No TDS liability u/s. 194C where the assessee, a transporter has made payments for hiring of trucks simplicitor and not for transportation of goods.

IN THE ITAT KOLKATA BENCH 'A'

Lokesh Duggal

vs.

Income Tax Officer, Ward 35(3), Kolkata

Facts: The assessee is an individual, and is engaged in the business of transportation of goods. During the course of business carried on by him, the assessee had to take several trucks on hire, from middlemen or agents of the subcontractor, so as to meet his requirements. It is on these payments that the assessee did not deduct tax at source under section 194C, and, this non deduction of tax source from payments to the agents of the truck-owners, inter alia, resulted in the impugned disallowance under section 40(a)(ia). In appeal the CIT(A) has confirmed the disallowance.

Held that,-

"What follows from the above analysis, with which we are in considered agreement, that so far as pre June 2008 position is concerned, tax withholding obligations under section 194 C in respect of an individual only in cases where the payments were made to a sub contractor for carrying out a part off work, or the work itself, undertaken by the assessee and that too when such individual's turnover from business or profession exceeded threshold specified in section 44AB. That condition is clearly not satisfied in the present case. It is not the revenue's case that the payment is made for sub contracting the work, and, as we seen in the earlier discussion, there is nothing on record to even suggest so. That would have been the case, for example, when assessee received the goods for transportation and the assessee had made payment for such transportation of goods, not truck hire simplictor as is the case before us, to a third party. When it is not a case of sub contracting, it is wholly immaterial that assessee's turnover exceeded the specified threshold under section 44AB, which, as we have noted above, applied only in respect of sub contracting work at the relevant point of time. Clearly, therefore, the assessee did not have any tax withholding obligation in respect of truck hire payments in the pre-amendment period. Once we come to the conclusion that the assessee did not have any obligations to deduct tax at source under section 194C, the very basis of impugned disallowance ceases to be good in law. The disallowance must, therefore, stand deleted for this short reason alone. In these circumstances, we also see no need to address ourselves to other very erudite legal contentions put forward by the learned counsel. The impugned disallowance stands deleted."

In the result, the appeal was allowed. 

Initiation of recovery proceedings without rejecting the Stay Application is against the Principle of Natural Justice as held by ITAT, Hyderabad

Rule of Natural Justice in TaxLaw

The principles of natural justice concern procedural fairness and ensure a fair decision is reached by an objective decision maker. 

IN THE ITAT HYDERABAD BENCH 'A'

Capital IQ Information Systems India (P.) Ltd.

vs.

Assistant Commissioner of Income-tax, Cir. 1(2), Hyderabad

The initiation of recovery proceedings without rejecting the stay petition is against the Rule of Natural Justice. 

Briefly the facts are as follows,-


Assessee is engaged in Information Technology enabled services and business support services to the parent company. Assessment for the year under appeal, was completed invoking the provisions relating to the Transfer Pricing, under S. 143(3) of the Act read with S. 144C of the Act as against returned income. Demand was accordingly raised.

The learned counsel for the assessee had filed a copy of notice under S. 226(3) dated 6.6.2012 regarding the attachment of the bank of account of the assessee and mentioned that such attachment made by the assessing officer when the application for stay of recovery was still pending, was not proper.

That without taking any decision on the stay application of the assessee pending before the assessing office, it is unfortunate that the Revenue authorities did not bother to inform the assessee about the fact of attachment on the bank account of the assessee, which was in fact, ultimately informed to the assessee by the bank.

Further, he reiterated by stating that in all probability, the assessment have to be set aside by the Tribunal in view of the violations caused to the principles of natural justice and the inquiries carried out at the back of the assessee, without meeting the objections raised by the assessee before the TPO/Assessing officer, DRT, etc.

Hon'ble ITAT held that, initiation of the recovery proceedings without passing any order on the stay application of the assessee. The recovery proceedings under S. 220(6) were initiated without attending to or expressly rejecting the stay application filed by the assessee before the assessing officer. Also stated that there was Lack of transparency and the assessing officer had failed to honor the set principles of natural justice. Subsequently, it was also observed that the objections raised by the assessee before the lower authorities were not met by passing a speaking order. 

In the result, Stay Application of the assessee was partly allowed.

High Court, Kolkata held that, the foreign travel expenses shall be disallowed in entirety in absence of details/evidences & explanation for justification of undertaking such foreign tours in connection to business

The assessee was required to give the details of foreign visits and justification related to assessee's business. The assessee has replied that these are incurred for possible future expansion of business but no other details were given regarding what in the further expansion plan and which visit is for what particular project or purpose and in these visits which foreign concerns were contacted and what business dealing was made. In the absence of these details the assessee has not proved that these are related business activities. The appellant-assessee has not been able to discharge initial burden to prove that the expenses on account of foreign visits was relatable to business expenditure. 

HIGH COURT OF CALCUTTA

Peerless General Finance & Investment Co. Ltd.

vs.

Commissioner of Income-tax, W.B.-I, Kolkata

KALYAN JYOTI SENGUPTA AND JOYMALYA BAGCHI, JJ.

IT APPEAL NO. 302 OF 2003

MAY 17, 2012

Facts of the case: the nature of the assessee's business is a non-banking financing that includes acceptance of deposit from public to pool for making investments within the limitation of prudential norms issued by the RBI, and it obviously precludes the possibility of any purpose of capital nature. The continuity of collection in foreign exchange and the long history of regular campaign over years per se is a circumstance of substantially evidentiary value.

Issue: The assessee claimed deduction on account of foreign tours undertaken at different times for business purposes of the company.

Assessee's contented that, both the assessing officer and the learned Tribunal had gone wrong not accepting this fact of collecting business from foreign countries and as such travel tour by the officials of the assessee to the foreign countries is an essential part of the business- that non-availability of formal evidence as recorded by the learned Tribunal, does not amount to a case of absence of evidence because the nature of campaign involving man to man and group contacts amongst the non-resident Indians produces no document- the standard of proof set by the learned Tribunal is not a pragmatic one- placing reliance on a judgment in case of CIT v.Coimbatore Salem Transport Co. (P.) Ltd. [1966] 61 ITR 480 (Mad.) that in a situation like this onus of proof is required to be discharged by the Revenue- enough evidence was produced giving list of names of the places and names of the personnel visited therefore no other proof was required- result of the foreign trip for the business purpose is not determinative factor as have been wrongly held by the learned Tribunal.

On the other hand revenue contended that, assessee-appellant failed to prove by supporting documents and evidence that there has been travel tour in connection with the business- Assessing Officer was perfectly justified in disallowing such claim- decision of the CIT (Appeals) allowing 50% of the claim was not legally sustainable as the same was based on surmises and assumptions- Tribunal has correctly reversed the judgment and order of the CIT (Appeals) as nothing was produced though repeated opportunity was given to produce the same. The appellant has not furnished full details and information with regard to following foreign trips by the personnel of the Assessing Officer.

