2015 (8) TMI 1042 - HC - Income Tax

High Court clarifies tax implications for supply of materials in Turn Key Projects and Bill Management Services

The High Court dismissed all appeals challenging the applicability of Section 194C of the Income-Tax Act on payments for supply of materials in Turn Key ... Payment made against the supply of materials included in composite contracts for executing Turn Key Projects - whether provisions under Section 194C would attract or not? - Held that:- Section 194C of the Act cannot be pressed into service to deduct tax at source. The whole object of introduction of that Section is to deduct tax in respect of payments made for works contract. No division is, therefore, permissible in respect of a contract for supply of materials for carrying out the work. It is in a case of distinct contracts. The contract for supply of material being a separate and distinct contract, no division is permissible under Section 194C of the Act. Section 194C has suffered an amendment also with effect from October 1, 2009 and the provision has been made very clear without any ambiguity.Thus, we can conclude safely that if a person executing the work, purchases the materials from a person other than the customer, the same would not fall within the definition of 'work' under Section 194C of the Act. - Decided against revenue. Payments made to Bellary Computers and IT Solutions, Bellary, towards Bill Management Services are fees for professional and technical services - whether comes within the purview of Section 194J or within the ambit of Section 194C - Held that:- The services rendered by the agencies engaged by the assessees at Hospet, Bellary and Raichur are not professional services, and, therefore, Section 194J is not attracted. The demand towards the alleged short deduction of tax deducted at source and interest, therefore, was improper. The contract was rightly held to be a service contract by the Tribunal and we, also, feel that it was a contract, which should be covered under Section 194C of the Act. - Decided against revenue. Issues:1. Applicability of Section 194C of the Income-Tax Act on payments made against supply of materials in composite contracts for Turn Key Projects.2. Classification of payments made for Bill Management Services under Section 194J or Section 194C of the Act.Analysis:Issue 1:The appeals by the revenue challenged the order of the Income-Tax Appellate Tribunal affirming the decision of the Commissioner of Income-tax (Appeals) regarding demands on the Gulbarga Electricity Supply Company Limited. The primary issue was whether payments made against the supply of materials in composite contracts for Turn Key Projects would attract the provisions of Section 194C of the Income-Tax Act. The Tribunal, referencing a previous judgment, concluded that no deduction under Section 194C was permissible for payments made on supply part of contracts awarded for executing Turn Key Projects. The Tribunal emphasized that the contract for supply of material was a separate and distinct contract, and no division was permissible under Section 194C. Therefore, the Tribunal held that if a person executing the work purchases materials from a person other than the customer, it would not fall within the definition of 'work' under Section 194C.Issue 2:The second issue revolved around the classification of payments made by the assessee towards Bill Management Services under either Section 194J or Section 194C of the Act. The Tribunal determined that the services rendered by the agencies engaged by the assessee were not professional services, hence Section 194J was not applicable. It was held that the contract for Bill Management Services should be covered under Section 194C of the Act. The Tribunal found that the demand for short deduction of tax and interest was improper as the contract was rightly classified as a service contract. Consequently, it was concluded that the demands made were not valid.In the final judgment, the High Court dismissed all the appeals, stating that no substantial question of law requiring consideration was found. The parties were directed to bear their respective costs, and the decision of the Tribunal was upheld in both issues.