as soon as it comes into existence, no matter what happens to it afterwards, whether it be sold, consumed, destroyed, or given away…………. It is the fact of manufacture which attracts the duty even though it may be collected later. In the case of a sales tax, the liability to tax arises on the occasion of a sale and a sale has no necessary connection with manufacture or production.”

The Court further observed that in the Constitution Act the whole of the taxing power in this particular sphere (power to impose duties of excise) is expressly apportioned between the Centre and the Provinces, to the one being assigned the power to impose duties of excise, to the other taxes on the sale of goods. It is natural enough, when considering the ambit of an express power in relation to an unspecified residuary power, to give a broad interpretation to the former at the expense of the latter. The case however is different where as in the Constitution Act there are two complementary powers, each expressed in precise and definite terms. There can be no reasons in such a case for giving a broader interpretation to one power rather than to the other; and there is certainly no reason for extending the meaning of the expression “duties of excise” at the expense of the Provincial power to levy taxes on the sale of goods.

10. In The Governor-General in Council vs. The Province of Madras, 1915 F. C. R. 179, the Judicial Committee approved of the distinction drawn in this case between the excise duty and a tax on sale. There the question arose in respect of tax on the sale of excisable goods. Their Lordships observed as follows:

“An exhaustive discussion of this subject (namely, the meaning of the term ‘duty of excise’) from which their Lordships have obtained valuable assistance is to he found in the judgment of the Federal Court in Re The Central provinces and Berar Sales of Motor Spirit and Lubricants taxation Act No. XIV of 1938, 1939 F. C. R. 18. Consistently with this decision their Lordships are of opinion that a duty of excise is primarily a duty levied on a manufacturer or producer in respect of the commodity manufactured or produced. It is a tax on goods not on sales or the proceeds of sale of goods. Here, again, their Lordships find themselves in complete accord with the reasoning and conclusions of the Federal Court in B. Paidanna case, (supra). The two taxes, the one levied on a manufacturer in respect of his goods, the other on a vendor in respect of his sales, may, as is there pointed out, in one sense overlap. But in law there is no overlapping. The taxes are separate and distinct imposts. If in fact they overlap, that may be because the taxing authority, imposing a duty of excise, finds it convenient to impose that duty at the moment when the exercisable article leaves the factory or workshop for the first time on the occasion of its sale. But that method of collecting the tax is an accident of administration; it is not of the essence of the duty of excise, which is attracted by the manufacture itself. That this is so is clearly exemplified in those excepted cases in which the Provincial, not the Federal, legislature has power to impose a duty of excise. In such cases, there appears to be no reason why the Provincial legislature should not impose a duty of excise in respect of the commodity manufactured and then a tax on first or other sales of the same commodity. Whether or not such a course is followed appears to be merely a matter of administrative convenience. So, by parity of reasoning, may the Federal Legislature impose a duty of excise on the manufacture of excisable goods and the Provincial legislature impose a tax on the sale of the same goods when manufactured.”

11. This discussion clearly shows that the relevant question is what is the nature of the tax. Excise duty is a tax on manufactured goods. Octrai duty is a tax levied on the entry of goods within a particular area. Under the Excise Act, tobacco becomes excisable goods within the meaning of Item 9 in the Schedule. The subsequent use of such manufactured goods in making different articles only affects the rate of tax. Therefore, tobacco becomes subject to excise duty when it reaches the stage of manufacture mentioned in Item 9 of the Schedule to the Excise Act. Even before it is converted into bidis or any other article mentioned in the entry it has become excisable goods and liable to pay excise duty. The levy of such duty is therefore not in conflict with the levy of an impost on the entry of the goods within a certain area. [ AIR 1950 SC 11 : (1950) SCR 15 : (1950) SCJ 148 (SUPREME COURT OF INDIA) Firm Ram Krishna Ramnath Agarwal, Kamptee 
Versus The Secretary, Municipal Committee, Kamptee]

 

Taxing Law in India

Note

 

1.  Accounting Standards U/s 145(2) of IT Act
2. Authority for Advance Rul¬ings (Procedure) Rules, 1996
3. Authority for Advance Rulings (Procedure for Appointment as Chairman and Vice-Chairman) Rules, 2016
4. Bank Term Deposit Scheme, 2006 – U/s 80C(2)(xxi)
5. Banking Cash Transaction Tax
6. Banking Cash Transaction Tax Rules, 2005
7. Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
8. Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Rules, 2015
9. Capital Gains Accounts Scheme, 1988
10. Centralised Processing of Statements of Tax Deducted at Source Scheme, 2013
11. Commodities Transaction Tax
12. Commodities transaction tax rules, 2013
13. Condonation of Delay in Filing Refund Scheme
14. Direct Tax Dispute Resolution Scheme Rules, 2016
15. Electoral Trusts Scheme, 2013
16. Electronic Filing of Re¬turns of Tax Collected at Source Scheme, 2005
17. Electronic Filing of Returns of Tax Deducted at Source Scheme, 2003
18. Electronic Furnishing of Return of Income Scheme, 2004
19. Electronic Furnishing of Return of Income Scheme, 2007
20. Employees’ Stock Option Plan or Scheme
21. Equalisation levy Rules, 2016
22. Equity Linked Savings Scheme, 2005
23. European Economic Community International Institutional Partners (ECIIP) Scheme, 1993
24. Expenditure-tax Act, 1987
25. Expenditure-tax Rules, 1987
26. Furnishing of Return of Income on Internet Scheme, 2004
27. Guidelines for providing train¬ing by Shipping Companies opting for Tonnage Tax scheme under Chapter XII-G
28. Income Declaration Scheme Rules, 2016
29. Income Tax Ombudsman Guidelines 2010
30. Income-tax (Appellate Tribunal) Rules, 1963
31. Income-tax (Certificate Proceedings) Rules, 1962
32. Income-tax (Dispute Resolution Panel) Rules, 2009
33. Income-tax Act, 1961
34. Income-tax Rules, 1962
35. Income-tax Settlement Commission(Procedure) Rules 1997
36. Income-tax Welfare Fund Rules
37. Industrial Park Scheme, 2002
38. Industrial Park Scheme, 2008
39. Interest-tax Act, 1974
40. Investment Deposit Account Scheme, 1986
41. Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993
42. Kisan Vikas Patra Rules, 1988
43. National Savings Certificates (VIII Issue) Rules, 1989
44. National Savings Scheme Rules, 1992
45. POST OFFICE (MONTHLY INCOME ACCOUNT) RULES, 1987
46. Pradhan Mantri Garib Kalyan Deposit Scheme, 2016.
47. PROHIBITION OF BENAMI PROPERTY TRANSACTIONS ACT, 1988
48. Prohibition of Benami Property Transactions Rules, 2016.
49. Public Provident Fund Scheme, 1968
50. Rajiv Gandhi Equity Savings Scheme, 2012
51. Rajiv Gandhi Equity Savings Scheme, 2013
52. Reduction or Waiver of Interest u/s 234A/234B/234C
53. REVERSE MORTGAGE SCHEME, 2008
54. Rules
55. Scheme for Bulk Filing of Returns by Salaried Employees, 2002
56. Scheme for Filing of Returns by Salaried Employees through Employer, 2004
57. Scheme for Furnishing of Paper Returns of Tax Collected at Source, 2005
58. Scheme for Furnishing of Paper Returns of Tax Deducted at Source, 2005
59. Scheme to develop, operate and maintain special economic zones under section 80-IA of Income-tax Act read with rule 18C(2) of Income-tax Rules
60. Schemes
61. Securities Lending Scheme, 1997
62. Securities Transaction Tax
63. Securities Transaction Tax Rules, 2004
64. Site Restoration Fund Scheme, 1999
65. Social Security Certificates Rules, 1982
66. Software Technology Parks Scheme
67. Sovereign Gold Bonds Scheme, 2015
68. Tax Return Preparer Scheme, 2006
69. Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana Rules, 2016
70. Wealth Tax Act, 1957
71. Wealth Tax Rules, 1957
72. Wealth Tax Settlement Commission(Procedure) 1997

Offences and Prosecution under Income Tax Act 1961

jUDGE

Collection and recovery of Income Tax

Income Tax Act 1961

Note

Procedure For Assessment of Income Tax in India

Income Tax Act 1961

ACCOUNTING

Income Tax Authorities

INCOME TAX ACT 1961

Note

Indian Oil Corporation Ltd. Vs. State of Bihar & ANR.[SC 2017 NOV]-Taxation

KEYWORDS : Entry Tax

Capture

The enacting part of Section 3(2), the Appellant is certainly a dealer liable to pay tax under the VAT Act, in that it is a registered dealer falling within Section 3(1) of the said Act. Therefore, any argument based on gross turnover is wholly unnecessary to include the Appellant under Section 3(2) of the Entry Tax Act.

ACT: ENTRY TAX-Bihar Value Added Tax Act, 2005 (VAT Act)

DATE: November 14, 2017.

BENCH:  (R.F. Nariman)  (Sanjay Kishan Kaul)


SUPREME COURT OF INDIA

Indian Oil Corporation Ltd. Vs. State of Bihar & ANR.

[Civil Appeal No.3018 of 2017] [Special Leave Petition (Civil) No.15875 of 2017]

[Special Leave Petition (Civil) No.15893 of 2017] [Special Leave Petition (Civil) No.15896 of 2017] [Special Leave Petition (Civil) No.15899 of 2017] [Special Leave Petition (Civil) No.15900 of 2017] [Special Leave Petition (Civil) No.15926 of 2017] [Special Leave Petition (Civil) No.16192 of 2017]

R.F. Nariman, J.

1. The present appeal and special leave petitions arise out of demands made from the Appellant for payment of Entry Tax under the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1993 (hereinafter referred to as the Entry Tax Act).

2. The Appellant has its marketing division in the State of Bihar with branches, inter alia, at Barauni and Patna. It is from these branches that sales of petroleum products are effected. The Corporation receives crude oil, which is imported from outside the State of Bihar, which then enters Bihar, where the Corporation has its oil refinery; and after undergoing certain processes, crude oil is converted into petroleum products, like High Speed Diesel, Petrol etc.

The products manufactured in the Bihar oil refinery are then sent to a branch in Patna, mainly through a pipeline constructed specifically for this purpose. Some part of these petroleum products, namely, High Speed Diesel and Petrol are sold by the Appellant to two other oil marketing companies (OMCs), namely, Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd. (HPCL), who then take the products from the depot of the Corporation situated in Patna and thereafter sell the products to their retail dealers or through their petroleum outlets.

The Appellants, apart from the sales made to these OMCs, also sell the aforesaid petroleum products to local retailers and through petroleum outlets in Patna. The Appellant pays Entry Tax at the rate of 16% when the product enters the local area of Patna and 24.5% VAT is paid and set off against the Entry Tax under Section 3(2) second proviso of the Entry Tax Act for sales made within the local area.

The grievance of the Appellant in the present appeals is that when a sale is made to the OMCs, after payment of Entry Tax, VAT is not set off against the Entry Tax. VAT is not actually paid by the Appellant by reason of a notification dated 4th May, 2006 under the Bihar Value Added Tax Act, 2005 (VAT Act), where, in case of petroleum products sold by the Appellant to OMCs, the levy itself is at the point of sale by the aforesaid OMCs to their retailers or directly to their consumers, and this being the case, the set off of such VAT paid, as claimed by the Appellant, was allowed until the year 2014.

However, pursuant to certain audit objections raised by the Accountant General, Bihar, the aforesaid set offs that were allowed to the Appellant, were re-opened with effect from the assessment year 2008-09, as a result of which set offs that were allowed were now disallowed. The Entry Tax demand arising from such disallowance for the assessment years 2008- 09 till 2014-15 amount to Rs.1,683.03 crores.

3. In Civil Appeal No.3018 of 2017, the impugned judgment dated 22nd October, 2013 of the Patna High Court agreed with the Advance Rulings Authority, and rejected the case of the Appellant under Section 3(2) second proviso of the Entry Tax Act, stating that the set off would not be allowable under the aforesaid proviso.

4. In the seven Special Leave Petitions before us by, a common judgment dated 19th April, 2017, a Division Bench of the Patna High Court framed five questions as follows:

“i) Whether the second proviso to Section 3(2) of the Entry Tax Act is ultra vires to the Constitution?

(ii) Whether interest can be levied in the matter of late payment of entry tax under the Entry Tax Act, by virtue of the provisions of the Bihar Finance Act, and, with the aid of Section 8 of the Entry Tax Act?

(iii) Whether entry tax is liable to be paid when the goods only enter the local area and after such entry is subjected to sell only without there being any use of consumption of the goods in the local area?

(iv) Whether based on audit objection as contemplated under the provisions of Section 33 of the VAT Act, assessment can be re-opened with the aid of Section 8 of the Entry Tax Act?

(v) Whether the assessment undertaken under Section 33 of the VAT Act is permissible after a period of four years in view of the provision of Section 31 of the VAT Act?”

5. Questions 1, 3, 4 and 5 were answered against the assessee, but question 2 was answered in its favour by stating that since there was no substantive provision by which interest could be levied, interest that was charged to the Appellant by the assessment orders in question would have to be set aside.

6. Shri Arvind Datar, learned Senior Advocate appearing on behalf of the Appellant, has referred in copious detail to various provisions of the VAT Act, Rules made thereunder and Form 5 RT-1 made under the VAT Act. He also referred in detail to various provisions of the Entry Tax Act. It is his case that the Entry Tax Act in Bihar, unlike other Entry Tax Acts, was essentially to ensure that VAT was collected under the VAT Act in the State. According to him, the moment products contained in Schedule IV of the said Act suffer tax, the scheme of the Entry Tax Act is that a set off on such goods, which bear VAT, is allowable. According to the learned counsel, Section 3(2) second proviso should be construed in such a manner as would accord with this object and set off, as claimed by the Appellant, cannot, therefore, be denied to it.

According to the learned counsel, it is clear that this practice of allowing set off was followed right up to 2014, showing that both the Government as well as the assessee were clear that the provision had to be worked in this fashion. The reason for retrospectively reopening the assessments made from 2008-09 is due to an audit objection raised only in the year 2014, after which the assessee has so arranged its affairs that set off would be claimable and has, in fact, been allowed by the authorities. According to the learned counsel, the audit objection was itself only on the footing that a 2006 amendment had changed the definition contained in Section 2(1)(c) of the Entry Tax Act of the “entry of goods” and it is for this reason that set off was disallowed, and not the reasons given later by the State.

According to the learned counsel, what has to be seen is the overall picture qua the goods under the Entry Tax Act and once it is clear that the aforesaid goods suffer VAT, then a set off becomes payable. According to the learned counsel, a large portion of Rs.1,683.03 crores that is demanded relate to sales that are made by HPCL and BPCL outside the local area of Patna, which would, therefore, not attract Entry Tax at all. This has not been segregated, and if segregated, the demand for the assessment years in question would fall by at least Rs.1,000 crores. The Appellants were given no opportunity to demonstrate this in detail, despite the fact that they were able to give certificates by HPCL and BPCL for all the assessment years in question that those companies had, in fact, effected sales worth over a thousand crores outside the area of Patna.

7. According to Shri Datar, if this Court were to decide against the appellant on the construction of Section 3(2) second 7 proviso, then, in any case, he would be liable to succeed, as the said proviso should be read down to make it constitutionally valid, as otherwise it would fall foul of Article 14 of the Constitution of India. According to the learned counsel, the same goods cannot bear different rates of tax which are ultimately passed on to the consumers and this ex facie discrimination would, therefore, make the proviso bad in law requiring this Court to read it down, so that, at least so far the Appellant is concerned, a set off would be granted. Also, according to him, in any case, the matter should go back to the Appellate Tribunal to determine as to how much of the sales made by HPCL and BPCL would be outside the Patna area and, therefore, not exigible to Entry Tax at all.

8. Shri S. Ganesh, learned Senior Advocate, appearing on behalf of the Revenue, has countered each of these submissions. According to the learned counsel, a plain reading of Section 3(2) second proviso of the Entry Tax Act would make it clear that the provision is assessee based and not goods based. According to the learned counsel, none of the conditions of the second proviso have been met by the Appellant and only if the said provision is completely rewritten, can the Appellant be given relief. Re-writing of the aforesaid provision, being a legislative function, would, therefore, be outside the judiciary’s ken. According to the learned counsel, in any case, VAT and Entry Tax are separate taxes levied under separate Entries of List II of the Seventh Schedule.

The granting of set off is a matter of indulgence and cannot be claimed as a matter of right. It is of essence that the same person should have paid both Entry Tax and VAT to claim set off. In the present case, the Appellant admittedly pays only Entry Tax and no VAT as there is no levy on the Appellant when it sells oil to other OMCs. According to the learned counsel, Article 14 of the Constitution cannot be invoked in the present case for the reason that there is no clear and hostile discrimination, which is the requirement of several judgments of this Court, before Article 14 can be used to strike down tax legislation. In any event, according to the learned counsel, striking down the second proviso would only result in no set off being claimable at all and would be counterproductive.

