(Per : HONOURABLE MR.JUSTICE AKIL KURESHI) Heard learned counsel for the parties for final disposal of the petition.
Petitioner-assessee has challenged the order dated 30th March 2011 passed by the Commissioner of Income Tax under section 264 of the Income Tax Act, 1961 by which he was pleased to partially confirm the order passed by the Assessing Officer on 17.3.2009. The issue arising before the Assessing Officer and those involved in the appellate order pertained to deduction of tax at source.
The petitioner has challenged three different adverse findings recorded by the Commissioner in the impugned order. We would be dealing with each one separately.
The Assessing Officer, having held that the petitioner had not deducted tax at source at an appropriate rate under section 194-I of the Income Tax Act, but had done at the rate of 2% under section 194C of the Act, the petitioner carried the issue in revision before the Commissioner. Before the Assessing Officer as well as the Commissioner, the stand of the petitioner was that the petitioner had not hired any machinery from the contractor, but only awarded works contract for transportation of material. Therefore, the petitioner had correctly deducted tax at source at the rate of 2% prescribed under section 194C of the Act. The Commissioner, however, rejected the the assessee's ground and confirmed the Assessing Officer's order, making following observations :
"6.3.
From the nature of work for which the payment is made. It is clearly a case of hiring of machinery and the same will be covered under section 194I and not under section 194C of the Act. Hence the stand taken by the AO on this point is upheld."
Having heard the learned counsel for the parties and having perused the documents on record, we see no reason to interfere. The Commissioner has while confirming the order of the Assessing Officer come to the conclusion that the petitioner had made payments indicating clearly that the same were for hiring of machinery and that therefore the case would fall under section 194I of the Act.
At Annexure G to the petition, the petitioner has produced the contract between the petitioner and M/s.R.B.Bharti & Sons (HUF). The contract pertains to awarding of certain works to said M/s.R.B.Bharti & Sons (HUF). Perusing various items of the said agreement, it emerges that the Commissioner was justified in arriving at the conclusion mentioned above. In particular, we may note clause 5 and 8 of the said agreement which read as under:
Shifting of loose tiles pallets from kiln to stocking area & re-shifting to squaring machine or polishing machine by manually or own forklift. The diesel will be supplied to you free of cost by the company Rs.21.25/ton 8 Operations of 32 head polishing machine with their tiles loading casuals and operations etc. Changing of abrasive grits and operational problem will be taken care by your team only. BGCL maintenance team will do the major preventive and accidental break down if any. The operation will be done under the supervision of department concerned. Each shift you have to keep one qualified supervisor for the quality & quantity production.
Rs.2,00,000/-
Month L/S When the Assessing Officer as well as the Commissioner both on appreciation of the documents on record came to the conclusion that the assessee had hired the machinery and that therefore, the case would fall under section 194I of the Act, we see no reason to interfere.
The second issue pertains to non-deduction of TDS of Rs.6,37,152. It pertained to entry of interest payable to Gas Authority of India Limited made by the petitioner which was subsequently during the year under consideration reversed. The case of the petitioner was that the petitioner due to the financial difficulties was unable to bear the additional burden of interest. GAIL, therefore, had waived such right. Thereupon, the petitioner was not required to make payment of such interest. Since despite such understanding, the entry was made, the same was subsequently reversed. No liability to deduct tax at source therefore arose. The assessing Officer did not accept the stand of the petitioner. The petitioner approached the Commissioner.
The Commissioner rejected the petitioner's case making following observations :
"9.3.
The assessee's contention is not correct because the provision requires that once an entry crediting interest is passed in the books of accounts it attracts TDS. The subsequent reversal is of no consequence. The liability to deduct T.D.S. is fastened at the moment the credit entry is passed. Moreover, no reason is shown by assessee why the entry was made in the first instance and what was the reason for its reversal. Therefore, no intervention under section 264 is called for and the order of the ITO on this point is upheld."
If we peruse sub-section (1) of section 194A of the Act, it provides inter alia that any person not being an individual or Hindu Undivided Family who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or a draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.
To apply sub-section (1) of section 194A, there has to be payment of interest by way of income. Such payment made either by making entry or by cash or cheque or any other manner whichever is earlier. In the present case, since parties agreed not to burden the petitioner with interest liability, there was no question of making any payment thereof to GAIL by way of interest income.
In the case of Hindustan Coca Cola Beverage P. Ltd. v. CIT 293 ITR 226, the Apex Court has recognized the purpose of collecting TDS which is to ensure tax collection and if the deductee has already paid full tax, there shall, thereafter be no deduction from the payee towards such amount.
