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

Contents Introduction Relevant sections under the Income-tax Act, 1961. Relevant provisions Issues

INTRODUCTION Presumptive Taxation = Taxation on “Estimated Income Method”.

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 .

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.

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

Section 44AD – Civil Construction Business

Section 44AD – Civil Construction Business 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’.

Section 44AD – Civil Construction Business 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 %.

Section 44AD – Civil Construction Business 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.

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)

Section 44AD – Issues 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)

Section 44AD – Issues 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.)

Section 44AE – Plying, hiring or leasing goods carriages

Section 44AE – Plying, hiring or leasing goods carriages 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 – any motor vehicle constructed or adapted for use solely for the carriage of goods or any motor vehicle not so constructed or adapted when used for the carriage of goods.

Section 44AE – Plying, hiring or leasing goods carriages 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.

Section 44AE – Plying, hiring or leasing goods carriages 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

Section 44AE – Plying, hiring or leasing goods carriages 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.

Section 44AE – Plying, hiring or leasing goods carriages 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.

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)

Section 44AF – Retail Business

Section 44AF – Retail Business 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.

Section 44AF – Retail Business 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’.

Section 44AF – Retail Business 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.

Section 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)

Section 44B – Shipping business of non-residents

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.

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).

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

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

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

Section 44BB – Exploration, etc. of mineral oils. Analysis of the section: Applies to 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 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.

Section 44BB – Exploration, etc. of mineral oils. Analysis of the section: 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.

Section 44BB – Exploration, etc. of mineral oils. Analysis of the section: 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

Section 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)

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).

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 %.

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

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.

44BB 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);

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.

Section 44BB – Issues Provisions of either the Act or the DTAA to be applied independently ~ Saipem S P A ~(2009 TIOL 102 ITAT Delhi)

Section 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).

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 .

SECTION 44 BB ~ Issues 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.

SECTION 44 BB ~ Issues 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).

SECTION 44 BB ~ Issues 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)

Reimbursement of expenses 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.

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) RRC - 2007

Section 44BBA – Operation of Aircraft - non-residents

Section 44BBA – Operation of Aircraft - non-residents Applies to an assessee Being a non-resident 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.

Section 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 ?

Section 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.

Section 44BBB – Foreign companies – turnkey power projects

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.

Section 44C – Deduction of head office expenditure

Section 44C – Deduction of head office expenditure 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.

Section 44C – Deduction of head office expenditure 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.

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

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

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

Assessee must be foreign company 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)

Assessee must be foreign company 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’.

No deduction shall be allowed: 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.

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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