2010 (12) TMI 745 - AT - Income Tax

TDS u/s 194C or 194J - circular 715 dated 08.08.1995 - TDS on labour charges only or on full value of contract - assessee was asked to show cause as to why the material used in the repair of transformers be not charged to tax along with labour charges - No fee was charged by the contractors for providing knowledge and vesting it in the assessee, could not be utilized by the assessee for repair of its transformer on its own in the future, i.e., after the contract was over - Once, the contract involved undisputedly had 4 components, TDS was liable to be deducted only with reference to the labour charges and it has rightly been so held by the CIT(A) - Decided in favour of the assessee

Summary

Issues:
- Interpretation of TDS provisions for payment made for repairing of transformer
- Applicability of CBDT circular on tax deduction from gross amount
- Application of section 194C and 194J
- Assessment of interest under section 201(1A) for non-deduction of TDS
- Appeal against CIT(A)'s decision

Interpretation of TDS provisions for payment made for repairing of transformer:
The department's appeal questioned the CIT(A)'s decision on the deductibility of TDS on payments for transformer repair. The department argued that tax should be deducted on the gross amount, including material costs, based on CBDT circular 715. However, the Tribunal found that the contract had distinct components, and TDS was correctly deducted only on labor charges, as per the contract terms. The Tribunal cited precedents and held that the interest was not chargeable due to the correct deduction method.

Applicability of CBDT circular on tax deduction from gross amount:
The department contended that tax should be deducted from the gross amount, including reimbursements, as per CBDT circular 715. However, the Tribunal ruled that the circular did not apply in this case. The Tribunal emphasized that TDS was correctly deducted based on the specific contract terms, which separated labor charges from material costs.

Application of section 194C and 194J:
The AO applied section 194 of the Act for non-deduction of TDS, treating the assessee as in default. However, the Tribunal disagreed, stating that the contract did not involve technical services under section 194J. The Tribunal highlighted that the contract had distinct components, and TDS was appropriately deducted only on labor charges, not on material costs.

Assessment of interest under section 201(1A) for non-deduction of TDS:
The AO charged interest under section 201(1A) for non-deduction of TDS. However, the Tribunal found no merit in this charge, as TDS was correctly deducted based on the contract terms. The Tribunal upheld the CIT(A)'s decision to allow the assessee's appeals for both years.

Appeal against CIT(A)'s decision:
The department appealed against the CIT(A)'s decision to allow the assessee's appeals. The Tribunal rejected the department's grounds, upholding the CIT(A)'s order. The Tribunal emphasized that TDS was appropriately deducted based on the contract terms, and interest was not chargeable. The appeals filed by the department were dismissed, affirming the CIT(A)'s decision.