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Issues involved: Challenge to Circular No. 681 dated March 8, 1994, of the Central Board of Direct Taxes regarding the applicability of section 194C of the Income-tax Act, 1961 to payments made to advertising agencies for professional services.
Scope and Ambit of Section 194C: The petitioners, an association of advertising agencies, challenged the circular based on the interpretation of section 194C of the Act. The Central Board of Direct Taxes reversed its interpretation after 20 years, citing a Supreme Court decision. The High Court previously dealt with similar issues in cases involving professionals like solicitors and transport operators, where it was held that section 194C does not apply to professional fees or transport contracts. The court noted that previous circulars had clarified that section 194C applies only to works contracts and labour contracts, not service contracts. Interpretation of Supreme Court Decision: The High Court analyzed the Supreme Court decision in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 and concluded that it did not expand the scope of section 194C. The Supreme Court affirmed that section 194C applies to both works contracts and labour contracts, contrary to the assessee's argument that it only applied to works contracts. The High Court emphasized that the Supreme Court's decision aligned with the Central Board of Direct Taxes' historical interpretation of section 194C. Judgment and Conclusion: Based on its previous decisions and the interpretation of the law, the High Court held that the Circular No. 681 of 1994 was illegal and lacked jurisdiction in mandating deduction at source from payments to advertising agencies for professional services. Consequently, the writ petition was allowed, and no costs were awarded. The court rejected the application for a stay of the order, emphasizing the circumstances of the case.
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