2025 (4) TMI 1617 - AT - Income Tax

TDS u/s 194C - Disallowance u/s 40(a)(ia) - non-deduction of TDS on the foods supply bills - HELD THAT - When the matter carried before DRP DRP hold that the impugned transaction with the catering service provider was covered u/s 194C of the Act and hence assessee was liable to deduct the TDS. But at the same time on the alternative plea of the assessee that the other party has paid the tax the assessee should not be treated as an assessee in default and therefore the matter was set aside to the file of the AO. AO has not discussed that issue and directly taken a view that since the assessee has not recorded purchase and debited the said as expenses and therefore he ordered for disallowance. Before us on this issue ld. AR invited our attention to the invoice which are of the nature supply of foods packets and not of the catering service. Had been a case of catering service the provision of section 194C shall apply but in this case this being the case of supply of foods and the same being subjected to GST the same shall not be considered as contract and therefore the provision of section 194C shall not apply on those transaction entered into by the assessee in the case of M/s. Ganesh Lal Yadav-HUF. Considering that aspect of the matter ground no. 1 raised by the assessee is allowed. Addition u/s 40(a) (ia) - non-deduction of TDS on business promotion expense to promote business and rewards to employees to achieve work targets - HELD THAT - Ratnagiri Impex Private Limited 2015 (1) TMI 354 - ITAT BANGALORE held the facilities/amenities made available by the petitioner No. 1 hotel to its customers do not constitute work within the meaning of section 194C of the Act. Consequently the Circular No. 681 dated 8-3-1994 to the extent it holds that the services made available by a hotel to its customers are covered u/s 194C of the Act must be held to be bad in law. Thus petition is allowed by quashing the Circular No. 681 dated 8-3-1994 to the extent it holds that section 194C of the Income-tax Act applies to payments by the customers to the petitioner No. 1 hotel for availing the facilities/amenities made available by the petitioners. Decided in favour of assesee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the appeal are:

(a) Whether the Assessing Officer (AO) erred in disallowing Rs. 22,54,737/- under section 40(a)(ia) of the Income Tax Act, 1961 (the Act) on account of non-deduction of Tax Deducted at Source (TDS) on catering expenditure for supply of food packets, despite submission of Form 26A and evidence that the deductee had declared the income and paid tax.

(b) Whether the AO erred in disallowing Rs. 2,09,794/- under section 40(a)(ia) on account of non-deduction of TDS on business promotion expenses, including hotel bills, e-vouchers, and conference attendance expenses, claimed as business promotion but contested as liable for TDS under section 194C of the Act.

(c) Whether the Dispute Resolution Panel (DRP) erred in not providing specific directions to the AO or Transfer Pricing Officer (TPO) under section 144C of the Act, leaving the AO to ascertain disallowance based on evidence already presented.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Disallowance under section 40(a)(ia) for non-deduction of TDS on catering expenditure

Relevant Legal Framework and Precedents: Section 194C of the Act requires deduction of TDS on payments to contractors for carrying out any work, including supply of labor. Section 40(a)(ia) mandates disallowance of expenses where TDS is not deducted as required. The proviso to section 40(a)(ia) and section 201(1) provide relief if the deductee has declared the income and paid tax.

Court's Interpretation and Reasoning: The AO treated the supply of food packets as catering service falling under section 194C, disallowing 30% of the expenditure. The DRP agreed that section 194C applied but directed AO to verify if the deductee had declared the income and paid tax, which could negate disallowance under the proviso.

The AO, however, did not consider the deductee's tax compliance and disallowed the entire amount. The Tribunal examined invoices and found that the transaction was for supply of food packets (goods) and not catering services (services). The supply was subject to GST and was on principal-to-principal basis without any contract for work or service.

Key Evidence and Findings: Invoices showed supply of food packets, not catering services. Form 26A and computation of income submitted by the assessee demonstrated that the deductee had declared the income and paid tax. The AO's failure to verify these facts was noted.

Application of Law to Facts: Since the transaction was supply of goods and not a contract for carrying out work or service, section 194C was not applicable. Further, as the deductee had declared the income and paid tax, the proviso to section 40(a)(ia) applied, preventing disallowance.

Treatment of Competing Arguments: Revenue argued that supply of food packets amounted to catering service under section 194C. The Tribunal rejected this, emphasizing the nature of transaction as supply of goods and the presence of GST, which negates the applicability of section 194C.

