The appeal filed by the revenue under Section 260A of the Income Tax Act, 19611 arises from a decision of the Income Tax Appellate Tribunal dated 1 March 2011 for Assessment Year 2008-09. The appeal has been admitted on 3 January 2012 on the following substantial questions of law :
"1. Whether the ITAT was correct in upholding the order of the CIT(A) regarding application of Board circular no. 558 dated 28 March 1990 when the Board Circular was issued prior to the introduction of Section 194(A); and
2. Whether the ITAT was correct in applying the circular no. 558 which speaks of cases where part time possession of buses was given (14hr./day), whereas in the present case the buses were given to the Assessee for exclusive possession for a period of 2 years."
The assessee conducts a school at NOIDA. As an incident of providing a facility for the transportation of students from their homes to the school and return, the assessee entered into a contract with a transporter. The contract envisaged the following salient conditions :
(i) the contractor would provide a stipulated number of buses for transportation of students and staff of the assessee from such starting points and routes and in accordance with such timings as would be specified by the assessee;
(ii) the buses would exhibit the route number and the name of the school;
(iii) the school timings being from 8:00 a.m. to 1:50 p.m. for classes II and above and from 8:40 a.m. to 12:45 p.m. for classes upto class I, it would be the duty of the contractor to ensure that regular, punctual and efficient service was provided. The buses were required to arrive at the bus stop within fifteen minutes of the scheduled time in the morning and twenty minutes of the scheduled departure time in the afternoon, failing which the bus users would be at liberty to travel by taxi or any other mode of transport at the cost of the transporter;
(iv) for classes upto class I, the reporting time for the buses in the morning would be at 8:45 a.m. and in the afternoon at 12:45 p.m. For class II and above, the reporting time would be at 7:50 a.m. and 1:45 p.m. respectively;
(v) the contractor was to provide a bus as approved by the assessee together with a conductor with a valid cover for insurance and any liability arising out of an accident would be borne by the contractor;
(vi) the monthly hire charges for the services to be provided by the contractor were prescribed per student for a distance upto a specified point and beyond;
(vii) the contract provided for specified deductions for a default on the part of the contractor in complying with the requirements, as specified, for the services to be provided;
(viii) no bus would be allowed to be driven by a driver with less than stipulated experience or who has been challaned on more than the stipulated occasions; and
(ix) the driver would be required to possess an identity card with an attested photograph, issued by the employer.
The Assessing Officer passed an order under section 201(1)/201(1-A) of the Act on 27 January 2010 and held that the assessee had erred in deducting tax at source under section 194C whereas its obligation was to deduct tax at source under section 194I on the payments made to the contractor. The Assessing Officer held as follows:-
"I don't agree with the submissions of the assessee that provisions of section 194I are not applicable in assessee's case. Here the nature and terms of the agreement does not make any difference while application (sic) of provisions of the section 194I of the I.T. Act. However, transporters have given the buses for exclusive use of the school with name and route of the buses painted on it. Moreover, now the dispute about hiring and contract is a settled issue by amendment in provision of section 194I of the I.T. Act as tax is now deductible @ ten percent for the use of any machinery or plant or equipment."
In appeal, the CIT(A) while relying on his own order in another case, held in his order dated 24 September 2010 that the provisions of section 194I were not attracted inter alia for the following reasons :
"(a) The Transporters have not given the buses for exclusive use by the appellant; the use is only for point to point transportation to students/staff to and from; only for convenience sake, the name of the appellant organisation and routes are placed temporarily.
(b) After the specified period of use; the buses are kept under the control of the operators and not of the appellant organisation. It is not the case of the department that these buses, vehicles have been given by the transporters, on hire to the appellant, for control and use 24 hours to 365 days. To that extent, this distinction is very important to understand that the buses have been hired by the appellant only for limited/specific purposes of transportation of the students and staff. It implies that the main object is transportation of passengers; and not complete hiring of the particular vehicle."
