2014 (9) TMI 51 - HC - Income Tax

Court rules transportation services contract subject to tax deduction under section 194C

The Court upheld the decision of the ITAT and CIT(A) in a tax dispute where the issue was whether a contract for transportation services involving buses ... TDS deduction u/s 194C @ 2% or u/s 194I – Buses on hire given for exclusive possession for a period of 2 years - Application of Board circular no. 558 dated 28 March 1990 when the Board Circular was issued prior to the introduction of Section 194(A) - Held that:- In Circular No.558 dated 28 March 1990, the Board clarified that the provisions of section 194C would have to be examined with reference to the terms and conditions of each contract – Held that:- The Tribunal did not commit any error of law in invoking section 194C which provides under Explanation III that work includes the carriage of goods and passengers by any mode of transport other than by railways – relying upon Assistant Commissioner of Income Tax (Tds) Versus M/s. Lotus Valley Education Society [2013 (9) TMI 976 - ALLAHABAD HIGH COURT] - on comparison of the two explanations added to Sections 194-I and 194-C of the Act, it was never the intention of the legislature to overlap any of the items mentioned within the meaning of 'rent', by including the same within the meaning of 'work' under Section 194-C of the Act. Also in Three Star Granites (P.) Ltd. Vs. Assistant Commissioner of Income Tax [2013 (12) TMI 546 - KERALA HIGH COURT] it has been held that the agreement does not require the owner of the vehicle to do any work at all - It is the assessee who makes use of the vehicles and the equipment - He pays hire charges on the basis of the number of hours of use and thus clearly the appellant is not justified in contending that Section 194C applies - all the work under the contract was required to be done by the assessee itself and no work within the meaning of section 194C was done by the owner of the vehicle - thus, the Tribunal was correct in holding that the liability of the assessee was to deduct tax at source u/s 194C and not u/s 194I – Decided against Revenue. Issues Involved:1. Whether the ITAT was correct in upholding the order of the CIT(A) regarding the application of Board circular no. 558 dated 28 March 1990 when the Board Circular was issued prior to the introduction of Section 194(A).2. Whether the ITAT was correct in applying the circular no. 558 which speaks of cases where part-time possession of buses was given (14hr./day), whereas in the present case the buses were given to the Assessee for exclusive possession for a period of 2 years.Detailed Analysis:Issue 1: Application of Board Circular No. 558The revenue's appeal under Section 260A of the Income Tax Act, 1961, questioned the decision of the Income Tax Appellate Tribunal (ITAT) concerning the application of Board Circular No. 558 dated 28 March 1990. The Assessing Officer (AO) had passed an order under section 201(1)/201(1-A) of the Act, holding that the assessee erred in deducting tax at source under section 194C instead of section 194I. The AO contended that the buses were given for exclusive use by the school, thus falling under the purview of section 194I, which mandates a higher tax deduction rate for the use of any machinery or plant, including vehicles.However, the CIT(A) reversed this decision, stating that the buses were not given for exclusive use but were used only for point-to-point transportation of students and staff. The CIT(A) emphasized that the buses were under the control of the operators and not the school, making the primary purpose transportation, not hiring of the buses. The ITAT upheld this view, agreeing that the contract was for transportation services, thus falling under section 194C, which deals with payments to contractors for carrying out any work, including the carriage of passengers.Issue 2: Exclusive Possession of BusesThe second issue revolved around whether the ITAT correctly applied Circular No. 558, which pertains to part-time possession of buses, to a case where the buses were allegedly given for exclusive possession for two years. The revenue argued that the contract was for the hiring of buses, thus necessitating tax deduction under section 194I. The assessee countered that the contract was for transportation services, with the contractor providing buses, drivers, and conductors, and the school paying per student transported.The Court noted that section 194C covers payments for carrying out any work, including transportation of passengers, while section 194I pertains to payments for the use of machinery or plant. The Court highlighted that the nature of the contract must be examined to determine the applicable section. It found that the contract in question was for transportation services, with the buses not being under the exclusive control of the school, and the contractor responsible for providing the buses, drivers, and conductors.The Court referred to previous judgments, including Assistant Commissioner of Income Tax (TDS), Noida Vs. M/s Lotus Valley Education Society and Commissioner of Income Tax (TDS) Vs. Reliance Engineering Associates (P.) Ltd., which supported the view that contracts for transportation services fall under section 194C, not section 194I. The Court also distinguished the present case from the Kerala High Court's decision in Three Star Granites (P.) Ltd. Vs. Assistant Commissioner of Income Tax, where the contract involved hiring vehicles for the assessee's use, thus falling under section 194I.Conclusion:The Court concluded that the contract in question was for transportation services, not the hiring of buses, and thus fell under section 194C. It held that the ITAT was correct in upholding the CIT(A)'s decision and applying Circular No. 558. The appeal was disposed of, affirming the Tribunal's decision that the assessee's liability was to deduct tax at source under section 194C, not section 194I.