The learned counsel made a fervent plea that interest by way of restitution, at least, should be given to the Government since the Writ Petitions that were filed in 2014 resulted in stay orders which have continued till date, making it impossible for the State to recover interest on the demands made. He cited a number of judgments to support all these propositions.


9. Having heard learned counsel for both the parties, it is necessary to set out some of the provisions of the two Acts in question. Since we are directly concerned with the Bihar Entry Tax Act, the following provisions need to be adverted to:

“2. Definitions.-

(1) In this Act unless the context otherwise requires,-

(c) “Entry of goods”, with all its grammatical variations and cognate expressions, means, entry of goods:

(i) into a local area from any place outside such area,

(ii) into a local area from any place outside the State,

(iii) into a local area from any place outside the territory of India, for consumption, use or sale therein. Provided that in case of such goods which are liable to tax under Section-12(1) of the Bihar Finance Act, 1981, entry of goods shall mean entry of goods into local area from any place outside the State for consumption, use or sale therein.

Explanation- Entry of goods into a local area for consumption, use or sale therein from any place outside the territory of India shall also be deemed to be an entry of goods for the purposes of this Act.

3. Charge of Tax-

(I) There shall be levied and collected a tax on entry of scheduled goods into a local area for consumption, use or sale therein for the purpose of development of trade, commerce and industry in the State, at such rate, not exceeding twenty percent, of the import value of such goods, as may be specified by the State Government in a notification published in a official gazette subject to such conditions as may be prescribed:

Provided different rates for different scheduled goods may be specified by the State Government.

Provided further, that if an importer claims that he imported goods notified under sub-section (1) not for the purpose of consumption, use or sale, the burden of proving that the import was for purposes other than for consumption, use or sale shall be on importer importing such goods and making such claim. Provided further, that if an importer claims that he imported goods notified under sub-section (1) not for the purpose of consumption, use or sale, the burden of providing that the import was for purposes other than for consumption, use or sale, shall be on importer importing such goods and making such claim.

(IA) The tax under sub-section (1) shall be continued to be levied till such time as is required to improve infrastructure within the State such as power, road, market condition etc. with a view to facilitate better market condition for trade, commerce and industry and to bring it to the level of, National average.

(2) The tax leviable under this Act shall be paid by every dealer liable to pay tax under Bihar Value Added Tax Act, 2005 or any other person who brings or causes to be brought into the local areas such scheduled goods whether on his own account or on account of his principal or takes delivery or is entitled to take delivery of such goods on such entry:

Provided no tax shall be leviable in respect of entry of such scheduled goods effected by a person other than the dealer if, the value of such goods does not exceed one thousand in a year. Provided further that where an importer of Scheduled goods liable to pay tax under the Act, incurs tax liability, at the rate specified under Section 14 of the Bihar Value Added Tax Act, 2005 (Act 27 of 2005), by virtue of sale of imported Scheduled goods or sale of goods manufactured by consuming such imported Scheduled goods, his tax liability under the Bihar Value Added Tax Act, 2005 (Act 27 of 2005) shall stand reduced to the extent of tax paid under the Act: Provided also that if the sale of such scheduled goods is exempted from tax under any notification issued under Section 7 of the Bihar Value Added Tax Act, 2005, reduction of his liability under the Bihar Value Added Tax Act, 2005, as provided in this section or any notification there under, issued shall not be made.

(1) The amendment made in section 3 of the said Act shall be deemed to be, and to always have been, for all purposes, as validity and effectively in force at all material times (w.e.f. 25.2.1993) (2) Any assessment, collection, adjustment, reduction or computation made or any other action taken or anything done or purported to have been taken or done under the Bihar Finance Act, 1981 12 and the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1993 and notifications issued and rules made there under shall be deemed to be and to have always been, for all purposes, as validly and effectively, assessed, collected, adjusted, reduced, computed or taken or done as if the said Act as amended by this Ordinance had been in force at all material times and accordingly, notwithstanding anything contained in any judgment, decree, or order of any court, or tribunal or other authority:-

(a) no suit or other proceedings shall be maintained of continued in court or tribunal or other authority for the refund of any amount received or realized by way of such tax;

(b) no court, tribunal or other authority shall enforce any decree or order directing the refund or any amount received or realized by way of such tax;

(c) recoveries shall be made in accordance with the third proviso to subsection (2) of Section 3 of the Bihar Tax on Entry of Goods Into Local Areas for Consumption, Use or Sale Therein Act, 1993 of all amounts which could have been collected as tax under the said Act by reason of amendment made in Section 3 by this Ordinance but which had not been collected.

(3) For the removal of doubts, it is hereby declared that no act or omission on the part of any person shall be punishable as an offence which would not have been so punishable if this section has not come into force. Provided that in case of a manufacturer the reduction in tax liability as aforesaid shall only be allowed to industrial units of the small scale sector, the medium scale sector and sick industrial units:

Provided that the said reduction in tax shall be available to manufacturer if the imported scheduled goods are used or consumed in the manufacture of goods which are sold within the State of Bihar or in the course of inter-State trade and commerce or in the course of export out of the territory of India. In case only a part of the goods manufactured out of imported Scheduled goods are sold within the State of Bihar or in the course of inter-State trade and commerce or in the course of export out of the territory of India, the claim for reduction in tax liability shall stand proportionately reduced:

Provided further that such reduction from the tax liability shall be admissible only if the dealer specifically mentions in the returns, filed under Section-24 of the Bihar Value Added Tax Act, 2005 (Act 27 of 2005), the Number, date and the amount of the Challan by which the payment of Entry tax in relation to which the reduction has been claimed, has been made.

(3) The liability to pay tax on Scheduled goods shall only be at the point of first entry into a local area and any subsequent entry or entries into any other local area or areas of the said Scheduled goods shall not be subject to tax provided the subsequent importing dealer produces before the assessing officer the original copy of the cash memo, invoice, bill or challan issued to him by the dealer from whom he purchased or received the said Scheduled goods, and files a true and complete declaration in the Form and manner prescribed: Provided that no tax shall be levied and collected in respect of any motor vehicle which was registered in any other State or Union Territory under the Motor Vehicles Act, 1988 for a period of fifteen months or more before the date on which it is registered in the State under that Act.

THE BIHAR TAX ON ENTRY of GOODS INTO LOCAL AREA RULES, 1993

8. Manner for claiming reduction in the liability to pay sales tax.-

(1) A claim for reduction in the liability to pay sales tax shall be made by registered dealer who is entitled to claim such reduction under sub-section (1) of section 4 or in accordance with the notification issued under sub-section (1) of Section 3 of the Act.

(2) The claim shall be valid only when the amount of entry tax has been paid on the concerned goods. (3) The burden of proving the claim for reduction of sales tax shall be on the dealer.

(4) Such claim shall be made by furnishing a statement in triplicate in Form ET-X which shall be filed along with the quarterly return.

(5) On receipt of the claim in Form ET-X, the authority prescribed for assessment of tax shall scrutinize the same before the date for filing of the next quarterly return and shall satisfy itself regarding the correctness of the claim. He shall make appropriate endorsement in the assessment record of the dealer and sign the certificate in the said form.

(6) Two copies of the statement containing certificate of the assessing authority shall be returned to the dealer. He shall furnish one copy of the form to the authority prescribed under the Bihar Value Added Tax Act, 2005 to enable it to reduce the dealers liability at the time of assessment of sales tax payable under the said Act and shall keep other copy as evidence with himself.

FORM E.T.-X 15

(See Rule 8)

Statement of claim for reduction in the liability of sales tax payable under the Bihar Finance Act, 1981 consequent upon payment of entry tax.

(To be furnished in triplicate)

1. Name of the dealer.

2. Style of business & full address

3. Registration number under the B.T. on E. of G. into L.A. Ord., 1993

4. Registration No. under the Bihar Finance Act, 1981.

5. Period to which the claim relates. I ………… (Full name of the dealer) hereby request for reduction in my liability of sales tax payable under the Bihar Finance Act, 1981 in accordance with the provision of sub-section (1) of section 4 of the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale therein Ordinance, 1993 the notification issued under sub-section (12) of section 3 in respect of the goods on which entry tax has been paid by me/us and which have been sold subsequently and sales tax under the Bihar Finance Act, 1981 has become payable.

PARTICULARS

Sl. No.

Description of schedule goods on which entry tax has been paid by the dealer

Concerned Bill / Invoice / Challan No. & date in case of Motor Vehicles mention Chassis no. & Engine No. also

Quantity

Value.

Amount of entry tax paid (Quote T.C. No. & date)

Period during which sold

C.M. Bills / Invoice no. & date relating to sale

Sales tax payable

Sale tax payable after reduction of liability

Remarks

I hereby declare and certify that the above particulars are collect and complete to the best of my knowledge and belief.

I further certify that the amount of entry tax shown in this statement has been paid by me. Signature of the dealer or his declared manager.

CERTIFICATE

(To be signed by the assessing officer)

Certified that the particulars furnished in this statement have been scrutinised by me and found to be correct. The amount of entry tax on the goods concerned, to the extent of which the liability of sales tax under the Bihar Finance Act, 1981 has been claimed to be reduced has been duly paid by the dealer.

Signature & designation of the authority.”

10. So far as the Bihar VAT Act is concerned, it is necessary to refer to the following provisions:

“3. Charge of tax.-

(1) Every dealer who is registered under the Bihar Finance Act, 1981 (Bihar Act 5 of 1981), as it stood before its repeal by section 94, shall be liable, on or after the commencement of this Act, to pay tax under this Act on sale or purchase, made by him.

(2) Every dealer to whom the provisions of subsection (1) do not apply and whose gross turnover of sales calculated from the commencement of the year ending on the day immediately before the commencement of the Act, exceeds the specified quantum, as applicable to him under the Bihar Finance Act, 1981, as it stood before its repeal by Section 94, on the last day of such year shall, in addition to the tax, if any, payable by him under any other provision of this Act, be liable to pay tax under this Act on all his sales.

(3) Every dealer to whom the provisions of subsection (1) or sub-section (2) do not apply, shall be liable to pay tax under this Act –

(a) on all his sales of goods which have been imported by him from any place outside Bihar, with effect from the day on which he effects first sale of such goods;

or (b) in any other case, from the date on which his gross turnover, during a period not exceeding 18 twelve months, first exceeded such taxable quantum as may be prescribed: Provided that the taxable quantum as may be prescribed under this sub-section shall not exceed ten lakh rupees. Provided further that different taxable quantum may be prescribed for different classes of dealers.

13. Point or points in series of sales at which Sales Tax shall be levied.-

(1) (a) Subject to the provisions of section 16 and section 17, tax on sale of goods shall be levied at each point in a series of sales in Bihar by a dealer liable to pay tax under this Act.

(b) Where the tax is levied at each point of sale, the tax payable by a dealer at any point shall be the amount arrived at after deducting, the input tax credit specified under section 16 or section 17, from the tax computed at that point of sale.

(2) (a) Notwithstanding anything contained in subsection (1), the tax on the sale of goods specified in Schedule IV shall be levied at such point or points in a series of sales in the State as the State Government may, by notification, specify.

(b) Where by a notification published under clause (a), the State Government specifies, in respect of any goods specified in Schedule IV, that the tax shall be levied at the first point of their sale in the State of Bihar by a dealer, subsequent sales of the same goods in the State of Bihar shall not be levied to tax, if the dealer making subsequent sale produces before the prescribed authority the original copy of the cash memo, or invoice or bill issued to him and files a true and complete declaration in the form and in the manner prescribed.

(c) Where by a notification published under clause (a), the State Government specifies, in respect of any goods specified in Schedule IV, that the tax shall be levied at more than one point or on all points of sale, the amount of tax paid at each preceding stage of sale shall be adjusted against the amount of tax payable at each subsequent stage of sale in the manner prescribed.

(d) The declaration referred to in clause (b) shall be issued by the selling dealer to the purchasing dealer not later than the 30th day of September of the year following the year to which such sales relate.

(3) If upon information, the prescribed authority has reasons to believe that the selling dealer has, without reasonable cause, failed to issue to the purchasing dealer the declaration referred to in subsection (2), he shall, after giving the selling dealer a reasonable opportunity of being heard, direct that the selling dealer shall pay, by way of penalty, a sum of rupees five thousand per month for every month of default or the amount of tax involved, whichever is less.

14. Rate of Tax.-

(1) Tax shall be payable on the sale price of-

(a) the goods specified in the Schedule II, at the rate of one percent;

(b) the goods specified in the Schedule III, at the rate of six percent;

(bb) the goods specified in the Schedule IIIA, at the rate of five percent;

(c) the goods specified in the Schedule IV, at the rate not below ten percent and not exceeding fifty percent and subject to such conditions and restrictions, as the State Government may, by notification specify.

(d) any other goods, not specified in the Schedules I, II, III, IIIA and IV, at the rate of fifteen percent.

(2) The State Government may, by notification, alter any Schedule to this Act. 16. Input Tax Credit (3) No input tax credit under sub-section (1) shall be claimed or be allowed to a registered dealer –

(a) in respect of goods specified in Schedule-IV or such other goods as may be prescribed; 35. Taxable Turnover.-

(1) For the purposes of this Act, the taxable turnover of a dealer shall be that part of his gross turnover which remains after deducting therefrom –

(f) sale price at the subsequent stages of sale of such goods as are specified in Schedule IV of the Act as being subject to tax at the first point of their sale in the State of Bihar, if necessary evidence as required by sub-section (2) of section 13 are filed with the return filed by the dealer under sub-section (3) of section 24.

Schedule-IV

(See section 14)

Goods

1.

Country liquor including spiced country liquor.

2.

Portable spirit, wine or liquor whether imported or manufactured in India.

3.

High Speed Diesel Oil and Light Diesel Oil.

4.

Motor Spirit.

5.

Natural Gas.

6.

Aviation Turbine Fuel

7.

Tobacco and tobacco products, except biri and unmanufactured tobacco (commonly known as “Khaini”), and other unmanufactured tobacco used in manufacture of biri.

Bihar Value Added Tax Rules, 2005

18. Taxable turnover- For purposes of section 35 the taxable turnover of the dealer shall be that part of his gross turnover which remains after deducting therefrom:

(6) Sale price at the subsequent stages of sale of such goods:

(a) specified in Schedule IV of the Act as being subject to tax at the first point of their sale in Bihar, or

(b) on the sale whereof tax at the maximum retail price has been paid at the first point of its sale in Bihar, if necessary evidence as required by sub-section (2) of section 13 is annexed with the return required filed by the dealer under sub-section (1) of section 24.

19. Returns. –

[(2) Every registered dealer, other than a dealer paying tax under sub-section (1) or sub-section (1A) or sub-section (4) of Section 15, shall furnish to the authority specified in Rule 62:-

(a) A quarterly return in Form RT-I in duplicate; (b) An annual return in Form RT-III in duplicate. Provided that every registered developer, who has opted to pay compounding tax under the provisions 22 of Section-15C of Bihar Value Added Tax Act, 2005 in lieu of tax payable under the Act shall furnish to the authority specified in Rule 62-

(a) a quarterly return in Form RT-IA;

(b) an annual return in Form RT-IIIB.

FORM RT-I

[See Rule 19(2)]

Quarterly Return under Section 24 of the Bihar

Value Added Tax Act, 2005

Name and style of the dealer:

TIN: Period of Return (Quarter and Year):

Part I (Details of turnover/transfers)

Gross Turnover (including value of debit notes):

1

Deductions:

2

Sales in the course of inter-state trade and commerce

3(i)

Value of sales outside the State under Section 4 of the Central Sales Tax Act, 1956

3(ii)

Value of stock transfer to outside the State

4

Value of sales return of goods within 6 months of sale under the Act

5

Export sales

6

Amount of other allowable deductions [As per Box A]

7

Total of deductions [2+3+4+5+6]

8

Taxable turnover [1-7]

Box A (other allowable deductions)

Deduction on account of:

Value

(ii)

Sale of Petrol, Diesel, ATF and Natural Gas by an Oil Company to another Oil Company (a list of different goods to be annexed to this return separately alongwith their respective sales values) [Details of goods sold to different companies to be submitted as per Box E-2]

11. A notification dated 4th May, 2006 issued under Section 13(2)(a) of the VAT Act reads as follows: “In exercise of the powers conferred by clause (a) of sub-section (2) of section 13 of the Bihar Value Added Tax Act, 2005 the Governor of Bihar is pleased to direct that tax on the sale of goods specified in column 2 of the table appended hereto shall be levied at point or points in a series of sales specified in column 3 of the said table subject to the conditions and restrictions specified in column 4 of the said table.

Table

Description of Goods

Stage at which said tax is to be levied

Conditions and Restrictions

1

Motor spirit (Petrol)

(A) At the point of sale by importer if the goods are imported from outside Bihar or at the point of sale by 24 manufacturer if the goods are manufactured in Bihar or,

(b) at the point of sale by oil companies to the retailer or direct to the consumers, if goods are sold by these companies.