Taking into account the facts of the case, we are of the opinion that the Assessing Officer as well as the Commissioner committed an error in demanding TDS on payment of interest of Rs.6,37,152/- from the petitioner under the circumstances mentioned above.
The third issue pertains to appropriate rate at which the petitioner should have deducted tax. As per the Department, the petitioner was required to deduct tax at the rate of 10% under section 194J of the Act whereas the stand of the petitioner was that tax was required to be deducted at the rate of 2% under section 194C which the petitioner had done.
The Commissioner in revision filed by the petitioner rejected the claim making following observations:
"10.3 As per Article 10.2(b) of the Agreement dated 01.04.2006 executed between Gail (India) Limited and the assessee, the assessee is required to make fixed monthly transmission charges of Rs.5,13,896/- per month plus additional transmission charges at the unit rate of Rs.1869/- per thousand standard cubic meters for the Quantity over and above the quantity as mentioned under Article 5.1 of the agreement. Therefore, since there is a fixed rate of payment of transmission charges per month, the same should have been termed as rent and TDS should have been made under section 194-I. The ITO has misclassified the payment and has applied section 194-J. However the rate of TDS is same i.e. @ 10% under both the sections. So there is no loss to the assessee excepting the wrong classification of section. So far as the revenue effect is concerned, there will be no relief. That the decision of the I.T.A.T. Bench B, Ahmedabad in the case of M/s.Krishak Bharti Coop Ltd. (KRIBHCO), Surat v. ITO, TDS Surat dated on 05.09.2008. On which reliance has been placed by the assesse is also not applicable to its case because in assessee's case the issue is not in dispute but the dispute is as to whether section 194C or 194I is applicable to the transmission charges cannot be said that the TDS is not deductable on payment of transmission charges. Moreover, when the assessee has already deducted tax at sources under section 194C on payment of transmission charges is in dispute. Hence, no interference under section 264 of the I.T.Act is considered necessary on this point."
From the record we gather that the petitioner had entered into gas purchase agreement with GAIL and made payment for supply of goods as per the bills issued by GAIL which included cost of gas and transportation.
Under identical circumstances, while examining the Revenue's Appeal being Tax Appeal No.618 of 2010 in case of KRIBHCO, we made made following observations :
"6. The Tribunal was of the opinion that the assessee did not hire any service for carriage of goods and that, therefore, the case would not fall in clause (c) of Explanation III to Section 194C of the Act. To come to such a conclusion, the Tribunal referred to various clauses of the agreement between the assessee and the Gas Authority of India Limited ("GAIL" for short). To this issue, we may advert to at a slightly later stage. At this stage, it would be sufficient to note that the Tribunal allowed the Appeal making following observations:-
" A distinction between a sale and works contract is very significant particularly under the sales-tax laws. Before the introduction of tax on work contract, the sale-tax was levied on sales and it could not be levied on works contract. What is the exact scope of expression 'work contract' has been considered by the Hon'ble Supreme Court in a number of cases and by and large distinction between the two also seems to have been adopted for the purpose of Income-Tax Act. In the present case, it is a contract for purchase of gas from various gas suppliers up to the assessee's gas metering station at Hazira, Surat. Transportation charges in the gas supply contract are part of purchase cost of gas. This can easily be inferred from the above referred invoice. The object of the contract between suppliers of gas and assessee is essentially transfer of chattel qua Chattel i.e., natural gas up to the factory premises at Hazira until then the property in question i.e. the gas is of suppliers. This being the factual position, the payment for the purchase of natural gas and as per the contract of the assessee, it is only asking for supply of natural gas from the producers for the purpose of use of this gas for burning in assessee's factory for manufacturing of urea. Clearly this is a contract for sale goods and not a work contract as held by the lower authorities. In view of the above, we quash the orders of the lower authorities and allow the appeals of the assessee."
7. Counsel for the Revenue drew our attention to the provisions contained in clause (c) of Explanation III to Section 194C of the Act and vehemently contended that the Tribunal erred in reversing the orders passed by the Revenue authorities. He submitted that Section 194C of the Act was clearly attracted. The case on hand was covered by clause (c) of Explanation III to Section 194C of the Act. He submitted that the assessee had agreed to bear the transportation charges separately and that such charges were to be paid monthly. Our attention was drawn to Article 4.02 of the contract between the assessee and GAIL, wherein it was provided inter alia that the buyer i.e (the assessee) in addition to price of gas mentioned in Article 11, shall pay to the seller, monthly transportation charges of Rs. 49,58,250/- plus taxes with effect from 1.4.1996 for the facilities provided by the seller ( GAIL) for supply of gas to the point of delivery located at the buyer's premises. There is also escalation clause permitting increase in such charges on yearly basis after completion of first year of the agreement.
