2011 (4) TMI 874 - AT - Income Tax

Payments to contractors - supply of material - Non deduction of TDS - assessee had incurred expenses for cutting of trees to the tune of more than Rs.2 crores - Held that - It may be seen that the contractor not only paid compensation to the owners but also carried out the work of cutting, transporting and block of cut wood and as such there was involvement of work and labour which attracts the provisions of section 194C - The assessee s contention is lacking conviction as had the removal of trees and destruction of standing crops being an isolated incident while installing of a tower, it would have been without any iota of hesitation, accepted the theory of the assessee, however, the amounts paid towards cutting of trees were running into crores of rupees which unambiguously exhibit the enormity of trees have been removed to facilitate for installation of towers and also subsequent hauling of uprooted trees to the storing places of the assessee. These twin works have been executed by the contractors on behalf of the assessee. In such an event, one could safely infer that the assessee had required, rather assigned the contractors to pay compensation to the farmers for losing of their trees/crops etc., and for removing and carting of the logs to its storing places. The assessee had neither in the course of proceedings before the AO nor before the FAA came up with the details of compensation of amounts so paid to the farmers. Even at the time of hearing before this Bench, the assessee had not come up with any details and the quantum of compensation so paid to the farmers. Thus in view of the above this issue should go back on the file of the AO for fresh consideration with specific directions to the effect that in respect of compensation paid; two issues were interlinked compensation amounts for loss of trees/crops and removal of trees and allied works executed by the respective contractors. Survey work - assessee contented that survey work fall within the ambit of professional service . - Held that - The survey work undertaken by the assessee does fall within the ambit of professional service as the assessee s argument was not backed with any documentary evidence to suggest that it had, in fact, incurred an expenditure to the extent of Rs.17,08,766/- only. The case relied on by the assessee is rather misplaced and cannot be of any help to the assessee - Appeal is partly allowed

Issues Involved:
1. Treatment of the assessee as 'assessee in default' under Section 201(1) for non-deduction of TDS on payments made to contractors for supply of materials.
2. Levy of interest under Section 201(1A) for non-deduction of TDS.
3. Non-deduction of TDS on compensation paid for cutting trees or crop losses.
4. Incorrect adoption of the amount paid for survey work.

Detailed Analysis:

I. Treatment of the Assessee as 'Assessee in Default' under Section 201(1) for Non-Deduction of TDS on Payments Made to Contractors for Supply of Materials:
The assessee was engaged in the business of electricity transmission and had entered into agreements with contractors for setting up electrical substations. The contracts were divided into supply of materials, erection, and civil work. The Revenue noted that while the assessee deducted TDS on civil work and erection, no TDS was deducted on payments towards the supply of materials. The Assessing Officer (AO) concluded that the assessee should have deducted TDS on the supply portion as well and treated the assessee as 'assessee in default' under Section 201(1).

The CIT (A) sustained the AO's action, stating that the contracts were indivisible and involved both supply and work. However, the Tribunal found that the contracts were separate for supply, erection, and civil work, and the assessee was not obligated to deduct TDS on the supply portion. The Tribunal cited the Finance Act (No.2) of 2009, which clarified that TDS under Section 194C does not extend to the supply of materials. Therefore, the Tribunal held that the assessee could not be treated as 'assessee in default' for non-deduction of TDS on the supply portion.

II. Levy of Interest under Section 201(1A) for Non-Deduction of TDS:
Since the Tribunal concluded that the assessee was not obligated to deduct TDS on the supply portion, the question of charging interest under Section 201(1A) did not arise. The Tribunal emphasized that when there was no obligation to deduct tax, there could be no interest charged for non-deduction.

III. Non-Deduction of TDS on Compensation Paid for Cutting Trees or Crop Losses:
The assessee contended that the payments made to contractors for compensating farmers for cutting trees or crop losses were reimbursements and did not attract TDS under Section 194C. The CIT (A) and AO held that these payments involved work and labour, thus attracting TDS under Section 194C.

The Tribunal found that the contractors were not only paying compensation but also removing trees and transporting them, which involved work and labour. However, the Tribunal noted that the compensation amounts paid to farmers, if quantified separately, would not attract TDS under Section 194C. The Tribunal directed the AO to quantify the compensation paid and apply TDS provisions only to the work and labour portion.

IV. Incorrect Adoption of the Amount Paid for Survey Work:
The assessee argued that the AO incorrectly adopted the amount paid for survey work as Rs.40.06 crores instead of Rs.17.08 lakhs. The CIT (A) did not address this issue. The Tribunal remitted this issue back to the AO for verification and correction, directing the assessee to provide relevant details.

Conclusion:
The Tribunal partly allowed the appeals, holding that the assessee was not an 'assessee in default' for non-deduction of TDS on the supply portion and directing the AO to re-examine the compensation payments and survey work amounts. The order emphasized the importance of distinguishing between supply contracts and work contracts and the need for accurate quantification in applying TDS provisions.

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