2

High Speed Diesel Oil and Light Oil

Do

12. Since the set off in question depends upon the interpretation of Section 3(2) of the Entry Tax Act, it is necessary to state, at the outset, that the following conditions need to be satisfied for claim of set off under the said provision:

(i) First and foremost, under Section 3(2) itself, the tax leviable by way of Entry Tax can only be paid by every dealer liable to pay tax under the VAT Act;

(ii) The set off can only be granted if the assessee is an importer of scheduled goods, who is liable to pay tax under the VAT Act;

(iii) The assessee must incur tax liability at the rates specified under Section 14 of the VAT Act;

(iv) This must only be by virtue of the sale of imported scheduled goods; and

(v) “His” tax liability under the VAT Act will then stand reduced to the extent of tax paid under the Act. 13. It will be seen that the tax leviable under the Entry Tax Act shall be paid by every dealer liable to pay tax under the VAT Act. Under Section 3(1) of the VAT Act, all persons who are registered dealers under the Bihar Finance Act, 1981, as it stood before its repeal, are liable to pay tax under the said Act on sales and purchases made by them. There is no dispute that the Appellant is a registered dealer under the Bihar Finance Act, 1981 and is thus liable to pay tax under the VAT Act.

Condition (i), therefore, is certainly fulfilled.

14. So far as Condition (ii) is concerned, the Appellant is an importer of scheduled goods, viz., petroleum products. Words and expressions that are not defined under the Entry Tax Act shall have the meaning assigned to them under the VAT Act, (See Section 2(2) of the Entry Tax Act). Under the VAT Act, “importer” is defined as follows:

“2. Definitions- In this Act, unless the context otherwise requires: (p) “importer” means a dealer who brings any goods into the State of Bihar or to whom any goods are despatched from any place outside the State of Bihar.” It can be seen from the aforesaid definition that an importer would necessarily refer to a dealer who imports scheduled goods from outside the state. The question arises as to whether, on such goods, the Appellant, as importer, is liable to pay tax under the VAT Act.

15. As is clear from Section 13(1) of the VAT Act, all sales of Schedule II and III goods have to suffer a levy of tax at each point in the series of sales by a dealer liable to pay tax under the said Act. This is subject, however, to Section 16, by which once the goods have suffered tax, input tax credit is given at every stage thereafter. This scheme applies generally down the line to all Schedule II and III goods. However, when it comes to tax on the sale of goods specified in Schedule IV, Item of which includes High Speed Diesel oil and light diesel oil, the levy under the said Act is only at such point as the State Government may, by notification, specify.

This takes us to the notification dated 4th May, 2006, which clearly states that when it comes to motor spirit, High Speed Diesel oil and light diesel oil, the levy is at the point of sale by oil companies to the retailer or direct to the consumer. On a reading of the aforesaid notification, it is clear that when a sale is effected by the Appellant to BPCL and HPCL, there is no levy of any VAT that is contemplated at this point. The VAT gets levied only at the next point in the chain of sales, which is the sale from BPCL and HPCL to their retailers and/or consumers. Thus, it is clear that the second condition is not fulfilled as the importer of the scheduled goods i.e. the Appellant is not at all liable to pay tax under the VAT Act. 16. So far as the Condition (iii) is concerned, there being no levy on the Appellant, the Appellant does not incur any tax liability at the rates specified under Section 14 of the VAT Act.

17. So far as Condition (iv) is concerned, in any case, this must be by virtue of sale of the very imported scheduled goods, which means that the sale must be by the Appellant itself and not by the other OMCs. This becomes clear from the second 28 part of this provision which reads: “………. or sale of goods manufactured by consuming such imported scheduled goods………”

18. Further, Condition (v) must be that “his” i.e. the Appellant’s tax liability under the VAT Act will then stand reduced, and this is only to the extent of tax paid under the Act. This condition is also not met inasmuch as the set off is person specific and not goods specific, as is correctly contended by Shri Ganesh, learned Senior Advocate, appearing on behalf of the Revenue. 19. Thus, it will be seen that on a literal reading of Section 3(2) second proviso, the Appellant would not be entitled to claim set off. However, Shri Datar relied strongly on the judgment in Associated Cement Companies Ltd. v. State of Bihar & Ors., (2004) 7 SCC 642.

In this judgment, two manufacturing units of the Appellant, post-bifurcation of the State of Bihar, fell into the State of Jharkhand. Thanks to an industrial policy to give incentives to existing units to encourage additional production, the Appellant was exempted in terms of the aforesaid policy from payment of sales tax on additional production for the period in question. The Entry Tax Act, as it then stood, was set out in the judgment and this Court held that, despite the fact that sales tax on cement was exempted, the Appellant was held to be a person who was liable to pay tax as the question of exemption would arise only when there is a liability to pay tax in the first place.

The Appellant was liable to pay tax but for the exemption, and since it paid tax on the original production, apart from the additional production, it would be entitled to set off of tax paid under the Entry Tax Act. In our opinion, it is clear that this judgment would have no direct application in the facts of the present case, inasmuch as the aforesaid judgment related to exemption of sales tax on production of additional cement in order that production of cement be boosted in the State.

The expression “liable to pay tax” was held to apply because the question of exemption would arise only if there is a liability to pay tax in the first place. Cement was, at the relevant time, “scheduled” goods and, therefore, sales tax was liable to be paid on such goods. It is only on account of an exemption notification issued under 30 Section 7 of the Act, as it then stood, that additional production of cement stood exempted from payment of sales tax. In the present case, there is no exemption at all. The present is a case where the importer under the second proviso must first be liable to pay tax under the Act. We have already seen that the Appellant is a registered dealer under Section 3(1) of the VAT Act and would be a dealer liable to pay tax under the aforesaid Act within the meaning of the enacting part of Section 3(2) of the Entry Tax Act.

However, it is clear that as importer of scheduled goods, the Appellant must be liable to pay tax under the VAT Act. As has already been found, the Appellant as an importer of scheduled goods is not liable to pay tax as the levy of tax is itself postponed when the Appellant sells the oil to another OMC, and VAT is leviable only on the transaction between the said OMC and its retailer or other customers. In the ACC (supra) case, the levy on cement was always there, being a scheduled item, an exception to which by way of exemption was allowed only on additional production of cement. It is also important to note that the expression “by virtue of sale of imported scheduled goods or sale of goods manufactured by consuming such imported scheduled goods …….” was added later by way of amendment and was not contained in Section 3(2) second proviso which was construed in the ACC (supra) case.

This condition has clearly not been met in the present case as has been held by us hereinabove. In any case, the effect of the aforesaid judgment has been nullified by the addition of a third proviso to Section 3(2) by the Bihar Finance Act, 2006, which specifically provides that exempted goods will not be entitled to set off. For all these reasons, we are of the view that this judgment does not take the Appellant’s case very much further.

20. Shri Datar also heavily relied upon The State of Tamil Nadu v. M.K. Kandaswami & Ors., (1975) 4 SCC 745, in which this Court, while construing Section 7A of the Madras General Sales Tax Act, referred with approval to a Kerala High Court judgment to hold that a dealer selling goods may still be liable to pay tax in circumstances in which no tax is payable under the Act. We must remember that this Court was dealing with a provision which was stated to be a charging as well as a remedial provision, the main object being to plug leakage and prevent evasion of tax. It is in this situation that the aforesaid provision was given a purposive interpretation. In the present case, Section 3(2) second proviso is neither a charging section nor a prevention of evasion of tax section. It is a section which gives a certain concession as to set off, provided its conditions are fulfilled. This judgment, therefore, also does not avail the Appellant.

21. Shri Datar also relied upon A.V. Fernandez v. The State of Kerala, 1957 SCR 837, for the proposition that the gross turnover of the dealer should be looked at for finding out whether a dealer is liable to pay VAT and clearly all sums payable, including sums by way of inter-State sales and exports, are taken into account for calculating gross turnover which would then show that the dealer would be liable to pay tax. This case again need not detain us any further because we are not concerned with dealers liable to pay tax, but with importers of scheduled goods who are liable to pay tax in order that Section 3(2) second proviso is attracted. We have already held that in the enacting part of Section 3(2), the Appellant is certainly a dealer liable to pay tax under the VAT Act, in that it is a registered dealer falling within Section 3(1) of the said Act. Therefore, any argument based on gross turnover is wholly unnecessary to include the Appellant under Section 3(2) of the Entry Tax Act.

22. Shri Datar then referred to State of Bihar & Ors. v. Bihar Chamber of Commerce & Ors., (1996) 9 SCC 136, for the proposition that the Objects and Reasons appended to the Bill of the Entry Tax Act showed that it was with a view to make the provision of the Bihar Finance Act more workable. From this it can scarcely be held that this being the object, the second proviso must be completely altered in order that it subserves such object. We have already held that a literal reading of the second proviso, which gives a concession by way of set off, cannot possibly be held to be altered qua every material condition, so that the Appellant be entitled to claim a set off. Consequently, this judgment and other judgments cited by the Appellant, such as Commissioner of Income Tax, Bangalore v. J.H. Gotla, Yadagiri, (1985) 4 SCC 343, to buttress the plea of purposive interpretation cannot be held to apply in the facts and circumstances of this case.

23. Shri Datar’s next plea was that a literal reading of the second proviso would lead to a situation where the same goods would suffer different rates of tax and this would be discriminatory. We are afraid that this plea also does not avail the Appellant for the simple reason that there are two taxes which are levied in the present case, one is VAT and the other is Entry Tax. In one case, VAT is set off against the Entry Tax and in another, VAT is not so set off. Any anomaly arising from the aforesaid position would not lead to a charge of clear and hostile discrimination.

24. When it comes to taxing statutes, the law laid down by this Court is clear that Article 14 of the Constitution can be said to be breached only when there is perversity or gross disparity resulting in clear and hostile discrimination practiced by the legislature, without any rational justification for the same. (See The Twyford Tea Co. Ltd. & Anr. v. The State of Kerala & Anr., (1970) 1 SCC 189 at paras 16 and 19; Ganga Sugar Corporation Ltd. v. State of Uttar Pradesh & Ors., (1980) 1 SCC 223 at 236 and P.M. Ashwathanarayana Setty & Ors. v. State of Karnataka & Ors., (1989) Supp. (1) SCC 696 at 724- 35 726).

25. We must also not forget that no assessee can claim set off as a matter of right and the levy of Entry Tax cannot be assailed as unconstitutional only because set off is not given. (See Godrej & Boyce Mfg. Co. Pvt. Ltd. & Ors. v. Commissioner of Sales Tax & Ors., (1992) 3 SCC 624 at para 9 and State of Karnataka v. M.K. Agro Tech Pvt. Ltd, C.A. 15049-15069 of 2017 decided on 22nd September, 2017, at para 31).

26. However, Shri Datar referred to observations contained in Ayurveda Pharmacy & Anr. v. State of Tamil Nadu, (1989) 2 SCC 285, Aashirwad Films v. Union of India & Ors., (2007) 6 SCC 624, State of Uttar Pradesh & Ors. v. Deepak Fertilizers and Petrochemical Corporation Ltd., (2007) 10 SCC 342 and Union of India & Ors. v. N.S.Rathnam and Sons, (2015) 10 SCC 681. Each of these judgments concerned taxation rates that were ex-facie arbitrary and/or discriminatory, in that the very same tax was levied at different rates without any rational justification for the same and were, thus, struck down as being arbitrary and/or discriminatory. None of these judgments would have any application to the facts of the present case, in which it is clear that the plea of discrimination is qua a set off of one tax against a separate and independent tax imposed. This fact circumstance would be sufficient to distinguish the said judgments from the facts of the present case.

27. Since we have found that the plea of discrimination must fail on the aforesaid grounds, no question of reading down the provisions would then arise.

28. However, when it comes to the levy of interest, the impugned judgment dated 19th April, 2017, held that there can be no levy of interest as there is no substantive statutory provision for the same. The assessee succeeded on this point and the State has not filed any appeal against the same. Therefore, the finding qua interest, having become final, cannot be interfered with by us.

29. However, Shri S. Ganesh, learned Senior Advocate appearing for the Revenue, has argued before us that, as a matter of restitution, interest must be granted in favour of the 37 Revenue for the period for which stay orders have been obtained in writ petitions filed in 2014 and 2015. This Court has held that, if a party ultimately succeeds, it must be put back in the same position as if no such stay orders have been passed, and for this purpose he referred to and relied upon State of Rajasthan & Anr. v. J.K. Synthetics Limited & Anr., (2011) 12 SCC 518 at paras 18 and 23 and Nava Bharat Ferro Alloys Limited v. Transmission Corporation of Andhra Pradesh Limited & Anr., (2011) 1 SCC 216 at paras 16 to 27.

30. It will be noticed, on a reading of para 23 of Bharat Ferro Alloys (supra), that ultimately restitution is not a matter of right, but is a matter of discretion, and that hardships on both sides must be looked at in order to find a pragmatic solution by way of restitution. Given the fact that the State continued with the grant of set off till the year 2014, and reopened assessments beginning from 2008-09 based on an audit objection, we are of the view that it would be highly inequitable at this juncture to allow the State to charge interest, which would arise as a result of stay orders being passed in the writ petitions.

The principal amount also is not something that the Appellant was able to pass on to the ultimate consumer in the peculiar facts of this case. Had the Appellant known, from the assessment year 2008-09, and had the Department raised an objection in that very year, it would have arranged its affairs in such a manner as to avail of set off under the Entry Tax Act, which it did after 2014, when the audit objections were raised for the first time. On the facts of this case, therefore, we are not inclined to exercise our discretion to grant restitutional interest to the Revenue.

31. The matter, however, does not end here. Shri Datar pointed out that after the audit objections; a show cause notice dated 16th April, 2014 was issued by the authority, which was replied to by letters dated 16th June, 2014 and 27th June, 2014, in which the assessee repeatedly asked for time to make a detailed objection on the merits of the case. Finally, by a letter dated 22nd August, 2014, the assessee was able to muster certain certificates for the assessment years in question given by BPCL and HPCL to show that a large amount of the sales made by them in turn to their retail consumers and though retail outlets were outside the local area of Patna, and, therefore, not exigible to Entry Tax at all.

We find that, without asking for further data and back up details, the Assistant Commissioner of Commercial Taxes passed an assessment order immediately thereafter, on 27th August, 2014, and issued demand notices on the very same date. We are of the view that the Revenue appeared to have been in a great hurry to issue the aforesaid demand notices, and since we are dealing with OMCs who have complete details of sales made for the years in question to their retail customers and outlets outside the area of Patna, we feel that Shri Datar is right in asking that we give an opportunity to the Appellant to produce all relevant documentary material, which would show that a large amount of the demand for these years (of Rs.1,683.03 crores), would be liable to be done away with as Entry Tax would not be leviable on these transactions at all as the consumption, use or sale of petroleum products has taken place outside the local area of Patna.

Indeed, all these sales must have suffered Entry Tax in the local area outside Patna, where such retail sales were made, provided, of course, that they were made within the State of Bihar. We are, therefore, of the view that the Appellant will approach the Appellate Tribunal with all relevant materials in this behalf, and the Appellate Tribunal will render a finding as to how much of the demand of Entry Tax for the assessment years in question would have to be struck down, in that sales made by HPCL and BPCL to their retail consumers and to others are made outside the local area of Patna. We give the Appellants 12 weeks’ time to approach the Appellate Tribunal with all details as aforesaid and request the Appellate Tribunal to render findings as required by this judgment, as expeditiously as possible thereafter. The stay orders granted in the writ petitions, which have been continued till date, will continue till the decision of the Appellate Tribunal.

32. With these observations, the Civil Appeal and the Special Leave Petitions are disposed of.

Union of India & Ors. Vs. Bengal Shrachi Housing Development Ltd. & ANR [SC 2017]

Date: November 07, 2017

• Keywords:-Taxable person vs Taxable event ⇒

Supreme Court-min

It is thus clear, on a conspectus of the authorities of this Court, that service tax is an indirect tax, meaning thereby that the said tax can be passed on by the service provider to the recipient of the service. Being a tax on service, it is not a direct tax on the service provider but is a value added tax in the nature of a consumption tax on the activity which is by way of service. It is settled by various judgments of this Court that, in order to have conceptual clarity, the taxable event and the taxable person are distinct concepts.

Acts: Service Tax Act of 1994


SUPREME COURT OF INDIA

Union of India & Ors. Vs. Bengal Shrachi Housing Development Ltd. & ANR.

Bench :  (R.F. Nariman) (Sanjay Kishan Kaul)

Dispute: Since disputes and differences arose between the parties as to who was liable to pay service tax for the aforesaid commercial premises.

[Civil Appeal No.9952 of 2017]

R.F. Nariman, J.

