Commissioner Of Income-Tax And Another v. O.N.G.C (And Connected Appeals)

1. Being aggrieved by judgment and order of the Income-tax Appellate Tribunal (Delhi Bench), the Department has come in appeal against the order dated August 12, 1999. The appeal is filed by the Department under Section 260A of the Income-tax Act. This appeal has been filed in respect of the assessment year 1990-91. This appeal No. 471 of 2001 is heard along with Income-tax Appeal No. 22 of 2003 ; I. T. A. No. 343 of 2001, I. T. A. No. 470 of 2001 and I. T.A. No. 518 of 2001 as they raise a common question of fact and law, therefore, all the appeals are heard together and disposed of by a common judgment. For the sake of convenience we are referring to the facts in I. T. A. No. 471 of 2001.

Facts :

2. On December 31, 1990, ONGC filed a return under Section 160(1)(i) read with Section 163(1)(c) as agent of Cooper Engineering Services International declaring a net income of Rs. 3.69 lakhs. The assessee-company is a non-resident company. The said company had undertaken repairs of two gas compressors on Bombay High platform. The scope of the work included design, fabrication, installation, testing and repairs. ONGC as the agent/authorised representative of the NRC had agreed to bear the corporate tax liability on the income of the NRC under the contract. In other words, the contract between ONGC and NRC was "net of tax" contract. Since the contract was for oil exploration Section 44BB was applicable. Under that Section 10 per cent. of the gross receipts is deemed to be the income of the NRC (assessee). This is not in dispute. However, the contract was net of tax. ONGC had taken over the tax liability of the NRC. Therefore, the Assessing Officer came to the conclusion that the extent to which ONGC undertook to discharge the tax liability of the NRC would amount to benefit under Section 28(iv) of the Income-tax Act. Accordingly, he added that tax component to the income of the assessee on the basis of multiple grossing. According to the Assessing Officer, Section 44BB of the Income-tax Act did not override Section 28(iv) of the Income-tax Act. According to the Assessing Officer, Section 28(iv) was a charging section. He, therefore, took the view that to the extent of the liability undertaken by ONGC to pay tax on behalf of the assessee if constituted a benefit to the assessee under Section 28(iv) of the Act. Being aggrieved the assessee preferred appeal to the Commissioner of Income-tax (Appeals), who took the view that Section 44BB read with Section 195A did not permit multiple grossing up of income on tax protected contracts. Accordingly, the appeal was allowed. This decision of the Commissioner of Income-tax (Appeals) has been confirmed by the impugned judgment of the Tribunal. Hence, the Department has come in appeal under Section 260A of the Income-tax Act as stated above.

Question : The following question of law is required to be answered :

"Whether, the Tribunal was right in holding that mulitple stage grossing up of income was not applicable to notional income under Section 44BB read with Section 195A of the Income-tax Act ?"

Answer : FOR reasons given hereinafter we answer the above question in the affirmative, i.e., in favour of the assessee and against the Department.

Reasons :

3. On behalf of the Department it was argued that Section 44BB does not supersede Section 28(iv) and therefore to the extent of the liability which ONGC had undertaken to discharge on behalf of the NRC constituted a benefit whose value should be added to the income of the assessee. It was further argued that if the contention of the assessee is accepted it would obliterate the difference between the net of tax contracts and contracts under which the NRC undertakes to discharge all its tax liabilities. In other words, it was argued, that there are two types of contracts, namely, tax protected contracts under which ONGC agrees to pay the tax on behalf of the NRC and those contracts under which the NRC pays tax on the consideration it receives from ONGC under Section 44BB. It was argued that these are two different contracts. It was argued by Mr. Posti, learned counsel for the Department, that if the argument of the assessee is accepted then there will be no difference between the two contracts. It was further argued on behalf of the Department that Section 195A contemplates multiple stage grossing up of income in case of tax protected contracts. In this case we are concerned with tax protected contracts. It was argued that if one reads section 28(iv), section 44bb and section 195a it is clear that the assessee was required to pay tax on the income determined as per multiple stage grossing. It was further argued that in case of tax protected contracts every benefit/perquisite was taxable under Section 44BB with the help of Section 28(iv). It was argued that to the extent ONGC paid the tax on behalf of the NRC and to the extent that ONGC did not deduct the tax at source, the tax amount paid by ONGC on behalf of the NRC constituted a benefit/perquisite under Section 28(iv) and consequently, that benefit was required to be added to the income of the NRC under Section 28(iv). Mr. Posti, learned counsel for the Department, further submitted that the assessee in this case has accepted its liability under Section 28(iv) at single stage but they are disputing multi stage grossing up of income which the Department has resorted to by invoking Section 28(iv). It was argued that since the NRC had accepted its liability under Section 28(iv) of the Act, may be at single stage, it is clear that Section 28(iv) has to be read with Section 44BB of the Income-tax Act and that Section 44BB does not override Section 28(iv) of the Act. In this connection, Mr. Posti has relied upon the judgment of the Delhi High Court in the case of Frank Beaton v. CIT [1985] 156 ITR 16. He had also relied upon the judgment of the Supreme Court in the case of Emil Webber v. CIT [1993] 200 ITR 483.

