2012 (4) TMI 230 - AT - Income Tax

Tribunal Rules No TDS Deduction Required for Payments to Third Parties

The Tribunal allowed the appeal, ruling that the appellant was not obligated to deduct TDS under section 194C(1) for payments to outside parties. ... Disallowance made u/s.40(a)(ia) for the failure to deduct TDS u/s.194C – assessee undertakes contract work of transportation of oils through oil tankers to various locations of BPCL - sub-contract – Held that:- the contract for carrying out the work was between the BPCL and the appellant the appellant alone had risk and responsibility for carrying out the contract work as per the agreement -there is no material on record to suggest that there was any contract or sub-contract whether written or oral with the outside tank owners and the appellant, whereby the risk and responsibility which is associated with a contract has also been passed on to these outside parties - once the CIT (Appeals) has accepted the fact that the outside tank owners do not had any responsibility or liability towards the principal, then it cannot be held that these outside parties were privity to the contract - thus the payment made to the outside parties do not come or fall within the purview of section 194C, as the 'carrying out any work - the appellant was not liable to deduct TDS u/s. 194C(1) for payments made to the outside parties and consequently the disallowance made u/s.40(a)(ia) by the authorities below are deleted. The appellant thus gets relief of ₹ 56,03,210/-. Issues Involved:1. Disallowance of Rs. 56,03,210/- under section 40(a)(ia) for failure to deduct tax under section 194C.Issue-wise Detailed Analysis:1. Disallowance under Section 40(a)(ia) for Failure to Deduct Tax under Section 194C:The appellant, a partnership firm engaged in the business of transport contracting, received freight charges of Rs. 2,83,06,986/- for transporting oils for BPCL and other companies. The firm used its own tankers and hired additional tankers from outside parties to fulfill its contractual obligations. During the assessment proceedings, the Assessing Officer (AO) noted that the appellant paid Rs. 1,79,03,198/- as freight charges to various parties but failed to deduct TDS under section 194C for payments totaling Rs. 56,03,210/- made to three parties. Consequently, the AO disallowed this amount under section 40(a)(ia).Before the Commissioner of Income Tax (Appeals) [CIT(A)], the appellant argued that hiring tankers from outside parties did not constitute a sub-contract, as the appellant was solely responsible for the contract with BPCL. The appellant cited case laws Kavita Chug v. ITO and ITO v. Indian Roadlines, arguing that hiring tankers does not amount to a sub-contract under section 194C. The CIT(A) agreed that the appellant bore the risk and liability of the contract but held that the payments to outside parties fell under section 194C(1), thus justifying the disallowance.Before the Tribunal, the appellant contended that there was only one contract with BPCL and no sub-contract with outside parties. The appellant cited the judgment of the Hon'ble Madras High Court in CIT v. Poompuhar Shipping Corpn. Ltd., which held that hiring ships for business use does not fall under section 194C. The appellant argued that neither section 194C(1) nor section 194C(2) applied.The Tribunal examined the facts and found that the appellant was solely responsible for the transportation contract with BPCL. There was no evidence of any contract or sub-contract with the outside tank owners. The Tribunal noted that the CIT(A) accepted that the outside tank owners did not share any responsibility or liability with the appellant. Therefore, the payments to outside parties did not fall within the purview of section 194C, as there was no contract for carrying out work between the appellant and the outside parties.The Tribunal relied on the judgment of the Hon'ble Madras High Court in Poompuhar Shipping Corpn. Ltd., which held that hiring ships for business use does not amount to a contract for carrying out work under section 194C. Applying this principle, the Tribunal concluded that the appellant was not liable to deduct TDS under section 194C(1) for payments made to outside parties. Consequently, the disallowance under section 40(a)(ia) was deleted, and the appellant was granted relief of Rs. 56,03,210/-.Conclusion:The Tribunal allowed the appeal, holding that the appellant was not required to deduct TDS under section 194C(1) for payments made to outside parties, and consequently, the disallowance under section 40(a)(ia) was deleted.