2019 (3) TMI 1356 - HC - Income Tax

TDS u/s 194C or 194J - short deduction of TDS - payments made to the subcontractor - as per revenue payment is for professional and technical services - scope of work given to the sub-contractor was construction work for grounding including straightening, cutting, unloading in the site, transporting to pre-assembly/erection site, alignment, welding, text and inspection, illumination and communication work etc. - liability of any interest under Section 201(1A) - HELD THAT - The assessee was executing a works contract (Thermal Power Plant) for its customer. It included men, machinery, material, other tangible and intangible goods. For the said project, the services of technical personnel including engineers were inevitable. The scope of work given to the sub-contractor was construction work for grounding including straightening, cutting etc. material receipt from contractors stores or unloading in the site, transporting to preassembly/ erection site, erection, alignment, welding, test and inspection etc., illumination and communication work. The assessee was getting a physical output, a tangible structure and not merely the services of its qualified, professional engineers/staff from the sub-contractor. The said activities were undertaken with the help of men and machines which were beyond the scope of technical services. The said contract between the assessee and the sub-contractor satisfied the provisions of Section 194C of the Act and did not attract the provisions of Section 194J of the Act. The Tribunal had, thus, rightly concluded that the case of the assessee fell under Section 194C of the Act and not under Section 194J of the Act. Tribunal had noticed that the sub-contractor had already offered the payments received from the assessee to tax and, thus, there was no justification in creating additional demand on account of short deduction of tax. Since, there was no short deduction of tax at source under Section 201(1) of the Act, therefore, there would be no liability of any interest under Section 201(1A) of the Act upon the assessee. - decided against revenue

Summary

Issues involved:
1. Whether the payments made to a sub-contractor for construction work fall under the scope of technical services as defined in the Income Tax Act, 1961?
2. Whether the comparison between the construction of a thermal power plant and a building is valid in this case?
3. Whether the decision of the Hon'ble Supreme Court regarding the treatment of the payee in default applies to the present case?

Detailed Analysis:
Issue 1:
The appeal was filed by the revenue under Section 260A of the Income Tax Act against the order of the Income Tax Appellate Tribunal. The dispute arose from the classification of payments made to a sub-contractor for construction work. The Assessing Officer demanded tax and interest from the assessee for short deduction of tax at source under Section 194J of the Act. However, the CIT(A) allowed the appeal, stating that the work done by the sub-contractor fell under Section 194C and not Section 194J. The Tribunal affirmed this decision, highlighting that the activities involved tangible construction work beyond technical services, leading to the conclusion that the case fell under Section 194C.

Issue 2:
The contention regarding the comparison between the construction of a thermal power plant and a building was raised. The Tribunal observed that the nature of work undertaken, which included physical construction activities like grounding, welding, and inspection, did not align with the definition of technical services under Section 194J. The Tribunal concluded that the project's scope involved tangible outputs and physical structures, making it more akin to a works contract falling under Section 194C.

Issue 3:
Regarding the decision of the Hon'ble Supreme Court, the Tribunal noted that the sub-contractor had already declared the payments received from the assessee for tax purposes. This declaration indicated compliance with tax obligations, and therefore, there was no basis for creating additional tax demands. As there was no short deduction of tax at source, the liability for interest under Section 201(1A) did not apply. The Tribunal's findings were upheld, and the appeal was dismissed by the High Court, as no substantial question of law arose for consideration.

In conclusion, the High Court dismissed the appeal by the revenue, finding no merit in challenging the Tribunal's decision. The judgment clarified the classification of payments made to a sub-contractor for construction work, emphasizing the distinction between technical services and works contracts under the Income Tax Act.