2016 (6) TMI 90 - AT - Income Tax

TDS u/s 194J OR 194C - service provided by the contractor as technical services - assessee in default u/s 201(1)- whether the contract entered into by the assessee with M/s. Divine Establishment, is one for supply of manpower for execution of works contract attracting TDS provisions of section 194C or is the contract for providing technical services attracting the provisions of section 194J? - Held that - whether the contract entered into by the assessee with M/s. Divine Establishment, is one for supply of manpower for execution of works contract attracting TDS provisions of section 194C of the Act or is the contract for providing technical services attracting the provisions of section 194J of the Act Once the recipient assessee has paid the taxes on the considerations received from the deductor, than the A.O. cannot hold the assessee as an assessee in default in view of the provisions of section 191(1) of the Act and also in view of the circular issued by the CBDT vide circular no.275/201/95/IT(b) on 29.1.1997. This position has further strengthened by the decision of Hon ble Supreme Court, in the case of Hindustan Coca-Cola Beverages Pvt. Ltd. (2007 (8) TMI 12 - SUPREME COURT OF INDIA ) wherein held that no demand can be visualized, once the assessee proved to the satisfaction of the officer incharge of TDS that the recipient has considered the payment and discharged the tax liability. In the present case on hand, on perusal of the documents available on record, we find that the assessee has furnished the income tax returns on the recipient for the relevant assessment years. The assessee also furnished a certificate from the recipient, wherein the recipient has categorically stated that he has paid the taxes on the consideration received from the assessee company. Therefore, we are of the opinion that the A.O. was not correct in coming to the conclusion that the assessee as an assessee in default u/s 201(1) of the Act. Therefore, we are of the view that on both counts, the demand raised by the A.O. cannot sustain in the eyes of law. - Decided in favour of assessee

Summary

Issues Involved:
1. Classification of the nature of services provided by the contractor and the applicable TDS provisions (Section 194C vs. Section 194J).
2. Applicability of Section 191 and the CBDT circular regarding non-enforcement of TDS demand if the recipient has paid taxes.

Detailed Analysis:

Issue 1: Classification of Services and Applicable TDS Provisions

The primary issue was whether the services provided by the contractor, M/s. Divine Establishment, for the extraction of limestone should be classified under Section 194C (works contract) or Section 194J (technical services) of the Income Tax Act, 1961.

The Assessing Officer (A.O.) argued that the services provided were technical in nature, requiring expertise in operating heavy earth-moving machinery (HEMM) and thus fell under Section 194J. The A.O. noted that the contractor issued invoices for technical services, which indicated the provision of technical expertise rather than mere labor supply. Consequently, the A.O. treated the assessee as an assessee in default under Section 201(1) for not deducting TDS under Section 194J.

The assessee contended that the contract was for the supply of labor for the execution of a works contract, which should be covered under Section 194C. The assessee provided the machinery, and the contractor was responsible for deploying manpower to operate the machinery and extract limestone. The payment was made on an hourly basis, and the terms of the agreement specified that the contractor was to supply trained manpower, not technical services.

The CIT(A) supported the assessee's view, holding that the services provided were indeed for the supply of labor for a works contract. The CIT(A) emphasized that the contractor used the machinery provided by the assessee and was responsible for deploying the necessary manpower to operate the machinery. Therefore, the CIT(A) concluded that the payments were covered under Section 194C, not Section 194J.

Issue 2: Applicability of Section 191 and CBDT Circular

The assessee alternatively argued that even if the payments were considered under Section 194J, the recipient contractor had already paid taxes on the income received, as evidenced by the contractor's income tax returns and a certificate stating that taxes were paid on the consideration received from the assessee. According to Section 191 and the CBDT circular no.275/201/95-IT(b) dated 29.1.1997, no demand should be enforced under Section 201(1) if the recipient has paid the taxes.

The CIT(A) and the Tribunal agreed with the assessee's alternative plea. They noted that the recipient contractor had indeed paid taxes on the income, and the assessee had provided sufficient evidence to prove this. Therefore, the Tribunal held that the A.O. was incorrect in treating the assessee as an assessee in default under Section 201(1) for not deducting TDS, as the taxes were already paid by the recipient.

Conclusion:

The Tribunal dismissed the revenue's appeals and upheld the CIT(A)'s order, concluding that:
1. The services provided by the contractor fell under the definition of a works contract covered by Section 194C, not technical services under Section 194J.
2. Even if the services were considered technical, the recipient had paid the taxes, and hence, no demand could be enforced under Section 201(1) as per Section 191 and the relevant CBDT circular.

The Tribunal directed the A.O. to delete the additions made under Section 201(1) of the Act. The judgment was pronounced in the open court on 29th April 2016.