The expression “contractor” does not include within its fold a subcontractor carrying out any work in pursuance of a subcontract with a sub subcontractor in AY 2006–2007, as held by MumTrib in HCC-L&T Purulia Joint Venture v JCIT — In favour of: The assessee; ITA Nos 1644, 3041/Mum/2010: (AYs 2006–2007and 2007–2008).
Decided on: 24 June 2011.
On and from 1 October 2009, payments made by a subcontractor to a sub subcontractor would also be covered under s 194C of the Act.
HCC-L&T Purulia Joint Venture v JCIT
ITAT BENCH 'H', MUMBAI
ITA Nos. 1644, 3041/MUM/2010
Assessment Year: 2006-07and 2007-08
N V Vasudevan, JM and R K Panda, AM
Decided on: 24 June 2011
Counsel appeared:
Shri H.P. Mahajani for the appellant
Shri V.V. Shastri for the respondent
Order
Per: Bench:
ITA No.1644/M/2010 is an appeal by the assessee against the order dated 22/1/2010 of CIT(A)
XXXIII, Mumbai relating to assessment year 2006-07. Ground No.1 raised by the assessee reads as
under:
“1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in
confirming the disallowance of 15% out of payments made to vendors covered by the
provisions of section 40A(2)(b) of the Income Tax Act. The addition be deleted.”
2. The assessee is an AOP. It is a joint venture between Hindustan Construction Company Ltd. and
Larsen & Toubro Limited. The joint venture was formed to execute on a sub-contract basis from the
main contractor M/s. Taisei Corporation, the Purulia Pumped Storage Project of West Bengal State
Electricity Board (WBSEB). In the course of assessment proceedings the Assessing Officer noticed
that the AOP had paid hire charges to one of its members namely Rs. 83,32,000/- to L&T Ltd.
towards machinery hire charges of Rs. 1,62,30,194/- to M/s.Hindustan Construction Company Ltd.
According to the assessee the machineries that were taken on lease were highly specialized
equipments for which there was no ready hire market. The AOP did not procure this machine on its
own because of high lead time and other procedural delays in purchase of such specialized
equipments. Further delay in procuring the machinery would mean delayed completion of the project.
The cost involved also did not justify making huge investment by the AOP. The assessee pointed out
that the hire charges paid were 3% of the cost of the machinery which a general practice in the
construction industry.
3. The Assessing Officer however noticed that in the A.Y 2005-06, 15% of the payments of hire
charges by the AOP to its members was considered excessive and disallowed as a deduction by
invoking the provisions of section 40A(2)(b) of the Income Tax Act, 1961 (the Act). The Assessing
Officer, therefore, disallowed 15% of the hire charges paid to the related parties.
4. On appeal by the assessee the CIT(A) confirmed the order of the Assessing Officer following the
order of the CIT(A) on identical issue in A.Y 2005-06.
5. At the time of hearing it was brought to our notice that in A.Y. 2005- 06 this Tribunal considered
identical issue and set aside the order of the CIT(A) and remanded the issue for fresh consideration by
the Assessing Officer. In view of the above we set aside the order of the CIT(A) in the present
assessment year and remand the issue to Assessing Officer in the light of the decision that may be
arrived at by the Assessing Officer in 2005- 06.
6. Ground No.2 raised by the assessee reads as follows:
“On the fats and in the circumstances of the case and in law, the learned CIT(A) erred in
confirming the disallowance u/s. 40(a)(ia) of the Income Tax Act vary with section 194C of
the Income Tax Act."
7. As we have already seen the assessee is an AOP. It was executing as a sub-contractor the Purulia
Pump Storage Project of the WBSEB on behalf of the main contractor M/s. Taisei Corporation. The
assessee AOP as a subcontractor in turn executed the sub-contract through various persons
(hereinafter referred to as sub sub-contractor). The assessee made payment to sub sub-contractors.