The order of the CIT(A) has been upheld by the Tribunal on 1 March 2011.
Section 194C of the Act deals with payments to contractors. Sub-section (1) of section 194C prior to its substitution by Finance Act No.33 of 2009 w.e.f. 1 October 2009, provided as follows:-
"(1) Any person responsible for paying any sum to any resident (hereafter 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; or
(k) any individual or a Hindu undivided family or an association of persons or a body of individuals, whether incorporated or not, other than those falling under any of the preceding clauses, whose total sales, gross receipts or turnover from the business or profession carried out by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor, 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."
(emphasis supplied) Explanation III to section 194C defined the expression 'work' to also include :
"(a) Advertising;
(b) Broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
(c) Carriage of goods and passengers by any mode of transport other than by railways;
(d) Catering."
(emphasis supplied) If Section 194C applies, a deduction at source of 2% was required in this case. The assessee deducted tax at source at 2%.
Section 194I, at the material time, read as follows:
"Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of rent, 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 the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of-
(a) ten per cent. for the use of any machinery or plant or equipment;
(b) fifteen per cent. for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings where the payee is an individual or a Hindu undivided family; and
(c) twenty per cent. for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings where the payee is a person other than an individual or a Hindu undivided family."
Under the Explanation to section 194I, the expression 'rent' was defined thus:
"(i) "rent" means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any,-
(a) land; or
(b) building (including factory building); or
(c) land appurtenant to a building (including factory building); or
(d) machinery; or
(e) plant; or
(f) equipment; or
(g) furniture; or
(h) fittings, whether or not any or all of the above are owned by the payee."
(emphasis supplied) The Assessing Officer was of the view that upon the insertion of the provisions of section 194I, the assessee was liable to deduct tax at source under the aforesaid provisions. According to Assessing Officer, the Explanation defines 'rent' as a payment by whatever name called for the use of a 'plant'. Under sub-section (3) of section 43 of the Act, the expression 'plant' is defined to include vehicles. Hence, the assessee was found in default in making a short deduction of tax at source for the relevant period and was held liable to pay interest besides the tax so deducted. Penalty proceedings under section 271-C were directed to be initiated separately. This view has been reversed by the CIT(A) who came to the conclusion that essentially the contract between the transporter and the assessee was for point to point transportation of students and staff; the buses were not under the exclusive control of the assessee; and the main object of the contract was the transportation of passengers within the meaning of Explanation III(c) to section 194C of the Act. The Tribunal concurred with the view.
The submission which has been urged on behalf of the revenue is that section 194I is an omnibus provision under which a deduction is liable to be made where any person is responsible for paying to a resident any income by way of rent. It has been urged that the expression 'rent' is defined in broad terms to incorporate a payment not only under a lease, sub-lease or tenancy but under any other agreement or arrangement for the use of any plant, machinery, land, building, equipment, furniture or fittings. It has also been urged that the expression 'plant' is comprehensive enough to include vehicles. Consequently, it has been urged that particularly in view of the provisions of section 43(3), an artificial definition of the expression 'plant' has been introduced for the purpose of computing the profits and gains of business or profession under sections 28 to 41. The contract, in the present case, is a contract for the hiring of buses, it has been urged. Hence, it has been submitted that the view which was taken by the Assessing Officer was correct and ought not to have been interfered with by the CIT(A). The Tribunal is according to the Revenue in error in affirming the decision of the CIT(A).
On the other hand, it has been urged on behalf of the assessee that the contract in the present case is to provide a service for the transportation of the staff and students. The ownership and control of the buses continues to vest in the service provider, namely the contractor. The assessee does not hire the buses as such since a contractual obligation has been undertaken by the contractor for providing transportation for the staff and students from point to point. The contractor provides the fuel, a conductor and a driver and receives a payment for each student transported per month depending upon the stipulated distance for performing the work. Hence, it has been urged that it was not section 194I but section 194C that would govern.
