The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has held that Goods and Service Tax (GST) cannot be included while computing deemed income under Section 44B of the Income Tax Act.
The bench of Amit Shukla (Judicial Member) and Amarjit Singh (Accountant Member) has observed that if GST is to be added to the amounts paid on account of taxes, then deduction of such GST is also required to be given under section 43B. Though the provision of Section 44B overrides Section 28-43A of the Income Tax Act, other sections including Section 43B are not specifically overridden by Section 44B.
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Background
The appellant/assessee, Orient Overseas Container Line Limited is a company incorporated under the Companies Ordinance of Hong Kong. It is engaged in the business of operation of ships in international traffic and its revenue comprises freight income and ancillary charges from import transportation (i.e. carriage inward) and export transportation (i.e. carriage outward). Since assessee is a tax resident of Hong Kong and therefore, it has claimed the beneficial provisions of the India-Hong Kong Tax Treaty under Article 8.
In India assessee has filed its return of income for the A.Y 2020-21 declaring total income of Rs. 46,07,99,198/- and offered its income from operation of ships to tax under the deemed provisions of Section 44B of the Act.
The AO in his draft assessment order under section 143(3) r.w.s. 144C(1) proposed that GST should be considered as part of the turnover for the purpose of computing the income u/s.44B and accordingly added 7.5% of GST of Rs. 96,51,49,085/- which worked out to Rs. 7,23,86,182 to the deemed income computed u/s.44B.
The AO observed that in the case of the assessee, the partner has been treating the service tax also the part of the turnover for the purpose of u/s.44B of the Act.
In response, assessee submitted that the same issue had come up before the Tribunal in various assessment years right from A.Y. 2007-08 to 2016-17, in which the additions have been deleted.
The DRP upheld the action of the AO. The majority view of 2:1 held that GST should be considered as part of the amounts paid or payable/amount received or deemed to be received for computing deemed income under section 44B of the Income Tax Act in view of provision of Section 44A(ii), whereas minority decision of one of the member was in favour of the assessee.
Pursuant to the direction of the DRP, AO has passed the final assessment order considering GST at 7.5% as deemed income under section 44B.
Issue Raised
The issue raised was whether GST is to be included while computing the deemed profit under section 44B.
What Is Section 44B?
Section 44B is a special provision for computing profits and gains of shipping business in the case of non-residents.
Prior to insertion of Section 44B, taxable profits of foreign shipping enterprises were determined by suitably apportioning their global profits between their Indian business and foreign business or on the basis of “voyage accounts” which led to difficult and complicated issues in assessments.
With a view to simplifying and rationalising the assessments in such cases, Section 44B was inserted for computing profits and gains of shipping business in the case of non- residents at 7.5% of specified amounts. Insertion of Section 44B substituted computation as per normal provisions in which both debit of expenses and credit of income were considered.
Amendment to Section 145A was to include taxes of cost of sales / services for valuation of inventory to align with ICDS-2 and nowhere it can be inferred that it tantamount to change the computation mechanism on presumptive basis of taxation.
Earlier Section 145A was inserted to bring clarity with the method of accounting for valuation of purchase and sale of goods and inventory, to determine business income. It in effect, provides that for inventory valuation, the amount actually paid or incurred by way of any tax, duty, cess or fees shall be included therein.
Earlier there were various litigations whether the valuation of closing stock of the inputs, work-in-progress and finished goods must necessarily include the element for which MODVAT credit is available, and in order to ensure that the value of opening and closing stock reflect the correct value, the amendment was brought in Section 145A by the Finance Act, 1998.
Conclusion
The tribunal held that while computing income under section 44B, GST cannot be included and all the judgments relied upon by the assessee by the Hon‟ble High Court and Hon‟ble Supreme Court and the Tribunal will apply in this year also.
Thus, the ITAT upheld the minority view of the single member of the DRP that GST cannot be included while computing deemed income under section 44B, and decided in favour of the assessee.
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Case Details
Case Title: Orient Overseas Container Line Limited Versus DCIT
Case No.: ITA No.3278/Mum/2023
Date: 24/10/2024
Counsel For Appellant: Rajan Vora
Counsel For Respondent: Rajeshwari Menon
