2014 (12) TMI 222 - AT - Income Tax

Tribunal rules in favor of assessee in tax disallowance case, finding payments were for independent contracts.

The Tribunal ruled in favor of the assessee, finding that the disallowance under Section 40(a)(ia) of the Income Tax Act was not justified as the payments ... Disallowance u/s 40(a)(ia) – TDS to be deducted on labour charges or not - Held that:- The assessee is an individual carrying out job work business - The assessee receives the orders from various companies for roughing and finishing of the raw material provided by the customer - The raw material is supplied by the customer and the assessee does the machining work through use of CNC machines - Sometimes, the raw material provided by the customer is required to be roughened and the roughing cannot be done at the assessee's premises since the assessee does not have the requisite plant and machinery - in F.Y. 2006-07, the assessee being an individual was not liable to deduct TDS on the payments to contractors and he was liable to deduct tax only on the payments made to sub-contractors. Nature of contract - Whether the labour charges paid by the assessee are in the nature of contract awarded by the assessee or sub contract awarded – Held that:- The customer provides the raw material to the assessee for carrying out certain job work - Since the assessee do not have certain machines and hence, the assessee in turn, gives the contract to other labour contractors to carry out part of the job - Ultimately the assessee is liable for the work carried out by them - This is evident from the purchase order from Jinabakul Forge Pvt. Ltd. for whom the assessee do the job work, wherein it is clearly mentioned that rejection upto 1% is allowed and rejection more than 1% would be to the assessee's account - the labour contract given by the assessee is in the nature of separate contract of work and assessee was not liable to deduct TDS under the provisions of section 194C. The assessee has engaged various labour contractors for which, the assessee himself was responsible for executing the contract and the labour contractors had no privacy of contract with Principal customer - For a contract to qualify as a subcontractor, the subcontractor should spend their time and energy and also undertake the risk attached with the main contract - As the element of risk taking was missing, the contract could not be held as subcontract – thus, the payments made to the labour contractors are not in the nature of sub-contracts and there was no obligation on the assessee to deduct TDS on the said payments and consequently, no disallowance could be made u/s. 40(a)(ia) of the Act – relying upon Mr. Vijay Ramchandra Shirsth, C/o. Shah Khandelwal Jain & Associates Versus ACIT, Circle -2, Nashik [2011 (9) TMI 904 - ITAT PUNE] - there is no written or real agreement to substantiate the view taken by the AO and it could not be held to be a contract - thus, the authorities below were not justified in making disallowance u/s 40(a)(ia) – Decided in favour of assessee. Issues Involved:1. Disallowance under Section 40(a)(ia) of the Income Tax Act.2. Obligation to deduct TDS under Section 194C(2) of the Income Tax Act.3. Nature of contracts: Whether they are sub-contracts or independent contracts.4. Applicability of TDS provisions to individuals for the relevant assessment year.Detailed Analysis:1. Disallowance under Section 40(a)(ia) of the Income Tax Act:The primary issue is the disallowance of Rs. 1,46,95,052/- under Section 40(a)(ia) due to non-deduction of TDS on labor charges. The Assessing Officer (AO) noted this non-deduction in the audit report and disallowed the amount. The CIT(A) upheld this disallowance, asserting that the payments were in the nature of sub-contracts, thus requiring TDS deduction under Section 194C(2). However, the assessee contended that these were independent contracts and not sub-contracts, hence no TDS was required. The Tribunal found that the assessee was not liable to deduct TDS as the contracts were independent, not sub-contracts, and thus disallowance under Section 40(a)(ia) was not justified.2. Obligation to Deduct TDS under Section 194C(2) of the Income Tax Act:The CIT(A) held that the payments were sub-contracts and required TDS deduction under Section 194C(2). The Tribunal examined whether the labor charges paid were sub-contracts or independent contracts. It concluded that the payments were for independent contracts, not sub-contracts, as the labor contractors had no direct relationship with the principal customer and no risk was transferred to them. Therefore, the assessee was not liable to deduct TDS under Section 194C(2).3. Nature of Contracts: Whether They Are Sub-Contracts or Independent Contracts:The Tribunal analyzed the nature of the contracts and found that the labor contracts were independent. The assessee was fully responsible for the main contract, and the labor contractors had no direct dealings with the principal customer. The labor contractors executed the work under the full control of the assessee without assuming any risk associated with the main contract. This lack of risk transfer indicated that the contracts were independent, not sub-contracts.4. Applicability of TDS Provisions to Individuals for the Relevant Assessment Year:For the assessment year 2007-08, individuals were not required to deduct TDS on payments to contractors unless it was a sub-contract. The Tribunal noted that the obligation to deduct TDS for individuals under Section 194C(2) was introduced from 01.06.2007. Since the assessment year in question was 2007-08, the assessee, being an individual, was not liable to deduct TDS on the payments made to contractors as they were not sub-contracts.Conclusion:The Tribunal concluded that the disallowance under Section 40(a)(ia) was not justified as the payments were for independent contracts, not sub-contracts. The assessee was not required to deduct TDS under Section 194C(2) for the relevant assessment year. Consequently, the appeal filed by the assessee was allowed, and the disallowance was directed to be deleted.