2015 (1) TMI 1519 - AT - Income Tax

TDS u/s 194C - freight charges paid to truck owners/drivers - HELD THAT - The relationship between FCI and the assessee was that of contractee and contractor where FCI is contractee and the assessee was contractor that any payment to the assessee by FCI as contractee was liable for TDS u/s 194C(1) of the Act that the payment of freight charges made by the assessee to the trucks owners/driver directly and for the specific journeys carried out against specific weights of goods carried. Clearly the disputed freight charges were not paid by the assessee to any middle man or sub contractor who in turn engaged the trucks for carrying the goods. We hold that the relationship between and the truck drivers was not in the nature of contractor and sub-contractor and the transaction between them did not come came under the purview of sub-section (2) of Section 194C. As under sub-section (1) of section 194C an individual is not liable for any TDS in respect of any payments made to contractors. Therefore the assessee being an individual was not liable for making TDS in respect of any payment made to the truck drivers under the head freight paid. Thus provisions of section 40(a)(ia)of the Act are not applicable in respect of the freight payments made by the assessee and the FAA had rightly deleted the addition made by the AO - Decided against the AO.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal question considered was whether the payments made by the assessee for freight charges to truck owners/drivers were subject to Tax Deducted at Source (TDS) under Section 194C of the Income Tax Act, 1961, and consequently, whether the disallowance of Rs. 9,63,50,692/- under Section 40(a)(ia) was justified.

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The legal framework revolves around Section 194C of the Income Tax Act, 1961, which mandates TDS on payments to contractors and sub-contractors for carrying out any work, including carriage of goods. Explanation III to Section 194C specifies that payments for carriage of goods by any mode other than railways are liable for TDS. Section 40(a)(ia) disallows certain expenses if TDS is not deducted.

Court's Interpretation and Reasoning

The Tribunal analyzed the relationship between the assessee and the truck owners/drivers. It concluded that the relationship was not that of a contractor and sub-contractor but rather direct payments for specific services. The Tribunal emphasized that the assessee, being an individual, was not liable to deduct TDS under sub-section (1) of Section 194C for payments made to truck drivers.

Key Evidence and Findings

The Tribunal considered the contractual terms between the assessee and the principal, FCI, which prohibited subletting the contract. The assessee hired trucks directly from local truck stands, and payments were made directly to truck owners/drivers for each trip. The road challans and debit vouchers supported the claim that no sub-contract was involved.

Application of Law to Facts

The Tribunal applied the provisions of Section 194C and concluded that the payments made by the assessee did not fall under the purview of sub-section (2), which deals with sub-contractors. Since the assessee was an individual, there was no obligation to deduct TDS under sub-section (1) for payments to truck owners/drivers.

Treatment of Competing Arguments

The Departmental Representative argued in favor of the Assessing Officer's disallowance, asserting that the payments were to sub-contractors. However, the Tribunal found the assessee's argument more persuasive, supported by the case of CIT v. Bhagwati Steels, which was cited by the Authorized Representative to argue against the disallowance under Section 40(a)(ia).

Conclusions

The Tribunal concluded that the payments made by the assessee to truck owners/drivers were not subject to TDS under Section 194C, and therefore, the disallowance under Section 40(a)(ia) was not justified. The appeal was decided in favor of the assessee.

SIGNIFICANT HOLDINGS

The Tribunal held that the relationship between the assessee and the truck owners/drivers did not constitute a contractor-sub-contractor relationship under Section 194C(2). The Tribunal stated, "Clearly the disputed freight charges were not paid by the assessee to any middle man or sub contractor who in turn engaged the trucks for carrying the goods." This established the principle that direct payments for specific services to individuals do not necessitate TDS if the payer is an individual not engaged in a contractual relationship as defined under Section 194C(2).

The Tribunal confirmed that the provisions of Section 40(a)(ia) were not applicable to the freight payments made by the assessee. Consequently, the Tribunal upheld the decision of the First Appellate Authority to delete the addition made by the Assessing Officer, allowing the appeal filed by the assessee.