2013 (1) TMI 592 - HC - Income Tax

Tax Tribunal Rules Against Revenue in Contractor-Subcontractor Dispute

The Tribunal held that Section 194C(1) of the Income Tax Act did not apply as it was introduced after the relevant assessment year. Additionally, Section ... Disallowance u/s.40(a)(ia) – TDS u/s 194C - Scope of sub-section (2) of section 194C – Assessee is individual and engaged in the business of construction - To transport construction material at the site, assessee had availed the services of transporters - Made payments to such transporters under the head transport charges - Payment made to contractor and sub-contractor - Assessee had only availed of the services of such transporters for carrying out the material to the site Held that:- Section 194C(2) what was necessary was a relationship between the contractor and sub-contractor and not merely be hiring of an agency by the contractor during the course of execution of the work. Such vital requirement of relationship of a contractor and sub-contractor between the assessee and the transporters was missing Till introduce of Clause (k) of sub-section (1) of section 194C, the category of individual, HUF or AOP was not included. Such amendment was made with effect from 1st June 2007 and obviously, therefore, would not apply to the case on hand. The Tribunal, therefore, correctly came to the conclusion that the case of the assessee was not covered u/s 194C(1) In favour of assessee Issues Involved:1. Applicability of Section 194C(1) of the Income Tax Act, 1961.2. Applicability of Section 194C(2) of the Income Tax Act, 1961.3. Interpretation of the term 'work' under Explanation III of Section 194C.4. Disallowance of expenditure under Section 40(a)(ia) of the Income Tax Act, 1961.Detailed Analysis:1. Applicability of Section 194C(1) of the Income Tax Act, 1961:The Tribunal noted that a contract was awarded to M/s. Petronet LNG Ltd. for construction work, which was sub-contracted to M/s. ANS Construction Ltd., and further sub-contracted to the respondent-assessee. The assessee made payments to transporters for transporting construction materials. The Tribunal held that Section 194C(1) did not apply as the provision was introduced with effect from 1st June 2007, and the assessment year in question was 2007-08. The Tribunal correctly concluded that the case of the assessee was not covered under Section 194C(1) since the payment was made by the assessee to individuals.2. Applicability of Section 194C(2) of the Income Tax Act, 1961:Section 194C(2) requires a contractor to deduct TDS when making payments to a sub-contractor for carrying out any part of the work undertaken by the contractor. The Tribunal examined the relationship between the assessee and the transporters and concluded that this was not a case of sub-contract. The Tribunal noted that the assessee had indemnified ANS Construction against any legal or financial liability, and no part of such liability was fastened on the transporters. The transporters were only hired for transporting materials, not for executing any part of the work. Therefore, the Tribunal held that Section 194C(2) did not apply as there was no contractor-sub-contractor relationship.3. Interpretation of the term 'work' under Explanation III of Section 194C:The Revenue argued that the term 'work' under Explanation III to Section 194C includes the carriage of goods. However, the Tribunal noted that this explanation applies to both sub-sections (1) and (2) of Section 194C. The Tribunal held that the explanation cannot be used to bring the case within the scope of Section 194C(2) if the primary requirement of a contractor-sub-contractor relationship is not fulfilled. The Tribunal concluded that merely hiring an agency for transportation does not establish such a relationship.4. Disallowance of expenditure under Section 40(a)(ia) of the Income Tax Act, 1961:Section 40(a)(ia) disallows certain expenditures if TDS, though required, has not been deducted or paid. Since the Tribunal concluded that Sections 194C(1) and 194C(2) did not apply, the disallowance under Section 40(a)(ia) was not warranted. The Tribunal found that the assessee was not liable to deduct TDS on the payments made to the transporters, and therefore, the expenditure could not be disallowed under Section 40(a)(ia).Conclusion:The Tribunal's decision was upheld, and the appeal by the Revenue was dismissed. The Tribunal correctly interpreted the provisions of Section 194C and concluded that the assessee was not liable to deduct TDS on the payments made to the transporters. Consequently, the disallowance of expenditure under Section 40(a)(ia) was not justified. The High Court found no error in the Tribunal's decision, and the tax appeal was dismissed.