Section 194C, as it stood at the material time, contemplated a deduction at the stipulated rate (2% in a case other than advertising) by any person who is responsible for paying a sum to a resident for carrying out any work including supply of labour for carrying out any work in pursuance of a contract between the contractor and one of the stipulated agencies, falling within the purview of clauses (a) to (k). The expression 'work' is defined in Explanation III to include the carriage of goods and passengers by any mode of transport other than by railways. The essential feature of section 194C is that the payment that is contemplated is in pursuance of a contract and the contract must be for carrying out any work. The expression 'work', as defined, includes the carriage of goods and passengers by any mode of transport other than by railways. In contradistinction, section 194I contemplates a payment by way of rent. The expression 'rent' is defined so as to include a payment under a lease, sub-lease, tenancy or any other agreement or arrangement for the use of land, building or land appurtenant thereto, machinery, plant, equipment, furniture or fittings.
In Assistant Commissioner of Income Tax (TDS), Noida Vs. M/s Lotus Valley Education Society which was decided on 12 September 20132, it was held by a Division Bench of this Court that the expression 'plant' is defined in Section 43(3) for the purposes of computing the profits and gains of business and profession under Sections 28 to 41. Hence, the definition in section 43(3) cannot be incorporated into the recovery and collection provisions of Chapter XVII.
For the purpose of the present case, the Court may proceed on the basis, as suggested by the revenue, that independently of section 43(3) the expression 'plant' should not be construed in a narrow sense but in a broader connotation to include vehicles as well which are incidental to the main activity or business. Even if that be the position, it is clear that for the provisions of section 194I to be attracted, the payment that is contemplated must be a payment for the use of land, building, machinery, plant, equipment, furniture or fittings. Payment for the use of a plant under section 194I is distinct from a situation that the legislature envisages in section 194C, where payment is contemplated for carrying out any work. Carrying out of any work under section 194C may also envisage the utilisation of a vehicle. But the mere fact that the work which is envisaged involves the utilisation of a vehicle would not ipso facto take the contract out of the purview of section 194C and bring it within the purview of section 194I. The basic distinction between section 194C and section 194I is that the contract under the former provision is a contract for carrying out work, whereas the contract under the latter is a contract which envisages the payment of rent for the use of land, building, machinery, plant, equipment, furniture or fittings. Hence, it is necessary in each case to consider the provisions of the contract in relation to which the recovery and collection provisions are sought to be applied. Both section 194C and section 194I form part of Chapter XVII which deals with collection and recovery of tax. Section 190 contemplates that notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction or collection at source in accordance with the provisions of the Chapter. Sections 194C and 194I are, therefore, part of these provisions contained in Chapter XVII for the collection and recovery of tax.
In the present case, the contract was not construed at all by the Assessing Officer. In the view of the Assessing Officer, the nature and the terms of the agreement did not make any difference to the applicability of the provisions of section 194I. The Assessing Officer further held that the language and the terms of the agreement were not significant. In holding thus, the Assessing Officer clearly misapplied himself. It was only upon construing the contractual conditions that the Assessing Officer would be able to determine as to whether the contract in essence is for performance of work as envisaged in section 194C or for the use of a plant within the meaning of section 194I. Several circumstances weighed with the CIT(A) in appeal. The first was that the buses were not for the exclusive use of the assessee. Secondly, the agreement envisaged point to point transportation of the students and staff. Thirdly, the buses were under the control of the operator and not of the assessee. In other words, the main object of the contract was transportation of passengers (in the present case, the staff and students) and not the hiring of a particular vehicle.
