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2014 (1) TMI 343 - AT - Income TaxDisallowance u/s 40(a)(ia) - Held that - The modus of obtaining the Government contracts, the sequence and frequency of execution of the contracts clearly show that the assessee as a partnership firm secured contracts and given to its partners with a collective responsibilities and liabilities jointly and severally liable towards the owners for the execution of the contracts in accordance with the contract of the business as per clause (g) of the partnership deed - They have demarcated the nature of the contracts into principal contracts and sub-contracts for the purpose of identifying the work handled by the partners and for the purpose of accounting contract receipts and payments. In order to establish a relationship of contractor and sub- contractor, it is necessary to show that the parties have acted in such a manner conducive to uphold a contractor-sub contractor relationship when there is a strong case of interlacing of finance and funds, interdependence of responsibilities, interconnection of activities - There is no basis for coming to a conclusion that there existed a relationship of contractor vis-a-vis sub-contractor As per section 20 of the Indian Contract Act of 1872 - Where both parties to an agreement are under a mistake as to a matter of fact, essentially to the agreement, the agreement is void - The formats of the agreement entered into with the partners and the styling of accounts prepared by them are products of mistakes of fact, and therefore, the agreement is not to be relied on to hold that the assessee is acting in the status of contractors vis-a- vis sub-contractors. The question of TDS in the present case cannot be considered only on the basis of the agreements entered into between the assessee and its partners - The liability u/s 194C(2) is cast on the assessees only when they are in fact and in substance acting in the relationship of contractors and sub contractors - When the said provision relating to deduction of tax at source is not applicable for the assessee for the reasons stated above, violation u/s 40(a)(ia) does not arise - Payments made under the nomenclature of sub- contractors are not liable to be disallowed. There is no sub-contract between JV and the constituents and since the JV has been formed only to procure contract works from the Government and the contract is being executed by the constituent partners in their sharing ratio 60 40 as per the terms of JV, it cannot be said that the JV is a contractor and its constituents are sub- contractors - Decided in favour of assessee.
Issues Involved
1. Whether the assessee is liable to deduct TDS on payments made to its partners under section 40(a)(ia) of the IT Act. Detailed Analysis Issue 1: Liability to Deduct TDS on Payments to Partners The primary issue is whether the assessee (a joint venture) is liable to deduct TDS on payments made to its partners, which would attract the provisions of section 40(a)(ia) of the IT Act. Facts of the Case: - Two partnership firms, M/s. Hindustan Engineers Syndicate and M/s. Ratna Constructions, entered into a joint venture (JV) agreement on 16.08.2004. - The JV agreement outlined roles, responsibilities, and participation ratios (Hindustan 60%, Ratna 40%). - Both firms were later converted into private limited companies and executed a new partnership deed on 31.08.2007. - The JV was awarded infrastructure contracts, and receipts were distributed to the partners in the agreed ratio. - The Assessing Officer (AO) questioned the non-deduction of TDS on sub-contract expenses of Rs. 111,09,23,018/-. Arguments by the Assessee: - The assessee argued that the JV was formed solely to win contracts, not to make profits. - The relationship between the JV and its members was not that of a contractor and sub-contractor. - The assessee relied on various judicial decisions to support its claim that TDS provisions were not applicable. Arguments by the Revenue: - The AO contended that the payments were in the nature of sub-contract payments and not capital repayments, remuneration, or interest to partners. - The AO disallowed the sum under section 40(a)(ia) due to non-deduction of TDS. - The CIT(A) upheld the AO's decision, stating that the assessee failed to deduct TDS on sub-contract expenses. Tribunal's Analysis and Findings: - The Tribunal examined the partnership deed and the nature of the JV. - It was noted that the JV was formed for the purpose of executing contracts, and the partners were jointly and severally liable for the execution of the contracts. - The Tribunal emphasized the need to look beyond the formalities of agreements and accounts to understand the real nature of the relationship and transactions. - The Tribunal concluded that the partners were not sub-contractors but were executing the contracts through joint efforts. - The Tribunal found no basis for the AO's conclusion that there existed a contractor-sub-contractor relationship. - The Tribunal held that the liability under section 194C(2) arises only when there is a contractor-sub-contractor relationship, which was not the case here. - The Tribunal also referred to section 70 of the Contract Act, which deals with the obligation of a person enjoying the benefit of a non-gratuitous act, to prevent unjust enrichment by the Revenue. Conclusion: - The Tribunal concluded that the relationship created by the partnership deed did not constitute a sub-contractor relationship. - The provisions of section 194C were not applicable, and hence, the provisions of section 40(a)(ia) could not be invoked. - The disallowance of Rs. 111,09,23,018/- made by the AO was deleted. Judgment: - The appeal of the assessee was allowed. - The order pronounced in the open Court on 18/12/2013. Summary The Tribunal held that the assessee (a joint venture) was not liable to deduct TDS on payments made to its partners, as the relationship between the JV and its partners was not that of a contractor and sub-contractor. Consequently, the provisions of section 40(a)(ia) could not be invoked, and the disallowance made by the AO was deleted. The appeal of the assessee was allowed.
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