2001 (2) TMI 8 - SC - Income Tax

Section 194C's 'carrying out any work' excludes transport contracts for carriage of goods before Explanation III (effective July 1, 1995)

Birla Cement Works Versus Central Board of Direct Taxes And Others

The SC held that, prior to insertion of Explanation III effective July 1, 1995, section 194C's phrase 'carrying out any work' did not cover transport ... Legality of circular dated March 8, 1994 issued by the Central Board of Direct Taxes (the 'CBDT') - deduction of tax at source from payments to contractors and subcontractors - applicability of section 194C - transport contracts, i.e., contracts for carriage of goods - HELD THAT:- The key words in section 194C are 'carrying out any work'. Learned counsel for the appellant contended that a word or collection of words should fit into the structure of the sentence in which the word is used or collection of words formed. The contention is that in the context of section 194C, carrying out any work indicates doing something to conduct the work to completion or something which produces such result. The mere transportation of goods by a carrier does not affect the goods carried thereby. The submission is that by carrying the goods, no work to the goods is undertaken and the context in which the expression 'Carrying out any work' has been used, makes it evident that it does not include in it the transportation of goods by a carrier. Two interpretations are reasonably possible on the question whether the contractor for carrying of goods would come or not within the ambit of the expression 'carrying out any work'. One of the two possible interpretations of a taxing statute, which favours the assessee and which has been acted upon and accepted by the Revenue for a long period should not be disturbed except for compelling reasons. There can be no doubt that if the only view of section 194C had been the one reflected in the impugned circular, then the issue of earlier circulars and acceptance and acting thereupon by the Revenue reflecting the contrary view would have been of no consequence. That, however, is not the position. Further, there are no compelling reasons to hold that Explanation III inserted in section 194C with effect from July 1, 1995, is clarificatory or retrospective in operation. We hold that section 194C before insertion of Explanation III is not applicable to transport contracts, i.e., contracts for carriage of goods. For the aforesaid reasons the appeal is allowed, the impugned circular to the extent it relates to transport contracts is quashed. Issues Involved:1. Legality of the circular dated March 8, 1994, issued by the Central Board of Direct Taxes (CBDT) regarding the applicability of Section 194C of the Income-tax Act, 1961, to transport contracts.2. Interpretation of Section 194C and whether it includes transport contracts for the carriage of goods.3. Retrospective or prospective application of Explanation III inserted in Section 194C by the Finance Act, 1995.Issue-wise Detailed Analysis:1. Legality of the Circular Dated March 8, 1994:The appellant challenged the legality of the CBDT's circular dated March 8, 1994, which prescribed fresh guidelines regarding the applicability of Section 194C to transport contracts. The circular stated that the provisions of Section 194C shall apply to all types of contracts for carrying out any work, including transport contracts. The appellant contended that no tax deduction at source was made from payments to transport operators as Section 194C was not applicable to such transactions. The High Court, however, upheld the circular, stating that payment to transporters for the carriage of goods is a payment for work covered by Section 194C.2. Interpretation of Section 194C:Section 194C provides for the deduction of tax at source from payments to contractors and subcontractors for carrying out any work. The appellant argued that transport contracts do not fall under 'carrying out any work' as used in the section. The High Court, relying on the judgment in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435, held that the expression 'carrying out any work' includes the carriage of goods. However, the Supreme Court found that the Associated Cement Co. Ltd. case did not pertain to transport contracts but to loading and unloading of goods. The Supreme Court concluded that the CBDT's interpretation of the Associated Cement Co. Ltd. case was incorrect and that Section 194C did not apply to transport contracts before the insertion of Explanation III.3. Retrospective or Prospective Application of Explanation III:Explanation III, inserted by the Finance Act, 1995, with effect from July 1, 1995, clarified that the expression 'work' includes the carriage of goods and passengers by any mode of transport other than railways. The Supreme Court examined whether this Explanation was clarificatory and retrospective or applied prospectively. The Court noted that various High Courts, including Bombay, Calcutta, Karnataka, Gujarat, Madras, Orissa, and Delhi, had quashed the impugned circular, holding that 'carrying out any work' did not include transport contracts. The Supreme Court held that there were no compelling reasons to consider Explanation III as clarificatory or retrospective. Therefore, Section 194C, before the insertion of Explanation III, did not apply to transport contracts.Conclusion:The Supreme Court allowed the appeal, quashing the impugned circular to the extent it related to transport contracts. The Court held that Section 194C was not applicable to transport contracts before the insertion of Explanation III on July 1, 1995. The parties were left to bear their own costs.