1. The present appeal arises from service tax payable under a clause in the deed of lease dated 1.9.2012, between the Appellants (lessee) and the Respondents (lessor). By this deed of lease between the lessor and the lessee for a period of three years at a rent of Rs.16,34,967/- per month, it was agreed that:

“6. The lessor/lessors shall pay all rates, taxes, assessment, charges and other outgoings whatsoever of every description which under the statutes are primarily leviable upon the lessor and shall keep the premises free from all encumbrances and interference in this behalf. Rates and taxes  primarily leviable upon the occupier shall be paid by the Government.”

2. Since disputes and differences arose between the parties as to who was liable to pay service tax for the aforesaid commercial premises, a writ petition was filed by the Respondents-herein before the Calcutta High Court, in which it was prayed that a Writ of Mandamus be issued commanding the Appellants to make payment of service tax for the aforesaid premises.

The learned single Judge by his judgment dated 15.5.2014, referred to the aforesaid Clause 6 in the deed of lease between the parties, and further went on to refer to a judgment of the Delhi High Court in Pearey Lal Bhawan Association v. M/S. Satya Developers Pvt. Ltd., (2010) 173 DLT 685, in which it was held that as the authorities in that case did not visualize that a service tax levy would be made in respect of lease or rentals of commercial properties and that since the levy was made effective only from 2007 onwards, it was held that as service tax is essentially an indirect tax, the user of the premises who avails the service has to bear it.

This being the case, on the facts of that case, it was held that the lessee should be made to pay service tax. A judgment of the Allahabad High Court dated 16.01.2013 in M/s Bhagwati Security Services (Regd.) v. Union of India, to the same effect was also followed by the learned single Judge. The single Judge, therefore, held that liability to bear service tax being that of the recipient of the service, there cannot be an escape from the conclusion that the Appellants i.e. the Union of India would be liable to pay the said tax.

3. An appeal to the Division Bench yielded the same result. The Division Bench, in the impugned judgment dated 9.9.2014, referred to various provisions of the Finance Act, 1994 and adopted the same reasoning as that of the learned single Judge and, therefore, held that Clause 6, if properly construed, would yield the same result as was found by the learned single Judge and, therefore, dismissed the appeal.

4. Shri A.K. Sanghi, learned senior counsel appearing on behalf of the Appellants, has referred in detail to various provisions of the Finance Act, 1994 along with amendments thereto and has argued that the person primarily liable to pay service tax under the Act read with the Service Tax Rules, 1994, is the service provider i.e. the lessor in the present case. He, therefore, stated that on a proper reading of Clause 6, it is clear that service tax being “primarily leviable on the lessor” within the meaning of Clause 6, would have to be borne by the lessor alone and not his client.

5. On the other hand, Shri Jaideep Gupta, learned senior counsel appearing on behalf of the Respondents, supported the judgments of the courts below. According to him, on a proper reading of the said clause, since service tax, by its essential nature is an indirect tax, being nothing other than a value added tax on consumption of service, the levy under the Service Tax Act of 1994, as amended, would fall upon the lessee. In any case, according to the learned counsel, on a reading of various judgments of this Court, it is clear that the person on whom this tax is primarily leviable is the lessee and that, therefore, it is the Appellant who should bear this tax.


6. Having heard learned counsel for both the parties, it is necessary to first advert to the relevant statutory provisions.  Service tax was introduced by Chapter 5 of the Finance Act of 1994. Under Section 65 thereof, an assessee is defined to mean:

“Section 65. Definitions In this Chapter, unless the context otherwise requires, —

(7) “assessee” means a person liable to pay the service tax and includes his agent;” Under Section 65 (105), “taxable service” means any service provided or to be provided – “….. (zzzz) to any person, by any other person, by renting of immovable property or any other service in relation to such renting, for use in the course of or for furtherance of, business or commerce.”

7. Under Section 66, as it stood substituted by the Finance Act of 2007, the tax was leviable in the following manner:

“66. Charge of service tax – There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent of the value of taxable services referred to in sub-clauses (a), (d), (e), (f), (g,) (h), (i), (j),(k), (l), (m), (n), (o), (p), (q), (r), (s), (t), (u), (v), (w), (x), (y), (z), (za), (zb), (zc), (zh), (zi), (zj), (zk),(zl), (zm), (zn), (zo), (zq), (zr), (zs), (zt), 5 (zu), (zv), (zw), (zx), (zy), (zz), (zza), (zzb), (zzc), (zzd), (zze), (zzf), (zzg), (zzh), (zzi), (zzk), (zzl), (zzm), (zzn), (zzo), (zzp), (zzq), (zzr), (zzs), (zzt), (zzu), (zzv), (zzw), (zzx), (zzy), (zzz), (zzza), (zzzb), (zzzc), (zzzd), (zzze), (zzzf), (zzzg,) (zzzh), (zzzi), (zzzj), (zzzk), (zzzl), (zzzm), (zzzn), (zzzo), (zzzp), (zzzq), (zzzr), (zzzs), (zzzt), (zzzu), (zzzv), (zzzw), (zzzx), (zzzy), (zzzz), (zzzza), (zzzzb), (zzzzc), (zzzzd), (zzzze), (zzzzf), (zzzzg), (zzzzh), (zzzzi), (zzzzj), (zzzzk), (zzzzl), (zzzzm), (zzzzn), (zzzzo), (zzzzp),(zzzzq) (zzzzr) (zzzzs) (zzzzt),(zzzzu), (zzzzv) (zzzzv) and (zzzzw) of clause (105) of section 65 and collected in such manner as may be prescribed:

Provided that the provisions of this section shall not apply with effect from such date as the Central Government may, by notification, appoint.”

8. On and from 1.7.2012, under Section 66B, the tax was levied in the following manner: “66B. Charge of Service Tax – There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.” It is this last Section with which we are directly concerned as the lease deed between the parties is dated 1.9.2012.

9. Section 68 is important and reads as follows:-

“68. Payment of service tax. –

(1) Every person providing taxable service to any person shall pay service tax at the rate specified in section 66B in such manner and within such period as may be prescribed.

(2) Notwithstanding anything contained in subsection (1), in respect of such taxable service as may be notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66B and all the provisions of this chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service: Provided that the Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of this Chapter shall apply to such person to the extent so specified and the remaining part of the service tax shall be paid by the service provider.”

10. The Service Tax Rules, 1994 have been made in exercise of powers under the rule making Section, namely, Section 94 of the Finance Act, 1994 which came into force on 1.4.1994. Rule 2(1)(d) is important from our point of view and reads as follows:-

“2. Definitions (1) In these rules, unless the context otherwise requires, – ….

(d) “person liable for paying service tax”, –

(i) in respect of the taxable services notified under sub-section (2) of section 68 of the Act, means,- ……. (E) in relation to services provided or agreed to be provided by Government or local authority except,-

(a) renting of immovable property, and

(b) services specified sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act,1994, to any business entity located in the taxable territory, the recipient of such service; ……

(ii) in a case other than sub-clause (i), means the provider of service.”

11. Under Rule 4 of the aforesaid Rules, every person liable to pay service tax is to apply for registration under the Act, and under Rule 7, every such assessee shall submit a half yearly return in the relevant form prescribed therein.

12. A reading of the Act and the Rules, therefore, makes it clear that “assessee”, as defined, means the person liable to pay service tax under the Act. In the present case, we are concerned with the taxable service of renting of immovable property.

It is clear that under Section 66B, the levy of service tax at the rate of 12% is on the value of the service of renting of immovable property that is provided or agreed to be provided by one person to another and collected in such manner as may be prescribed. Section 68 whose marginal note reads – “payment of service tax”, makes it clear that it is the person providing the taxable service to another, who is to pay service tax at the rate specified in Section 66B, in such manner and within such period as may be prescribed, unless otherwise specified by the Central Government. Therefore, the person liable for paying service tax is to be determined on a reading of the Rules.

13. When we come to the Rules, it is clear that under Rule 2(1)(d), the person liable for paying service tax, where the service of renting immovable property is agreed to be provided by the Government, is the provider of such service. Even in a converse situation, which is the situation in the facts of the present case, it is the provider of the service alone, who is liable for paying service tax.

14. The question with which we are faced is the meaning to be given to the expression “primarily leviable on the lessor” in Clause 6 of the deed of lease dated 1.9.2012.

15. This Court has, in several judgments delineated the extent of and the meaning of service tax. Thus, in Tamil Nadu Kalyana Mandapam Assn v. Union of India & Ors., (2004) 5 SCC 632 at 637, this Court held as follows:-

“4. Service tax is an indirect tax and is to be paid on all the services notified by the Government of India for the said purpose. The said tax is on the service and not on the service provider. However, under Section 68 of the Finance Act, 1994 as amended by the Finance Act, 1997 read with Rule 2(1)(d)(ix) of the Service Tax Rules, 1994, the service provider (in the present case the mandap-keeper) is expected to collect the tax from the client utilizing his services.”

16. In All India Federation of Tax Practitioners & Ors. v. Union of India & Ors., (2007) 7 SCC 527 at 536, 542, this Court held as follows:

“Reason for imposition of service tax

4. Service tax is an indirect tax levied on certain services provided by certain categories of persons including companies, associations, firms, body of individuals, etc. Service sector contributes about 64% to GDP.

“Services” constitute a heterogeneous spectrum of economic activities. Today services 10 cover wide range of activities such as management, banking, insurance, hospitality, consultancy, communication, administration, entertainment, research and development activities forming part of retailing sector. Service sector is today occupying the centre stage of the Indian economy. It has become an industry by itself. In the contemporary world, development of service sector has become synonymous with the advancement of the economy. Economists hold the view that there is no distinction between the consumption of goods and consumption of services as both satisfy the human needs.

5. In the late seventies, the Government of India initiated an exercise to explore alternative revenue sources due to resource constraints. The primary sources of revenue are direct and indirect taxes. Central excise duty is a tax on the goods produced in India whereas customs duty is the tax on imports. The word “goods” has to be understood in contradistinction to the word “services”.

Customs and excise duty constitute two major sources of indirect taxes in India. Both are consumption specific in the sense that they do not constitute a charge on the business but on the client. However, by 1994, the Government of India found revenue receipts from customs and excise on the decline due to WTO commitments and due to rationalisation of duties on commodities. Therefore, in the year 1994-1995, the then Union Finance Minister introduced the new concept of “service tax” by imposing tax on services of telephones, non-life insurance and stockbrokers. That list has increased since then. Knowledge economy has made “services” an important revenue earner. Findings (i) Meaning of “service tax”

22. As stated above, the source of the concept of service tax lies in economics. It is an economic concept. It has evolved on account of service industry becoming a major contributor to the GDP of an economy, particularly knowledge-based economy. With the enactment of the Finance Act, 1994, the Central Government derived its authority from the residuary Entry 97 of the Union List for levying tax on services. The legal backup was further provided by the introduction of Article 268-A in the Constitution vide the Constitution (Eightyeighth Amendment) Act, 2003 which stated that taxes on services shall be charged by the Central Government and appropriated between the Union Government and the States.

Simultaneously, a new Entry 92-C was also introduced in the Union List for the levy of service tax. As stated above, as an economic concept, there is no distinction between the consumption of goods and consumption of services as both satisfy human needs. It is this economic concept based on the legal principle of equivalence which now stands incorporated in the Constitution vide the Constitution (Eighty-eighth Amendment) Act, 2003.

Further, it is important to note, that “service tax” is a value added tax which in turn is a general tax which applies to all commercial activities involving production of goods and provision of services. Moreover, VAT is a consumption tax as it is borne by the client.”

17. In Association of Leasing & Financial Service Companies v. Union of India, (2011) 2 SCC 352 at 367-368, this Court under the caption “nature and character of service tax” held as follows:-

“38. In All-India Federation of Tax Practitioners case [(2007) 7 SCC 527] this Court explained the concept of service tax and held that service tax is a value added tax (“VAT”, for short) which in turn is a destination based consumption tax in the sense that it is levied on commercial activities and it is not a charge on the business but on the consumer. That, service tax is an economic concept based on the principle of equivalence in a sense that consumption of goods and consumption of services are similar as they both satisfy human needs.

Today with the technological advancement there is a very thin line which divides a “sale” from “service”. That, applying the principle of equivalence, there is no difference between production or manufacture of saleable goods and production of marketable/saleable services in the form of an activity undertaken by the service provider for consideration, which correspondingly stands consumed by the service receiver. It is this principle of equivalence which is inbuilt into the concept of service tax under the Finance Act, 1994. That service tax is, therefore, a tax on an activity. That, service tax is a value added tax.

The value addition is on account of the activity which provides value addition, for example, an activity undertaken by a chartered accountant or a broker is an activity undertaken by him based on his performance and skill. This is from the point of view of the professional. However, from the point of view of his client, the chartered accountant/broker is his service provider. The value addition comes in on account of the activity undertaken by the professional like tax planning, advising, consultation, etc. It gives value addition to the goods manufactured or produced or sold. Thus, service tax is imposed every time service is rendered to the customer/client. This is clear from the provisions of Section 65(105)(zm) of the Finance Act, 1994 (as amended). Thus, the taxable event is each exercise/activity undertaken by the service provider and each time service tax gets attracted.

39. The same view is reiterated broadly in the earlier judgment of this Court in Godfrey Phillips India Ltd. v. State of U.P. [(2005) 2 SCC 515] in which a Constitution Bench observed that in the classical sense a tax is composed of two elements: the person, thing or activity on which tax is imposed. Thus, every tax may be levied on an object or on the event of taxation. Service tax is, thus, a tax on activity whereas sales tax is a tax on sale of a thing or goods.”

18. It is thus clear, on a conspectus of the authorities of this Court, that service tax is an indirect tax, meaning thereby that the said tax can be passed on by the service provider to the recipient of the service. Being a tax on service, it is not a direct tax on the service provider but is a value added tax in the nature of a consumption tax on the activity which is by way of service. It is settled by various judgments of this Court that, in order to have conceptual clarity, the taxable event and the taxable person are distinct concepts.

Thus, in Babu Ram Jagdish Kumar & Co. v. State of Punjab, (1979) 3 SCC 616, this Court made it clear that, in the case of a purchase tax, the “taxable event” is the purchase of paddy, whereas the “taxable person”, who is the person liable to pay the tax, is the purchaser. In the present case, therefore, the “taxable event” is the provision of the service of renting out immovable property, and the “taxable person”, that is the person liable to pay tax, is the service provider, namely the lessor.

19. It needs to be clarified at this juncture that our Constitution, unlike the British North America Act of 1867, makes no distinction, constitutionally speaking, between direct and indirect taxes.

20. In Chhotabhai Jethabhai Patel and Co. v. The Union of India and Anr.,1962 Supp. (2) SCR 1 at 20-21, this Court was faced with the challenge of the levy of a retrospective excise duty. One of the arguments made against the levy of such duty is that excise duty being indirect, which is that it is ultimately to be passed on to the consumer, a retrospective levy would be ultra vires the legislative competence of Parliament as it could not possibly be passed on. This argument was repelled in the following terms: 1 Section 92(2) provides for a provincial legislature exclusively making laws in relation to direct taxation within the province “in order to the raising of a revenue for provincial purposes”.

“There is no doubt that excise duties have been referred to by the economists and in the judgments of the Privy Council as well as in the Australian decisions as an instance of an “indirect tax”, but in construing the expression “duty of excise” as it occurs in Entry 84 we are not concerned so much with whether the tax is “direct” or “indirect” as upon the transaction or activity on which it is imposed. In this context one has to bear in mind the fact that the challenge to the legislative competence of the taxlevy is not directed to the imposition as a whole but to a very limited and restricted part of it. This challenge is confined

(a) to the operation of the tax between the period March 1, 1951, and April 28, 1951, and

(b) even in regard to this limited period, it is restricted to the imposition of the additional duty of six annas per lb. which was levied, beyond the eight annas per lb. collected from the appellants by virtue of the Finance Bill under the provisions of the Provisional Collection of Taxes Act, 1931.

It would seem to be rather a strange result to achieve that the tax imposed satisfies every requirement of a “duty of excise” in so far as the tax operates from and after April 28, 1951, but is not a “duty of excise” for the duration of two months before that date. Learned Counsel conceded, as he had to, that even on the decision relied upon by him, the fact that owing to the operation of economic forces it was not possible for the taxpayer to pass on the burden of the tax, did not alter the nature of the imposition and detract from its being a “duty of excise”.

For instance, the state of the market might be such that the duty imposed upon and collected from the producer or manufacture might not be capable of being passed on to buyers from him. Learned Counsel urged that this would not matter, as one had to have regard to “the general tendency of the tax” and “the expectation of the taxing authority” and to the possibility of its being passed on and not 16 to the facts of any particular case which impeded the operation of natural economic forces. The impediment to the duty being passed on might be due not merely to private bargains between the parties or abnormal economic situations such as the market for a commodity being a buyers’ market. Such impediments may be brought about by the operation of other laws which Parliament might enact, such for instance, as control over prices.

