2017 (10) TMI 1441 - AT - Income Tax

TDS u/s 194C OR 194J - short deduction of tds - work under taken by the sub-contractor - demand u/s 201 and 201(l A) - whether sub-contractor company is doing civil construction work and payment for that is covered u/s 194C of the act only? - HELD THAT - Section 194J mandates deduction of tax at 10% in respect of payments made towards fee for technical services . Technical services has been defined in Explanation 2 to clause (vii) of sub-section (l) of section 9 In the instant case the appellant is executing a works contract (Thermal Power Plant) for its customer. This involves men machinery material and other tangible and intangible in goods. For the construction of a Thermal Power Plant the services of technical personnel including engineers is inevitable. The scope of the sub-contract was actual execution of work involving the services of technical personnel as well as non-technical personnel. However. what the appellant intended to get from its subcontractor was a physical output a tangible structure and not merely the services of its qualified professional engineers/staff. The contract between the two parties is for work which clearly satisfies the provisions of section 194C and does not by any stretch of imagination attract the provisions of section 194J In any case the sub-contractor has already offered the payments received from the appellant tax. as per the evidence furnished by the AR. As per section 191 of the Act. A person shall be treated as assessee in default only when (i) he does not deduct tax at source as required under the Act from the payments made to the assessee and (ii) the assessee has also failed to pay such tax directly. In view of the above the appellant cannot be deemed as an assessee in default and the disputed short deduction of tax cannot be demanded from the appellant as per the case law of Hon ble Supreme Court in Hindustan Coca Cola Beverages (P.) Ltd. V. CIT. 2007(8) TMI 12 Supreme Court . This ratio has also been inserted subsequently w.e.f. 01.07.2012 as proviso to section 201 (I) of the Act. We confirm the finding of the Id CIT(A) that tax on such payment to subcontractor was required to be deducted 194C of the Act and same was complied with by the assessee. Therefore there is no short deduction of tax at source u/s 201 of the Act and hence there cannot be any interest liability a/s 201(IA) of the Act. Hence we dismiss the appeal Of the Revenue.

Summary

Issues Involved:
1. Whether the order passed by the Assessing Officer (AO) is bad in law and facts.
2. Whether the payments to the sub-contractor should be treated under section 194J or section 194C of the Income Tax Act.
3. Whether the sub-contractor should be considered a company of professionals or a civil construction company.
4. Whether the appellant can be deemed an assessee in default for short deduction of tax.

Issue-wise Detailed Analysis:

1. Legality of the AO's Order:
The appellant contended that the order passed by the AO was bad in law and facts and should be quashed. The appellate tribunal evaluated the AO's decision and the CIT(A)'s order, ultimately agreeing with the CIT(A) that the AO's interpretation was incorrect and that the order was flawed in law and facts.

2. Applicability of Section 194J vs. Section 194C:
The primary issue was whether the work undertaken by the sub-contractor should be covered under section 194J (fees for technical services) or section 194C (payments to contractors). The AO contended that the payments should fall under section 194J, subjecting them to a 10% tax deduction. The CIT(A) and the tribunal, however, found that the work involved construction activities, which are explicitly excluded from the definition of technical services under Explanation 2 to section 9(1)(vii). The tribunal noted that the appellant's activities involved physical construction work, such as grounding, welding, and erection, which are beyond the scope of technical services as defined in section 9. Therefore, the payments were rightly subjected to tax deduction under section 194C, not section 194J.

3. Nature of the Sub-contractor's Services:
The AO considered the sub-contractor as a company of professionals, implying that the services provided were technical in nature. However, the CIT(A) and the tribunal found that the sub-contractor was engaged in civil construction work. The tribunal emphasized that the contract involved tangible construction activities requiring both technical and non-technical personnel. The services provided by the sub-contractor included erection, installation, and commissioning of parts of a thermal power plant, which are classified under section 194C as construction work and not technical services.

4. Assessee in Default for Short Deduction of Tax:
The tribunal examined whether the appellant could be deemed an assessee in default for the alleged short deduction of tax. It was noted that the sub-contractor had already paid the taxes on the payments received from the appellant. According to section 191 of the Act, a person is treated as an assessee in default only if they fail to deduct tax at source and the recipient also fails to pay the tax. Since the sub-contractor had paid the tax, the appellant could not be considered in default. This was supported by the Supreme Court's decision in Hindustan Coca Cola Beverage (P) Ltd. v. CIT, which was also reflected in the proviso to section 201(1) effective from 01.07.2012.

Conclusion:
The tribunal upheld the CIT(A)'s decision that the payments to the sub-contractor were rightly subjected to tax deduction under section 194C and not section 194J. Consequently, there was no short deduction of tax, and the appellant was not liable for any interest under section 201(1A). The revenue's appeal was dismissed, confirming that the appellant complied with the tax deduction requirements under section 194C. The order was pronounced in the open court on 26.10.2017.