According to the Assessing Officer the assessee ought to have deducted tax at source on payments
made to the sub subcontractors and since the assessee failed to make deduction of tax at source, the amounts paid to the sub-sub contractors cannot be claimed as deduction as an expenditure which was debited in the P&L Account because of the provisions of section 40(a)(ia) of the Act. The CIT(A) concurred with the view of the Assessing Officer.
8. The plea of the assessee was that:
a) Sub-section (1) of section 194C deals with payments made by the Client to the Contractor.
Hence payments made by the West Bengal State Electricity Board to M/s. Taisei Corporation,
Japan would only be covered by this sub-section, had Taisei Corporation been a resident
entity.
b) Sub-section (2) of Section 194C deals with payments made by the Main Contractor to the
sub-contractor. Hence payments made by Taisei Corporation, Japan to the assessee Joint
Venture would be covered by this sub-section.
The Assessee pointed out that Explanation 1 to Sec.194-C of the Act, which defines the term
‘contractor’ provides that “Contractor” shall also include a contractor who is carrying out any
work in pursuance of a contract between the contractor and the Government of a foreign state
or a foreign enterprise or any association or body established outside India. The Assessee
brought to the notice of the CIT(A), the objective of the said definition as expressly stated in
Para 51 of CBDT Circular No.684 dated 10.06.1994, which provided Explanatory Notes on
the Provisions of Finance Act 1994, which is reproduced as under:
“51. Section 194C(2) of the Income Tax Act contains provisions relating to deduction of
income-tax at source from payments made to a subcontractor by a contractor. Prior to the
amendment made by the Finance Act, these provisions were applicable only where the
contractor was a resident person referred to in section 194C(1) of the Act, that is to say, he
had taken a contract for carrying out any work, or for supply of labour for carrying out any
work, from the Central Government or any State Government, a local authority, a statutory
corporation or a company, etc. [i.e. the agencies specified in section 194C(1)]. In the recent
past, certain instances had come to notice where the resident contractors entered into
contracts with the Government of a foreign State, etc. and parceled out the work of such
contracts to sub-contractors who were also residents. In such cases, the payments made by
the contractors to sub-contractors were not subject to the requirement of deduction of
income-tax at source. The need is to bring these payments also within the scope of deduction
of income tax at source.
51.2. The Finance Act has, therefore, amended section 194C (2) of the Income-tax Act, in
order to provide that the expression ‘contractor’ shall also include a contract who is carrying
out any work(including supply of labour for carrying out any work) in pursuance of a
contract between the contractor and the Government of a foreign State or a foreign enterprise
or any association or body established outside India.”
The Assessee pointed out that in the present case that the client (Main contractor) in the
instant case was a resident whereas the Explanation-1 contemplates a case where main
contractor is a non-resident. Thus the Assessee submitted that the TDS provisions are
designed to cover payments made by a client to a contractor and thereafter payments made by
a contractor to a sub-contractor. However, these provisions do not require deduction of TDS
on payments made by one sub-contractor to a person to whom the work has further been
delegated. There is no doubt therefore that a sub-contractor is not required to deduct TDS
under the provisions of section 194 C. The Assessee also submitted that the above submission
is further bolstered by the rates assigned for deduction at each level. A client is required to
deduct TDS at 2% (Basic rate) from payments to the contractor. Therefore, the contractor is
required to deduct TDS at 1% from the payments made to the sub-contractor. It was
submitted that as one goes down chain the rate of TDS decreases. In such scenario a further
rate has also not been prescribed by the legislature in connection with payments made by a
sub-contractor to another sub-contractor. It was further pointed out that the provisions of
section 194C as substituted by the Finance Act No.2, 2009 w.e.f. 1/10/2009 contains a
definition of contract in Explanation (iii) which provides that contract shall include subcontract.
Thus prior to this amendment a contract between a sub-contractor and sub subcontractor
is outside the purview of section 194C of the Act.
9. The ld. D.R however submitted that the payments clearly fall within the definition of payments to
sub-contractor as contemplated in Explanation -1 to section 194C of the Act as it existed prior to the
substituted section 194C substituted by Finance Act, 2009 w.e.f. 1/10/2009.