Hon'ble High Court, Calcutta has held that, in order to claim deduction the assessee has to prove by adducing cogent evidence that it was incurred on account of business activities of the company. It appears as rightly pointed out by learned counsel for the respondent that despite opportunity being given they could not produce any materials that such foreign tour was undertaken in relation to the business of the company. Mere furnishing information and making of statement are not good enough to establish the case of foreign travel. 

Further stated that, "It will appear that the Commissioner of Income Tax (Appeals) has accepted mere statement made to be correct without caring for evidence and it would appear therefrom it is absolutely based on surmise and conjecture. We therefore find force in the submission of the learned Counsel for the respondent. Therefore the decision of the learned Tribunal is absolutely justified. We are of the view that the appellant-assessee has not been able to discharge initial burden to prove that the expenses on account of foreign visits was relatable to business expenditure. We are unable to accept the contention of Mr. Bagchi that materials produced before the learned Tribunal is quite adequate to hold that the foreign tour was relatable to business activity of the assessee company. We also fail to understand on what basis the Commissioner of Income Tax (Appeals) has allowed 50% we think it was completely guess work and it appears as if just because the Commissioner of Income Tax (Appeals) thinks that the aforesaid expenditure of disallowance should be granted and it was granted."

A "substantial question of law" arise from the order of the Tribunal- High Court u/s. 260A cannot consider the validity of a retrospective amendment when no such question has arisen from its Tribunal order

High Court of Kerela has observed and reasonably drawn a conclusion that, "a validity of a provision cannot be considered or adjudicated upon by the Tribunal constituted under the Act. Section 260A provides for an appeal from every order passed by the Appellate Tribunal, if it involves a substantial question of law. Such question of law should arise from the order of the Tribunal. If the Tribunal cannot consider the validity of a retrospective amendment, no doubt such question does not arise from its order and the jurisdiction conferred on the High Court under Section 260A cannot also enable the High Court to consider such validity or otherwise". 

HIGH COURT OF KERALA

M. Abdul Rehuman Kunju

vs.

Assistant Commissioner of Income-tax, Circle -I, Kollam

THOTTATHIL B. RADHAKRISHNAN AND K. VINOD CHANDRAN, JJ.

I T APPEAL NOS. 50 & 63 OF 2012

AUGUST 3, 2012

ORDER

Facts of the case: The appellant/assessee is an exporter of cashew kernels and the assessments for the respective years were completed by accepting the returns under Section 143(1) of the Income Tax Act, 1961. Subsequently noticing that the income chargeable to tax has escaped assessment within the meaning of Section 147 of the Act, notice was issued under Section 148. 

Issue: The issue that arose was regarding the deduction claimed while computing the deduction under Section 80 HHC more specifically the deduction claimed with respect to the profit on sale of Duty Entitlement Pass Book (DEPB) (hereinafter referred to as DEPB).

Revenue's contention: pursuant to the amendment brought in, in the year 2005, every assessee having turnover exceeding Rs.10 crores, for claiming entitlement of profits on sale of DEPB under Section 80 HHC; has to satisfy two conditions regarding availability of an option to choose either duty drawback or DEPB scheme and also that the duty drawback credit was higher than that available under DEPB. Exporters of cashew having no such option and the assessee having failed to produce any evidence, the claim made by the assessee was to be disallowed.

Before First Appellate Authority: three specific grounds with respect to the disallowance of the claim under Section 80HHC was raised. 

The first two grounds were on the reopening of the assessment under Section 147 alleging there was no material to invoke the provision and whether an amendment tantamounts to new material. 

The next ground was regarding the reopening of the assessment on the ground of retrospective amendment of Section 80 HHC, since according to the assessee no retrospective amendment could have been made to withdraw the exemption or concessions already granted. 

Held that, The first two grounds were rejected as the reopening under Section 147 was done based on the retrospective amendment, which is new material, and was within the prescribed time limit and hence is valid. The 1st appellate authority, in any event could not have considered the validity of the retrospective amendment.

Appeal by the appellant before ITAT: Whether the assessing officer was entitled to withdraw the deduction in respect of DEPB incentive on the basis of the subsequent amendment. 

The Tribunal held that, "since in a similar situation the jurisdictional High Court has upheld the order of the assessing officer under Section 154, there is no infirmity in the action taken under Section 147. The assessee does not challenge the said finding in the instant appeal".

Appeal before High Court: The question of adjudication raised before High court is as follows,-

"In the facts and circumstances of the case, ought not the Tribunal have allowed the Appeal filed by the assessee more showing the view of the judgment of the Supreme Court in Civil Appeal No.1700/2012 dated 8th February 2012"  

Assessee contended that, the retrospective amendment made by the Finance Act, 2005 classifying exporters into those having turnover less than Rs.10 crores and above Rs.10 crores and also imposing conditions for claim of deduction under Section 80 HHC on the latter; more specifically on the profit derived by sale of DEPB; has been struck down by the High Court of Gujarat at Ahmedabad.

High Court of Kerela held,

"The validity of a provision cannot be considered or adjudicated upon by the Tribunal constituted under the Act. Section 260A provides for an appeal from every order passed by the Appellate Tribunal; if it involves a substantial question of law. Such question of law should arise from the order of the Tribunal. If the Tribunal cannot consider the validity of a retrospective amendment, no doubt such question does not arise from its order and the jurisdiction conferred on the High Court under Section 260A cannot also enable the High Court to consider such validity or otherwise. 

Though the provisions for reference to the High Court, by the Tribunal, of questions of law arising from the order is no longer in existence; the jurisdiction going by the words employed in Section 260A, of the Income Tax Act, 1961, remains the same.

By following or dissenting from the judgment of the High Court of Gujarat, we would be determining the constitutional validity of the amendment of 2005. We would then be stepping out of and beyond the scope of the jurisdiction under Section 260A. The assessee too has not raised such a question in the appeal."

Due date for filing of form ST3 of 1st Quarter has been extended to 25-11-2012

RULE 7 OF THE SERVICE TAX RULES, 1994 - RETURNS - EXTENSION OF TIME TO FILE RETURN IN FORM ST3

ORDER NO. 3/2012 [F.NO.137/99/2011-ST], DATED 15-10-2012

In exercise of the powers conferred by sub-rule (4) of rule 7 of the Service Tax Rules, 1994, the Central Board of Excise & Customs hereby extends the date of submission of the return for the period 1st April 2012 to 30th June 2012, from 25th October, 2012 to 25th November, 2012.

The circumstances of a special nature which have given rise to this extension of time are as follows:

(a)  ACES will start releasing the return in Form ST3 in a quarterly format, shortly before the due date of 25th October, 2012.

(b)  This will result in all the assessees attempting to file their returns in a short time period, which may result in problems in the computer network and delay and inconvenience to the assessees.

Spilt of consideration below Rs. 20,000/- would not save the assessee from the rigorous provision of Sec- 40A (3) in absence of business expediency

IN THE ITAT JODHPUR BENCH

Vaishali Builders & Colonizers

vs.

