2017 (12) TMI 190 - AT - Income Tax

TDS u/s 194C - non deduction of tds on payments made to subcontractors - subcontract relationship between JV partners - Held that - As per the agreement, all the costs, liability and bank guarantees will be arranged by only AMRCL and KCL will only be a facilitator in procuring the orders. As per our view, JV is only an arrangement between two entities on mutual agreement, JV can be any type depending upon the mutual agreements and object of such agreement. The JV can be run on similar to partnership basis or mere an entity to secure the orders or may be just to execute the work orders. In the given case, members of JV decided to form a JV only to secure the orders and execution of the orders will be done by one of the constituents of the JV. JV is formed for the benefit of the individual members and a business is carried on for the benefit of the businessman. Thus there is no subcontract relationship existed between JV partners. Accordingly, the work executed by the AMRCL is not in sub-contract. See Hindustan Ratna case 2015 (2) TMI 1257 - ITAT HYDERABAD . Accordingly, ground raised by revenue is dismissed. Estimation of the profit of the business as well as disallowance u/s 40(ba) - disallowing all the administrative expenses - Held that - As the assessee has not shown any profit in the business and the assessee being used as a Passover entity and set up only to secure the order, the AO has the option of disallowing all the administrative expenses, if any. Since the assessee has not shown any profit nor paid any remuneration to any of the members, the provisions of section 40(ba) will not be attracted. Coming to the execution of the contract awarded to the assessee, we have already adjudicated that it does not amount to sub-contract. The payment made to AMRCL will never be considered as remuneration, but, paid for execution of back to back work order. Assesse has already considered as revenue in case of AMRCL and offered for taxation. It shows that the full value of revenue is already offered for taxation, by following the golden rule that a source of income can be taxed only once. The source of income is a work contract given by the corporation and the same was offered to tax by AMRCL. Same source of income can never be subjected to tax twice, first by the assessee and followed by AMRCL. As far as revenue is concerned, that source is already taxed, in the hands of AMRCL, therefore, it need not be taxed again in the hands of assessee. - Decided in favour of assessee.

Summary

Issues:
- Disallowance u/s 40(a)(ia) of the IT Act for failure to deduct TDS on subcontractor payments.
- Estimation of profit and disallowance u/s 40(ba) of the IT Act.
- Tax liability of an Association of Persons (AOP) engaged in contract work.

Analysis:
1. Disallowance u/s 40(a)(ia) of the IT Act:
- The assessee, an AOP formed by two entities for a road construction project, claimed to be a pass-through entity. The Assessing Officer disallowed a payment made to a constituent as a subcontractor due to failure to deduct TDS. The CIT(A) deleted the disallowance, stating that the members were not subcontractors, thus no TDS was required. The Tribunal upheld this decision, emphasizing that the JV partners were not in a subcontract relationship, as per previous rulings.

2. Estimation of profit and disallowance u/s 40(ba) of the IT Act:
- The CIT(A) estimated the assessee's profit at 8% of gross turnover and made a disallowance u/s 40(ba). However, the Tribunal found that the JV was formed solely to secure orders, not to execute work, and hence no profit was generated. As the JV did not show any profit or pay remuneration, the provisions of section 40(ba) were deemed inapplicable.

3. Tax liability of an AOP engaged in contract work:
- The Tribunal clarified that the JV was a mutual agreement between entities to secure orders, with one member executing work. The Tribunal held that the payment to the executing member was not remuneration but for work execution. As the revenue from the work was already taxed in the executing member's hands, it should not be taxed again in the JV's hands. The Tribunal allowed the assessee's appeal and dismissed the revenue's appeal, emphasizing the one-time taxation principle.

In conclusion, the Tribunal ruled in favor of the assessee, clarifying the tax treatment of payments within a JV, disallowance of TDS, estimation of profit, and the unique tax implications for AOPs engaged in contract work. The judgment highlights the importance of understanding the nature of business arrangements and the tax implications arising from them.