1993 (3) TMI 1 - SC - Income Tax

Person paying contractor on behalf of specified organizations must deduct 2% tax under section 194C(1) despite not being direct contracting party.

Associated Cement Co. Limited Versus Commissioner of Income-Tax And Another

The SC held that a person who credits or pays any sum to a contractor on behalf of organizations specified in section 194C(1) of the Income-tax Act, 1961 ... Whether a person who credits to the account of or pays to a contractor any sum payable by any of the organisations specified in section 194C(1) of the Income-tax Act, 1961 for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the specified Organisation is liable to deduct two per cent. of such sum as income-tax as required under that sub-section. The core legal question considered by the Court is whether a person who credits to the account of or pays to a contractor any sum payable by any of the organisations specified in section 194C(1) of the Income-tax Act, 1961, for carrying out any work (including supply of labour for carrying out any work) pursuant to a contract between the contractor and the specified organisation, is liable to deduct two per cent of such sum as income-tax as mandated under that sub-section.More specifically, the issues presented and considered include:Whether the obligation to deduct tax under section 194C(1) applies only to payments made under a 'works contract' (i.e., a contract producing tangible property) or extends to any contract for carrying out any work, including supply of labour.Whether the two per cent deduction under section 194C(1) is to be made on the entire sum credited or paid to the contractor, or only on the income (profit) component comprised in that sum.Whether reimbursements made to the contractor for payments to workers, as per contractual terms, fall within the sums liable for deduction under section 194C(1).Issue-wise detailed analysis:1. Scope of 'work' under section 194C(1): Whether limited to 'works contract' or includes any work including supply of labourThe legal framework is section 194C(1) of the Income-tax Act, which mandates deduction of two per cent tax at source on sums paid or credited to a contractor for carrying out any work (including supply of labour) pursuant to contracts with specified organisations.The appellant contended that the deduction obligation arises only in respect of 'works contracts' - contracts producing tangible property - and not for any other type of work. They relied on prior precedent which held that the deduction is on the income (profit) element of a works contract.The Court interpreted the language of section 194C(1) strictly and literally, observing that the sub-section explicitly uses the phrase 'any work (including supply of labour for carrying out any work),' showing the legislative intent to cover a wide range of contracts beyond just 'works contracts.' The Court noted that 'any work' is not synonymous with 'works contract,' which has a special meaning in tax law. The inclusion of supply of labour within the scope further confirmed the broad ambit of the provision.Thus, the Court rejected the appellant's argument to confine the deduction to works contracts only, holding that the statutory language admits no such restriction.2. Basis of deduction: Whether deduction is on the entire sum paid/credited or only on the income (profit) componentThe appellant argued that the deduction should be on the income comprised in the sum paid to the contractor, not on the gross sum credited or paid. They relied on the phrase 'on income comprised therein' in section 194C(1) and prior case law to support that the deduction applies only to the profit element of the contract value.The Court examined the statutory language and context carefully. It held that the words 'on income comprised therein' following the directive to deduct two per cent 'of such sum' cannot be interpreted as permitting deduction only on the income portion of the sum. The Court reasoned that it is practically impossible and impermissible for the payer to determine the contractor's income component within the payment. Parliament could not have intended to impose such an unworkable burden on the payer.The Court emphasized that the deduction is a withholding tax mechanism, requiring deduction at source on the gross sum paid or credited, not on the net income or profit. The phrase 'on income comprised therein' was understood to mean that the deduction is a tax on income which is deemed to be included in the sum, not that the deduction is limited to the income portion.The Court also distinguished the prior decision relied upon by the appellant, which dealt with determination of income for assessment purposes, not the scope of tax deduction at source under section 194C(1).3. Treatment of reimbursements to contractor for payments to workersThe appellant contended that amounts reimbursed to the contractor for payments made to workers (as per contractual clause 13) should not be included in the sum liable for deduction under section 194C(1).The Court found no language in the sub-section permitting exclusion of such reimbursed amounts from the sums on which deduction is to be made. Since these payments were made pursuant to the contract and credited or paid to the contractor, they fall within the ambit of sums liable for deduction under section 194C(1).Key evidence and findings:The facts showed that the appellant paid the contractor sums under two clauses: clause 12, a flat rate per tonne for loading cement, and clause 13, reimbursement of difference in dearness allowance and annual increments payable to workers. The appellant made deductions under section 194C(1) but less than required, contending that no deduction was due on clause 13 payments. The Income-tax Officer issued notices for short deduction, which were upheld by the High Court. The appellant challenged these notices before the Supreme Court.The Court found that the appellant's narrow construction of section 194C(1) was inconsistent with the statutory language and legislative intent. The Court held that the appellant was liable to deduct two per cent tax on the entire sums credited or paid to the contractor, including reimbursements.Treatment of competing arguments:The appellant's arguments for restricting the deduction to works contracts and income portions were rejected as contrary to the plain language of the statute and impractical to administer. The Court emphasized the legislative policy behind withholding tax provisions, which require deduction on gross payments to ensure effective tax collection.Conclusions:The Court answered the question in the affirmative, holding that any person responsible for paying or crediting sums to a contractor for carrying out any work (including supply of labour) pursuant to a contract with specified organisations must deduct two per cent income-tax on the entire sum so paid or credited under section 194C(1).Significant holdings include:'Any work' means any work and not a 'works contract', which has a special connotation in the tax law. Indeed, in the sub-section, the 'work' referred to therein expressly includes supply of labour to carry out a work. It is a clear indication of the Legislature that the 'work' in the sub-section is not intended to be confined to or restricted to 'works contract.''It is neither possible nor permissible for the payer to determine what part of the amount paid by him to the contractor constitutes the income of the latter. It is not also possible to think that Parliament could have intended to cast such impossible burden upon the payer nor could it be attributed with the intention of enacting such an impractical and unworkable provision.''Hence, on the express language employed in the sub-section, it is impossible to hold that the amount of two per cent required to be deducted by the payer out of the sum credited to the account of or paid to the contractor has to be confined to his income component out of that sum.''There is also nothing in the language of the sub-section which permits exclusion of an amount paid on behalf of the Organisation to the contractor according to clause 13 of the terms and conditions of the contract in reimbursement of the amount paid by him to workers, from the sum envisaged therein.'The final determination is that the appellant was liable to deduct two per cent tax under section 194C(1) on the entire sums credited or paid to the contractor, including reimbursements, and the appeal was dismissed with costs payable to the Revenue.