Additional Commissioner of Income-tax, Range-1, Jodhpu

Facts: The assessee is dealing in Real Estate and land purchased is stock in trade - the assessee has purchased chunk of land from parties mentioned above and it is only the payment, which has been staggered over a period of time. Thus, the land is stock in trade of the business of the assessee and was not merely an asset. 

Contention of the assessee: The assessee pleaded before the authorities below that the parties insisted for cash payment, therefore, the cash payment is made on different dates, but the plea taken before the authorities below have not been established by any evidence or material on record or confirmation from the parties- the assessee challenged the disallowance u/s. 40A(3) of the IT Act. 

Contention of the A.O.: during the assessment proceeding, the assessee submitted that there have been purchases of Rs. 5,37,57,500/- and the assessee has made sales amounting to Rs. 5,84,30,300/-. 

Vide note sheet entry dated 5-10-2010, the assessee was asked to furnish mode of payment to parties to whom payments for purchase have been made. The assessee furnished the details of purchases vide letter dated 23-11-2010 wherein the mode of payment was mentioned. the assessee was asked as to why payment for purchase of land has been made in cash. The first reply of the assessee was that the persons receiving the money insisted for payment through cash only- the assessee was asked to explain why the expenditure made in cash for purchase of land should not be disallowed u/s 40A(3).

Submission of the assessee: relied on the provision of Section- 40A (3) and Rule 6DD.

" The condition when an assessee can claim exemption is given in Rule 6DD of the Income Tax Rules. However, the assessee has not cited any provision of this Rule and the only explanation of the assessee that the payment has been made within the limit of Rs. 20,000/- specified by the Act. The idea behind the introduction of such provision was to curb the transaction in cash. However, a limit was specified so that small traders/businessmen do not fell the pinch of the provision and their small day to day activities are not affected. The explanation of the assessee may be applied to a case where each bill is less than Rs. 20,000/- and the payment for such bills is being made in cash.

The assessee before Ld. CIT(A) has submitted in its submission dated 7-12-2010 that the payment made for purchase of land and the assessee had not made any violation of the provision of Section 40A(3) of the I.T. Act, 1961 during the year under consideration, the account copies of the parties to whom the payments made toward the purchase of land was enclosed. In this regard, it is submitted that the payment for purchases are made otherwise than by an account payee cheque within the limits specified under the provision of law. Further the assessee submitted that the payment was made for purchase of agricultural land which cannot be regarded as expenditure within the meaning of Sec. 40A(3) until the land is converted according to prevailing law. It is further submitted that the payment made toward purchase of agriculture land is an asset until the same is sold. The unsold land cannot be regarded as expenditure but the same will have to be shown as an asset in the balance sheet. Therefore, until the sale deed is executed and registered the amount paid toward purchases of the land cannot be regarded as an expenditure referred to in Section 40A(3). In this regard, the assessee has relied the decision of Hon'ble ITAT Delhi in the case ofKanshi Ram Madan Lal v. ITO [1983] 3 ITD 290 in which it has been held that the Sec.40A(3) is not attracted in the case of capital expenditure. The assessee has further submitted that apart from the non availability of the banking facility the consideration of the business expediency and other relevant factors are also applicable for deciding the applicability or non-applicability of Sec.40A(3). The assessee has further stated that it is engaged in the business of purchase and sale of land and real estate. It is impossible to carry on the aforesaid business of the real estate without at least occasionally receiving/paying money in cash in relation to transaction of the land. Such payments are not only necessary in the interest of the business expediency but it becomes a business necessity in relation to some transactions. Further, the assessee has stated that the said second proviso also recognizes other relevant factors. The other relevant factors will surely include cases where it is impracticable or impossible to make cash payment relating to purchase/sale of the land or other immovable property. In this regard the assessee has relied various decisions. Further, the assessee has stated that disallowance of the cash payment made for purchase of land by invoking Sec.40A(3) will result in levy up tax on gross sale value of the land and not on the real income derived by way of profit on sale of land and this will clearly violate the concept of the levy of tax on real and actual income and not on gross receipt. Therefore, the disallowance u/s 40A(3) in respect of the cash payment made on account of business expediency and business necessity are therefore, clearly covered by the exceptional provided in second proviso to Sec.40A(3). In this regard, the appellant has relied the decision of Hon'ble MP High Court in the case of CIT v. Balchand Ajit Kumar [2003] 263 ITR 610/[2004] 135 Taxman 180 (MP) and CIT v. President Industries [2002] 258 ITR 654/124 Taxman 654 (Guj)."

Hon'ble ITAT held,

"the appellant also stated regarding other relevant factors that it will surely include cases where it is impracticable or impossible to make cash payment relating to purchase/sale of land or other immovable properties, therefore, all the judgments on old rule 6DDJ prior its omission where cash payment were made on account of impracticability or impossibility of payment by cheque and other compelling reasons still continued to be valid justification in view of the exemption so carved out in second proviso of section 40A(3). 

In this regard, it is observed that provision of 6DD(J) was omitted by the Finance Act, 1995 w.e.f. 1.4.1996. First proviso to Sec. 40A(3) provides that no disallowance shall be made u/s 40A(3), where any payment in sum exceeding Rs. 20,000/- is made other than a account payee cheque drawn on a bank in such cases and such circumstances as may be prescribed having regard to the nature and extent of banking facility available, consideration of business expediency and other relevant factors. The appellant has not mentioned impracticability or impossibility of payment by cheque and other compelling reasons which enable it to make payment in cash. It is also not acceptable because appellant's has not specified Rule 6DD(J) under which the appellant's case falls. Therefore, under this situation, applicability of the cases relied by the appellant cannot be liked to the facts of the present case and the argument in this regard is rejected. Further, I also rely the decision of Hon'ble Rajasthan High Court, in the case of Nahgi Lal vs. CIT, reported in 167 ITR 139 (Raj) where on the issue of disallowance u/s 40A(3) under Rule 6DD(J), it is held that it is not sufficient for the assessee merely to establish that the purchases were genuine and the payments were identifiable. 

The assessee is further required to prove that due to exception and unavoidable circumstances, or because payment by cheques was not practicable, cash payments were made. Further, the Hon'ble Gujarat High Court in the case of Associated Engineering Enterprises. vs. CIT, reported in 216 ITR 366 (Guj.) held on the issue of disallowance u/s 40A(3) regarding exception and unavoidable circumstances that certificate given by the payee does not even remotely indicate any genuine difficulty faced by parties necessitating cash payments. It cannot be said that cash payments were made by the assessee due to any exceptional or unavoidable circumstances as envisaged by cl(j) of Rule 6DD, It is also held that it is not merely the genuineness of the transaction but also the existence of the circumstances warranting payments by cash which is required to be proved.

