2012 (7) TMI 544 - AT - Income Tax

Payments to SEBs deemed statutory, not contractual, exempting assessee from TDS

Railway Electrification Versus ITO

Railway Electrification Versus ITO - TMI Issues Involved:1. Legality and applicability of Section 201(1) and 201(1A) of the IT Act, 1961.2. Applicability of Section 194C for tax deduction on payments to State Electricity Boards (SEBs).3. Nature of payments made to SEBs - contractual or statutory.4. Relationship between the assessee and SEBs - consumer-licensee or contractor-contractee.5. Applicability of Section 196 concerning payments between Government organizations.6. Limitation period for passing the order under Section 201 and 201(1A).7. Procedural correctness of the CIT(A)'s dismissal of appeals based on the grounds raised.Issue-wise Detailed Analysis:1. Legality and Applicability of Section 201(1) and 201(1A) of the IT Act, 1961:The assessee contested the orders passed under Sections 201(1) and 201(1A) as illegal, arbitrary, and unjustified. The Tribunal examined whether the payments made by the assessee to SEBs were subject to tax deduction at source (TDS) under these sections. The AO had issued notices under these sections, asserting that the assessee failed to deduct TDS on payments made for constructing transmission lines.2. Applicability of Section 194C for Tax Deduction on Payments to SEBs:The primary contention was whether Section 194C, which mandates TDS on contractual payments, was applicable. The assessee argued that there was no contract between them and the SEBs, and thus, no TDS was required. The AO and CIT(A) held that the payments for constructing transmission lines were contractual and thus subject to TDS under Section 194C.3. Nature of Payments Made to SEBs - Contractual or Statutory:The assessee argued that the payments to SEBs were statutory charges under the Electricity Act, 2003, and not contractual payments. They contended that SEBs, as distribution licensees, were duty-bound to supply electricity and create necessary infrastructure. The Tribunal agreed with the assessee, noting that the payments were for statutory obligations and not for a work contract.4. Relationship between the Assessee and SEBs - Consumer-Licensee or Contractor-Contractee:The Tribunal examined whether the relationship was that of a consumer-licensee or contractor-contractee. The assessee argued that they were merely consumers, and SEBs were licensees providing electricity. The Tribunal found that the relationship was indeed consumer-licensee, as the infrastructure created by SEBs remained their property, and the payments were for statutory duties under the Electricity Act.5. Applicability of Section 196 Concerning Payments Between Government Organizations:The assessee claimed that payments between government organizations are not subject to TDS under Section 196. The AO countered that SEBs were assessed as limited companies, not as government organizations. The Tribunal did not delve deeply into this issue, as it found that the payments were not contractual.6. Limitation Period for Passing the Order under Section 201 and 201(1A):The assessee argued that the order was barred by limitation, being passed beyond a reasonable period of four years. The Tribunal held that the order, passed within a year of the survey/inspection, was within a reasonable time frame and not barred by limitation.7. Procedural Correctness of the CIT(A)'s Dismissal of Appeals Based on the Grounds Raised:The CIT(A) had dismissed the appeals, noting that no specific grounds were raised in Form No. 35. The Tribunal found that the assessee had indeed raised grounds in a letter accompanying the appeal. However, since the CIT(A) had decided on the merits, this procedural lapse was deemed non-prejudicial.Conclusion:The Tribunal concluded that the payments made by the assessee to SEBs were not contractual but statutory, arising from the SEBs' duty to supply electricity under the Electricity Act, 2003. Consequently, the assessee was not liable to deduct TDS under Section 194C. The demands raised under Sections 201(1) and 201(1A) were directed to be deleted. The appeals were partly allowed, with the additional grounds concerning limitation and procedural correctness dismissed.