If in such a situation where the price which the producer might charge his buyer is fixed by the statute, say under the Essential Supplies Act, and a “duty of excise” is later imposed on the manufacturer, it could not be said that the duty imposed would not answer the description of an “excise duty”. Learned Counsel had really no answer to the situation created by such a control of economy except to say that it would be an abnormal economic situation. It could hardly be open to argument that a tax levied on a manufacturer could be stated not to be a “duty of excise”, merely because by reason of the operation of other laws the tax payer was not permitted to pass on the tax-levy. The retrospective levy of a tax would be one further instance of such inability to pass on, which does not alter the real nature or true character of the duty.”

21. It is thus clear that the judgments of this Court which referred to service tax being an indirect tax have reference only to service tax being an indirect tax in economic theory and not constitutional law. The fact that service tax may not, in given circumstances, be passed on by the service provider to the recipient of the service would not, therefore, make such tax any the less a service tax. It is important to bear this in mind, as the main prop of Shri Jaideep Gupta’s argument is that service tax being an indirect tax which must be passed on by virtue of the judgments of this Court, would make the recipient of the service the person on whom the tax is primarily leviable.

22. Let us now examine some of the judgments relating to another indirect tax, namely excise duty. Like service tax, excise duty is also in the economic sense, an indirect tax. The levy is on manufacture of goods; and the taxable person is usually the manufacturer of those goods. In the matter of the Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938 RCP, A.I.R. 1939 Federal Court 1, the Federal Court decided, through Chief Justice Maurice Gwyer, that excise duty under the Government of India Act, 1935 is a power to impose duty of excise upon the manufacturer of excisable articles at the stage of or in connection with manufacture or production. In a separate judgment, Jayakar J. held that all duties of excise are levied on manufacture of excisable goods and can be levied and collected at any subsequent stage up to consumption.

23. In R.C. Jall vs. Union of India, 1962 Supp. (3) SCR 436 at 451, this Court after referring to the judgment in Central Provinces and Berar Sales (supra) and certain other judgments held: “With great respect, we accept the principles laid down by the said three decisions in the matter of levy of an excise duty and the machinery for collection thereof. Excise duty is primarily a duty on the production or manufacture of goods produced or manufactured within the country. It is an indirect duty which the manufacturer or producer passes on to the ultimate consumer, that is, its ultimate incidence will always be on the consumer.

Therefore, subject always to the legislative competence of the taxing authority, the said tax can be levied at a convenient stage so long as the character of the impost, that is, it is a duty on the manufacture or production, is not lost. The method of collection does not affect the essence of the duty, but only relates to the machinery of collection for administrative convenience. Whether in a particular case the tax ceases to be in essence an excise duty, and the rational connection between the duty and the person on whom it is imposed ceased to exist, is to be decided on a fair construction of the provisions of a particular Act.”

24. In the present case, it is clear that the expression “primarily leviable upon” has reference to the “taxable person”, i.e. the person who is liable to pay the tax. The tax that is levied on “service” may be collected either from the service 19 provider or the recipient of the service. The person assessed to tax, who is primarily liable to pay the tax is, on the facts of this case, the lessor.

25. Shri Gupta cited a judgment of this Court in Peekay Re- Rolling Mills (P) Ltd. v. Assistant Commissioner and another, (2007) 4 SCC 30, for the well worn distinction between levy and collection of a tax. What is important to note from this judgment is that the expression “levy” would include “assessment”, though it would not include “collection”. This being the case, it is clear that the expression “primarily leviable upon the lessor” makes it clear that the lessor should be the person upon whom levy takes place – in the sense that “assessment” has to be of such person. “Levy”, in all cases of indirect taxes, is never upon an individual – it is upon a specific aspect of what is sought to be taxed. In the case of a service tax, like the present, the activity of renting out immovable property is sought to be taxed. Therefore, when the expression “primarily leviable” is used in relation to a person and not an activity, it has reference to the assessee upon whom assessment is made under the Act. Thus construed, it is clear that, in the present case, the person liable to pay the tax, who is the assessee under the said Act, in all cases like the present, is only the service provider and not the recipient of the service.

26. Shri Gupta then referred to Section 83 of the Finance Act, 1994, by which Section 12B of the Central Excise Act, 1944, so far as may be, would apply in relation to service tax as it applies in relation to a duty of excise. Section 12B is set out hereinbelow:

“12B – Presumption that incidence of duty has been passed on to the buyer – Every person who has paid the duty of excise on any goods under this Act shall, unless the contrary is proved by him, be deemed to have passed on the full incidence of such duty to the buyer of such goods.”

27. Based on this Section, Shri Gupta has argued, in support of the Division Bench judgment, that since there is a presumption that the incidence of duty has been passed on to “the buyer”, who is the recipient of the service in the present case, unless the contrary is proved, such passing on shall be deemed in law to have occurred and, therefore, it is the Appellant before us who is the person on whom the duty is primarily leviable.

This argument, which found favour with the Division Bench, is again incorrect for the basic reason that the reason for extending Section 12B of the Central Excise Act to service tax is for the reason that when refund of service tax is claimed in case the tax paid is found to be in excess or not payable at all, the same cannot be made over to the assessee unless the assessee proves that the said tax is not passed on to the recipient of the service.

This Section only casts the burden of proof upon the service provider to prove negatively that he has not passed on the incidence of the tax to the recipient of the service. This Section, which is part of the machinery for refund, can in no way help Shri Gupta to determine as to who is the person primarily liable to pay service tax which has to be determined on a reading of the Act and the Rules.

28. Shri Gupta then relied upon the judgment of the learned Single Judge in Pearey Lal (supra). In that case, clause 5 of the lease deed read as follows:

“5. That the lessor shall continue to pay all or any taxes, levies or charges imposed by the MCD, DDA, L & DO and/or Government, Local Authority, etc.”

29. In para 12, the learned Single Judge made the significant observation that there is no dispute that the parties did not visualize that service tax would be imposed when they entered into the lease. This being the case, the learned Single Judge held: “It is true, that the contracts entered into between the parties in this case, spoke of the Plaintiff lessor’s liability to pay municipal, local and other taxes, in at least two places. The Court, however, is not unmindful of the circumstance that service tax is a species of levy which the parties clearly did not envision, while entering into their arrangement.

It is not denied that leasing, and renting premises was included as a “service” and made exigible to service tax, by an amendment; the rate of tax to be collected, is not denied. If the overall objective of the levy – as explained by the Supreme Court, were to be taken into consideration, it is the service which is taxed, and the levy is an indirect one, which necessarily means that the user has to bear it. The rationale why this logic has to be accepted is that the ultimate consumer has contact with the user; it is from them that the levy would eventually be realized, by including the amount of tax in the cost of the service (or goods).”

30. In an appeal to the Division Bench of the Delhi High Court, the Delhi High Court was more specific in rejecting the plea that service tax should be borne by the lessor. Thus, the Division Bench in Satya Developers Pvt. Ltd. and Ors. v. Pearey Lal Bhawan Association and Ors, (2015) 225 DLT 377 stated:

“31. Thus a contract has to be construed by looking at the document as a whole and the meaning of the document has to be what the parties intended to give to the document keeping the background in mind and conclusion that flouts business commonsense must yield unless expressly stated. In the present case it will also have to borne in mind whether the parties intend to include taxes which were not contemplated at the time of the agreement as indubitably the agreements between the parties in the three suits were entered into prior to the Finance Act, 2007 coming into force w.e.f. June 01, 2007.

xxx xxx xxx

33. As regards the lease deed and the agreement of maintenance of common services and facilities between Satya and PLBA Clause 5 of the lease deed as noted above provides that the lessor shall continue to pay all or any taxes, levies or charges imposed by the MCD, DDA, L & DO and or Government, Local Authority etc. By use of the words “Lessor shall continue to pay” it is evident that the parties contemplated the existing taxes, levies or charges and not future. Even as per the agreement of maintenance of common service facilities though the same has no application to the service tax however, still the said clause II(1) cannot be said to exclude HDFC Bank from paying future service tax.”

A reading of these two judgments would, therefore, show that, on facts, it was held that since payment of service tax was not contemplated by the parties and it was agreed that the lessor shall continue to pay taxes, it was evident that the parties contemplated only existing taxes and not taxes which may arise in the future. This being the overwhelming circumstance in that case, any observations made on law have to be read in light of the facts of that case.

31. Shri Gupta then adverted to another judgment of the Division Bench of the Delhi High Court in Raghubir Saran Charitable Trust v. Puma Sports India Pvt. Ltd., 2013 SCC OnLine Del 1972, decided on 15.5.2013. In this judgment, clauses 7 and 9 of the lease deed read as follows:

“7. MAINTENANCE, ELECTRICITY; WATER

7.1. It is agreed by and between the Parties that the Lessor shall be liable to pay property taxes and other outgoings in respect of the Premises, whatsoever payable and as levied from time to time promptly and timely, including any revisions thereto, directly to the authorities concerned and no claim for contribution towards such taxes, cesses, levies and increases shall be made by the Lessor or be entertained by the Lessee.

xxx xxx xxx

9. COVENANTS OF THE LESSEE

The Lessee, for itself, its successors and permitted assigns and to the intent that its obligations may continue through the term hereby created, but not exceeding the Initial Term, covenants with the Lessor as follows:

xxx xxx xxx

(d) To pay all taxes necessary for carrying on its business within the Premises, other than municipal taxes and other related property taxes.”

32. An arbitration award construed the aforesaid clauses stating that service tax would have to be paid by the lessor. This, according to the Division Bench, was not a possible construction inasmuch as the Division Bench bifurcated taxes that were payable by the lessor and the lessee. Clause 7 being confined to property taxes and clause 9 referring to taxes other than property taxes, the judgment of the Division Bench stated:

“………Thus, Clause 7.1 is clearly confined to property taxes or other outgoings in respect of the ‘premises’. It has to be a tax on the premises or the property. Such a tax may be of any nature whatsoever and thus even a new tax on the premises would be covered by this clause and absolves the lessee of the liability in this behalf, this clause nowhere envisaging an indirect tax of the nature of a service tax. The aforesaid view is further reinforced by Clause 9 (d) which in fact puts the responsibility on the lessee to pay all taxes necessary for carrying on its business within the premises other than the municipal taxes and related property taxes.

Thus, any tax on the business activity is on the lessee and the only exclusion made is of municipal tax and related property taxes for which there is a specific Clause 7.1. It is not as if there is a singular clause relating to taxes in the agreement being the Lease Deed which puts the burden on the lessor alone. The nature of taxes if bifurcated into two categories; one borne by the lessor and the other to be borne by the lessee.

The aforesaid becomes important in the context of the nature of service tax which is a tax on the commercial activity and to that extent would, thus, fall within the parameters of Clause 9 (d) and not Clause 7.1. We thus have not the slightest of doubt that these are not clauses which can brook of any two interpretations, but there can by only one interpretation on a plain reading of the clauses. The language of a clause cannot be twisted to come to a conclusion as is sought to be done by the learned Arbitrator. It appears that Clause 9 (d) seems to have been completely lost by the learned Arbitrator. ……….”

33. In this view of the matter, the arbitration award was set aside. This judgment again turned on the language of the particular clauses in the lease deed and would have no application to the facts of the present case.

34. At the fag end of the argument, however, Shri Gupta referred us to a sanction letter dated 27th April, 2012 and a letter dated 30th April, 2012. The sanction letter of 27th April, 2012 issued by the Government of India conveying sanction for hiring of the lease premises in the present case to the Director General, Indian Coast Guard, specifically states: “…… The registration charges, stamp duty, service taxes, etc. (if applicable) is the liability of the lessee……”

35. The letter dated 30th April, 2012, written by the Deputy Inspector General, Chief Staff Officer, to the Respondent, in turn, in paragraph 3(c) reiterated the same position as that of the sanction letter. The learned single Judge in dealing with the letter dated 30th April, 2012 has held:

“12. Turning to the facts of the present case, it appears that clause 6 extracted supra delineated the respective obligations of the lessor and the lessees. The parties agreed that the rates and taxes primarily leviable upon the occupier would be paid by the Government. That the respondents were not oblivious of their obligation to bear service charge is reflected from the letter dated April 30, 2012. Although the said deed does not specifically refer to service tax, the letter dated April 30, 2012 expressly provides that Government of India had sanctioned the terms and conditions of hiring including, inter alia, the liability of the “lessee in respect of registration charges, stamp duty, service tax etc., (if applicable)”. The words “if applicable” in brackets follows “etc.” and not “service tax”.

Therefore, it is not a case that if obligation to make payment of service tax arises, the respondents would have discretion to foist the responsibility on the lessor (the first petitioner). Liability to bear service tax being that of the person receiving service, there can be no escape from the conclusion that the respondents are liable to bear service tax.

36. This being the case, though in law and under clause 6 of the lease deed the Appellant is not required to pay service tax, we are loathe to upset the finding of the learned single Judge based upon a letter by the Appellant to the Respondent in which the Appellant has expressly stated that it was liable to pay service charges. Having thus clarified the legal position, given the sanction letter of 27th April, 2012 and the letter dated 30th April, 2012, in which it was made clear that the Union of India alone will bear the service charges, we refuse to exercise our discretion under Article 136 of the Constitution of India in favour of the Union of India. Thus, the impugned Division Bench judgment is set aside on law, but the appeal fails on the facts of the present case.

Sedco Forex International Inc. through it’s Constituted Attorney Mr. Navin Sarda Vs. Commissioner of Income Tax, Meerut & ANR[SC 2017]

Keywords:-Non-resident assessees-Mobilization fee

SC INDEx

Section 44BB has to be read in conjunction with Sections 5 and 9 of the Act and Sections 5 and 9 of the Act cannot be read in isolation. The aforesaid amount paid to the assessees as mobilisation fee is treated as profits and gains of business and, therefore, it would be “income” as per Section 5. This provision also treats this income as earned in India, fictionally, thereby satisfying the test of Section 9 of the 44 Act as well.

SUPREME COURT OF INDIA

[Civil Appeal No. 4906 of 2010]* 

BENCH: (A.K. SIKRI)  (ASHOK BHUSHAN)

ACTS: Section 44BB of the Income Tax Act, 1961.Sections 28 to 41, 43 and 43A of the Act

History: The assessees herein had entered into contracts primarily with Oil and Natural Gas Commission (ONGC), a public sector company, for hire of their rig for carrying out oil exploration activities in India. For this purpose, they were paid mobilisation fee as well, for and on account of 10 mobilisation/movement of rig from foreign soil/country to the off-shore side at Mumbai (India). The issue that has fallen for consideration is as to whether aforesaid amount received is to be included for computation of deemed profits and gains of the business, chargeable to tax under Section 44BB of the Act. Right from the Assessing Officer (AO) till the High Court, all the fora have answered this question in affirmative holding that this amount is to be included for computing profits and gains of the businesses of the assessees.

A.K. SIKRI, J.

1. Leave granted in SLP(C) No. 2955 of 2012, SLP(C) No. 11560 of 2014, SLP(C) No. 20000 of 2015, SLP(C) No. 22343 of 2012, SLP(C) No. 22833 of 2012, SLP(C) No. 39683 of 2013 and SLP(C) No. 21939 of 2017.

2. In all these appeals filed by different appellants (hereinafter referred to as the ‘assessees’) except Civil Appeal No. 3695 of 2012 which is filed by Director of Income Tax (Revenue), the question of law which arises for consideration is identical and pertains to the scope and interpretation of Section 44BB of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

3. For computation of profits and gains of a business, to make it exigible to tax under the Act, provisions contained in Chapter IV, from Sections 28 to 41, 43 and 43A of the Act apply. However, in those cases where the assessee is a non-resident and specifically engaged in the business of exploration etc. of mineral oil, special mechanism is provided in Section 44BB of the Act for computation of profits and gains, on which the tax is charged.

It, however, gives choice to such non-resident assessees to opt for computation formula provided under Section 44BB or to be covered by normal computation mechanism contained in Sections 28 to 41, 43 and 43A of the Act. Section 44BB of the Act stipulates that a sum equal to 10% 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’.

Thus, concessional rate of 10% is charged as tax, which is admittedly much less than the normal tax rate payable on profits and gains of business or profession. However, this tax @10% is on the aggregate of the amounts specified in sub-section (2) which are “deemed” profits and gains of such business. Thus, insofar as calculation of profits and gains of the business under Section 44BB of the Act is concerned, on which 10% tax is payable, it is worked out on fictional basis by adopting the formula laid down in sub-section (2). Sub-section (2) mentions those amounts aggregate whereof is to be treated as deemed profits and gains of such a business.

4. At this juncture, we reproduce the provisions of Section 44BB of the Act, as reading of this provision is necessary before spelling out the nature of dispute which had arisen in these appeals. This section reads as under:

“44BB. Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils.

(1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in the case of an assessee, being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten 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” :

Provided that this sub-section shall not apply in a case where the provisions of section 42 or section 44D or section 44DA or section 115A or section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections.

(2) The amounts referred to in sub-section (1) shall be the following, namely :-

(a) 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 or production of, mineral 7 oils in India; and

(b) the amount received or deemed to be received in India by or on behalf of the assessee 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 or production of, mineral oils outside India.