8. Reliance was placed by the Revenue in the case of Central Board of Direct Taxes vs. Cochin Goods Transport Association reported in [1999] 236 ITR 993 (Ker.) and in the case of Associated Cement Co. Ltd. vs. Commissioner of Income-Tax and another reported in [1993] 201 ITR 435 (S.C.)
9. Having heard learned counsel for the Revenue and having perused the documents on record, we are of the opinion that the above mentioned clause of the agreement between the assessee and the seller cannot be seen in isolation. The entire contract of sale of gas has to be perused to ascertain whether the case of the assessee fell within the four corners of Section 194C of the Act, in particular, under clause (c) of Explanation III to Section 194C of the Act.
10. We are concerned with assessment year 2005-06. In the present case. At the relevant time, Section 194C reads as under:-
"194C.(1) Any person responsible for paying any sum to any resident ( hereinafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and-
(a) the Central Government or any State Government; or
(b) any local authority; or
(c) any corporation established by or under a Central, State or Provincial Act; or
(d) any company; [or]
(e) any co-operative [society;or]]
(f) any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both; or
(g) any society registered under the Societies Registration Act,1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India; or
(h) any trust; or
(i) any University established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a University under section 3 of the University Grants Commission Act,1956); (3 of 1956) [or]
(j) any firm,] shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, [deduct an amount equal to-
(i) one per cent in case of advertising,
(ii) in any other case two per cent, of such sum as income-tax on income comprised therein.] (2) **** Explanation I-*** Explanation II-*** Explanation III- For the purposes of this section, the expression "work" shall also include-
(a) ****
(b) ****
(c) carriage of goods and passengers by any mode of transport other than by railways;
(d) ****"
11. From the above statutory provision, it can be seen that in case of carrying out of any work in pursuance of any contract between the contractor and any of the specified bodies provided under different clauses of sub-section (1) of Section 194C of the Act, which includes cooperative society, there had to be a deduction of 1% or 2%, as the case may be, at the time of credit of such sum to the account of the contractor or at the time of payment in cash or by issuance of cheque or draft or any other mode, whichever is earlier.
Term 'work' in turn has been explained in Explanation III to Section 194C of the Act, which shall also include besides others, carriage of goods and passengers by any mode of transportation other than by railways.
12. In that view of the matter, if the assessee had entered into any contract for carrying out any work of carriage of goods with the seller, his case would certainly fall under clause (c) of Explanation III to Section 194C and in turn tax had to be deducted at source as specified in sub-Section (1) thereof.
13. The question, however, is did the assessee have any contract for carriage of goods with the seller?
This crucial question has to be decided upon the terms of the contract between the parties. As already noted, though the assessee agreed to make separate payment for transportation of gas from outlets of GAIL to the different points in the assessee's factory, in our view, such clause cannot be seen in isolation and has to be viewed in the background of other conditions contained in the contract.
14. In the order of the Tribunal challenged before us, such conditions have been reproduced in the order. These conditions read as follows:-
4.01 GAS shall be delivered by the SELLER to the BUYER at the Outlet of Gas Metering Station located at BUYER's premises at Hazira. GAS will be transported from the crown stream flange of pipeline at the Outlet of the Gas Metering Station hereinafter referred to as point of delivery by means of pipeline to be provided and maintained by the SELLER.
4.02 Gas Metering Station and building needed for the same shall be set up/Constructed and maintained by the SELLER. The land needed for the Purpose of such GAS Metering Station/ Building shall be provided by the BUYER free of cost. The SELLER may use the said location in consultation with the BUYER for effecting deliveries to another parties in the area without affecting the supply of GAS by the SELLER to the BUYER as per the CONTRACT.
4.03 The BUYER, in addition to price of GAS mentioned in Article 11, shall pay to the SELLER monthly transportation charges of Rs.49,58,250/- (Rupees forty nine lakhs fifty eight thousand two hundred and fifty only) plus taxes with effect from 01.04.1996( First April One Thousand Nine hundred and Ninety Six) thereon for the facilities provided by the SELLER for supply of GAS to the point of delivery located at the BUYER's Premises. The above monthly transportation charges shall be increased by 3% ( three percent) on yearly rest basis with effect from 01.04.1997( First April one Thousand Nine hundred and Ninety Seven). The BUYER shall pay the above monthly transportation charges to the SELLER in addition to payment of invoice for supply of GAS to be raised as per Article 11 & 12 hereinafter. Provided further, in case monthly transportation charges are not paid by the BUYER within 3(three) working days of presentation of invoice, the SELLER will present the invoice for the same to a Bank against Letter of Credit and draw the amount.