Regarding the business expediency, the assessee has not filed any evidence before the authorities below and nothing is clarified as to what were the other relevant factors, for which the cash payment has been made and no specific Rule has been explained u/r 6DD, which is applicable to the case of the assessee. The ld. counsel for the assessee argued that for purchase of agricultural land and payment made to the villagers, the provisions of section 40A(3) may not be applied as provided in exception to Rule 6DD. We have gone through the Rule 6DD applicable now and prior to amendment also, in which none of the exception has been provided for making payment in cash for purchase of land. It is, however, provided that above rule can be avoided if payment is made for purchase of agricultural produce which is not the case of the assessee at all. 

The assessee is dealing in real estate and in land and as such, it was for the assessee to establish that the cash payments have been made for business exigencies, which the assessee has failed to prove in this case. Further Rule 6DD(j) would not apply in this case because the assessee failed to prove that on the date of payment whether banks were closed either on account of holiday or strike. The ld. CIT(A), therefore, rightly noted in his finding that the assessee has not satisfied as to under which Rule, the assessee's case would fall. In the case of Trivedi Corporation Pvt. Ltd. (supra), ITAT Ahmedabad Bench considered the issue of disallowance u/s. 40A(3) in respect of cash payment made to Gujrat State Electricity Board, which was considered as one of the undertaking of the State Government. Therefore, it was considered to be a payment made to Government Body and was falling in exception. The case law cited by the ld. counsel for assessee would not support the case of the assessee because they are based on their own facts and that the theory of real income would not apply for dealing with the issue of section 40A(3) of the IT Act. 

Considering the facts and circumstances and above discussion, it is very clear that the assessee consciously split up the payments in whole of the year, which is impracticable, illogical as noted above and it was done just to circumvent the provisions of law. There was no justification for the assessee to split up the transactions of crores of rupees in small payments of Rs. 15,000/- to Rs. 20,000/- everyday. Whatever plea was taken before the authorities below was not supported by any evidence. Therefore, the assessee failed to prove any business expediency or other facts for making staggered payments in cash. The case of the assessee would not fall in any exception to Rule. The assessee deliberately and consciously split up the payments in part so as to circumvent the provisions of law. 

We, therefore, do not find any justification to interfere with the orders of the authorities below. There is no merit in these grounds of appeal by the assessee. 

Same are accordingly dismissed."

draft report of the Expert Committee on retrospective amendments relating to indirect transfer on no-resident taxation

Here is the brief introduction on draft report of the Expert Committee on retrospective amendments relating to indirect transfer on no-resident taxation

Vide Finance Act, 2012, certain retrospective amendments were made in Income-tax Act, 1961 (hereinafter referred to as the Act), intended to clarify and restate the legislative intent of the source rule of taxation for nonresidents in India. In particular, they addressed situations where transfers took place exclusively between such non-residents—hence indirectly—of underlying assets in India.  The relevant section 9(1)(i) of the Act became effective retrospectively as of 01 April 1962.

The language and scope of the amendments led, however, to apprehensions about the certainty,predictability and stability of tax laws in India. The legislation with retrospective application in particular obviating an earlier Supreme Court decision on the matter of indirect transfer was not expected and thus perceived in negative light.  The present Committee was mandated to analyze the amended provisions. Based on inputs received from various stakeholders and the Committee’s own analysis, the Committee is of the view that, as a matter of policy, Government should best avoid introducing fundamental changes in tax provisions without consultations and thus not anticipated by the taxpayer.  

The adverse reactions to the amendments intermingled the two matters— retrospectivity in tax law, and indirect transfer—under the same rubric. This Report has attempted to untangle the two aspects.  It addresses the issue of retrospectivity and prospectivity.  It then proceeds to make a series of recommendations, including some that would apply if retrospectivity is opted for by Government, and others that would apply in either case. 

The Committee concluded that retrospective application of tax law should occur in exceptional or rarest of rare cases, and with particular objectives: first, to correct apparent mistakes/anomalies in the statute; second, to apply to matters that are genuinely clarificatory in nature, i.e. to remove technical defects, particularly in procedure, which have vitiated the substantive law; or, third, to “protect” the tax base from highly abusive tax planning schemes that have the main purpose of avoiding tax, without  economic substance, but not to “expand” the tax base.  Moreover, retrospective application of a tax law should occur only after exhaustive and transparent consultations with stakeholders who would be affected.

The entire draft report of the Expert Committee on retrospective amendments relating to indirect transfer on no-resident taxation is on www.incometaxindia.gov.in

Law on TDS - Sec - 194C

“THE LAW ON TDS”

As famously said by Albert Einstein, “The hardest thing in the world to understand is the income tax”, the provision of TDS is "the source of income for purposes of the income tax" and one of the most controversial and litigated provision of the Income Tax Act, 1961.

INTRODUCTION TO SECTION 194C

Section 194C was introduced in the Income Tax Act, 1961 w.e.f. 1st April 1972.

In a very short span of time, soon after its introduction in the Act, Central Board of Direct Taxes promptly came up with Circular No. 86 dated 29-5-1972, Circular No. 93 dated 26-9-1972 and Circular No. 108 dated 20-3-1973 throwing light on the interpretation & application of the provision in a given case.

The Amendments to the provision sec-194C were made from time to time and as on today the law reads,

q       that TDS has to be made at a prescribed rate by any person/Contractor who is responsible for making payment of any sum to any resident for carrying out any work (including supply of labour) in pursuance of a contract between the contractor and any “Specified Person”

q       that TDS has to be made @1% in case of individuals and in case of Hindu Undivided Family and any other case it is @2%;

q       that TDS has to be made by the contractor in pursuance of a contract with the sub-contractor for carrying out any work or for supply of labour for carrying out such work (whether whole or any part of the work) either by way of cash or by way of cheque or draft, or any other mode;

q       that No Tax is required to be deducted where sum credited or paid or likely to be credited or paid does not exceed Rs.30000/-. However, if the aggregate of such sums credited or paid or likely to be credited or paid in the financial year exceeds Rs.75,000/-, TDS is required to be made;

The expression "Contractor" shall 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/ foreign enterprise/ any association or body established outside India. 

For the purpose of the applicability of the provision, the term "work" includes –

q       Advertising;

q      Broadcasting and telecasting including production of programmes for such broadcasting or telecasting;

q       Carriage of goods and passengers by any mode of transport other than by railways;

q       Catering;

q       Manufacturing or supplying a product according to the requirement or specification of a customer by using the material purchased from such customer,

However, it does not include manufacturing or supplying a product according to the requirement or specification given by a customer using the material purchased from a person, other than such customer.

HISTORY OF THE PROVISION OF SEC-194C

CIRCULAR NO. 86 DATED 29.05.1972 CLARIFIED

q       distinction between a “work contract” and a “contract for sale” It was clarified that the “contracts for construction” and “the contract and erection or installation of plant and machinery” are in the nature of contracts for work and labour;

q       that where materials are supplied by one person and the fabrication work is done by a contractor the contract is that of a works contract;

q       that the Contracts for rendering professional services by lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. CANNOT be regarded as contract "for carrying out any work" and, accordingly, no deduction of income tax shall be made from payments relating to such contracts. 