(3) Notwithstanding anything contained in sub-section (1), an assessee may claim lower profits and gains than the profits and gains specified in that sub-section, if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee under sub-section (3) of section 143 and determine the sum payable by, or refundable to, the assessee.

Explanation.-For the purposes of this section,-

(i) “plant” includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said business;

(ii) “mineral oil” includes petroleum and natural gas.”

5. A bare reading of the aforesaid provision brings out the following salient features thereof:

(a) Sub-section (1) is a non-obstante clause, starting with the expression ‘notwithstanding anything to the contrary contained in Sections 28 to 41 and Sections 43 and 43A’. Thus, once we apply this special provision for computation of profits and gains, provisions for computation of such profits as contained in Sections 28 to 41 and Sections 43 and 43A of the Act stand excluded.

(b) In order to attract the provisions of Section 44BB of the Act, two conditions are to be specified, namely,

(i) assessee has to be a non-resident; and

(ii) assessee should be engaged in the business of exploration etc. in mineral oils of the nature specifically spelled out in the provision.

(c) Choice is given to such an assessee under sub-section (3) of the Act to either claim lower profits and gains than the profits and gains specified in sub-section (2) and covered by normal provisions of computing profits and gains of business or profession, subject to fulfilling the conditions of audit etc. as mentioned therein or to be governed by Section 44BB of the Act.

(d) In case the twin conditions mentioned above are satisfied, the assessee can take the benefit of paying the tax as per the provisions of Section 44BB on “deemed profits and gains” of its business and such profits and gains are to be calculated as per the formula provided in sub-section (2) thereof. Pertinently, it is a ‘deemed’ provision for calculating profits and gains of business or profession, which means that such profits and gains are to be arrived at fictionally, as per provisions contained in sub-section (2).

(e) Sub-section (2) mentions the amounts which are to be added up, and the aggregate of those amounts is deemed to be profits and gains on which 10% tax is charged as component of income tax.

6. Coming to the lis that is involved in these appeals, it may be seen that sub-section (2) mentions two kinds of amounts which are to be treated as profits and gains of the business. In clause (a) of sub-section (2), the amount referred to are those which are paid or payable to the assessee 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 or production of, mineral oils in India. It is immaterial whether the said amount is paid or payable in India or out of India. Second kind of amounts mentioned in clause (b) of sub-section (2) are those sums which are received or deemed to be received by or on behalf of the assessee on account of 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, extraction or production of mineral oils outside India. Here, however, only those sums which are paid or payable in India are to be included.

7. The assessees herein had entered into contracts primarily with Oil and Natural Gas Commission (ONGC), a public sector company, for hire of their rig for carrying out oil exploration activities in India. For this purpose, they were paid mobilisation fee as well, for and on account of 10 mobilisation/movement of rig from foreign soil/country to the off-shore side at Mumbai (India). The issue that has fallen for consideration is as to whether aforesaid amount received is to be included for computation of deemed profits and gains of the business, chargeable to tax under Section 44BB of the Act. Right from the Assessing Officer (AO) till the High Court, all the fora have answered this question in affirmative holding that this amount is to be included for computing profits and gains of the businesses of the assessees.

8. Civil Appeal Nos. 4906 of 2010, 4907 of 2010, 4915 of 2010 filed by Sedco Forex International Inc., M/s Transocean Offshore Inc., M/s Sedco Forex International Drilling Inc. respectively were taken up as lead matters and, therefore, for the sake of brevity, we recapitulate the factual matrix from the said appeals, as it would suffice for answering the question involved.

9. During the years under consideration, the assessees are engaged in executing the contracts all over the world including India in connection with exploration and production of mineral oil. The assessees are companies incorporated outside India and, therefore, non-resident within the meaning of Section 6 of the Act. The assessees entered into agreements with ONGC, Enron Oil and Gas India Ltd. The aforesaid agreements provided for the scope of work along with separate consideration for the work undertaken. Since the dispute is about mobilisation charges, clauses in respect thereof are as under:

“Operating Rate – Receipts for undertaking drilling operations computed by per day rates provided in the contract. The operating rates shall be payable from the time the drilling unit is jacked-up and ready at the location to spud the first well. Mobilisation – charges for the transport of the drilling unit from a location outside India to a location in India as may be designated by ONGC.” In addition to the above, assessees also received amounts from the operator towards reimbursement of expenses like catering, boarding/lodging, fuel, customs duty, the supply of material etc., with which we are not concerned.

10. The assessees filed their return of income declaring income from charter higher of the rig. The same was offered to tax under Section 44BB of the Act. In the case of Sedco Forex International Inc., the assessee did not include the amount received as mobilisation charges to the gross revenue for the purpose of computation under Section 44BB of the Act. In the case of Transocean Offshore Inc., the assessee included 1% of the mobilisation fees. The mobilisation fees were offered to tax on a 1% deemed profit basis on the ratio of the CBDT Instruction No. 1767 dated July 1, 1987.

11. The AO included the amounts received for mobilisation/demobilisation to the gross revenue to arrive at the “profits and gains” for the purpose of computing TAX under Section 44BB of the Act. The Commissioner of Income Tax (Appeals) {hereinafter referred to as the ‘CIT(A)’} confirmed the action of the AO. The Income Tax Appellate Tribunal (hereinafter referred to as the ‘ITAT’) in the case of Sedco Forex International Inc. dismissed the appeal of the assessee and the action of the AO was upheld insofar as the mobilisation charges were concerned. In the case of Transocean Offshore Inc., the ITAT upheld the view taken by the assessee and directed the AO to assess the profits on mobilisation charges at 1% of the amount received.

This was done following the Circular of CBDT Instruction No. 1767 dated July 1, 1987 and decision of the third Member in the case of Saipem S.P.A. v. Deputy Commissioner of Income Tax. The High Court has held that the mobilisation charges reimbursed inter alia even for the services rendered outside India were taxable under Section 44BB of the Act as the same is not governed by the charging provisions of Sections 5 and 9 of the Act. Even on the issue of reimbursement in M/s. Sedco Forex International Drilling Inc. (Civil Appeal No. 4915 of 2010), the High Court followed its earlier judgments dated September 20, 2007 and May 22, 2009 to hold that reimbursement of expenses incurred by the assessee was to be included in the gross receipts, and taxable under Section 44BB of the Act. 1 88 ITD 213 (Del)

12. From the aforesaid brief narration of facts, it may be discerned that following three types of payments were given by the ONGC to the assessees:

(i) Mobilisation/demobilisation advance.

(ii) Custom duty reimbursement.

(iii) Operational charges reimbursement.

13. The High Court has held that these payments be also included as amounts received for computation of aggregate of amounts specified in sub-section (2) as deemed to be the profits and gains of the businesses of the assessees, chargeable to tax under the said provision.

14. Mr. Porus F. Kaka, learned senior advocate appearing in some of these appeals submitted that the aforesaid amounts were, in fact, towards reimbursement of expenses actually incurred by the assessees. According to him, the work undertaken was, in fact, the obligation of the ONGC and it was for ONGC to provide such facilities/material under the contract. Still the assessees performed the said task at the request of the ONGC and ONGC simply reimbursed these expenses which did not have any profit element.

It was emphasised by Mr. Kaka that insofar as the assessee-Sedco Forex International Inc. is concerned, the expenditure incurred on mobilisation was much higher than the actual payment received. Thus, this assessee had, in fact, suffered loss on this transaction. He also pointed out that the agreement separately provided for consideration/remuneration for mobilisation and demobilisation of drilling unit and reimbursement of cost incurred on behalf of the operator of ONGC. It was submitted that as this was the nature of the amount received, namely, reimbursement of expenses without there being any profit element, it could not be treated as ‘amount’ within the meaning of sub-section (2) of Section 44BB of the Act.

15. Explaining the taxation of income scheme enumerated under Sections 4, 5 and 9 of the Act, Mr. Kaka submitted that globally the tax systems can be classified broadly into two models; Worldwide and Territorial system. India follows a territorial system of taxation specially qua business income of non-residents, which is taxed only as it is attributable to operations within the Indian territory. This, according to him, was clear from the conjoint reading of Sections 4, 5 and 9 of the Act. Section 4 is the charging section for levying a tax on income of any person under the Act which provides that income tax shall be levied at the rates provided by the Finance Act on the ‘total income’ of the previous year.

Scope of total income is provided under Section 5 of the Act which deals with total income of residents as well as non-residents. The learned senior counsel pointed out that insofar as non-residents are concerned, total income as per Section 5(2) of the Act is the income which is received or deemed to be received in India in such year or on 15 behalf of such person; or income which accrues or arises or is deemed to accrue or arise in India during such year.

He, thus, argued that in respect of non-residents only that income which is received or deemed to be received in India or which accrues or arises or deemed to accrue or arise in India is taxable. In order to locate the income which is deemed to accrue or arise in India, Section 9 is the concerned provision. Section 9 acknowledges principle of attribution of income under the Act. Section 9 lays down two broad categories of taxable of income i.e.

(a) business income; and

(b) income from interest or royalty or fees for technical services.

Insofar as business income is concerned, it becomes taxable and only that income becomes chargeable to tax in India which is attributable to operations carried out in India. Insofar as second category, namely, income in the nature of interest, royalty or fees for technical services is concerned, such income would be deemed to accrue or arise in India, irrespective of situs of the services. The learned senior counsel argued that insofar as payment for mobilisation which was received by the assessee is concerned, it is neither income receipt nor deemed to be received in India. It is in respect of services outside India and, therefore, does not accrue or arise or deemed to accrue or arise under Section 5 read with Section 9 of the Act.

16. Proceeding further on the aforesaid line of argument, he submitted that, in the first instance, it has to be determined that income accrues or 16 arises or is deemed to accrue or arise in India. Only when that is established, the next step is to compute the total income based on other provisions of the Act and here Chapter IV of the Act which deals with computation of income from ‘Profits and Gains of Business or Profession’ gets triggered. It was submitted that, no doubt, Sections 44B, 44BB, 44BBB etc. provide for special mechanism for computing the income in the case of non-residents on presumptive basis.

However, even when the income is to be computed under any of these provisions, first pre-requisite is to find out as to whether a particular income has accrued or arisen or deemed to accrue or arise in India. If that threshold is not met, the question of treating such payments as ‘income’, merely because the income is to be computed under special provision, is of no consequence. Mr. Kaka also referred to Circular No. 495 dated September 22, 1987 issued by the Central Board of Direct Taxes (CBDT) which, according to him, explains the Legislature intent behind inserting Section 44BB in the Act.

According to the circular, the computation of taxable income of a non-resident assessee engaged in the business of exploration etc. of mineral oils in accordance with the general mode of computation under Sections 28 to 43A involved a number of complications. As a measure of simplification, Section 44BB was inserted by the Finance Act, 1987 with retrospective effect from April 1, 1983 for determination of income of such tax payers on a presumptive basis, at 10% of the amounts mentioned in sub-section (2) thereof. Relevant portion of that circular is as under:

“21.1 A number of complications are involved in the computation of taxable income of a taxpayer engaged in the business of providing services and facilities in connection with or supply of plant and machinery on hire, used or to be used in the exploration for and exploitation of mineral oils. With a view to simplifying the provisions, the Amending Act has inserted a new Section 44BB which provides for determining of the income of such taxpayers at 10 percent of the aggregate of certain amounts which have been specified. This amount will include the amounts received or due to be received in India on account of such services or facilities or supply of plant and machinery.”

17. After arguing that the provisions have to be read in the aforesaid manner, proposition advanced by the learned senior counsel is that Section 44BB of the Act is only a computation provision and does not override Sections 4 and 5 of the Act. For this purpose, he referred to the judgment of this Court in Union of India & Anr. v. A. Sanyasi Rao & Ors.2 wherein Section 44AC of the Act has been interpreted in a similar manner holding that Section 44AC read with Section 206C is the only machinery provision and not charging Section.

18. Towing the aforesaid line of argument, another submission of Mr. Kaka was that since Section 44BB is a computation provision under the head ‘income’, it cannot override the charging section. For this purpose, he relied upon the judgment of Bombay High Court in Commissioner of Income Tax v. F.Y. Khambaty3. Mr. Kaka also relief upon the following judgments:

(a) Anglo-French Textile Company, Ltd., by Agents M/s Best & Company, Ltd., Madras v. Commissioner of Income Tax, Madras

(b) Ishikawajma-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai5

(c) Carborandum & Co. v. CIT, Madras6

(d) Commissioner of Income Tax, Madras v. Best and Company (Private) Ltd., Madras7

19. He also cited judgments on the proposition that CBDT Circulars are binding on tax authorities; reimbursement of actual expenses does not represent income and, therefore, cannot be taxed; and normal concept of income cannot be taken away by presumption provisions.

20. In nutshell, as can be seen from the aforesaid arguments, the proposition advanced by learned senior counsel are as follows:

(a) Principle of apportionment between India and outside India is a basic principle of income tax law. Where payments are made to a non-resident outside India, for services rendered outside India, 3 (1986) 159 ITR 203 4 (1954) 25 ITR 27 (SC) 5 (2007) 288 ITR 408 (SC) = (2007) 3 SCC 481) 6 (1977) 108 ITR 335 (SC) 7 (1966) 60 ITR 11 (SC) 19 namely mobilization charges for drilling rigs from a foreign location to a location in India, the same is not chargeable to tax in India under Sections 5 and 9 of the Act and the same cannot be made chargeable to tax under Section 44BB of the Act.

(b) A computation provision like Section 44BB cannot override the charging provisions of Sections 4 and 5. It is so stated in the instruction No. 1767 dated July 1, 1987 issued by the CBDT. The understanding of the CBDT is binding on the Revenue.

(c) The charges were reimbursed for services rendered outside India. Services rendered outside India cannot be chargeable to tax under the Act. There should be sufficient territorial nexus between the rendering of services and the territorial limits of the Act to make the income taxable.

(d) Where the actual expenditure incurred by the assessee for the mobilization of the rigs was higher than the amount reimbursed, there cannot be any income chargeable to tax under the Act.

(e) Reimbursement of actual expenditure, which was the obligation of the operator/company cannot be included in receipts under Section 44BB of the Act as the income tax is levied on income. Further, the fact of such reimbursements being devoid of any profit element has not been disputed by the Revenue.

21. Mr. Vohra, learned senior counsel appearing for the appellant Pride Foramer S.A. (Civil Appeal No. 4543 of 2013) stated that the appellant in the said case is a non-resident company incorporated in the Republic of France. It also entered into contract with ONGC for hire of its rig for carrying out oil exploration activities by ONGC in India. The rig was located in Singapore and accordingly, under the contract, mobilization fees of US$1 million (equivalent to Rs.4,31,10,000/-) was payable by ONGC to the appellant for and on account of mobilization/ movement of rig from Singapore to the offshore site at Mumbai.

In case of delay, liquidated damages @0.5% of operating day rate subject to a maximum of 5% of the annual operating charges was payable by the appellant to ONGC. In Assessment Year 2000-01, during the year under consideration, the appellant received outside India, net mobilization charges of US$ 6,42,300 (equivalent to Rs.2,76,89,533/-) after deduction of liquidated damages for delay, for mobilization from Singapore to the offshore site (in India).

22. On the aforesaid facts, he submitted that net mobilization charges received outside India could not be taxed in India, more so, when these were in the nature of reimbursement of expenses on account of mobilization/movement of rig from Singapore to the offshore site at Mumbai. His primary contention was that before this payment could be included while making computation under Section 44BB of the Act, it had to be ‘income’ which is taxable in India in the first instance.

His submissions on the scheme of Sections 4, 5 and 9 of the Act were the same as that of Mr. Kaka, already noted above. Additionally, he submitted that insofar as Section 44BB of the Act is concerned, it only provides a simplified computation mechanism for computing profits and gains in case of non-resident assessee engaged in activities relating to business of exploration of mineral oil etc.

Thereby, overriding the normal computation mechanism contained in Sections 28 to 41, 43 and 43A of the Act. His emphasis was that this provision does not override charging provisions as contained in Section 4 read with Sections 5 and 9 of the Act, thereby bringing to tax an amount which is not at all taxable under the provisions of the Act. In addition to Circular No. 495 dated September 22, 1987 (already noted above), he also relied upon Instruction No. 1767 dated July 1, 1987 issued by CBDT explaining the computation of business income in case of a contractor engaged in business of exploration of oil where part of the activities are carried out in India and part of the activities are carried on outside India. It has been stated as under:

“3. On these facts, it is clear that income accruing or arising to the non-resident contractor should be apportioned between the various activities carried on by it, some of which would be within India and some outside. Where the ownership in the platform, terminal, treatment plant or other facilities passed outside India, the non-resident will be taxable only in respect of the activities performed in India by way of installation, hook-up and commissioning etc., of the facilities acquired by the Indian enterprises engaged in oil exploration or production…”

23. In support of the aforesaid submissions, Mr. Vohra relied upon the following judgments:

(i) Commissioner of Income Tax and Anr. v. Hyundai Heavy Industries Co. Ltd.

