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2005 (3) TMI 398 - AT - Income TaxApplicability of section 194C on manufacturer the product as per the requirement of the assessee - failure to Deduct tax at source on suppliers of packing material - Applicability of section 194C or 194J on the payment of reimbursement of actual expenses - valuation of perquisite for the purpose of deduction of TDS - residential accommodation to its managing director - Rent-free furnished accommodation to its managing director - expenditure incurred on payment of salary to drivers - maintenance and hire charges of AC as well as repairs and renewals towards the leased accommodation HELD THAT - It was a clear case of sale of goods by the said suppliers to the assessee-company and this was evident from the fact that sales-tax as well as excise duty was paid by the concerned suppliers on the packing material supplied to the assessee-company, wherever applicable. As rightly pointed out by the learned counsel for the assessee, the CBDT itself in cl. 7(b) of its Circular No. 681 issued on 8th March, 1994, has clarified that where the contractor undertakes to supply any article or thing fabricated according to the specifications, the property in such article or thing passes to the purchaser only after such article or thing is delivered and the contract thus being for sale of such article or thing, would be outside the purview of s. 194C. As such, considering all the facts and circumstances of the case and keeping in view the aforesaid decision of the Tribunal in the case of Wadilal Dairy International Ltd. 2000 (11) TMI 312 - ITAT PUNE as well as Circular No. 681, dt.8th March, 1994, issued by the CBDT, we hold that the learned CIT(A) was right in holding that the provisions of s. 194C were not applicable in respect of payments made by the assessee to the suppliers of packing material requiring any deduction of tax. Thus, we uphold his impugned order on this issue and dismiss ground No. 1 of the Revenue s appeal. Failure to deduct tax at source on reimbursement of actual expenses - It was a clear case of reimbursement of actual expenses incurred by the assessee and the same, therefore, was not of the nature of payment covered by s. 194J requiring the assessee to deduct tax at source therefrom. The CBDT Circular No. 715, dt. 8th Aug., 1995, relied upon by the AO in support of his case on this issue was applicable only in the cases where bills are raised for the gross amount inclusive of professional fees as well as reimbursement of actual expenses and the same, therefore, was not applicable to the facts of the present case, where bills were raised separately by the consultants for reimbursement of actual expenses incurred by them. Thus, we are of the view that the provisions of s. 194J were not applicable to the reimbursement of actual expenses and the assessee-company was not liable to deduct tax at source from such reimbursement. In that view of the matter, we uphold the impugned order of learned CIT(A) on this issue and dismiss the relevant grounds of the Revenue s appeal. Determination of value of perquisite - We are of the view that the perquisite value of the stay arrangement made by the assessee-company for its managing director in a hotel determined by the AO on the basis of actual hotel bill paid by it was not correct and the learned CIT(A) was fully justified in not upholding the same. Even the expenses of Rs. 3,47,216 incurred during the stay of managing director in a hotel were mainly on account of expenditure tax, luxury tax, laundry expenses, telephone and food, and the same being incidental to the stay of the managing director in a hotel, we are of the view that the same could not be considered as a separate perquisite. In that view of the matter, we hold that the learned CIT(A) was not justified in adding 25 per cent of such expenditure as perquisite provided by the assessee-company to its managing director in order to work out his salary income for the purpose of deduction of tax at source. His impugned order on this issue is, therefore, suitably modified and the AO is directed to accept the value of perquisite taken by the assessee on this count for estimating the salary for the purpose of deduction of tax at source. The assessee thus cannot be held responsible for short deduction of tax, if any, on this count u/s 201(1). Valuation of perquisite in respect of expenditure incurred on payment of salary to drivers - The valuation of perquisites on this count, therefore, was liable to be determined as per r. 3(iii)(c)(iv) as rightly done by the learned CIT(A) and not as per r. 3(iii)(c)(ii) as contended by the learned counsel for the assessee. Even the action of learned CIT(A) in attributing 50 per cent of the salary reimbursed by the assessee-company to its employees towards personal use was fair and reasonable in the facts and circumstances of the case, and there is nothing on record to justify any interference with the same. Thus, we find no infirmity in the impugned order of learned CIT(A) on this issue and upholding the same, we dismiss the relevant grounds of the Revenue s appeal as well as that of assessee s cross-objections. Maintenance and hire charges of AC as well as repairs and renewals towards the leased accommodation - In the present case, the AC provided in the accommodation of managing director was taken on hire by the assessee-company from a third party and, therefore, actual hire charges paid/payable for the said AC was liable to be included in the value of perquisite provided to the managing director on account of rent-free accommodation as rightly done by the AO and confirmed by learned CIT(A). Similarly, furniture and other incidental items were provided in the accommodation given by the assessee-company to its managing director costing Rs. 25,28,410 and value of this perquisite was to be calculated at 10 per cent per annum of the original cost of such furniture as specifically provided in r. 3(a)(iii), irrespective of whether the cost so incurred on account of furniture by the assessee-company was subsequently recovered by it from the subsequent occupant. Keeping in view these specific provisions contained in r. 3(a)(iii), we hold that the valuation of perquisite on account of providing AC and other furniture in the rent-free accommodation of managing director to the extent sustained by the learned CIT(A) was in accordance with law, especially the relevant Rules framed thereunder and there being no infirmity in his impugned order on this issue, we find no justifiable reason to interfere with the same. The same is, therefore, upheld, dismissing ground No. 2 of the assessee s cross-objection for financial year 1998-99 being C.O. In the result, all the appeals of the Revenue as well as cross-objections of the assessee being C.O.are dismissed, whereas the cross-objection of the assessee for financial year C.O. is partly allowed.