4. Mr. Muralidhar, learned counsel appearing on behalf of the assessee, on the other hand, submitted that the concept of multiple stage grossing up of income was not applicable for computing notional income under Section 44BB of the Income-tax Act. In this connection he submitted a chart in order to explain the meaning of the expression "multiple stage grossing up of income" vis-a-vis "single stage grossing up of income". He pointed out that under single stage grossing if the income of the NRC was Rs. 1,000 and the tax rate was 20 per cent., then ONGC would bear the tax liability of Rs. 200 for and on behalf of the NRC which would amount to benefit to the NRC and accordingly the deemed profits of the NRC which would be taxable under Section 44BB would be Rs. 1,200 whereas according to the Department which has applied multiple stage grossing up of income the benefit to the assessee in the first instance would be Rs. 200, which in turn would be taxable at 20 per cent. amounting to Rs. 40 which amount would be further added to the total income of Rs. 1,200 and so on and so forth till the benefit is reduced to zero. According to the assessee, the benefit received by the assessee, in the above example on account of ONGC paying the tax on behalf of the assessee, was only Rs. 200 whereas according to Department which has applied multiple stage grossing up of income the benefit to the assessee was Rs. 250 (approximately). This is the only point at issue in this case. That Section 44BB begins with the non obstante clause. That Section 44BB is a special provision which imposed tax on income derived by non-resident companies from oil exploration. That Section 44BB deals with notional income of the NRC. It, inter alia, states that 10 per cent. of the gross receipts mentioned in Section 44BB shall be deemed to be the profit of the NRC. It was argued that Section 44BB contemplates tax on notional income and therefore Section 28(iv) was not applicable. It was argued that whenever an assessee ordinarily derives income from business such income is taxable under Section 28 of the Income-tax Act. However, Section 28(iv) provides for an independent machinery to compute income earned by a NRC from oil exploration and therefore Section 28(iv) has no application. It was further argued that there are two types of contracts, namely, tax protected contracts and contracts in which the NRC discharges the tax liability on its own. In the former case, the tax liability is discharged by the agent. That in the case of contracts concerning oil exploration 10 per cent. of the gross receipts computed under Section 44BB is considered to be the deemed profits of the assessee. It was argued that in the case of contracts, where the NRC pays the tax on its own and not through its agent, the NRC has to pay the tax on the consideration which it receives from ONGC. That, in such an event, the assessee was required to pay tax under Section 44BB only on Rs. 200 and therefore whether one takes the contracts as tax protected contract or contract which is not net of tax, makes no difference. In both the cases the value of the benefit is only Rs. 200. That the Department is wrong in applying the concept of multiple stage grossing up of income to tax protected contracts because whether one takes the contract as tax protected or as contracts under which tax is paid by the assessee on its own account, the benefit is constant at Rs. 200. In the circumstances, it was argued that there is no difference between the NRC-assessee filing returns in respect of its income from oil exporation under Section 139(1) and the NRC filing its returns for such income through its agent under Section 160 read with Section 163(1). It was further argued that Section 44BB was a code by itself and therefore it overrides Section 28(iv), In support of the said argument several authorities have been cited on behalf of the assessee.

5. As stated above in this appeal we are concerned with the assessment year 1990-91. Section 44BB is a special provision for computing profits and gains in connection with the business of oil exploration. It applies to non-resident companies engaged in such business. It begins with a non obstante clause. It provides for charging 10 per cent. tax on the aggregate of receipts referred to in Section 44BB. Even if the NRC makes a loss in a given year it is liable to pay tax. Therefore, Section 44BB provides both for chargeability of tax and computation. Therefore, it is a complete code by itself. Section 44BB imposes tax on notional income and that notional income has to be computed in accordance with Section 44BB. Therefore, there is no need to refer to Section 28(iv) of the Act. Our view on this point is supported by several judgments of different High Courts (see Oil India Ltd. v. CIT [1995] 212 ITR 225 (Orissa); CIT v. Oil and Natural Gas Commission [2002] 255 ITR 413 (Raj) and CIT v. Schlumberger Sea Co, Inc. [2003] 264 ITR 331 (Cal)).

