1 DEEMED BUSINESS INCOME AND PRESUMPTIVE TAXATION CA Ketan Ved 21 March 2009.

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DEEMED BUSINESS INCOME AND DEEMED BUSINESS INCOME AND PRESUMPTIVE TAXATIONPRESUMPTIVE TAXATION

CA Ketan Ved CA Ketan Ved

21 March 200921 March 2009

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Contents Introduction

Relevant sections under the Income-tax Act, 1961.

• Relevant provisions

• Issues

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INTRODUCTION

Presumptive Taxation = Taxation on “Estimated Income Method”.

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WHY NEEDED: A number of complications are involved in

the computation of taxable income in certain businesses / activities.

To simplify the taxing provisions - presumptive taxation provisions are introduced for these specific businesses / activities .

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HOW DOES IT WORK:

Determining taxable income by applying a fixed percentage to the gross revenues/turnover

Thereby obviating the need to actually determine the taxable income by deducting all expenses from income.

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RELEVANT SECTIONS UNDER THE INCOME-TAX ACT, 1961

44AD – Civil Construction

44AE – Plying, hiring or leasing goods carriages

44AF – Retail business

44B – Shipping business of non-residents

44BB – Exploration of mineral oils

44BBA – Operation of aircraft - Non-residents

44BBB – Turnkey power projects

44C - Head Office expenses

44D / 44DA – Income from royalties,etc - Non-residents

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Section 44AD – Civil Construction Business

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Applies to an assessee engaged in the business of civil construction or supply of labour for civil construction.

Civil Construction defined to include:

Construction / repair of any building, bridge, dam, canal, road or other structure and

Execution of any works contract

A sum equal to 8 % of gross receipts = profits of such business chargeable to tax under the head ‘profits and gains of business or profession’.

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Does not apply when gross receipts exceeds Rs. 40 lakhs.

Deductions u/s. 30 to 38 are deemed to be allowed. WDV of assets used in the eligible business to be

considered as if depreciation allowed.

Interest and Salary to partners to be deducted from the aforesaid profits of 8 %.

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Maintenance of books of accounts u/s. 44AA and furnishing of audit report u/s. 44AB – not required.

Assessee has an option to claim lower income – Assessing Officer to make an assessment u/s. 143 (3) In such cases requirement of 44AA and 44AB

would be applicable.

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Section 44AD – Issues

Constitutional validity upheld ~ Manohar Ram Chandra Patil (2003) 260 ITR 87 (Ori)

Can be made applicable in search cases ~ Balaji Construction (2001) 72 ITD 559 (Pune)

Not applicable to interior decorating business ~ Sanjay Kataria (2004) 3 SOT 18 (Del)

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Not applicable in case of builders ~ Anil Ahuja (2007) 14 SOT 180 (JAB) In this case the assessee was buying/arranging the

land from the owners, constructing the house(s) on such land after taking permission and approval of competent authority(ies), then after furnishing them, he is selling such furnished house.

Salary paid to partners allowable only to the extent of the amounts provided in the books ~ Shivani Piles (2004) 141 Taxman 30 (TDel) (Mag)

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Assessee having maintained books of accounts cannot claim recourse to

section 44AD ~ Shivani Builders (2007) 108 ITD 520 (Ahd)

Income in excess of 8% offered by assessee to be accepted unless AO controverts the same ~ K Damodar (2007) 12 SOT 389(Bang.)

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Section 44AE – Plying, hiring or leasing goods carriages

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Applies to an assessee who: owns NOT MORE THAN 10 GOODS CARRIAGES at

any time during the previous year and

is engaged in the business of plying, hiring or leasing such goods carriages

Goods carriage shall have the same meaning as assigned to it u/s. 2 of the Motor Vehicles Act, 1988 which is as under:

2 (14) “goods carriage” means –

(i) any motor vehicle constructed or adapted for use solely for the carriage of goods or

(ii) any motor vehicle not so constructed or adapted when used for the carriage of goods.

