2011 (2) TMI 488 - AT - Income Tax

Disallowance u/s 40(a)(ia) - TDS u/s 194C - assumption of Payment in kind - On the basis of the quantity of the wheat supplied by the assessee to AIL the assessee has collected the end products namely Atta or Dalia and is not bothered about the other products and wastage arising therefrom. In other words under the terms of agreement by-products waste and the residual of the wheat after manufacture belong to AIL and not to the assessee. Nowhere in the books of the assessee the assessee has made any payment towards the services rendered by AIL in producing the Atta and Dalia for and on behalf of the assessee in the packets and containers provided by the assessee in terms of the agreement. - AO has invoked the provisions of section 194C and was of the opinion that even under the terms of the agreement the assessee is under an obligation to deduct tax at source on this job work. Held that - which is just exchange of goods for goods and does not involve any cash outflow. Although services were taken it is difficult to say that the residuals and the losses left by the assessee in favour of AIL are purely consideration for the job that is done. The market fluctuations in the price structure of the raw material and the end product cannot be just ignored in the whole transaction nor the process loss. The process loss could be either more or less than the percentage agreed to between the parties. - the residual that is left by the assessee apart from covering the labour cost of processing also includes the protection from market fluctuations as also protection from adverse process loss. - Decided in favor of assessee.

Issues Involved:
1. Whether the assessee was required to deduct tax at source under section 194C of the Income Tax Act on the processing charges retained by M/s Ahaar International Ltd. (AIL).
2. The valuation of the by-products retained by AIL and the corresponding disallowance under section 40(a)(ia) of the Income Tax Act.

Detailed Analysis:

Issue 1: Obligation to Deduct Tax at Source under Section 194C

The primary issue revolves around whether the assessee was required to deduct tax at source on the processing charges retained by AIL. The Assessing Officer (AO) held that the assessee should have deducted tax at source on the processing charges, which were calculated based on the quantity of wheat supplied and the finished products (atta and dalia) received. The AO contended that the non-deduction of tax attracted disallowance under section 40(a)(ia) of the Income Tax Act.

The assessee argued that the arrangement with AIL was a job work contract and did not involve any payment for carrying out any work, including the supply of labor. The assessee emphasized that there was no payment or credit in the books of account that required tax deduction at source. The CIT(A) partially agreed with the assessee, reducing the disallowance but still holding that some valuation was necessary.

Upon review, it was found that the assessee supplied wheat and received atta and dalia in return, with the by-products and residuals retained by AIL. The transaction was treated as a barter or exchange rather than a works contract involving payment. The tribunal concluded that the assessee was not under an obligation to deduct tax at source as there was no payment or credit for the services rendered. The provisions of section 194C were not applicable as the transaction did not involve any monetary consideration.

Issue 2: Valuation of By-Products and Disallowance under Section 40(a)(ia)

The AO calculated the processing charges retained by AIL based on the quantity of wheat supplied and the finished products received, resulting in a disallowance of Rs. 1,11,53,566 for the assessment year 2006-07. The CIT(A) reduced this amount to Rs. 40,00,000, considering the by-products retained by AIL, such as choker, cattle feed, and refraction, and the certificate from the Wholemeal Atta Manufacturers Association.

The tribunal examined the agreement between the assessee and AIL, noting that the by-products and residuals were retained by AIL as part of the processing charges. The tribunal agreed with the CIT(A) that the valuation should consider the by-products and not just the atta and dalia. However, the tribunal emphasized that the entire transaction was an exchange of goods without any monetary payment, and the assessee did not claim any deduction for the processing charges.

The tribunal concluded that the provisions of section 40(a)(ia) were not applicable as the assessee was not required to deduct tax at source. The transaction was treated as a barter, and the residuals retained by AIL were not purely for the job work but also included protection from market fluctuations and process loss.

Conclusion:

The tribunal allowed the assessee's appeal, holding that the assessee was not required to deduct tax at source under section 194C and that the disallowance under section 40(a)(ia) was not justified. The revenue's appeal was dismissed, and the order was pronounced on 28th February 2011.

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