4.04 The BUYER shall make all proper and adequate arrangement for receiving GAS at the outlet of Gas Metering Station at its own risk and cost. Should any defect in the BUYER's intake arrangement arise, the same shall be rectified by the BUYER themselves.
4.05 For effecting deliveries of GAS as aforesaid the SELLER shall install and maintain at its own risk and cost, the piping control, regulation and metering equipment in the aforesaid Gas Metering Station and all other accessories. The said equipment so installed by the SELLER shall remain the property of the SELLER and the SELLER shall have the right to remove such equipment at any time within twelve (12) months after the expiry of the contract. The SELLER shall have the right to use the BUYER's utilities essentially required for installation, operation and maintenance of GAS metering station and allied equipment required for the supply of GAS on payment of such charges for utilities only as may be mutually agreed. All Statutory approvals shall be obtained by the SELLER.
4.6 The title of Gas shall pass from the SELLER to the BUYER at the point of delivery of GAS. The delivery point shall be at the down stream flange of the pipeline at the outlet of the Gas Metering Station."
15. Combined reading of the terms and conditions noted hereinabove would reveal that the gas had to be delivered by the seller to the buyer through pipelines and equipments laid down, owned and maintained by the seller. The seller also had the right to use such pipeline for distribution of gas in favour of other purchasers. Most significantly, para 4.6 of the agreement provided that the title of gas shall pass from the seller to the buyer at the point of delivery of gas. The delivery point shall be at the down stream flange of the pipeline at the outlet of the Gas Metering Station.
16. It thus becomes clear that in the contract itself it was envisaged between the assessee and GAIL that gas would be supplied by GAIL to the assessee at the receiving point of the assessee's factory. For such purpose GAIL would be laying down its pipelines and other equipments and would maintain such paraphernalia. GAIL would also have the right to use such pipelines and equipments for the purpose of distributing gas to other gas consumers. As already recorded, most significantly, the ownership of the gas passed on from GAIL to the assessee only at the point of delivery and not before.
17. In our view, the agreement essentially was for purchase and sale of gas. Transportation of gas was only a part of the entire sale transaction. Laying down the pipeline and supplying gas through such pipeline were the steps in furtherance of the terms of such a contract. Clear understanding of the parties that the ownership of gas would pass on to the buyer at the delivery point would clearly show that transport of gas by the seller was a step towards execution of contract for sale of gas and there was no contract for carriage of goods. We are not unmindful of the decision of the Apex Court in case of Associated Cement Co. Ltd. vs. Commissioner of Income-Tax and another reported in 201 ITR 435, wherein it was observed that Section 194C(1) does not require that a contract to carry out a work or the contract to supply labour to carry out work should be confined to "works contract". However, in the present case we are not faced with such a situation. We only find that there was no contract between GAIL and the assessee for carriage of goods. Transportation of gas by GAIL was only in furtherance of contract of sale of gas.
18. In view of the above discussion, we are of the opinion that the Tribunal committed no error in coming to the conclusion that the case was not covered under Section 194C of the Act. It may be that the transportation component of gas was paid separately by the assessee to GAIL. Here also the transportation charges did not depend on the consumption of quantity of gas but was of fixed monthly charges to be borne by the assessee as part of the agreement between the parties. The ownership of the gas vested in GAIL till it was transported and delivered to the assessee's premises at the outlet of the gas metering station. The pipeline was laid down by GAIL and was permitted to be utilized for further onward transportation of gas to other consumers.
19. Combined effect of the above observations and conclusions would be that the assessee entered into a contract for purchase of gas and that there was no work contract entered into between the assessee and GAIL. Application of Section 194C therefore, does not arise. Tribunal, therefore, in our view, committed no error. Appeal is therefore, dismissed."
Consequently, this ground of the petitioner also must succeed.
In the result, the impugned order of the Commissioner is reversed in so far as it pertains to demand of Rs.6,37,152/- for non collection of TDS on the interest entries which was later on reversed as also with respect to demand of higher rate of TDS of 10% under section 194J instead of 2% deducted by the petitioner under section 194C for the payment made to GAIL for supply of gas. Rest of the order remains unchanged.
The petition is allowed to the above extent.
(Akil Kureshi J.) (Ms.Sonia Gokani, J.) (vjn) Top