During the course of the hearing, we have perused the terms of the agreement, which are not in dispute. The agreement envisages that the contractor would provide a stipulated number of buses. The buses would pick up the students and teachers at stipulated points and would depart after school for transporting of students and staff to their homes. The contract naturally contains a stipulation in regard to the time at which the students would be dropped and the time at which the buses would depart and contains provisions for imposition of penalty in default. The conductor and the driver were to be provided by the contractor. The contractor was only entitled to a payment calculated at certain rates per student per month. In other words, the dominant nature of the contract was that it was not a contract for the hiring of the buses or vehicles but a contract which envisages provision of a service by the contractor under which he performs work of providing a facility for the transporting students and staff to and from the school.
In this view of the matter, the view which has been taken by the CIT(A) and affirmed by the Tribunal commends itself for acceptance. The CIT(A) placed reliance on Circular No.558 issued by the Board on 28 March 1990. In the view which we have taken, as a matter of first principle, on the interpretation of the provisions of section 194C and section 194I, the Circular dated 28 March 1990 need not really matter. We may only note that in Circular No.558 dated 28 March 1990, the Board clarified that the provisions of section 194C would have to be examined with reference to the terms and conditions of each contract. Having examined the issue and the terms and conditions governing contracts between the owners of buses and the State Road Transport Corporation, the Board opined that although the contract may appear to be a hiring contract, it was actually a service contract which would be governed by section 194C. The relevant conditions of the contract which were adverted to in the Board's Circular were as follows:
"(i) The owner of the bus shall give his bus on hire to the corporation for plying on notified routes;
(ii) The owner shall provide a driver, with a valid licence and P.S. Badge for the vehicle supplied by him, who shall follow the instructions of the authorised officials of the Corporation;
(iii) The owner shall make available the bus for 14 hours a day and complete the schedules given to him for the day;
(iv) The owner shall keep the bus road-worthy in terms of Chapter V of the Motor Vehicles Act, 1939 and rules made thereunder from time to time by carrying out necessary maintenance and repairs;
(v) The Corporation shall provide a conductor for the operation of service with necessary equipment for issuing tickets to the passengers as well as luggage;
(vi) The owner shall submit his claim twice in a month, once for the period from 1st to 15th and the other for the remaining part of the month, accompanied by a certificate issued by the Traffic Supervisor of the depot with regard to the distance operated during the respective periods; and
(vii) The Corporation shall pay the owner at the rate of Rs.............. as fixed cost per day in addition to Rs......... per km. operated as variable cost, etc., etc."
A subsequent Circular No.681 dated 8 March 1994 clarified that the term 'transport contract' would in addition to a contract for transportation and loading/unloading of goods also cover a contract for plying of buses, ferries, etc. along with staff (e.g., driver, conductor, cleaner, etc.) and a reference has also been made to the earlier Circular dated 28 March 1990. We have, however, rested this decision independent of the circulars and on a plain construction of the provisions.
In a judgment of a Division Bench of this Court in Assistant Commissioner of Income Tax (TDS), Noida Vs. M/s Lotus Valley Education Society, this Court had to deal with the issue as to whether the Tribunal was justified in holding that it was the provisions of section 194C and not of section 194I that would apply to a contract which was entered into by a school with a contractor for the transportation of the students and the staff from their homes to the school and back. The Tribunal in that case had held as follows:-
"We have carefully considered the rival submission in the light of material placed before us. A careful consideration of the assessment order would reveal that AO while holding that assessee is liable for deduction of tax at source under the provisions of Section 194-I of the Act has mainly rested his case on the ground that it is the "rent" as defined in explanation under Section 194-I and the assessee has paid rent in respect of buses utilized by him being in the nature of plant. In our opinion, simply for the reason that "rent" being explained under Explanation given u/s 194-I in respect of a plant will not make the relevant payments liable for deduction u/s 194-I. The sum and substance of the transaction has to be seen and it has to be decided that under which Section the case of the assessee would fall. If one goes by the logic adopted by the AO, then the same will also be equally applicable in respect of Section 194-C where also under Explanation-III to sub-section (2) of Section 194-C, the "work" has been defined or explained which according to clause (c) thereto includes "carriage of goods and passengers by any mode of transport other than by railways". According to the transport contract entered into by the assessee, the activity of the transport contractor will be a simple activity of carriage of passenger by any mode of transport other than by railways. The object of the assessee to enter into such agreement was a simple activity of carrying its students and staff from their homes to the school and similarly from school to their homes. The assessee has not responsibility whatsoever regarding the buses to be utilized for that purpose, which was the sole responsibility of the transport contractor. The transport contractor only was liable to keep and maintain the required number of buses for such activity at their own expenses with the specified standard therefore, the said contract is purely in the nature of services rendered by the transport contractor to the assessee. The assessee was not having any responsibility whatsoever regarding the transport vehicles used in such activity. As against that, "rent" which is defined in Explanation Section 194-I inter-alia is for the use "plant" which according to the AO includes buses. Here, according to the facts of the present case, assessee itself has not utilized the buses being plants but they were used by the transport contractor for fulfilling the obligations set out in the contract agreement. Therefore, the provisions of Section 194-I could not be applied to the facts of the present case and it has to be held that assessee has rightly deducted tax at source under the provisions of Section 194-C of the Act. Ground Nos. 2 & 3 raised in both the appeals are allowed."