CIRCULAR NO. 93 DATED 26.09.1972 CLARIFIED

CONTRACT OF SALE	CONTRACT OF WORK
the main object is the transfer of property and delivery of possession of the property	the main object in a “contract for work” is not the transfer of the property but it is one for work and labour
if is it by transfer at the time of delivery of the finished article as a chattel it is a “sale”	by accession during the procession of work on fusion to the movable property of the customer the contract is “works-contract”

q       that a transport contract cannot ordinarily be regarded as "contract for carrying out any work" and, as such, no deduction is required to be made from the payments made under contract;

q       EXCEPTION, that in the case of Composite Contract involving transport as well as loading and unloading charges, the entire contract is regarded as "works contract".  

q       Note: w.e.f. 01.07.1995 a new explanation was inserted which includes the carriage of goods and passengers by any mode other than railways within the meaning of “carrying of work”.

 REVIEW OF THE ABOVE CIRCULARS AND REFERENCE MADE BY HON’BLE SUPREME COURT IN THE CASE OF

“Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435”

Guidelines pronounced & in pursuant to the same Central Board of Direct Taxes clarify the applicability of the provisions of section 194C: —

(A) The Provision of sec-194C would be applicable:

q       to all types of contracts for carrying out any work including, transport contracts, service contracts, advertisement contracts, broadcast­ing contracts, telecasting contracts, labour contracts, material contracts and works contracts;

q       to contracts for the construction, repair, renovation or alteration of buildings or dams or laying of roads or airfields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labour, income-tax will have to be deducted from payments made in respect of such contracts;

q       to contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Gov­ernment or such person, will also fall within the purview of this section.

q       to payments made to persons who arrange advertisement, broadcast­ing, telecasting, etc;

q       to payments made for hiring or renting of equipments, etc;

q       to payments made to banks for discounting bills collecting/receiving payments through cheques/drafts, opening and nego­tiating Letters of Credit and transactions in negotiable instruments;

q       not only to written contracts but also oral contracts;

q       to “Service contracts” since the term ‘service’ means doing any work as explained above.

(B) The provisions of this section would not cover “Contracts for Sale of Goods”:

q  Where the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and therefore outside the purview of this section.

CIRCULAR NO. 681 DATED 08.03.1994

With the issuance Circular No. 681 dated 08.03.1994, Central Board of Direct Taxes decided to withdrew both the Circular no. 86 and 93.

In circular no. 681 CBDT has clearly prescribed that, the provisions of section 194C would not cover contracts for sale of goods. It has further stated that, where a contractor undertakes to supply any article or thing fabricated according to the specifications given by the Government or any other specified person, and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and as such would be outside the purview of this section.

State of Himachal Pradesh vs. Associated Hostels of India Ltd. [1972] 29 STC 474

In the above-captioned case, Hon’ble Supreme Court has laid down few principles as guidelines, to be followed-

v     where the principal objective of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, contract is of work and labor;

v     whether or not the work and labor bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labor as compared with the value of the materials is conclusive and it has to be determined in the light of the facts and circumstances of a particular case to find out that, whether the contract is, in substance, one of work and labor, or one for the sale of a chattel;

v    where the intention is not to sell the article but to improve the land or the chattel & the material is furnished for work to be done the contract will that be of work and labor;

In case of any controversy regarding issue as to whether a particular contract would be a work contract or contract for sale the above guidelines prescribed by the Supreme Court were followed.

Subsequently, CBDT came up with another Circular namely CIRCULAR NO. 715 DATED 3-8-1995 clarifying several queries and bringing various types of contracts in the ambit of section 194C. The following nature of contracts were included-

q       Payments made to clearing and forwarding agents;

q       Payments to couriers;

q       Payments to transporters; and

q       Supply of printed material

Therefore, the controversy of the interpretation and determination of the nature of contract has continued and till today the issue is a subject-matter of litigation at various stages.

CONTROVERSY

WORK CONTRACT VS. CONTRACT OF SALE

the difference between the two expressions & a broader interpretation made by Hon’ble Judicial & Quasi- judicial authorities while adjudicating the controversy of determining whether a contract is a “contract for sale” or “work contract”

Section 194C provides that, any person responsible for paying any sum to any resident for carrying out any work has an obligation to deduct tax at source on such payment. The crux of the litigation is as to whether the supply of products by third parties constituted ‘work’ for the purpose of section 194C. The amendment made to the Explanation II of section 194C by the Finance Act 2009 provided an inclusive list of activities that would be considered as ‘work’.

In language of a layman, a contract for sale can be distinguished from a contract of work.

The issue as to whether a particular agreement falls within one or the other category depends upon, -

 the object and intent of the parties which is evidenced by the terms of the contract;

       the circumstances in which it was entered into and;

       the custom of the trade

If a contract involves the sale of movable property it would constitute a contract for sale. On the other hand, if the contract primarily involves carrying on of work involving labour and service and the use of materials is incidental to the execution of the work, the contract would constitute a contract of work and labour.

The most relevant circumstance from a clear distinction can be made is, whether the article which has to be delivered has an identifiable existence prior to its delivery to the purchaser upon the payment of a price.

When the title to the property vests with the purchaser upon delivery, that is an important indicator suggesting that the contract is that of a contract for sale and not a contract for work.

The Controversy started with the pronouncement of authoritative decision in the case of State of Himachal Pradesh v. Associated Hotels of India Ltd. by Hon’ble the Supreme Court of India.

Subsequent, to the above judicial pronouncement, several matters have been adjudicated and controversies as to how the “contract for work” and “contract for sale” could be distinguished were resolved in the light of the facts and circumstances of each case.

Some of the important decisions are mentioned as here under: -

q       BDA Ltd. Vs ITO [2006] 281 ITR 99 (BOM)- In this case the assessee had distillery, wherein it has purchased materials that is required for bottling and marketing the foreign made Indian liquor inclusive of the printing and packing of material. M/s. Mudranika, another establishment was also supplying the printed labels, which was required to be rapped on the bottles to the assessee. The assessing officer held that, the payment made to M/s. Mudranika, the supplier of the printed material from whom the printed labels were purchased were in pursuance of a contract and thus liable to deduct tax at source u/s. 194C of the Act. The Hon’ble High Court observed that the assessee has issued purchase order in favour of M/s. Mudranika for the supply of printed labels as per the specification provided and the assessee did not supply the raw material. In the light of the above, Hon’ble Bombay High Court held that the supply of printed labels by M/s. Mudranika to the assessee was “contract for sale” & it could not be deemed as “works contract”.

q       Glenmark Pharmaceuticals Ltd. v ITO (TDS), Hon’ble ITAT has observed that, the goods were manufactured by the manufacturers in their own establishments in accordance with the specifications given by the assessee. The raw material cost and other expenses were also incurred by themselves. The manufacturers also paid the excise duty when the goods were sold & the sales tax was paid. When the goods were sold to the assessee the property in them passed over to the assessee. Therefore, Hon’ble ITAT held that the agreements of the assessee with the manufacturers cannot be termed as ‘works contract’ and no TDS u/s. 194C has to be made.

q       Commissioner of Income Tax vs. Deputy Chief Accounts Officer, it was held that, the fact that the goods manufactured were according to the requirement of the customer did not mean or imply that any work carried out on behalf of that customer. Accordingly, held that the purchase of particular printed packing material by the respondent was a contract for sale and outside the purview of Section 194C of the Act.