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An assessee who is in possession of a goods carriage, whether taken on hire purchase or on installment and for which the whole or part of the amount payable is still due, shall be deemed to be the owner of such goods carriage – Explanation (b) to section 44AE.

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Quantum of taxable profits and gains from each goods carriage:

Heavy goods vehicle = Rs. 3,500 /- for every month or part of a month

Other vehicle = Rs. 3,150 /- for every month or part of a month

DURING WHICH THE GOODS CARRIAGE IS OWNED BY THE ASSESSEE IN THE PREVIOUS YEAR

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Deductions u/s. 30 to 38 are deemed to be allowed.

WDV of assets used in the eligible business to be considered as if depreciation allowed.

Interest and Salary to partners to be deducted from the aforesaid profits.

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Maintenance of books of accounts u/s. 44AA and furnishing of audit report u/s. 44AB – not required.

Assessee has an option to claim lower income – Assessing Officer to make an assessment u/s. 143 (3) In such cases requirement of 44AA and 44AB

would be applicable.

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SECTION 44 AE ~ Issues

No provision under this section allowing the assessee to apply provisions in some cases and go for regular assessement in other cases

~ C.P.Kunhimohammed (2005) 94 ITD 278 (Cochin)

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Section 44AF – Retail Business

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Replaced the old scheme known as “Rs. 1,400 tax scheme” which was applicable for 5 years i.e. AY 1993-1994 to 1997-1998.

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Applies to an assessee engaged in retail trade in any goods or merchandise.

A sum equal to 5 % of the total turnover = profits of such business chargeable to tax under the head ‘profits and gains of business or profession’.

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Does not apply when turnover exceeds Rs. 40 lakhs.

• As distinguished from sales.

Deductions u/s. 30 to 38 are deemed to be allowed.

44AA and 44AB = same as section 44AD / 44AE.

Option to claim lower income.

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Section 44AF – IssuesSection 44AF – Issues A producer of an item even though he

sells his production in retail cannot seek to apply 44AF ~ Pramod Kumar Sahu (HUF) (2005) 92 TTJ 101 (Ranchi)

Assessee cannot be denied the benefit u/s 44AF(1) on the ground that he has submitted a an audit report belatedly ~Leyland Automobiles (2006) 103 TTJ 438 (Cochin)

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Section 44B – Shipping business of non-residents

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Section 44B – Shipping business of non-residents

Applies to an assessee Being a non-resident

Engaged in the business of operation of ships

A sum equal to 7.5 % of the aggregate of the following: Amount paid / payable (in India or outside India / to

the assessee or to any other person on his behalf) on account of the carriage of passengers, livestock, mail or goods shipped at any port in India.

Amount received / deemed to be received in India (by or on behalf of the assessee) on account of the carriage of passengers, livestock, mail or goods shipped at any port outside India.

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Section 44B – Issues

Inland transportation charges – not in the nature of demurrage and hence section 44B not applicable ~ Safmarine Container Lines N. V. (2008) 24 SOT 211 (BOM)

Charter Charges – not covered by section 44B ~ Reliance Industries Ltd. (2003) 81 TTJ 787 (BOM).

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Section 44B / Section 172 - Comparison

Basis Section 44B Section 172

Intention Deals with computation of Income

Recovery mechanism

Provision Covers the amount paid/payable for carriage of passengers, goods, etc. shipped at any port in India as well as amounts received in India or deemed to be received in India for carriage of passengers, goods, etc. shipped at any port outside India

Covers only the amount paid/payable for carriage of passengers, goods, etc. shipped at any port in India

Tax rate Normal tax rates apply Flat tax @ 40% + surcharge (if applicable) + 3% education cess

Non-obstante Over-rides sections 28 to 43A Over-rides the entire Income-tax Act

Set off of losses Current year and brought forward losses of other businesses can be set off

No set off is permissible

Applicability of Chapter VI-A Chapter VI-A deductions are available

Chapter VI-A deductions are not available

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Section 44BB – Exploration, etc. of mineral oils.

