Joint Venture not liable to deduct tax under sections 194C and 194H

The Tribunal ruled that the Joint Venture (JV) was not obligated to deduct tax under sections 194C and 194H for payments to its constituents. Consequently, the JV was not considered an assessee in default under section 201(1) and was not liable for interest under section 201(1A). Both appeals by the assessee were successful.

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Issues Involved:
1. Whether the assessee Joint Venture (JV) is required to deduct tax under section 194C from payments made to one of its constituents for execution of work.
2. Whether payments made to another constituent as compensation constitute payment in the nature of commission covered under section 194H of the Income-tax Act, 1961.

Summary:

Issue 1: Deduction of Tax under Section 194C

The primary issue is whether the assessee JV is required to deduct tax under section 194C from payments made to ECI, one of its constituents, for executing the work awarded by NHIDCL. The JV, formed by RAMKY and ECI, had an internal agreement where ECI was responsible for executing the entire project on its own risk and resources, while RAMKY was to be compensated by 2.25% of the gross bills received. The Assessing Officer (AO) assumed the JV failed to deduct tax as per section 194C and issued a show cause letter. The assessee contended there was no contractor-subcontractor relationship and cited CBDT Circular No. 07 of 2016, which outlines attributes where a consortium arrangement may not be treated as an AOP. The Tribunal found that the JV fulfilled the attributes listed in the CBDT circular and concluded there was no contract and sub-contract relationship between the JV and ECI. Hence, the JV was not liable to deduct tax at source under section 194C.

Issue 2: Nature of Compensation under Section 194H

The second issue is whether the compensation paid to RAMKY, amounting to 2.25% of the gross bills received from NHIDCL, constitutes a commission under section 194H. The AO treated this compensation as commission and applied section 194H. The Tribunal examined the definition of commission under section 194H and found that the compensation paid was not for acting on behalf of the JV for any service, nor was it related to buying or selling of goods or any transaction involving assets or valuable articles. Therefore, the payment did not fit the definition of commission, and section 194H was not applicable. Consequently, the JV was not required to deduct tax under section 194H.

Conclusion:

The Tribunal concluded that the assessee JV was not required to deduct tax under sections 194C and 194H for the payments made to its constituents. Therefore, the JV could not be held as an assessee in default under section 201(1) and was not liable for interest under section 201(1A). Both appeals of the assessee were allowed.

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