Conclusion: The disallowance of Rs. 22,54,737/- under section 40(a)(ia) was not justified and was deleted.

Issue (b): Disallowance under section 40(a)(ia) for non-deduction of TDS on business promotion expenses

Relevant Legal Framework and Precedents: Section 194C applies to payments for carrying out any work, including catering, advertising, broadcasting, carriage of goods, manufacturing or supplying a product as per customer specification. Circular No. 715/1995 and judicial precedents such as the decision of the Bangalore ITAT in Ratnagiri Impex (P.) Ltd. v. DCIT and Bombay High Court in East India Hotels Ltd. v. CBDT restrict the scope of section 194C to specific service contracts and exclude hotel accommodation payments from its ambit.

Court's Interpretation and Reasoning: The AO disallowed 30% of business promotion expenses amounting to Rs. 2,09,794/- on the ground of non-deduction of TDS under section 194C. The DRP directed AO to re-verify the evidence, noting the expenses were business-related and not employee perquisites.

The Tribunal examined the ledger and invoices, noting that the major part of the expenses related to hotel room bookings, attendance at a conference, and e-vouchers. It was found that hotel room booking payments are not liable for TDS under section 194C, supported by the Bangalore ITAT decision in Ratnagiri Impex and the Bombay High Court ruling in East India Hotels Ltd.

Key Evidence and Findings: The expenses included Rs. 4,87,740/- for hotel bookings, Rs. 31,574/- for conference attendance reimbursements, and Rs. 1,80,000/- for Amazon vouchers. The Tribunal noted that hotel accommodation payments are treated as rent under section 194-I, not as work under section 194C. Conference fees below threshold limits and reimbursements to employees are not liable for TDS under section 194C.

Application of Law to Facts: The payments did not fall within the ambit of section 194C as they were not for carrying out any work or service contract. Circular No. 715 clarified that hotel accommodation payments are subject to TDS under section 194-I, not 194C. The Tribunal applied these principles to hold that the disallowance was not justified.

Treatment of Competing Arguments: Revenue relied on circulars and the AO's findings to justify disallowance under section 194C. The Tribunal distinguished the nature of expenses and relied on binding precedents to reject the applicability of section 194C to hotel bookings and related expenses.

Conclusion: The disallowance of Rs. 2,09,794/- under section 40(a)(ia) was deleted.

Issue (c): Alleged error by DRP in not providing specific directions under section 144C

Relevant Legal Framework and Precedents: Section 144C requires the DRP to provide specific directions to the AO or TPO after considering objections by the assessee. The purpose is to ensure clarity and avoid arbitrary assessments.

Court's Interpretation and Reasoning: The assessee contended that the DRP erred by leaving the AO to ascertain disallowance without specific directions. The Tribunal noted that since the substantive issues were decided on merits, this technical ground became academic.

Conclusion: No separate determination was necessary on this ground as the substantive issues were resolved in favour of the assessee.

3. SIGNIFICANT HOLDINGS

On the applicability of section 194C to supply of food packets, the Tribunal held:

"Considering that aspect of the matter ground no. 1 raised by the assessee is allowed."

The Tribunal emphasized the distinction between supply of goods and provision of catering services, noting the presence of GST on the supply of food packets as a key factor negating the applicability of section 194C.

On business promotion expenses, the Tribunal held:

"Respectfully following the judgement as referred herein above direct the ld. AO to delete the addition of Rs. 2,09,794/-."

This was based on the precedent that hotel accommodation payments are not covered under section 194C but under section 194-I, and that other expenses such as conference fees and vouchers were not liable for TDS under section 194C.

The Tribunal further observed:

"Since we have considered ground no.1 & 2 on merits of the issue ground no. 3 being the technical ground becomes academic."

Core principles established include:

• The nature of a transaction (supply of goods vs. provision of service) is crucial to determine applicability of TDS provisions.
• Section 194C applies narrowly to contracts for carrying out work or services and does not extend to supply of goods or hotel accommodation payments.
• The proviso to section 40(a)(ia) protects the deductor from disallowance if the deductee has declared the income and paid tax.
• DRP directions under section 144C must be followed, but failure to provide specific directions may become academic if substantive issues are decided.

Final determinations:

(i) Disallowance of Rs. 22,54,737/- on catering expenditure under section 40(a)(ia) was deleted.

(ii) Disallowance of Rs. 2,09,794/- on business promotion expenses under section 40(a)(ia) was deleted.

(iii) The technical ground regarding DRP directions was rendered academic.