(ii) State Bank of Travancore v. Commissioner of Income Tax, Kerala


24. To summarise, proposition advanced by Mr. Vohra are as under:

(i) Mobilization fee was in respect of activities carried outside India prior to coming into existence of the PE in India and, therefore, this mobilization fee was not taxable at all, in view of Article 7 of Double Taxation Avoidance Agreement (DTAA) between India and France, the relevant portion whereof is as under:

“1. The profits of an enterprise of one of the Contracting States shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable to that permanent establishment….”

(ii) In case the payment is held liable to tax in India, then the same has to be computed in terms of Sections 4, 5 and 9 read with Section 44BB of the Act. In that situation, only the mobilization fee pertaining to voyage within the territorial waters of India can be subjected to tax. 8 (2007) 7 SCC 422 9 (1986) 158 ITR 102 (SC) 23

(iii) Without prejudice to the aforesaid, it is alternatively submitted that since the appellant only received mobilization fee amounting to Rs.2,76,89,533/- (equivalent to US$ 6,42,300), after deduction of liquidated damages, the AO erred in bringing to tax the gross amount of US$1 million under Section 44BB of the Act.


25. Mr. Lakshmikumaran and Mr. Jay Savla, learned advocates appearing for some other assessees treaded the same path by adopting same line of arguments.

26. M/s. Chidananda and Arijit Prasad, learned advocates appearing for the Revenue put up an emphatic defence to the judgment of the High Court which has accepted the position taken by the Revenue. It was argued that assessee Sedco, which is a non-resident company, had entered into a composite/indivisible contract with ONGC to provide a drilling unit to carry out drilling operations. A finding of fact to this effect i.e. a composite/indivisible contract was entered into, was arrived at by the ITAT and, therefore, matter had to be proceeded on that basis. Submission was that, as per this contract, it was the obligation of the assessee to mobilise its resources for the purpose of drilling operations.

According to them, since the payments were made by ONGC to the assessee in terms of indivisible contract for the purposes of drilling operations, it was not open to the assessee to claim that mobilisation 24 fee/charges and it should not be included in the aggregate receipts for the purposes of Section 44BB of the Act and their plea that they are not actual charges but expenses in the nature of reimbursement by ONGC was not permissible. It was submitted that though, mobilisation fee/charges have been separately indicated in the said contract, the payments have been made by ONGC for supply of drilling unit including the rigs, for operating these rigs and for providing experts and other personnel for operating the rigs etc.

Therefore, it is a misnomer to term payment of mobilisation fee/charge as ‘reimbursement’. They are payments made pursuant to an indivisible contract. Assuming, for the purposes of argument that it amounts to reimbursement, the same will not make any difference for the reason that parties may agree to divide the total amount as a direct payment by way of fees and some part of the consideration by way of expenses, but this arrangement between the parties would not alter the character of receipts. A receipt will remain as such and will not partake the character of an expenditure. According to the learned counsel, the mobilisation fee/charges paid by ONGC to assessee amounts to income chargeable to tax.

27. For this purpose, reliance was placed on the definition of “income” as contained in Section 2(24) of the Act which defines the said expression in an inclusive manner. Attention was also drawn to Section 2(45) of the Act which defines “total income” to mean total income referred to in Section 5, computed in the manner laid down in the Act. It was, thus, argued that income had to be computed as per the provisions of the Act. Even Section 4 of the Act, which is a charging section, clearly points out that income tax is to be paid ‘in respect of the total income of the previous year’. Likewise, Section 5 of the Act which deals with ‘scope of total income’ includes all income from whatever the source derived.

It was submitted that, in this hue, Section 9 which deals with income deemed to accrue or arise in India, had to be looked into. According to the learned counsel, the assessee had business connection in India through the equipment owned by it, operating in India and its employees, experts etc. working in India. Its assets are employed/used in India and the source of income is in India. Therefore, the ingredients of Section 9(1)(i) are fulfilled. Thus, assessee has territorial nexus in India. Further, in a given case, if the assessee fulfils these requirements and a DTAA applies, this will also constitute a Permanent Establishment (PE) through which an assessee operates its business in India.

Further, the rigs/equipment are mobilised for its business operations in India and that source of income is in India, therefore, the question of apportionment. Thus, the mobilisation fee/charges paid by ONGC to assessee is an income chargeable to tax from a conjoint reading of Sections 4, 5 and 9. Therefore, the submission of the assessee that Section 44BB seeks to tax an event 26 which the charging sections does not seek to tax is incorrect.

28. Adverting to the provisions of Section 44BB of the Act which finds place in Chapter IV dealing with ‘computation of income’ in respect of business or profession, it was submitted that the scope and effect of Section 44BB has been explained in Departmental Circular No. 495 dated September 22, 1987. It has been mentioned in the said circular that a number of complications were involved in the computation of taxable income of a taxpayer engaged in the business of providing services and facilities in connection with or supply of plant and machinery on hire, used or to be used in the exploration for and exploitation of mineral oils. Section 44BB was introduced with a view to simplifying the relevant provisions which provide for determining the income of such taxpayers at 10 per cent of the aggregate of certain amounts, which have been specified in the said section. It was submitted that Section 44BB provides for “presumptive income determination”.

It is a complete code in itself for determining the taxable income in the case of an assessee, being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils. It replaces Sections 28 to 41 and Sections 43 and 43A (which otherwise mandates assessee to maintain accounts, claim and prove expenses).

Only the 27 receipts are taken into account. Even if the actual profits and gains of the assessee are more than 10%, only 10% is presumed to be its income. Thus, 10% is the income and the rest 90% is allowed as expenditure/allowable claims of the assessee. Assuming that Section 44BB was not on the statute book, assessee would have shown mobilisation fee as receipt and claimed the actual expenditure and arrived at the net taxable income. Now, Section 44BB presumes that only 10% of the aggregate receipts is income and the remaining 90% is expenditure.

It was also argued that in the case of presumptive income determination like Section 44BB, items of expenditure cannot be claimed separately, otherwise it would lead to double deduction as Section 44BB presumes that only 10% of the aggregate receipts is income and the remaining 90% is expenditure. It was pleaded that when all the authorities including the final fact finding authority as well as the High Court have recorded their concurrent findings on consideration of relevant material, this Court may not disturb those findings. Reliance was placed on Avasarala Technologies Limited v. Joint Commissioner of Income Tax, Special Range 1, Bangalore10 and Commissioner of Income Tax Bihar and Orissa, Patna v. Ashoka Marketing Co.11

29. Before we appreciate the rival submissions made by counsel for 10 (2015) 14 SCC 732 11 (1972) 4 SCC 426 28 the parties on both sides, it would be apposite to go into the raison d’etre behind the orders of the ITAT as well as the High Court.

30. The ITAT in its order has taken note of the relevant clauses of the agreements entered into between ONGC and assessee (Sedco) pertaining to mobilisation and mobilisation fee. Clause 3.2 of the Agreement dated September 3, 1985 relating to providing the Shallow Dash Water Jack Up Rig covering this aspect reads as under: “Mobilisation Operator shall pay to Contractor a mobilisation fee of eight hundred thousand United States Dollars (US $ 800,000) (“Mobilisation Fee”) for the mobilisation of the Drilling Unit from its present location in Setubal, Portugal to the first well location designated by Operator, Offshore Bombay, India.

Operator will notify Contractor no later than fifteen (15) days from the execution of this Agreement if it desires to mobilize the Drilling Unit to another location offshore India and no additional costs shall be charged to Operator for mobilisation to such other location. In the event that Operator desires to mobilize the Drilling Unit to another location offshore India and it fails to notify Contractor by such date, any additional costs incurred by Contractor for such mobilisation in excess of the Mobilisation Fee shall be borne by the Operator.

Contractor shall invoice Operator for payment of the Mobilization Fee after the Drilling Unit is jacked-up on the first well location and ready to spud the well. Operator shall make payment to Contractor no later than thirty (30) days after receipt of the invoice.”

31. Clause 4.2 of the Agreement dated July 12, 1986 relating to Mobilisation of the Drilling Unit (including Rig 21) is also reproduced hereunder: “Mobilisation and Mobilisation Fee Contractor shall notify Operator when it is prepared to commence mobilisation of the Drilling Unit from Muscat, Oman. Within thirty days of receipt of Contractor’s notice of readiness, Operator shall instruct Contractor to commence mobilisation, and Contractor shall forthwith ship the Drilling Unit to the port of entry (Kandla or Bombay). Contractor shall be compensated for the mobilisation of the Drilling Unit from its place of origin by a mobilisation fee payable within thirty days following the commencement date.”

32. It also noted that apart from the aforesaid mobilisation fee stipulated in the aforesaid two contracts, the ONGC had undertaken to pay compensation based on operating rate of US $ 24,550 per 24 hours a day for all operating time and US $ 24,060 as non operating rate per day relating to Sedco 252 Rig. Similarly operating rate – R1 and stand by rate – R2 was also separately stipulated in the other contract dated July 12, 1986 relating to Rig-21 etc.

33. Thereafter, the ITAT pointed out that even as per the assessee, there was no dispute about the applicability of Section 44BB of the Act in relation to payments made by the ONGC under the aforesaid agreements by way of operating charges and other payments made by ONGC to the assessee except in relation to mobilisation fee and reimbursement of certain other expenses as according to the assessee, these payments were not in the nature of fee (income) but reimbursement of expenses only.

This argument is dealt with by the ITAT, taking note of the provisions of Section 44BB of the Act. The ITAT 30 concluded that it was a special provision for computing profits and gains in connection with the business of exploration of mineral oils, effect whereof was explained in Departmental Circular No. 495 dated September 22, 1987.

It further noted that agreements between ONGC and the assessee were indivisible in nature as per which entire payments had been agreed to be made by ONGC for supply of drilling unit including the rigs, for operating those rigs, and for providing experts and other personnel for operating those rigs. Therefore, all these payments were deemed to be the profits and gains of business for the purposes of Section 44BB of the Act and 10% thereof was to be treated as income chargeable to tax. Section 44BB of the Act does not provide that separate consideration mentioned in the Agreement for transportation of the drilling units/rigs from their present location to the designated location in India would be excluded from the correct amount of gross receipts on which 10% profit rate is required to be applied. The ITAT held that the mobilisation fee paid by ONGC to the assessee had no nexus with the actual amount incurred by the assessee for transportation of drilling units/rigs and, therefore, it could not be said that this payment was made for reimbursement of actual expenditure.


34. This is the summary of the rationale given by the ITAT in support of its conclusion, as can be seen from the following detailed discussion:

“2.14 The aforesaid Sec. 44BB making a special provision for 31 computing profits and gains in connection with the business of exploration of mineral oils has been inserted by the Finance Act, 1987 with retrospective effect from 1st April, 1983. The scope and effect of new Sec. 44BB was explained in Departmental Circular No. 495 dated 22nd September, 1987.

It has been mentioned in the said Circular that a number of complications were involved in the computation of taxable income of a taxpayer engaged in the business of providing services and facilities in connection with or supply of Plant & Machinery on hire, used or to be used in the exploration for and exploitation of mineral oils. Section 44BB was introduced with a view to simplifying the relevant provisions which provide for determining the income of such tax-payers at 10% of the aggregate of certain amounts, which have been specified in the said Section.

The provisions of Section 44BB were amended by the Finance Act, 1988 with retrospective effect w.e.f. 1st April, 1983 which clarifies that applicability of Section 44BB will be restricted to the cases of only non-resident tax-payers. It is clear from the language used in Section 44BB(2)(a) that the amount referred to in Section 44BB(1) on which profits have to be calculated @10% will be the aggregate of amounts paid or payable to the taxpayer or to any person on his behalf whether in or out of India on account of the provisions of such services or facilities.


2.15 A perusal of the relevant Agreements executed between the appellant company and ONGC clearly reveals that both the Agreements are indivisible contracts. It is true that mobilisation fee and operating charges have been separately indicated in the said Agreements but the entire payments have been agreed to be made by ONGC for supply of the Drilling Unit including the Rigs, for operating these Rigs, and for providing experts and other personnel for operating those rigs etc. Section 44BB specifically provides that the aggregate of the amounts referred to in sub-section (2) of Section 44BB will be adopted as the basis for calculating profits @10%, which shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits & Gains of Business or Profession”.

It does not provide that separate consideration mentioned in the Agreement for transportation of the Drilling Unit/Rig from their present location to the designated location in India will be excluded from the aggregate amount of gross receipts on which 10% profit rate is required to be applied.

ONGC has made the entire payment including the mobilisation fee, operating charges, daily hire on non operating days etc. for availing the services and facilities and the supply of Plant & Machinery on hire agreed to be provided by the appellant company to ONGC.

The mobilisation fee paid by ONGC to the appellant company has no nexus with the actual amount incurred by the appellant company for transportation of the Drilling Unit/Rigs to the specified drilling location in India. Even if the actual expenditure incurred by the appellant company would have been substantially less, ONGC was liable to pay the fixed amount of mobilisation fee stipulated in the respective Agreements.”

35. Before the High Court, argument of the assessee was that amount of mobilisation charges cannot be included in the amount referred to under sub-section (2) of Section 44BB of the Act as the mobilisation charges represent reimbursement of expenses incurred for transportation of drilling units of rigs from outside India to designated drilling places in India and the payment has also not been made in India. In support of his submission, apart from other judgments, heavy reliance was placed on the decision of this Court in Ishikawajima-Harima Heavy Industries Ltd. case.

The High Court noted that in the said case, the assessee was a Japanese company, inter alia, engaged in the business of construction of storage tanks as also engineering etc. It formed consortium along with few other Japanese companies and one subsidiary company of the Japanese company. This consortium had entered into an agreement with an Indian company on January 19, 2001 for setting up a Liquefied Natural Gas (LNG) receiving, storage and degasification facility at Dahej in the State of Gujarat. A supplementary agreement was also entered by the parties on March 19, 2001. It was a turnkey project.

At the same time, role and responsibility of each member of the consortium was separately specified and each of the members of the consortium was to receive separate payments. Insofar as appellant-assessee is concerned, it was to develop, design, engineer and procure equipment, materials and supplies to reject and construct storage tanks of 5 MMTPA capacity, with potential expansion of 10MMTPA capacity at the specified temperature, i.e., 200 degree celsius.

The arrangement also included marine facilities (jetty and island breakwater) for transmission and supply of LNG to purchaser; to test and commission facilities relating to receipt and unloading, storage and regasification of LNG and to send out regasified LNG by means of a turnkey fixed lump sum price time certain engineering procurement, construction and commission contract.

The contract indisputably involved:

(i) offshore supply,

(ii) offshore services,

(iii) onshore supply,

(iv) onshore services and

(v) construction and erection.

The price was payable for offshore supply and offshore services in US dollars, whereas that of onshore supply as also onshore services and construction and erection partly in US dollars and partly in Indian rupees.

36. The High Court noted that while determining the tax liability of the said foreign company, this Court had taken into consideration Section 5(2), Section 9(1)(i) and Section 9(1)(vii) of the Act and considered the question of imposition of tax on income arising from a business connection of the assessee. Holding that income is not taxable in India, 34 the Court premised the conclusion, inter alia, on the ground that as per clause (a) of Explanation 1 to Section 9(1)(i) of the Act, only such part of income as is attributable to the operations carried out in India, is taxable in India and further that sufficient territorial nexus between the rendition of services and territorial limits of India is necessary to make the income taxable. As far as offshore supply and offshore services in US$ are concerned, it was done outside the territory of India and the payment was also made to the assessee (a foreign company) in US$ outside India, said payment was not taxable as it was not “income” arising from a business connection of the said assessee.

37. The High Court, after taking note of the aforesaid judgment, has held that it is not applicable in the instant case. Reason given is that in Ishikawajima-Harima Heavy Industries Ltd., the Court had dealt with the assessment of a non-resident company on its income as per the provisions of Sections 5 and 9 of the Act and these sections are not attracted in the instant case, as the same is governed by Section 44BB of the Act. This is the material distinction, in the opinion of the High Court, the manner in which the same is discussed needs to be reproduced.

Thus, we hereby quote the relevant portion of the said discussion: “…..Therefore, section 5 and section 9 both are aimed a the income for the taxability under section 4 of the Act, while section 44BB does not take into Account the income for calculating the aggregate amount t calculate 10 percent profit 35 and gains. Profit and gains is a type of income to be taxed under a legal fiction, i.e., @10 percent of the amount specified in sub-section (2) of section 44BB. Section 44BB is a special provision relating to non-resident assessee who is providing 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 or production of, mineral oils in or outside India.

The section is a complete code in itself. Thus, the reliance placed by Sri Porus Kaka, learned Counsel for the assessee, is misplaced as we have observed that the amount referred in sub-section (2) of Section 44BB are four types of amounts and all the four types of amounts are mutually inclusive and has to be taken into account either all of them or any of them and its clauses themselves provide that whether the payment is made inside India or outside India.

