2018 (1) TMI 791 - AT - Income Tax

Nature of income - salary income or busniss income - technical skill for rendering the independent contract and professional services - proof of employer employee or master servant relationship - Held that - The assessee is a retired Electrical Technician from the Defense Department, Govt. of India, & currently is working as a contractor of electrical maintenance on board of different companies vessels. He has more than 30 years experience as electric maintenance engineer with Indian navy and private vessels on high seas. We further find that the entire agreements executed between the contracting company and the assessee, it is clearly evident that the nature of work executed by the assessee for the Marine Companies is in the nature of a contract. There is no employer employee or master servant relationship. There is also no permanent contract. It ranges from 6 weeks to 8 weeks only. In the agreement the companies mentioned the work executed by the assessee will be on contractual basis and at the time of making payment to the assessee, the company will deduct Tax at source. We also note that vide letter dated 19.11.2007 issued by Chief Legal Officer & Company Secretary, M/s Seamec Limited which was addressed to the ITO/AO, Ward-1, Rohtak of the assessee for furnishing information called u/s. 133(6) of the I.T. Act, 1961, has clearly mentioned that the work was in the nature of the contractor. The payments made by the said companies are for Technical Services rendered by the assessee. It is therefore, held that that the assessee has only Business Income and not Salary Income, hence, the professional contracts carried on by assessee are treated as contract for service and not contract of service , therefore, accordingly appropriate expenditure are allowed and as a result, the grounds taken by the assessee stand allowed.

Summary

Issues Involved:
1. The legality of the order of the Ld. CIT(A).
2. Classification of payments from M/s South East Asia Marine Engineering & Construction Ltd. and M/s Dolphin Offshore Enterprises Ltd. as income from salary or as contract amount for technical services.
3. Charging and withdrawing interest under sections 234A, 234B, 244A, and 234D of the Income Tax Act.

Detailed Analysis:

1. The legality of the order of the Ld. CIT(A):
The Assessee filed an appeal against the order dated 27.08.2009 by the Ld. Commissioner of Income Tax (Appeals), Rohtak, which was against the assessment year 2006-07. The appeal was based on the grounds that the order was against the facts and bad in law. The Ld. CIT(A) had confirmed the order of the Assessing Officer (AO), who had considered certain payments as income from salary rather than as contract amounts for technical services rendered.

2. Classification of payments as income from salary or as contract amount for technical services:
The AO had considered the receipts of ?11,43,150 from South East Asia Marine Engineering & Construction Ltd. and ?2,73,625 from Dolphin Offshore Enterprises Ltd. as professional receipts. The AO treated the total amount of ?14,16,775 as taxable income under the head 'Salary' and completed the assessment under section 143(3) of the Income Tax Act, 1961. The Ld. CIT(A) upheld this view, treating the receipts as income from salary under section 17 of the Act. The Assessee contested this classification, arguing that the contracts were for services and not employment, and thus, the income should be considered as business income.

The Tribunal referred to the order of the Hon’ble High Court of Punjab & Haryana in the case of M/s Ivy Health Life Sciences Pvt. Ltd., which distinguished between 'contract for service' and 'contract of service.' The High Court had held that a contract for service implies professional or technical services, while a contract of service implies an employer-employee relationship. The Tribunal found that the contracts in question were for specific technical services and not for employment. The agreements explicitly stated that the relationship was that of a contractor and sub-contractor, and payments were made on a day-to-day basis without any employer-employee benefits. Therefore, the Tribunal concluded that the income should be classified as business income and not salary.

3. Charging and withdrawing interest under sections 234A, 234B, 244A, and 234D:
The Assessee also challenged the charging and withdrawal of interest under sections 234A, 234B, 244A, and 234D of the Income Tax Act. However, the primary issue resolved was the classification of income, which impacted the calculation of interest under these sections. Since the Tribunal reclassified the income as business income, the interest calculations would need to be adjusted accordingly.

Conclusion:
The Tribunal allowed the Assessee's appeal, concluding that the payments received were for technical services under a 'contract for service' and not 'contract of service.' Thus, the income was to be treated as business income, allowing the appropriate expenditures. Consequently, the grounds taken by the Assessee were accepted, and the appeal was allowed. The order was pronounced in Open Court on 08-01-2018.