6. However, none of the above judgments cover the point at issue in this case. The main point which we are required to decide is whether, the concept of multiple stage grossing up of income is applicable to the deemed profits derived by the NRC under Section 44BB of the Act. Whether, that concept can be applied by the Department to compute income falling under Section 44BB of the Income-tax Act ? It was argued on behalf of the Department, that in case of tax protected contracts, Section 195A was attracted and therefore the Department was entitled to compute the deemed profits derived by the NRC by applying the method of multiple stage grossing up of income. We do not find any merit in this argument of the Department. Firstly, as stated above Section 44BB is a complete code by itself. It is a charging section as far as the income of the NRC is concerned from oil exploration. It deals with computation of deemed profits. Secondly, Section 195A comes under Chapter XVII of the Income-tax Act which deals with collection and recovery of tax whereas Section 44BB comes under Chapter IV which deals with computation of business income. Therefore, Section 195A will not assist the Department in applying the concept of multiple stage grossing up of income to the profits derived by the NRC from oil exploration falling under Section 44BB of the Act. As stated above, Section 44BB contemplates computation of deemed profits at 10 per cent. of the aggregate receipts received by the NRC from oil exploration. That Section 44BB refers to items covered by gross receipts. In this case the assessee has computed its income by taking into account the benefit which it has received on account of ONGC paying tax on its behalf. For example, in the above illustration if applied the assessee has paid tax on Rs. 200 which is treated as its deemed profits. However, the Department has calculated that benefit at Rs. 250 by resorting to multi stage grossing up of income. This is not the case where the assessee is not paying tax on the benefit of Rs. 200. The dispute is only regarding the value of that benefit. According to the assessee, the value of that benefit is Rs, 200, whether one takes the contract to be a protected contract or whether one takes that contract to be not protected. In both the cases the value of the benefit will remain constant. Therefore, there is no merit in the case of the Department. Lastly, we may point out that Section 195A of the Income-tax Act has no application. It is not a charging section. It provides for recovery of tax. It provides for tax deduction at source. The fact that tax at source is deductible under Section 195A from the sum payable does not mean that the contractor is assessable for that receipt. In certain cases, the contractor may not be chargeable to tax in respect of those receipts. For example, in cases where the contractor has carried forward losses or in cases where the contractor suffers losses from other contracts which are liable to be set off. Therefore, the mechanism for recovery of tax mentioned under Section 195A will not make the receipt chargeable to tax. Further, Section 195A is confined to incomes falling under Chapter XVII. That Section 195A is introduced only for the purposes of tax deducted at source. Therefore, that section cannot be applied in support of multiple stage grossing up of income in respect of computation of deemed profits under Section 44BB of the Income-tax Act. In order to illustrate the above examples of the assessee deriving benefit of Rs. 200 computed as per single stage grossing up of income vis-a-vis multiple stage grossing up of income we quote hereinbelow a statement which illustrates the meaning of "grossing up of income", both multi stage and single stage.

7. Example of grossing up where the tax on the personal income of the nonresident technician is to be borne by the ONGC.

8. Say the amount payable to the non-resident technician is Rs. 1,000 and for the sake of simplicity, the tax rate is 20 per cent.

Stand of ONGC I.T. Department's stand Income 1,000.00 1,000.00 Tax at 20 per cent. on Rs. 1,000 _ 200.00_ _ 200.00_ 1,200,00 1,200.00 Tax at 20 per cent. on Rs. 200 _ 40.00_ 1,240.00 Tax at 20 per cent. on Rs. 40 _ 8.00_ 1,248.00 Tax at 20 per cent. on Rs. 8 _ 1.60_ 1,249,60 Tax at 20 per cent. on Rs. 1.6 _ 0.32_ 1,249.92 Tax at 20 per cent. on Rs. 0.32 _ 0.08_ Taxable income _ 1,200.00_ _ 1,250.00_ Tax at 20 per cent.

_ 240.00_ _ 250.00_

9. There is one more aspect which we would like to mention before concluding this judgment. In this case we are concerned with the assessment year 1990-91. However, the Department has accepted the case of the assessee for all the assessment years after 1994-95.

10. For the foregoing reasons, the appeal is dismissed with no order as to costs.