The Division Bench of this Court dismissed the appeal filed by the revenue holding that the Tribunal did not commit any error of law in invoking section 194C which provides under Explanation III that work includes the carriage of goods and passengers by any mode of transport other than by railways.
The same view, as has been adopted by the Division Bench of this Court in Lotus Valley Education Society, was taken by a Division Bench of the Gujarat High Court in Commissioner of Income Tax (TDS) Vs. Reliance Engineering Associates (P.) Ltd.3 In that case, the assessee had engaged the service of a contractor for rendering transportation services. The contract was entered into for carriage of goods and passengers by vehicles. The Division Bench held as follows:
"On comparison of the two explanations added to Sections 194-I and 194-C of the Act, we are of the view that it was never the intention of the legislature to overlap any of the items mentioned within the meaning of 'rent', by including the same within the meaning of 'work' under Section 194-C of the Act. Since the agreement for carriage of goods by vehicles other than railways comes within the purview of explanation of 'work' within the meaning of Section 194-C of the Act, it necessarily follows that it was never the intention of the legislature to include the amount taken for hiring of such vehicles within the meaning of word 'rent'."
Reference has also been made to the decision of a Division Bench of the Kerala High Court in Three Star Granites (P.) Ltd. Vs. Assistant Commissioner of Income Tax, Circle-1(1)4. The assesee had entered into a contract for loading/unloading and transportation of granites within the mining area and outside. The contract before the Kerala High Court was clearly of a different nature and character than what was envisaged in the contract which came up for consideration before the Gujarat High Court in Reliance Engineering Associates and the Division Bench of this Court in Lotus Valley Education Society. The Kerala High Court held thus on a review of the contract:
"................. As correctly found by the tribunal, the agreement does not require the owner of the vehicle to do any work at all. It is the assessee who makes use of the vehicles and the equipment. He pays hire charges on the basis of the number of hours of use and thus clearly the appellant is not justified in contending that Section 194C applies............"
The Kerala High Court, in other words, found that all the work under the contract was required to be done by the assessee itself and no work within the meaning of section 194C was done by the owner of the vehicle. It was in these circumstances that the Division Bench of the Kerala High Court held that the provisions of section 194C were not attracted and that section 194I was applicable.
We are in respectful agreement with the principles which have been laid down in the three decisions referred to above.
In the view which we have taken, we have preferred to rest the judgment on the plain and natural meaning of the provisions of section 194C and section 194I. Consequently, we answer the questions of law by holding that the Tribunal was correct in holding that the liability of the assessee was to deduct tax at source under section 194C and not under section 194I.
The appeal is, accordingly, disposed of. There shall be no order as to costs.
Date:11.08.2014 SK (Dr. D.Y. Chandrachud, C.J.) (Dilip Gupta, J.)