LANDMARK JUDGMENT

KONE ELEVATORS (INDIA) LTD. 2005(181) ELT 156(SC)

Explains the difference “Contract of Sale” vis-a-vis “Works Contract”

The most crucial TEST that shall be applied is to study and interpret the essence of the contract and the reality of the transaction as a whole.

CONTROVERSY

COMPOSITE / INDIVISIBLE CONTRACT VS.  DIVISIBLE/ SEPARATE AGREEMENT

A major un-ending controversy pertaining to “Turn- key projects” largely revolving around generation of windmill projects comprising of supply, erection & installation for the Generation of Wind-mill

Recently, I have worked on a Income Tax appeal matter, where our client/assessee has been treated as an “assessee-in-default” and interest were charged u/s. 201 (1A) for non-deduction of TDS read with Sec-194C of the I.T. Act, 1961. The Revenue was of the opinion that assessee ought to have deducted TDS on the supply of material portion & that upon wrong interpretation of facts & materials put on record has treated the separate agreements (one for supply of supply of materials i.e. spare parts & Wind Turbine Generator) & another for (work comprising of supervision, erection & installation) as one and Indivisible or Composite Contract.

The necessary VAT was paid on the sale of generator and supply of materials delivered as chattel to the assessee. The two contracts were separate and divisible which is apparent from the materials submitted on record.

The Turn-key projects and issue of TDS u/s. 194C is still lingering before several judicial authorities, at several stage and it is pertinent to mention that, this particular issue may indeed never have one final verdict, as each case although by facts and circumstances may look similar, still the facts, circumstances and evidences found upon study of records may only be the main decisive factor of determining the fate of each case.

I would like to state some outstanding pronouncements passed by Judicial and quasi-judicial bodies related to the above issue:

When the parties entered into a consolidated contract with a spilt of consideration towards material & other of labour one cannot be termed as an indivisible works contract. Therefore, no tax is required to be deducted on the payment towards supply portion of the contract.

There are certain essential attributes, which are necessarily to be followed in order to come to a conclusion, that whether the contract is of Composite in nature or purely divisible one. These essentials are as follows: -

The obligations under the contract are distinct ones;

The supply obligation is distinct and separate from the service obligation

Hence, it is pertinent to mention that, in some cases assessee while entering into contract of work or even service, both the parties may enter into separate agreements, one of work and service, and other of sale and purchase of materials. Under such circumstances, the transactions would not be one and indivisible, but would fall into two separate agreements, one for work or service and the other of sale.

Hon’ble Supreme Court in the case of ITO vs. Sriram Bearings Ltd. (1987) 224 ITR 724 (SC) has held that, where the two parts of a contract, which are interdependent, cannot be treated as one, when the consideration and the services are distinct. 

Again Hon’ble Hyderabad ITAT Bench in the case of Power Grid Corpn. Of India Ltd. vs. Assistant Commissioner of Income Tax [2007] 108 ITD 340 (Hyd) has held that, where the title in goods has passed to the assessee before the commencement of work and the assessee has treated the goods as his property before issuing the same for erection; contract of supply shall be treated as contract of sale.

In the recent past, Hon’ble ITAT, Bangalore Bench in the case of Karnataka Power Transmission Corporation vs. Asst. CIT has held that, when an assessee is under no obligation to deduct tax on supply portion, the assessee’s case would not fall within the ambit of the provisions of Sec-201 (1) of the I.T. Act, and thus, the assessee could not be treated as an “assessee in default”.

Judgment passed by Hon’ble High Court of Madras in the case of State of Tamil Nadu vs. Titanium Equipment and Anode Manufacturing Corporation Ltd. in (1998) 110 STC 43 (Madras) is also utterly necessary to mention. In this case there was a contract for design, engineer, manufacture, supply and supervision of installation and commissioning. The Hon’ble Tribunal held that the contract is indivisible. 

Hon’ble Madras High Court reversed the decision of the Tribunal and held that the contract was clearly a divisible contract, i.e. one for the supply of the titanium anodes and another for supervision and installation and undertaking recoating maintenance. The price payable for the supply of material was distinct from the consideration payable for the supervision of installation and commissioning and for recoating maintenance. The parties themselves has no doubt as to the nature of the arrangement they has entered into and had specifically provided for the payment of the excise duty, sales tax and all other statutory levies by the buyer.

Likewise, Hon’ble Supreme Court has also taken a reversed view in many cases, where the contracts entered into by parties were not divisible and therefore the same was treated as a “composite and an indivisible contract”. I would like to mention couple of such decisions, which are as under.

In the case of Vanguard Rolling Shutters & Steel Work vs. Commissioner of Sales Tax [1977] 39 STC 372 (SC) and Ram Singh and Sons Engineering Works vs. Commissioner of Sales Tax AIR 1979 SC 545, it was held upon perusal that, the price charged by the contractor from the customer was in a lump sum and did not show a break up of the materials used or fabricated or the cost of services or labour separately. Hence, the same was held to be as “composite contract”.

It is also pertinent to state a very important judicial pronouncement passed by the Hon’ble Supreme Court in the case of Hindustan Shipyard Ltd. vs. State of Andhra Pradesh, where it was clarified that, -

 “ it is not the bulk of the material used in the construction alone but the relative importance of the materials qua the work, skill and labour of the payee which also has to be seen, but it is a relevant parameter.”

Therefore, single evidence would not be sufficient to treat an assessee as “assessee-in-default” for non-deduction of TDS U/s. 194C & the entirety of the facts and circumstances of any given case has to be taken into consideration in order to reach at a proper & applicable verdict.

POSITION OF A SUB - CONTRACTOR U/S. 194C

No TDS u/s. 194C in absence of contract between Contractor and sub-contractor 

Sub-section (2) of section 194C of the Income-tax Act, 1961 lays down that, 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 sub-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 one per cent of such sum as income-tax on income comprised therein.

Hence, in terms of the provisions of section 194C (2) as clarified by the Board vide Circular No. 715 dated 8-8-1995, conditions that are to be satisfied are:

(i)            that the assessee should be a contractor,

(ii)          that the assessee should enter into a contract with a sub-contractor,

(iii)         that the sub-contractor should carry out any part of the work undertaken by the contractor and;

(iv)        that the payment should be made for the work done.