Issues Involved:
1. Deduction of tax at source under Section 194C for contract payments. 2. Deduction of tax at source under Section 194J for payments made to consultants. 3. Valuation of perquisite for accommodation provided to the director. 4. Valuation of perquisite for salary paid to drivers. 5. Valuation of perquisite for maintenance and hire charges of AC and repairs for leased accommodation. 6. Levy of interest under Section 201(1A). Issue-wise Detailed Analysis: 1. Deduction of Tax at Source under Section 194C: The Revenue's appeal for financial year 1998-99 questioned the non-deduction of tax at source on contract payments amounting to Rs. 39,17,581. The assessee, a private limited company engaged in manufacturing and distributing homeopathic and herbal medicines, procured printed packing materials from various suppliers. The AO held that these procurements were material contracts requiring tax deduction under Section 194C, based on the decision in Associated Cements Co. Ltd. vs. CIT and CBDT Circular No. 681. However, the CIT(A) found that the transactions were sales of goods, not contracts for work, as the suppliers paid sales tax and excise duty. The Tribunal upheld the CIT(A)'s decision, referencing the Pune Bench's ruling in Wadilal Dairy International Ltd. and CBDT Circular No. 681, confirming that Section 194C did not apply. 2. Deduction of Tax at Source under Section 194J: The Revenue's appeal for financial years 1995-96 to 1998-99 involved payments to M/s Indochem Techno Consultants. The AO treated reimbursements for car maintenance as part of professional fees, requiring tax deduction under Section 194J. The CIT(A) disagreed, noting that separate bills were issued for consultancy fees and actual expenses, and only the consultancy fees should be subjected to tax deduction. The Tribunal upheld this view, emphasizing that reimbursements of actual expenses without profit elements are not subject to Section 194J. 3. Valuation of Perquisite for Accommodation Provided to the Director: The managing director stayed in a hotel before being provided with suitable accommodation. The AO valued the perquisite based on the actual hotel bill, while the CIT(A) accepted the assessee's valuation at 20% of the salary. The Tribunal agreed with the CIT(A), referencing the case of R.V. Graafeillan, and ruled that the arrangement was akin to providing rent-free accommodation, thus the perquisite value should be based on salary, not actual expenses. 4. Valuation of Perquisite for Salary Paid to Drivers: The AO treated the reimbursement of drivers' salaries as a perquisite. The CIT(A) ruled that 50% of the reimbursement could be attributed to personal use. The Tribunal upheld this decision, noting that the drivers were employed by the employees, not directly by the company, and the valuation should follow Rule 3(iii)(c)(iv) of the IT Rules. 5. Valuation of Perquisite for Maintenance and Hire Charges of AC and Repairs for Leased Accommodation: The assessee provided a rent-free furnished accommodation to its managing director, incurring expenses on AC maintenance and repairs. The AO added these as perquisites, while the CIT(A) limited the perquisite value to the period the accommodation was occupied. The Tribunal upheld the CIT(A)'s decision, stating that the valuation should include actual hire charges for AC and 10% of the cost of furniture as per Rule 3(a)(iii) of the IT Rules. 6. Levy of Interest under Section 201(1A): The CIT(A) directed the AO to allow consequential relief for interest under Section 201(1A), based on the final determination of short deduction of tax. The Tribunal upheld this, noting that interest is compensatory and only applicable where there is a failure to deduct or remit tax. Conclusion: The Tribunal dismissed the Revenue's appeals and the assessee's cross-objections for financial years 1995-96 to 1998-99, except for partly allowing the cross-objection for financial year 1998-99 regarding the valuation of perquisite for accommodation.
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