10. We have considered the rival submissions. The Provisions of Sec.194C of the Act, as it existed as
on 1-4-2007 is as follows:
“194C. Payments to contractors and sub-contractors.--@@(1) Any person responsible for
paying any sum to any resident (hereinafter in this section referred to as the contractor) for
carrying out any work (including supply of labour for carrying out any work) in pursuance of
a contract between the contractor and-
(a) the Central Government or any State Government ; or
(b) any local authority ; or
(c) any corporation established by or under a Central, State or Provincial Act ; or
(d) any company ; or
(e) any co-operative society ; or
(f) any authority, constituted in India by or under any law, engaged either for the purpose of
dealing with and satisfying the need for housing accommodation or for the purpose of
planning, development or improvement of cities, towns and villages, or for both ; or
(g) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under
any law corresponding to that Act in force in any part of India ; or
(h) any trust ; or
(i) any university established or incorporated by or under a Central, State or Provincial Act
and an institution declared to be a university under section 3 of the University Grants
Commission Act, 1956 (3 of 1956) ; or
(j) any firm ; or
(k) any individual or a Hindu undivided family, whose total sales, gross receipts or turnover
from the business or profession carried on by him exceed the monetary limits specified under
clause (a) or clause (b) of section 44AB during the financial year immediately preceding the
financial year in which such sum is credited or paid to the account of the contractor,
shall, at the time of credit of such sum to the account of the contractor or at the time of
payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is
earlier, deduct an amount equal to-
(i) one per cent. in case of advertising, (ii) in any other case two per cent.,
of such sum as income-tax on income comprised therein :
Provided that no individual or a Hindu undivided family shall be liable to deduct income-tax
on the sum credited or paid to the account of the contractor where such sum is credited or
paid exclusively for personal purposes of such individual or any member of Hindu undivided
family.
(2) Any person (being a contractor and not being an individual or a Hindu undivided family),
responsible for paying any sum to any resident (hereafter in this section referred to as the
sub-contractor) in pursuance of a contract with the sub-contractor for carrying out, or for the
supply of labour for carrying out, the whole or any part of the work undertaken by the
contractor or for supplying whether wholly or partly any labour which the contractor has
undertaken to supply shall, at the time of credit of such sum to the account of the subcontractor
or at the time of payment thereof in cash or by issue of a cheque or draft or by any
other mode, whichever is earlier, deduct an amount equal to one per cent. of such sum as
income-tax on income comprised therein.
Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or
turnover from the business or profession carried on by him exceed the monetary limits
specified under clause (a) or clause (b) of section 44AB during the financial year immediately
preceding the financial year in which such sum is credited or paid to the account of the subcontractor,
shall be liable to deduct income-tax under this sub-section.
Explanation I.--For the purposes of sub-section (2), the expression "contractor" shall also
include a contractor who is carrying out any work (including supply of labour for carrying
out any work) in pursuance of a contract between the contractor and the Government of a
foreign State or a Foreign enterprise or any association or body established outside India.
Explanation II.- For the purposes of this section, where any sum referred to in sub-section (1)
or sub-section (2) is credited to any account, whether called "Suspense account" or by any
other other name, in the books of account of the person liable to pay such income, such
crediting shall be deemed to be credit of such income to the account of the payee and the
provisions of this section shall apply accordingly.
Explanation III.-For the purposes of this section, the expression "work" shall also include-
(a) advertising ;
(b) broadcasting and telecasting including production of programmes for such broadcasting
or telecasting ;
(c) carriage of goods and passengers by any mode of transport other than by railways ;
(d)catering.