Also interesting enough to mention that, the provisions of section 194C as substituted by the Finance Act 2 of 2009 w.e.f. 1-10-2009 has not made any distinction between a payment made to a contractor or sub-contractor and that all payments made for carrying out any work in pursuance to a contract are covered within the section 194C (1) of the Act

For the purpose of the section the expression ‘work’ comprises of the following:

(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 and (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.

Work that is not covered under this provision is: 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.

Consequently, due to non-deduction of TDS, an assessee has to face challenges at several stages of litigation on account of disallowance u/s. 40 (a) (ia). The proof of existence of a ‘contract’ in the form of concrete evidence, either by the assessee or by the Revenue is disputed.

In the case of ITO V Rama Nand & Co (163 ITR 702), High Court of Himachal Pradesh has defined the expression “sub-contractor”. It stated,

“a sub-contractor would mean any person who enters into a contract with the contractor for carrying out, or for the supply of labour for carrying out, the whole or part of the work undertaken by the contractor under a contract with any of the authorities named above or for supply whether wholly or partly any labour which the contractor has undertaken to supply in terms of his contract with any of the aforesaid authorities.”

The Hon'ble Supreme Court in Birla Cement Works v CBDT [2001] 248 ITR 216 has laid down the conditions precedent for attracting the provisions of section 194C, which are as follows,

(i)                  there must be a contract between the person responsible for making payment to contractor,

(ii)                the contract must be for carrying out of any work,

(iii)               the work is to be carried through the contractor,

(iv)              the consideration for the contract should exceed Rs.10,000/-, i.e., the amount fixed by section 194C and

(v)                that the payment is made to the contractor for the work carried out by him. 

The above principles were discussed in the case of Safiuddin, Kolkata vs. Assessee. The controversy in the case was regarding the payments made for disbursement of labour charges to labour-heads and applicability of sec -194C. Revenue claimed that there was no necessity for the existence of a written contract and that an oral contract was equally valid. Although, there was no direct evidence on record to conclusively hold that there was any written contract or even oral contract agreement between the parties.

Therefore, in the light of the principles laid down by the Hon’ble Supreme Court in the case Birla Cement, Hon’ble ITAT, Kolkata restored the matter back to A.O. to decide the issue for determination of existence of any contract between the assessee and the labour-heads.

Likewise, several judgments were passed in the light of the said principles and to name few of them,

  

q       ACIT vs. Shiva Construction

q       ITO vs. Rama Nand and Co.

q       CIT vs. Esskay Construction Co. 

q       M/s. Samanwaya Vs. ACIT

q       S.S. Construction, Kolkata vs. Department of Income Tax

SECTION - 194C VS. 194I

Whether expression “carriage of goods and passengers by any mode of transport” finds place in section 194C or section 194-I of the Income Tax Act?

Section 194I of the Income Tax Act, 1961 is required to deduct Tax at source at the time of payment of any income by way of rent i.e. @10% for the use of any machinery or plant or equipment.

On the other hand Section 194C says that, TDS is to be made @2% for carrying out any work which includes carriage of goods and passengers by any mode of transport other than by railways.

Generally, all types of machinery, plant and equipment are given on hire and therefore gets covered u/s. 194I. However, hiring of transport vehicles in order to carry out work i.e. carriage of goods and passengers get specifically covered u/s. 194C.

Loudly, provision of sec-194C (2) clause (c) of Explanation III is subject to TDS provision on account of Transport vehicles that are used for carriage of goods and passengers.

As per rules of interpretation, a very well-established principle says, “a specific provision prevails over general provisions”. Section 194C contains specific provision for deduction of tax in transport contracts, whereas Sec. 1941 comprises of general provision for deduction of tax on rent on account of hiring of plants, machineries etc.

Number of cases had gone through litigation over the period of years. The issue not only revolved around the applicability of either of the provisions, but whether provisions of sec-194C would get attracted in case of carrying out work for transport of any goods or passengers from one place to another or not.

As discussed earlier it may be worth mentioning that, presence of contract is the dominant object for the purpose of section -194C (2). 

In the case of Dy. CIT vs. Satish Aggarwal & Co. (2009) 27 DTR 34 (Asr.), the assessee hired trucks for a fixed period upon payment of hire charges, utilized in the business of civil construction. There was no agreement for carrying out any work or to transport any goods or passengers from one place to another.

As hiring of trucks for the purpose of using those in business did not amount to contract for carrying out any work as contemplated in section 194C.

It was held that, in absence of a contract, the provision of section 194C did not get attract and hence no disallowance under section 40(a) (ia) can be made.

CIRCULAR NO. 715 DATED 8-8-1995

Clarifications provided on sec -194C in consonance to the amendments brought by Finance Act, 1995

The Finance Act, 1995, has enlarged the scope of TDS by making various amendments to the provisions of the Income Tax Act. Number of queries was raised at various associations/professional bodies regarding the scope and application of tax deduction at source.

In order to provide with right clarifications in a question and answer form, Circular No. 715 dated 08-08-1995 were issued by CBDT, thereby clearing the following doubts:

“Question 1: What would be the scope of an advertising contract for the purpose of section 194C of the Act?

Answer: The term ‘advertising’ has not been defined in the Act. During the course of the consideration of the Finance Bill, 1995, the Finance Minister clarified on the Floor of the House that the amended provisions of tax deduction at source would apply when a client makes payment to an advertising agency and not when advertising agency makes payment to the media, which includes both print and electronic media. The deduction is required to be made at the rate of 1 per cent. It was further clarified that when an advertising agency makes payments to their models, artists, photographers, etc., the tax shall be deducted at the rate of 5 per cent as applicable to fees for professional and technical services under section 194J of the Act.

Question 2: Whether the advertising agency would deduct tax at source out of payments made to the media?

Answer: No. The position has been clarified in the answer to question No. 1 above.

Question 3: At what rate is tax to be deducted if the advertising agencies give a consolidated bill including charges for artwork and other related jobs as well as payments made by them to media?

Answer: The deduction will have to be made under section 194C at the rate of 1 per cent. The advertising agencies shall have to deduct tax at source at the rate of 5 per cent under section 194J while making payments to artists, actors, models, etc. If payments are made for production of programmes for the purpose of broadcasting and telecasting, these payments will be subjected to TDS @ 2 per cent.

Even if the production of such programmes is for the purpose of preparing advertisement material, not for immediate advertising, the payment will be subject to TDS at the rate of 2 per cent.

Question 4: Where the tax is required to be deducted at source on payments made directly to the print media/ Doordarshan for release of advertisements?

Answer: The payments made directly to print and electronic media would be covered under section 194C as these are in the nature of payments for purposes of advertising. Deduction will have to be made at the rate of 1 per cent. It may, however, be clarified that the payments made directly to Doordarshan may not be subjected to TDS as Doordarshan, being a Government agency, is not liable to income-tax.

Question 5: Whether a contract for putting up a hoarding would be covered under section 194C or 194-I of the Act?