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History:

A number of complications were being faced by non-residents engaged in the oil and gas service sector in computation of the taxable income

With a view to simplify the provisions, gross basis of taxation was introduced for non-resident oil & gas service providers by Finance Act, 1987 vide Section 44BB w.r.e.f. Assessment Year 1983-84

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Analysis of the section:


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 prospecting for, or extraction or production of mineral oils.

Not applicable in case where the provisions of section 42 or 44D or 115A or 293A apply for the purposes of computing profits or gains or any other income referred to in those section.

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A sum equal to 10 % of the aggregate of the following amounts shall be deemed to be the profits of such business: Amount paid or payable (in India or outside India / to

the assessee or any other 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 oils in India and

Amount received or deemed to be received (in India outside India / to the assessee or 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 oils outside India.

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Plant includes: Ships

Aircraft

Vehicle

Drilling units

Scientific apparatus and equipments

Used for the purpose of the business

Mineral oil includes: Petroleum and

Natural gas

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Section 44BB – IssuesSection 44BB – Issues Imparting training for carrying out of

drilling for exploration of oil and natural gas - would be governed by section 44 BB ~ ONGC vs. ACIT (2007) 12 SOT 584(Delhi)

Reliance on the CBDT Instruction No: 1862 dated 22 October 1990

Mobilization charges attributable to activities carried out in India are only liable to be included for the purposes of section 44BB ~ R &B Falcon vs. ACIT (2007) 14 SOT 281(Delhi)

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Section 44BB – Issues Section 44BB – Issues Agreeing to provide helicopters to

facilitate operations of extraction and production of mineral oil – section 44BB is applicable and not 44BBA ~ Lloyd Helicopters International (2001) 249 ITR 162 (AAR).

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Section 44BB – Issues

Facts:

The assessee a non-resident company, incorporated in USA engaged in providing services in connection with exploration and extraction of mineral oils.

In the return of income, it had claimed that the following items are not subject to tax:

reimbursement of custom duty interest on income-tax refund.

The AO included reimbursement of custom duty while computing presumptive income under section 44BB of the ITA.

The AO also assessed interest received on income-tax refund as ‘income from other sources’ @ 41 %.

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Section 44BB – Issues

RULING:Reimbursement of custom duty - not in connection with the specification of services mentioned in section 44BB of the ITA hence not taxable.

Interest on tax refund – reliance on the AAR in reported in 236 ITR 637 and held that interest on Income-tax refund is liable to be taxed at the rate of 15 per cent under Article 11 of the Tax Treaty between India and USA.

Transocean Offshore Deep Water Drilling Inc – Delhi Tribunal unreported decision

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44BB v/s. Technical services

AAR Ruling P-6 of 1995 (100 Taxman 206)

Held it is not correct to state that if the assessee is engaged in the business of providing technical services, section 44D would not be applicable and only section 44BB would apply.

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44BB v/s. Technical services44BB v/s. Technical services Revenues received for providing

services by way of supervisory staff and personnel expertise - taxable u/s. 44BB ~ ONGC as agent of Foramer France (1999) 70 ITD 468 (Delhi).

Services rendered which are independent and not in connection with the prospecting of mineral oils - Section 44BB not applicable ~ ONGC (2006) 9 SOT 8 (Delhi) (SMC);

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Section 44BB - Other Issues Multiple grossing up not permissible –

section 195A not to be applied while computing 44BB income

~ ONGC (2003) 264 ITR 340 (Utt).

~ Compaigne General – de – Geophysique through Oil India (2003) 267 ITR 634 (Raj).

Transfer Pricing Regulations ~ whether applicable.

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Section 44BB – IssuesSection 44BB – Issues Provisions of either the Act or the

DTAA to be applied independently ~ Saipem S P A ~(2009 TIOL 102 ITAT Delhi)

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Section 44BB – IssuesSection 44BB – Issues Indivisible Agreements

Reimbursement of actual expenditure in relation to catering and supplies can not be treated as part of contract receipt for computing profits under section 44BB

Sedco Forex International Drilling Inc (2000) 72 ITD 415 (Delhi).