17.In the present case, a finding has been recorded by the ITAT that it was not in dispute before the Tribunal that the payment was made to the appellant company outside India and the mobilization fee as claimed by the assessee was paid to the appellant by ONGC has no nexus with the actual amount incurred by the appellant company for transportation of drilling units of rigs to the specified drilling locations in India.

Hence, the mobilization fee is not the reimbursement of expenditure. ONGC was liable to pay a fixed sum as stipulated in the contract regardless of actual expenditure which may be incurred by the assessee company for the purpose. In view of the fictional taxing provision contained under Section 44BB, the Assessing Officer was right in adding the amount of Rs. 99,04,000/- for the Assessment Year 1986-87 and amount worth Rs. 64,64,530/- for the Assessment Year 1987-88 received by the assessee towards mobilization charges for the purpose of imposing income tax and CIT (Appeals) and ITAT were also right in upholding the order of the Assessing Officer.”

38. We feel that High Court may not be entirely correct in law in excluding the provisions of Sections 5 and 9 in those cases where the assessment is opted by the assessee under Section 44BB of the Act. Submissions of learned counsel for the assessees are justified to the extent that Section 44BB of the Act is a special provision providing computation mechanism for computing profits and gains in case of 36 non-resident assessee engaged in activities relating to business of exploration of mineral oil etc. At the same time Sections 4,5 and 9 of the Act which deal with charging section, total income and income of non-resident which arises or deem to arise in India cannot be sidetracked.

These are the provisions which bring a particular income within the net of income tax. Therefore, it is imperative that a particular income is covered by the charging provisions contained in Section 5 of the Act. Indian Income Tax Act, admittedly, follows a territorial system of taxation. As per this system only that income of a non-resident is taxable in India which is attributable to operations within the Indian Territory. Therefore, in the first instance it is to be seen whether a particular income arises or accrues or deem to arise or accrue within India.


In order to seek this answer, the principles contained in Section 9 have to be applied only when it becomes an income taxable in India as per Section 9, in case of non-resident, the question of computation of the said income would arise. To recapitulate the scheme of the Act in this behalf, it may be stated that Section 4 is the charging section for levying a tax on the income of any person under the Act and provides that income-tax shall be levied at the rates provided by the Finance Act on the ‘total income’ of the previous year of every person. The expression ‘total income’ has been defined in Section 2(45) of the Act to mean the total amount of income referred to in Section 5 computed in the manner laid down under the Act.

39. The scope of the total income of any person, which could be subjected to tax under the provisions of the Act, is defined under Section 5 of the Act and dependent upon the residential status of the persons. Section 5(1) provides the scope of ‘total income’ in the case of residents, whereas Section 5(2) provides the scope of ‘total income’ in the case of non-residents. As per Section 5(2) of the Act, subject to the provisions of this Act, the ‘total income’ of any previous year of non-resident includes:

  • Income which is received or deemed to be received in India in such year or on behalf of such person; or
  • Income which ‘accrues or arises’ or is deemed to accrue or arise to him in India during such year.

40. Section 9 enumerates the income which is deemed to accrue or arise in India. There are two broad categories of taxability of income provided under this Section, i.e., Business Income and income from interest or royalty or fees for technical services (FTS).

41. Section 9(1)(i) provides that income is to be deemed to have accrued or arising in India if the income is accruing directly or indirectly through any business connection in India or from any property in India or from any asset or source of income in India or any capital asset situated 38 in India (referred as business income). Explanation 1(a) to Section 9(1)(i) of the Act provides an exclusion in the case of operations which are not carried out in India. The explanation provides that the income of the business deemed under this clause to accrue or arise in India shall be only that part of the income as is reasonably attributable to the operations carried out in India. Thus, business income earned by non-resident is chargeable to tax in India only to the extent reasonably attributable to the operations carried out in India.

42. It is, however, pertinent to point out that Section 44BB(2) makes certain receipts as “deemed income” for the purposes of taxation in the said provision. Therefore, aid of this provision is to be necessarily taken to determine whether a particular amount will be “income” within the meaning of Section 5 of the Act. Likewise, Section 44BB(2) also acts as guide to determine whether a particular income is attributed as income occurred in India. Section 44BB of the Act provides for special provision for computing profits and gains. However, that would not mean that if the income is to be computed under this provision, we have to give a go-by to Sections 5 and 9 of the Act. To this extent, remarks of the High Court may not be correct. Law in this behalf is settled by the judgment of this Court in A. Sanyasi Rao case as can be discerned from the following discussion in the said judgment.

“We are further of the view that the basis of a charge relating to income tax is laid down in Sections 4 to 9 of the Act. Section 4 is the charging section. Income-tax is levied in respect of the total income of the previous year of every person. Section 5 deals with the scope of total income. Section 6 deals with the residence in India. Section 7 deals with the income deemed to be received. Section 8 deals with dividend income. Section 9 deals with the income deemed to accrue or arise in India.

xxx xxx xxx

The crucial words in Section 9(1) to the effect that “all income accruing or arising , whether directly or indirectly, through or from any business connection” occurred in Section 42 of the Income Tax Act, 1922 as well. The said section came up for consideration before this Court in Anglo-French Textile Co. Ltd. v. CIT [(1953) 23 ITR 101…

xxx xxx xxx

The counsel for the revenue Dr. Gaurishankar vehemently contended before us that Section 44AC read with Section 206C are only machinery provisions and not charging sections. We see force in this plea. The charge for the levy of the income that accrued or arose is laid by the charging sections, viz., Sections 5 to 9 and not by virtue of Section 44AC or section 206C… xxx xxx xxx However, the denial of relief provided by sections 28 to 43C to the particular businesses or trades dealt with in Section 44AC calls for a different consideration. Even, according to the revenue, the provisions (sections 44AC and 206C) are only ‘machinery provisions’. If so, why should the normal reliefs afforded to all assessees be denied to such traders?

Prima facie, all assessees similarly placed under the Income Tax Act are entitled to equal treatment. In the matter of granting various reliefs provided under sections 28 to 43C, the assessees carrying on business are similarly placed and should there be a law, negativing such valuable reliefs to a particular trade or business, it should be shown to have some basis and fair and rational. It has not been shown as to why the persons carrying on business in the particular goods specified in section 44AC are denied the reliefs available to others. No plea is put forward by the revenue that these trades are distinct and different even for the grant of reliefs under 40 Sections 28 to 43C. The denial of such reliefs to trades specified in section 44AC, available to other assessees, has no nexus to the object sought to be achieved by the Legislature.

(emphasis supplied)”

43. Having corrected the position in law, by emphasising that Sections 4, 5 and 9 of the Act are to be kept in mind even in those cases where assessment is done under Section 44BB of the Act, we are of the opinion that the argument of the assessees that Section 44BB is only a computation provision, is also not entirely justified.

44. In the first blush, assessees may appear to be correct in their contentions that Section 44BB falls in Chapter IV of the Act. Insofar as computation of income from ‘Profits or Gains of Business or Profession’ is concerned, it has to be computed as per the provisions of Sections 28 to 43D(2). However, certain provisions are made for providing special mechanism for computing the income on presumptive basis in case of non-resident and it includes Section 44BB as well.

45. Having put the law in prospective, we need to examine as to whether mobilisation charges received by the assessees can be treated as ‘income’ under Section 5 of the Act and would fall within the four corners of Section 9, namely, whether it can be attributed as having arisen or deemed to arise in India. Argument of the learned counsel appearing for the assessees is that the amount was received by way of reimbursement of expenses for the operation carried outside India and the payment was also received outside India. It is on this premise, entire edifice is built to argue that it is not an “income” and, in any case, not taxable in India at the hands of the assessees which are foreign entities.

46. We have already reproduced above Clause 3.2 of the Agreement dated September 3, 1985 and Clause 4.2 of the Agreement dated July 12, 1986. Clause 3.2 of the Agreement dated September 3, 1985 pertains to providing the Shallow Dash Water Jack Up Rig against which payment was made to the assessees. This Clause says that the assessees shall be paid ‘mobilisation fee’ for the mobilisation of drilling unit from its present location in Portugal to the well location designated by ONGC, offshore Mumbai, India. Fixed amount is agreed to be paid which is mentioned in the said Clause.

The aforesaid mobilisation fee was payable to the assessees after the jacking up of the drilling at the designated location and ready to spud the well. After the aforesaid operation, assessees were required to raise invoice and ONGC was supposed to make the payment within 30 days of the receipt of this invoice. Insofar as Clause 4.2 of Agreement dated July 12, 1986 is concerned, it related to mobilisation of drilling unit. Here again, ‘mobilisation fee’ was payable for the mobilisation of the drilling unit from the place of its origin to the port of entry (Kandla Port, Mumbai).

What follows from the above is that a fixed amount of mobilisation fee was  payable under the aforesaid contracts as “compensation”. Contracts specifically describe the aforesaid amounts as ‘fee’. In this hue, we have to consider as to whether it would be treated as “income” under Section 5 of the Act and can be attributed as income earned in India as per Section 9 of the Act. For this purpose, Section 44BB(2) has to be invoked.

47. Section 44BB starts with non-obstante clause, and the formula contained therein for computation of income is to be applied irrespective of the provisions of Sections 28 to 41 and Sections 43 and 43A of the Act. It is not in dispute that assessees were assessed under the said provision which is applicable in the instant case. For assessment under this provision, a sum equal to 10% 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 the business or profession’.

Sub-section (2) mentions two kinds of amounts which shall be deemed as profits and gains of the business chargeable to tax in India. Sub-clause (a) thereof relates to amount paid or payable to the assessee or any person on his behalf on account of 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 or production of, mineral oils in India. Thus, all amounts pertaining to the aforesaid activity which are received on account of 43 provisions of services and facilities in connection with the said facility are treated as profits and gains of the business.

This clause clarifies that the amount so paid shall be taxable whether these are received in India or outside India. Clause (b) deals with amount received or deemed to be received in India in connection with such services and facilities as stipulated therein. Thus, whereas clause (a) mentions the amount which is paid or payable, clause (b) deals with the amounts which are received or deemed to be received in India. In respect of amount paid or payable under clause (a) of sub-section (2), it is immaterial whether these are paid in India or outside India. On the other hand, amount received or deemed to be received have to be in India.

48. From the bare reading of the clauses, amount paid under the aforesaid contracts as mobilisation fee on account of provision of services and facilities in connection with the extraction etc. of mineral oil in India and against the supply of plant and machinery on hire used for such extraction, clause (a) stands attracted.

 

Thus, this provision contained in Section 44BB has to be read in conjunction with Sections 5 and 9 of the Act and Sections 5 and 9 of the Act cannot be read in isolation. The aforesaid amount paid to the assessees as mobilisation fee is treated as profits and gains of business and, therefore, it would be “income” as per Section 5. This provision also treats this income as earned in India, fictionally, thereby satisfying the test of Section 9 of the 44 Act as well.

49. The Tribunal has rightly commented that Section 44BB of the Act is a special provision for computing profits and gains in connection with the business of exploration of mineral oils. Its purpose was explained by the Department vide its Circular No. 495 dated September 22, 1987, namely, to simplify the computation of taxable income as number of complications were involved for those engaged in the business of providing 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 or production of, mineral etc.

Instead of going into the nitigrities of such computation as per the normal provisions contained in Sections 28 to 41 and Sections 43 and 43A of the Act, the Legislature has simplified the procedure by providing that tax shall be paid @10% of the ‘aggregate of the amounts specified in sub-section (2)’ and those amounts are ‘deemed to be the profits and gains of such business chargeable to tax…’.

It is a matter of record that when income is computed under the head ‘profits and gains of business or profession’, rate of tax payable on the said income is much higher. However, the Legislature provided a simple formula, namely, treating the amounts paid or payable (whether in or out of India) and amount received or deemed to be received in India as mentioned in sub-section (2) of Section 44BB as the deemed profits and gains.

Thereafter, on such deemed profits and gains (treating the same as income), a concessional flat rate of 10% is charged to tax. In these circumstances, the AO is supposed to apply the provisions of Section 44BB of the Act, in order to find out as to whether a particular amount is deemed income or not. When it is found that the amount paid or payable (whether in or out of India), or amount received or deemed to be received in India is covered by sub-section (2) of Section 44BB of the Act, by fiction created under Section 44BB of the Act, it becomes ‘income’ under Sections 5 and 9 of the Act as well.

50. It is stated at the cost of repetition that, in the instant case, the amount which is paid to the assessees is towards mobilisation fee. It does not mention that the same is for reimbursement of expenses. In fact, it is a fixed amount paid which may be less or more than the expenses incurred. Incurring of expenses, therefore, would be immaterial. It is also to be borne in mind that the contract in question was indivisible.

Having regard to these facts in the present case as per which the case of the assessees get covered under the aforesaid provisions, we do not find any merit in any of the contentions raised by the assessees. Therefore, the ultimate conclusion drawn by the AO, which is upheld by all other Authorities is correct, though some of the observations of the High Court may not be entirely correct which have been straightened by us in the above discussion. For our aforesaid reasons, we uphold the conclusion. Resultantly, all the appeals of the 46 assessees are dismissed.

51. In this batch of appeals, Civil Appeal No. 3695 of 2012 is the solitary appeal which is preferred by the Director of Income Tax, New Delhi (Revenue) against the judgment of the High Court of Uttarakhand. The computation of income of the assessee was done under Section 44BB of the Act. However, the amount which was sought to be taxed was reimbursement of cost of tools lost in hole by ONGC. It is, thus, clear that this was not the amount which was covered by sub-section (2) of Section 44BB of the Act as ONGC had lost certain tools belonging to the assessee, and had compensated for the said loss by paying the amount in question. On these facts, conclusion of the High Court is correct. Even otherwise, the tax effect is Rs.15,12,344/-. Therefore, filed by the Revenue is dismissed.

NEW DELHI;

OCTOBER 30, 2017


*[Civil Appeal No. 2166 of 2012] [Civil Appeal No. 17388 of 2017 arising out of SLP (C) No. 2955 of 2012] [Civil Appeal No. 4908 of 2010] [Civil Appeal No. 2631 of 2013] [Civil Appeal No. 4910 of 2010] [Civil Appeal No. 4911 of 2010] [Civil Appeal No. 4907 of 2010] [Civil Appeal No. 4913 of 2010] [Civil Appeal No. 4543 of 2013] [Civil Appeal No. 5005 of 2014] [Civil Appeal No. 17389 of 2017 arising out of SLP (C) No. 11560 of 2014] [Civil Appeal No. 4920 of 2010] [Civil Appeal No. 4919 of 2010] [Civil Appeal No. 4921 of 2010] [Civil Appeal No. 4916 of 2010] [Civil Appeal No. 4918 of 2010] [Civil Appeal No. 4917 of 2010] [Civil Appeal No. 5015 of 2015] [Civil Appeal No. 4925 of 2010] [Civil Appeal No. 4924 of 2010] [Civil Appeal No. 4922 of 2010] [Civil Appeal No. 5437 of 2016] [Civil Appeal No. 5154 of 2011] [Civil Appeal No. 5152 of 2011] [Civil Appeal No. 5153 of 2011] [Civil Appeal No. 5089 of 2015] [Civil Appeal No. 5090 of 2015] [Civil Appeal No. 4923 of 2010] [Civil Appeal No. 8627 of 2013] [Civil Appeal No. 5155 of 2011] [Civil Appeal No. 6573 of 2014] [Civil Appeal No. 4909 of 2010] [Civil Appeal No. 5935 of 2010] [Civil Appeal No. 5934 of 2010] [Civil Appeal No. 6651 of 2014] [Civil Appeal No. 17390 of 2017 arising out of SLP (C) No. 20000 of 2015] [Civil Appeal No. 17391 of 2017 arising out of SLP (C) No. 22343 of 2012] [Civil Appeal No. 17392 of 2017 arising out of SLP (C) No. 22833 of 2012] [Civil Appeal No. 4914 of 2010] [Civil Appeal No. 4915 of 2010] [Civil Appeal No. 8595 of 2010] [Civil Appeal No. 9188 of 2013] [Civil Appeal No. 8665 of 2013] [Civil Appeal No. 10294 of 2016] [Civil Appeal No. 10295 of 2016] [Civil Appeal No. 10296 of 2016] [Civil Appeal No. 4926 of 2010] [Civil Appeal No. 267 of 2013] [Civil Appeal No. 268 of 2013] [Civil Appeal No. 17393 of 2017 arising out of SLP (C) No. 39683 of 2013]

[Civil Appeal No. 3695 of 2012] [Civil Appeal No. 435 of 2017] [Civil Appeal No. 10382 of 2017] [Civil Appeal No. 10385 of 2017] [Civil Appeal No. 10383 of 2017] [Civil Appeal No. 10384 of 2017] [Civil Appeal No. 10386 of 2017] [Civil Appeal No. 17394 of 2017 arising out of SLP (C) No. 21939 of 2017] [Civil Appeal No. 12365 of 2017] [Civil Appeal No. 12366 of 2017]