Answer: The contract for putting up a hoarding is in the nature of advertising contract and provisions of section 194C would be applicable. It may, however, be clarified that if a person has taken a particular space on rent and thereafter sub lets the same fully or in part for putting up a hoarding, he would be liable to TDS under section 194-I and not under section 194C of the Act.

Question 6: Whether payment under a contract for carriage of goods or passengers by any mode of transport would include payment made to a travel agent for purchase of a ticket or payment made to a clearing and forwarding agent for carriage of goods?

Answer: The payments made to a travel agent or an airline for purchase of a ticket for travel would not be subjected to tax deduction at source as the privity of the contract is between the individual passenger and the airline/travel agent, notwithstanding the fact that the payment is made by an entity mentioned in section 194C(1). The provision of section 194C shall, however, apply when a plane or a bus or any other mode of transport is chartered by one of the entities mentioned in section 194C of the Act. As regards payments made to clearing and forwarding agent for carriage of goods, the same shall be subjected to tax deduction at source under section 194C of the Act.

Question 7: Whether a travel agent/clearing and forwarding agent would be required to deduct tax at source from the sum payable by the agent to an airline or other carrier of goods or passengers?

Answer: The travel agent, issuing tickets on behalf of the airlines for travel of individual passengers, would not be required to deduct tax at source as he acts on behalf of the airlines. The position of clearing and forwarding agents is different. They act as independent contractors. Any payment made to them would, hence, be liable for deduction of tax at source. They would also be liable to deduct tax at source while making payments to a carrier of goods.

Question 8: Whether section 194C would be attracted in respect of payments made to couriers for carrying documents, letters, etc.?

Answer: The carriage of documents, letters, etc., is in the nature of carriage of goods and, therefore, provisions of section 194C would be attracted in respect of payments made to the couriers.

Question 9: In case of payments to transporters, can each GR be said to be a separate contract, even though payments for several GRs are made under one bill?

Answer: Normally, each GR can be said to be a separate contract, if the goods are transported at one time. But if the goods are transported continuously in pursuance of a contract for a specific period or quantity, each GR will not be a separate contract and all GRs relating to that period or quantity will be aggregated for the purpose of the TDS.

Question 10: Whether there is any obligation to deduct tax at source out of payment of freight when the goods are received on “freight to pay” basis?

Answer: Yes. The provisions of tax deduction at source are applicable irrespective of the actual payment.

Question 11: Whether a contract for catering would include serving food in a restaurant/sale of eatables?

Answer: TDS is not required to be made when payment is made for serving food in a restaurant in the normal course of running of the restaurant/cafe.

Question 12: Whether payment to a recruitment agency can be covered by section 194C?

Answer: Provisions of section 194C apply to a contract for carrying out any work including supply of labour for carrying out any work. Payments to recruitment agencies are in the nature of payments for services rendered. Accordingly, provisions of section 194C shall not apply. The payment will, however, be subject to TDS under section 194J of the Act.

Question 13: Whether section 194C would cover payments made by a company to a share registrar?

Answer: In view of answer to the earlier question, such payments will not be liable for tax deduction at source under section 194C. But these will be liable to tax deduction at source under section 194J.

Question 14: Whether FD commission and brokerage can be covered under section 194C?

Answer: No

Question 15: Whether section 194C would apply in respect of supply of printed material as per prescribed specifications?

Answer: Yes.

Question 16: Whether tax is required to be deducted at source under section 194C or 194J on payment of commission to external parties for procuring orders for the company’s product?

Answer: Rendering of services for procurement of orders is not covered under the provisions of section 194C. However, rendering of such services may involve payment of fees for professional or technical services, in which case tax may be deductible under the provisions of section 194J.

Question 17: Whether advertisement contracts are covered under section 194C only to the extent of payment of commission to the person who arranges release of advertisement, etc., or whether deduction is to be made on the gross amount including bill of media?

Answer: Tax is to be deducted at the rate of 1 per cent of the gross amount of the bill.

Question 18: Whether deduction of tax is required to be made under section 194C for sponsorship of debates, seminars and other functions held in colleges, schools and associations with a view to earn publicity through display of banners, etc., put up by the organizers?

Answer: The agreement of sponsorship is, in essence, an agreement for carrying out a work of advertisement. Therefore, provisions of section 194C shall apply.

Question 19: Whether deduction of tax is required to be made on payments for cost of advertisement issued in the souvenirs brought out by various organizations?

Answer: Yes.

DEBATE ON THE APPLICABILITY OF TDS ON REIMBURSEMENT OF EXPENDITURE

Where the expenses are claimed through separate statements, TDS on reimbursement of actual expenses is not required

The term "Reimbursement" has not been defined in the Income Tax Act and hence the meaning has to be understood in terms of dictionary meaning.

Black’s Law Dictionary defines "reimburse" as to pay back, to restore or to repay which is expended.

Question 30 of CBDT Circular No 795 dated 08.08.1995 clarifies an issue as to whether the deduction of tax at source under sections 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses.

In view of the above query, it was explicitly clarified that,

“Sections 194C and 194J refer to “any sum paid”. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.”

Where a single bill has been raised for professional fee and also inclusive of the reimbursement of actual expenditure, then in such a case TDS has to be made on the entire gross amount/bill. However, TDS on reimbursement of expenses is not required to be made when separate bills are raised.

The view has been supported in the case of ITO v. Dr. Willmar Schwabe (2005) 3 SOT 71.

Although circular No. 715 dated 8-8-1995 lays down that, TDS should be on the entire payment i.e. inclusive of the reimbursement of expenses, ITAT on the other hand has held that, where a separate bill is being raised for reimbursement of expenses provisions of TDS does not attract.

The view has been taken by way of many judicial decisions and to name few are:

q       Mitra Logistic Pvt. Ltd.  V. ITO, ITAT, Kolkata;

q       DCIT vs. Lazard India Pvt. Ltd., ITAT, Mumbai;

q       ITO V. M/s Planet Herbs Life Science Pvt. Ltd., ITAT, Delhi;

q       Income Tax Officer vs. Travels and Shopping (P) Ltd

Therefore in my view, it is worth mentioning that, where the amounts are reimbursed and are clearly identifiable, duly supported with concrete evidence of payment & thereof separately charged, there shall be no requirement of TDS on such amount paid fully supported by the above judicial pronouncements.

CONCLUSION AND REMARKS

an attempt to understand the complex issues simplified by way of the above analysis of issues

Section 194C as discussed above has been prone to prolonged litigation since its very inception. Hence, the issues pertaining to interpretation of the statute, amendments and clarifications by CBDT have lead various assessees’ and tax representatives stuck in litigation. Lots of queries were raised by the taxpayers and tax consultants, seeking for clarifications on the provision.

I have tried to discuss the topic at length so as to help the enthusiastic readers to get a precise idea of the judicial controversies involved in the provision of sec-194C of the Income Tax Act, 1961.

~THANK YOU~