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SECTION 44 BB ~ Issues

Facility provided by assessee must be in connection with prospecting for extraction or production of mineral oils ~ ARB Inc. (2005) 93 ITD 520 (Del)

FACTS :-

Assessee engaged in the business of laying pipelines for carrying natural gas purchased by GAIL.

GAIL engaged in manufacture of LPG and CNG.

Assessee applied presumptive rate of 10% of total receipt .

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ISSUES:Whether manufacture of LPG was considered as

manufacture of natural gas ?Whether manufacture of CNG was considered as

manufacture of natural gas?

RULING:

LPG does not contain methane while natural gas comprises 80% of methane.Hence faclity provided by assessee to GAIL does not come under the purview of production of mineral oil's as contemplated in section 44BB.44BB only includes production by mining process and would not include production of LPG,propane,butane as well as CNG by post mining process.

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Availability of short stay exemption in case profits are computed u/s. 44BB ~ Ensco Maritime Ltd. (2004) 91 ITD 459(Delhi).

Service tax cannot be excluded while computing section 44BB(2) ~ TECHNIP OFFSHORE CONTRACTING BV (2009-TIOL-54-ITAT –Del).

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Revenue earned from services which are in the nature of processing 2D/3D data for oil exploration / extraction project in India not FTS under Explanation 2 to section 9 (1) (vii) (b) but would be termed as business profits from services rendered with regard to exploration / extraction of mineral oils u/s. 44BB ~ Paradigm Geophysical Pvt. Ltd. (2008-TIOL-362-ITAT-Del)

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Section 44BB – Issues Section 44BB – Issues

Reimbursement of expenses Revenue authorities have consistently taken

the position that Section 44BB apply to all amounts received and there is no scope for a differential treatment in respect of reimbursement expenses.

Reimbursement of expenses would be covered by the definition of fees for technical services and tax accordingly ~ Cochin Refineries Ltd. (1996) 222 ITR 354.

4949RRC - 2007

Reimbursement of Expenses Favour CIT v. Industrial Engineering

Projects Pvt. Ltd. (202 ITR 1014) (Del)

Raymond Ltd. v. DCIT (86 ITD 791) (Mum)

CIT v. Dunlop Rubber Co. Ltd. (142 ITR 493) (Cal)

Sedco Forex International Drilling Inc. v. DCIT (67 TTJ 670) (Del)

Mannesmann Demag Lauchhammer v. CIT (26 ITD 198) (Hyd)

Schreiner Airways BV v. IAC (32 TTJ 313) (Del)

Zuari Agro Chemicals (ITA No. 3834/3835 of 1984) (Mum)

HNS India VSAT Inc. v. DDIT (95 ITD 157)

Against

• Cochin Refineries Ltd. v. CIT (222 ITR 354) (Ker)

• Steffen, Robertson and Kirsten Consulting v. CIT (230 ITR 206) (AAR)

• Danfoss Industries P. Ltd. (268 ITR 1) (AAR)

• Timken India Ltd. v. CIT (617 of 2003)

• DCIT v. Arthur Andersen & Co. (ITA No. 9125 / Mum / 1995) (Mum)

• Hindalco Industries Ltd. V. ACIT (94 ITD 242)(Mum)

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Section 44BBA – Operation of Aircraft - non-residents

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Section 44BBA – Operation of Aircraft - non-residents


Engaged in the business of operation of aircrafts

A sum equal to 5% of the aggregate of the following: Amount paid / payable (in India or outside India / to

the assessee or to any other person on his behalf) on account of the carriage of passengers, livestock, mail or goods from any place in India.

Amount received / deemed to be received in India (by or on behalf of the assessee) on account of the carriage of passengers, livestock, mail or goods shipped from any place outside India.

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Section 44BBA – IssuesSection 44BBA – Issues

Facts: Assessee leasing its aircrafts to Air India

- wet leasing agreement;

Received rental income from Air India

Issue:

Whether section 44BBA would be applicable ?

