2024 (11) TMI 653 - HC - Income Tax

TDS u/s 194C - capital grant subsidy given by the National Highways Authority of India (NHAI) to its Concessionaires - HELD THAT - It is the primary obligation of the Concessionaire to raise funds for the purposes of implementation of the project. The project itself is handed over to the Concessionaire to be held and possessed during the concession period and it is only thereafter that the highway would revert to the NHAI at the end of the concession period or termination whichever be earlier. While, principally it is the obligation of the Concessionaire to endeavour to meet the economic targets, arrange for appropriate credit facilities from lenders, the NHAI bearing in mind the huge investment required to be made also extends financial aid and support in the shape of viability gap funding. Having noticed the salient provisions of the Concession Agreement, it becomes apparent that the work relating to the creation of infrastructure, and which in this case was concerned with the six-laning of an expressway, constituted the physical component of the contract. It becomes relevant to note that Section 194C requires a deduction of tax at source on any sum which may be paid to a contractor for carrying out any work. The expression work is further expanded in the principal provision with the statute ordaining that it would include supply of labour for carrying out any work. The word work also stands defined in the Explanation to Section 194C and which includes activities such as advertising, broadcasting and telecasting of programmes, carriage of goods or passengers, catering, manufacturing or supplying a product as some of the activities which could fall within the meaning of that expression. That the definition is not intended to be exhaustive is evident from clause (iv) of the Explanation using the phrase shall include . As we read Section 194C, it becomes evident that the same is principally concerned with the undertaking of a physical or tangible activity as opposed to the mere grant of subsidy or financial assistance. The provision creates a direct linkage between the sum paid and the carrying out of work. While equity support was undoubtedly a concomitant of the Concession Agreement, it would be wholly incorrect to view it as payment made for a work entrusted to the Concessionaire. In fact, the BOOT contract itself envisaged investment being primarily made by the Concessionaire for the purposes of creation of the targeted infrastructure. In terms of the contract model, the Concessionaire was upon completion of the physical elements of the project, enabled to own and operate the expressway, collect fee from users of the highway and exploit the expressway in accordance with the stipulations of the concession so as to recoup the investment made in its creation. Upon completion of the concession term, the highway was to revert to the NHAI. Concessionaire was thus, and in that sense, in possession of the contract assets and conferred the right to exploit the same as per the contractual stipulations. Quite apart from the BOOT model itself being a hybrid arrangement, the capital grant subsidy was not a payment made for work per se but representative of the obligation of NHAI to extend financial support in connection with the creation of an asset of public utility and importance. The capital grant subsidy was essentially aid and support that the NHAI extended to the Concessionaire as opposed to payment that it would have ordinarily made to a contractor and would be directly connected with or constitute recompense for physical work that was performed. As the precedents noticed hereinabove bid us to acknowledge, the word work in the context of Section 194C is liable to be understood as relating to labour that is expended, the undertaking of a task or operation which produces a result. The infusion of equity capital as a measure of financial support, while surely a contractual obligation, cannot consequently be understood to mean the payment for a work undertaken. Regard must also be had to the provisions contained in Section 194C (2) and which prescribes that any sum credited to any account of the contractor, irrespective of its nomenclature, and entered in its books of accounts would be deemed to a credit of such income to the account of the payee. However, and as was noticed hereinbefore, the capital grant subsidy was not an amount which was to be deposited in its account or be accounted for in its books of account as that expression is understood in common parlance. Those sums were credited directly to the Escrow Account. This would, therefore, also not be a case where sub-section (2) of Section 194C would be attracted. Tribunal has correctly come to conclude that the subsidy or financial support which was extended by NHAI to the Concessionaire and was only envisaged to work as viability gap funding could not possibly have been construed as payment made for a work undertaken by the contractor. While it is true that Section 194C does not stand confined to a works contracts alone, unless the appellant had established that the sum in question and represented by the viability gap funding were recompense for a physical activity undertaken or labour expended, those disbursements could not have formed subject matter of a withholding tax under Section 194C. Decided against revenue.

Summary

Issues Involved:

1. Whether the capital grant subsidy given by the National Highways Authority of India (NHAI) to its Concessionaires is subject to withholding tax under Section 194C of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Nature of Capital Grant Subsidy:
- The primary issue was whether the capital grant subsidy provided by NHAI to its Concessionaires falls under the ambit of Section 194C of the Income Tax Act, which mandates tax deduction at source for payments made to contractors for carrying out any work. The Tribunal had held that the subsidy was not a payment for work and thus not subject to withholding tax.
- NHAI argued that the subsidy was financial support to address revenue shortfalls in projects where the Concessionaire's revenue was less than projected or where the total project cost could not be recovered. The subsidy was part of the viability gap funding and was not a revenue receipt in the hands of the Concessionaire.
- The Tribunal noted that the Concessionaire was recognized as the owner of the assets created under the Build-Own-Operate-Transfer (BOOT) model, with the right to collect tolls during the concession period. The capital grant was deemed as equity support rather than a payment for work done.

2. Interpretation of 'Work' under Section 194C:
- The court examined the definition and scope of 'work' under Section 194C, which includes activities like advertising, broadcasting, carriage of goods, and manufacturing according to customer specifications. The definition is not exhaustive but indicates a focus on tangible, physical activities.
- The court referenced various precedents, including the Supreme Court's decision in Associated Cement Company Ltd., which clarified that 'work' in Section 194C is not limited to works contracts but includes any work that involves physical or tangible activities.
- The court concluded that the capital grant subsidy was not a payment for any physical work undertaken by the Concessionaire. It was a financial aid to ensure the economic viability of infrastructure projects, not directly linked to the execution of physical tasks.

3. Role of the Escrow Account:
- The subsidy was credited to an Escrow Account, which regulated the use of funds for the project. The court noted that the funds in the Escrow Account were not at the discretion of the Concessionaire and were used according to specific priorities outlined in the concession agreement.
- This arrangement further supported the view that the subsidy was not a direct payment for work, as it was not deposited in the Concessionaire's account in a manner that would typically attract tax deduction under Section 194C.

4. Tribunal's Conclusion:
- The Tribunal's decision was upheld, affirming that the capital grant subsidy was not subject to withholding tax under Section 194C. The court agreed with the Tribunal's reasoning that the subsidy was a form of equity support, not a contractual payment for work.
- The court emphasized that unless the appellant could establish that the subsidy was compensation for physical activities or labor, it could not be subjected to withholding tax under the specified section.

In conclusion, the court dismissed the appeals, ruling that the capital grant subsidy provided by NHAI to its Concessionaires was not liable for tax deduction at source under Section 194C, as it did not constitute a payment for work as defined by the statute.