2016 (2) TMI 892 - AT - Income Tax

ITAT upholds CIT (A)'s decision on BHEL payments, rejects revenue's appeals

The ITAT upheld the CIT (A)'s decision to delete demands raised by the AO for three assessment years. The appeals by the revenue were dismissed, ... TDS u/s 194J OR 194C - design & drawings of the work are prepared by BHEL which is executed by the contractors under the supervision of BHEL - technical services - work by subcontractors - short deduction of tax - Held that:- CIT (A) has rightly observed that the scope of work given to the sub-contractors is for erection, testing, commissioning and trial operation and handing over of boiler units, electrostatic precipitators etc. and these activities involve construction work, welding, erection, alignment, transportation of equipment and materials etc. with the help of men & machines, which cannot be termed as technical services as per the definition given in section 9 of the Act. The ld. CIT (A) correctly stated that the contracts awarded by the assessee are for the Erection/Testing/ Commissioning of Plant & Machinery and are in the nature of carrying out any work including supply of labour for carrying out such work. We take note that the supply of labour to carry out the work/contract involves both skilled & unskilled labour. Further, we take note that for commission of power plant, qualified engineers and skilled manpower along with unskilled labour need to use by the sub-contractors for execution of the contract including testing/trial operations. The nature and scope of the subcontract as rightly held by the ld. CIT (A) was actual execution of work involving the services of technical personnel as well as non-technical personnel. In a turn-key project like commissioning of power plant etc. what the assessee intended to get from its sub-contractor was a physical output, a tangible structure and not merely the services of its qualified engineers/ staff. CIT (A) has rightly observed that any payment for technical services in order to be covered u/s 194J, should be a consideration for acquiring or using technical know-how provided or made available by human element. The work entrusted for the sub-contractors is part of the contract offered to the assessee by its client and hence the sub-contractors also come in the purview of the Act and the assessee has deducted the tax is u/s 194C from the payments made to it. The amounts paid to sub-contractors is either for erection, installation, fabrication, commissioning, testing & trial operation of some parts of the Power Plant and therefore cannot be termed as technical services as per the definition in Explanation 2 to section 9 (1) (vii). We also take note that in any case, the sub-contractors have already offered the payments received from the assessee to tax and so the short deduction of tax cannot be demanded from the assessee as per the case law of Hon'ble Supreme Court in Hindustan Coca Cola Beverage (P) Ltd. V. CIT (2007 (8) TMI 12 - SUPREME COURT OF INDIA). - Decided in favour of assessee Issues Involved:1. Short deduction of tax under Section 194J versus Section 194C of the Income-tax Act.2. Classification of payments to sub-contractors as technical services.3. Application of Section 201(1) retrospectively.Issue-wise Detailed Analysis:1. Short Deduction of Tax under Section 194J versus Section 194C:The primary issue was whether the payments made by BHEL to its sub-contractors should be subjected to tax deduction at source (TDS) under Section 194J (fees for technical services) or Section 194C (payments to contractors). The Assessing Officer (AO) argued that the services provided by the sub-contractors involved technical expertise and thus should fall under Section 194J, which mandates a higher TDS rate. The AO's stance was based on the nature of work involving qualified engineers and technical staff.However, the CIT (A) and ITAT found that the contracts were fundamentally for 'work and labour' including erection, testing, commissioning, and trial operation of power plant components. These activities, despite involving skilled and technical personnel, were classified as construction activities, which are explicitly excluded from the ambit of 'technical services' under Explanation 2 to Section 9(1)(vii) of the Act. Thus, the payments were rightly subjected to TDS under Section 194C.2. Classification of Payments to Sub-contractors as Technical Services:The AO contended that the nature of the work, which required qualified engineers and technical staff, constituted 'technical services' under Section 194J. The AO's interpretation was that the involvement of skilled manpower automatically categorized the services as technical.The CIT (A) and ITAT disagreed, emphasizing that the essence of the contracts was the execution of physical work resulting in tangible structures, not merely the provision of technical know-how or consultancy. The contracts involved substantial construction activities, which, according to the statutory definition, do not qualify as technical services. The ITAT upheld that the payments to sub-contractors for erection, installation, and commissioning activities were appropriately covered under Section 194C.3. Application of Section 201(1) Retrospectively:The AO raised a demand under Section 201(1) and 201(1A) for short deduction of TDS. The CIT (A) noted that the sub-contractors had already paid taxes on the amounts received, invoking the principle that an assessee cannot be treated as in default if the payee has discharged its tax liability. This principle was reinforced by the Supreme Court in Hindustan Coca Cola Beverage (P) Ltd. V. CIT.The ITAT affirmed that the CIT (A) correctly applied this principle, which was later codified in the proviso to Section 201(1) effective from 1.07.2012. This implied that even if there was a short deduction, the assessee could not be deemed in default if the sub-contractors had paid their taxes.Conclusion:The ITAT concluded that the CIT (A) correctly deleted the demands raised by the AO for all three assessment years. The appeals by the revenue were dismissed, reinforcing that the payments made by BHEL to its sub-contractors were for works contracts under Section 194C and not technical services under Section 194J. The principle that an assessee cannot be treated as in default if the payee has paid the taxes was upheld, negating the AO's demands under Section 201(1) and 201(1A).