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Section 44BBA – IssuesSection 44BBA – Issues

Ruling:

The assessee was in fact leasing out its aircrafts to Air India and not carrying on "business of operation of aircraft". Therefore, we agree with the lower authorities that the income of the assessee is not to be brought to tax under the provisions of section 44BBA of the Act.

Decision of the Mumbai Bench of the Tribunal in the case of Caribjet Inc. (2005) 4 SOT 18.

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Section 44BBB – Foreign companies – turnkey power projects

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Section 44BBB – Foreign companies – turnkey power projects

Applies to an assessee

Being a foreign company.

Engaged in the business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof.

In connection with a turnkey power project.

Approved by the Central Government in this behalf.

A sum equal to 10% of the amount paid or payable (in India or outside India / to the assessee or to any other person on his behalf) on account of such civil construction, erection, etc., shall be deemed to be profits of such business.

Claim for lower profits permitted – 44AA and 44AB to be adhered to.

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Section 44C – Deduction of head office expenditure

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Non-resident assessee

Deduction of head office expenditure restricted to least of the following

Five per cent of adjusted total income (ATI);

Where ATI is a loss, five per cent of average adjusted total income

Head office expenditure incurred as is attributable to the business or profession in India;

Adjusted Total Income : Excludes depreciation / losses carried forward for set off.

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Head office expenditure – executive and general administration expenditure incurred outside India, including expenditure incurred in respect of –

rent, rates, taxes, repairs or insurance of any premises outside India used for the purpose of business or profession;

salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profit in lieu or addition to salary, whether paid or allowed to any employee or other person employed in, or managing the affairs of, any office outside India

Travelling by any employee or other person employed in, or managing the affairs of, any office outside India,

such other matters connected with executive and general administration as may be prescribed.

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SECTION 44C ~ Issues

Expenses incurred by the assessee at its head office on account of administration, accounting and management services were wholly related to the Indian operations. ~ Ravva Oil (2008) 167 TAXMAN 177 (Del)

Facts:

The assessee a non-resident company, engaged in providing services in connection with exploration oils.

Has its head office at Singapore and a sole branch office in India

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Section 44C – Issues

Issues:

Whether entire head office expenses attributable to business in India had to be allowed ?

Ruling:

Expenses incurred by the assessee at its head office on account of administration, accounting and management services were wholly related to the Indian operations.

Section 44C of the Income-tax Act, 1961 (‘Act’) will not apply.

Reliance placed on Rupenjuli Tea Co. Ltd(1990) 186 ITR 301

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Section 44D / DA– ROYALTIES, ETC., IN THE CASE OF FOREIGN

COMPANIES.

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Section 44D / 44DA

Assessee must be foreign company

Income by way of royalty or fees for technical services received from Government or an Indian concern

Deduction:

Twenty per cent of the gross amount of such royalty or fees (only in cases where agreements prior to 31 March 1976)

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Section 44D / 44DA

Assessee must be foreign company

Income by way of royalty or fees for technical services received from Government or an Indian concern after 31 March 2003

Where foreign company carries on business in India through a PE / fixed place of business and the royalties and FTS are effectively connected with such PE / fixed place – income to be computed under the head ‘profits and gains of business or profession’.

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Section 44D / 44DA

No deduction shall be allowed:

Except of expenses which are not wholly and exclusively incurred for business of PE / fixed place of business.

Any amounts paid to HO / other offices (otherwise than towards reimbursements of actual expenses).

Books of accounts to be maintained / audited.

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Section 44D /44DA.

Definitions

Fees for technical services - Explanation 2 to clause (vii) of sub-section (1) of section 9;

Royalty - Explanation 2 to clause (vi) of sub-section (1) of section 9;

Permanent Establishment – Clause (iiia) to section 92 F.

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Questions?

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Thank You

1 DEEMED BUSINESS INCOME AND PRESUMPTIVE TAXATION CA Ketan Ved 21 March 2009.

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