(3) No deduction shall be made under sub-section(1) or sub-section (2) from--
(i) the amount of any sum credited or paid or likely to be credited or paid to the account of, or
to, the contractor or sub-contractor, if such sum does not exceed twenty thousand rupees :
Provided that where the aggregate of the amounts of such sums credited or paid or likely to
be credited or paid during the financial year exceeds fifty thousand rupees, the person
responsible for paying such sums referred to in sub-section (1) or, as the case may be,
subsection (2) shall be liable to deduct income-tax under this section :
Provided further that no deduction shall be made under sub-section (2), from the amount of
any sum credited or paid or likely to be credited or paid during the previous year to the
account of the subcontractor during the course of business of plying, hiring or leasing goods
carriages, on production of a declaration to the person concerned paying or crediting such
sum, in the prescribed form and verified in the prescribed manner and within such time as
may be prescribed, if such sub-contractor is an individual who has not owned more than two
goods carriages at any time during the previous year :
Provided also that the person responsible for paying any sum as aforesaid to the subcontractor
referred to in the second proviso shall furnish to the prescribed income-tax
authority or the person authorised by it such particulars as may be prescribed in such form
and within such time as may be prescribed ; or”
(ii) any sum credited or paid before the 1st day of June, 1972 ; or
(iii) any sum credited or paid before the 1st day of June, 1973, in pursuance of a contract
between the contractor and a co-operative society or in pursuance of a contract between such
contractor and the sub-contractor in relation to any work (including supply of labour for
carrying out any work) undertaken by the contractor for the cooperative society.
Explanation. - For the purposes of clause (i), “goods carriage” shall have the same meaning
as in the Explanation to sub-section (7) of section 44AE.”
We are of the view that the contentions put forth on behalf of the assessee has to be accepted.
Explanation-1 to section 194C of the Act provides that or the purpose of sub-section(2) the
expression contractor shall also include a contractor who is carrying out any work in
pursuance of a contract between the contractor and the Government of a foreign state or
foreign enterprise or any association or body established outside India. Thus the expression
contractor did not include within its fold a sub-contractor carrying out any work in pursuance
of a sub-contract with a sub subcontractor. In other words sub-section (2) of section 194C of
the Act applies only to payments made by contractor to sub-contractor but does not apply to a
payment made by a sub-contractor to a sub sub-contractor. The provisions of section 194 C as
substituted by the Finance Act 2 of 2009 w.e.f. 1/10/2009 has now not made any distinction
between a payment to a contractor or sub-contractor and all payments for carrying out any
work in pursuance of contract are covered within the fold of section 194C (1) of the Act.
Further Explanation (iii) also provides that a contract include subcontract. Thus on and from
1/10/2009 payments made by sub-contractor to a sub sub-contractor would also be covered
under section 194C of the Act. The substituted provisions of Sec.194-C of the Act, w.e.f. 1-
10-2009 are as follows:
“194C. Payments to contractors.--(1) Any person responsible for paying any sum to any
resident (hereafter in this section referred to as the contractor) for carrying out any work
(including supply of labour for carrying out any work) in pursuance of a contract between the
contractor and a specified person shall, at the time of credit of such sum to the account of the
contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any
other mode, whichever is earlier, deduct an amount equal to -
(i) one per cent. where the payment is being made or credit is being given to an individual or
a Hindu undivided family ;
(ii) two per cent. where the payment is being made or credit is being given to a person other
than an individual or a Hindu undivided family,
of such sum as income-tax on income comprised therein.
(2) Where any sum referred to in sub-section (1) is credited to any account, whether called
“Suspense account” or by any other name, in the books of account of the person liable to pay
such income, such crediting shall be deemed to be credit of such income to the account of the
payee and the provisions of this section shall apply accordingly.
(3) Where any sum is paid or credited for carrying out any work mentioned in sub-clause (e)
of clause (iv) of the Explanation, tax shall be deducted at source -
(i) on the invoice value excluding the value of material, if such value is mentioned separately
in the invoice ; or
(ii) on the whole of the invoice value, if the value of material is not mentioned separately in
the invoice.
(4) No individual or Hindu undivided family shall be liable to deduct income-tax on the sum
credited or paid to the account of the contractor where such sum is credited or paid
exclusively for personal purposes of such individual or any member of Hindu undivided
family.
(5) No deduction shall be made from the amount of any sum credited or paid or likely to be
credited or paid to the account of, or to, the contractor, if such sum does not exceed twenty
thousand rupees :
Provided that where the aggregate of the amounts of such sums credited or paid or likely to
be credited or paid during the financial year exceeds fifty thousand rupees, the person
responsible for paying such sums referred to in sub-section (1) shall be liable to deduct
income-tax under this section.
