2014 (2) TMI 74 - HC - Income Tax

TDS u/s 194C - Disallowance for non-deduction of tax at source - transporting the employees of Institute of Plasma Research - Held that - Relying upon the decision in CIT v. Prashant H. Shah 2013 (1) TMI 592 - GUJARAT HIGH COURT - For application of section 194C(2) of the Act what was necessary was a relationship between the contractor and sub-contractor and not merely be hiring of an agency by the contractor during the course of execution of the work - In the case of assessee such vital requirement of relationship of a contractor and subcontractor between the assessee and the transporters was missing - The Revenue did not bring out any material to establish that the owner of the vehicles performed the work of transportation - The entire task of transportation of employees and the guests was to be performed by the contractor The assessee had not assigned it to a subcontractor - The assessee had merely hired the vehicles for performing its part of the contract with IPR - The work of transportation or part thereof was assigned to a subcontractor was rightly not accepted by the Tribunal - The Tribunal was perfectly justified in holding that liability to deduct tax at source in the present case do not arise - Decided against Revenue.

Summary

Issues Involved:
1. Whether the assessee was required to deduct tax at source under Section 194C of the Income Tax Act.
2. Whether the payment made by the assessee for hiring vehicles should be disallowed under Section 40(a)(ia) of the Income Tax Act due to non-deduction of tax at source.

Issue-wise Detailed Analysis:

1. Requirement to Deduct Tax at Source under Section 194C:
The primary issue revolves around whether the assessee was obligated to deduct tax at source under Section 194C of the Income Tax Act for the payments made towards hiring vehicles. The Assessing Officer (AO) argued that the payments made by the assessee for hiring vehicles from a private agency were subject to tax deduction under Section 194C, which deals with payments to contractors. The AO contended that the assessee was required to deduct tax at source, as the payment was for "carrying out any work" in pursuance of a contract, which included the carriage of passengers by any mode of transport other than railways, as per Clause (c) of Explanation III to Section 194C. The AO cited judicial interpretations and Board's Circular No. 681 to support this view, ultimately disallowing the expenditure under Section 40(a)(ia) for non-compliance with Section 194C.

2. Disallowance under Section 40(a)(ia) due to Non-deduction of Tax at Source:
The assessee contended that the payments were made for renting or hiring vehicles and not for any service of carriage of passengers, thus falling outside the purview of Section 194C. The appellate authority, CIT [A], upheld the AO's decision, emphasizing that the terms of the agreement between the assessee and the Institute of Plasma Research (IPR) did not support the assessee's claim. However, the Tribunal reversed this decision, noting that the assessee was responsible for the transportation work and not the vehicle owners from whom the vehicles were hired. The Tribunal concluded that the relationship between the assessee and the vehicle owners was not that of a contractor and subcontractor, thus Section 194C was not applicable.

Judgment Analysis:
The High Court examined the terms of the agreement between the assessee and IPR, highlighting several clauses that outlined the responsibilities of the contractor, including providing and maintaining vehicles, ensuring timely transportation, and bearing costs related to fuel, maintenance, and staff wages. The agreement prohibited subcontracting without prior consent from IPR. The Court found that the entire task of transportation was assigned to the assessee, who merely hired vehicles to fulfill its contractual obligations, without delegating any part of the work to a subcontractor. The Court referred to a previous judgment in the case of CIT v. Prashant H. Shah, which clarified that for Section 194C(2) to apply, there must be a clear contractor-subcontractor relationship. In this case, such a relationship was absent, as the assessee retained full responsibility for the transportation work.

Conclusion:
The High Court upheld the Tribunal's decision, concluding that the payments made by the assessee for hiring vehicles did not fall under Section 194C, and thus, the disallowance under Section 40(a)(ia) was not justified. The appeal by the Revenue was dismissed, with the Court finding no question of law arising from the Tribunal's judgment.