(6) No deduction shall be made from any sum credited or paid or likely to be credited or paid
during the previous year to the account of a contractor during the course of business of
plying, hiring or leasing goods carriages, on furnishing of his Permanent Account Number, to
the person paying or crediting such sum.
(7) The person responsible for paying or crediting any sum to the person referred to in subsection
(6) shall furnish, to the prescribed income-tax authority or the person authorised by
it, such particulars, in such form and within such time as may be prescribed.
Explanation. - For the purposes of this section, -
(i) “specified person” shall mean,-
(a) the Central Government or any State Government ; or
(b) any local authority ; or
(c) any corporation established by or under a Central, State or Provincial Act ; or
(d) any company ; or
(e) any co-operative society ; or
(f) any authority, constituted in India by or under any law, engaged either for the purpose of
dealing with and satisfying the need for housing accommodation or for the purpose of
planning, development or improvement of cities, towns and villages, or for both ; or
(g) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under
any law corresponding to that Act in force in any part of India ; or
(h) any trust ; or
(i) any university established or incorporated by or under a Central, State or Provincial Act
and an institution declared to be a university under section 3 of the University Grants
Commission Act, 1956 (3 of 1956) ; or
(j) any Government of a foreign State or a foreign enterprise or any association or body
established outside India ; or (k) any firm ; or (l) any person, being an individual or a Hindu
undivided family or an association of persons or a body of individuals, if such person,-
(A) does not fall under any of the preceding sub-clauses ; and
(B) is liable to audit of accounts under clause (a) or clause
(b) of section 44AB during the financial year immediately preceding the financial year in
which such sum is credited or paid to the account of the contractor ;
(ii) “goods carriage” shall have the meaning assigned to it in the Explanation to sub-section
(7) of section 44AE ;
(iii) “contract” shall include sub-contract ;
(iv) “work” shall include-
(a) advertising ;
(b) broadcasting and telecasting including production of programmes for such broadcasting
or telecasting ;
(c) carriage of goods or passengers by any mode of transport other than by railways ;
(d) catering ;
(e) manufacturing or supplying a product according to the requirement or specification of a
customer by using material purchased from such customer,
but does not include manufacturing or supplying a product according to the requirement or
specification of a customer by using material purchased from a person, other than such
customer.”
In the present case we are concerned with A.Y 2006-07 and, therefore, payments by a subcontractor
to sub sub-contractor would not be covered under the provisions of section
194C(2) of the Act. We therefore, agree with the submissions made on behalf of the assessee
and hold that there is no obligation to deduct tax at source on the part of the assessee in
respect of payments made to sub sub-contractors. Therefore, the disallowance made under
section 40(a)(ia) is directed to be deleted.
11. In the result, appeal in ITA No.1644/M/2010 is partly allowed.
ITA NO.3041/MUM/2010:
12. This is an appeal by the assessee against the order dated 30/3/2010 of CIT(A) XXXIII, Mumbai
relating to assessment year 2007-08. Grounds of appeal raised by the assessee read as follows:
“1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in
confirming the disallowance of 15% out of payments made to vendors covered by the
provisions of section 40A(2)(b) of the Income Tax Act. The addition be deleted.”
2. “On the fats and in the circumstances of the case and in law, the learned CIT(A) erred in
confirming the disallowance u/s. 40(a)(ia) of the Income Tax Act vary with section 194C of
the Income Tax Act.”
13. These grounds are identical to the grounds raised and considered by us while deciding appeal of
the assessee for A.Y. 2006-07. For the reasons stated therein the order of CIT(A) with regard to the
disallowance under section 40A(2)(b) of the Act is set aside and the issue is remanded to the
Assessing Officer for fresh consideration. The disallowance under section 40(a)(ia) of the Act
challenged in ground No.2 is decided in favour of the assessee.
14. In the result, both the appeals by the assessee are partly allowed.
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