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TMI Blog2014 (1) TMI 343X X X X Extracts X X X X X X X X Extracts X X X X ..... ship of contractor vis-a-vis sub-contractor – As per section 20 of the Indian Contract Act of 1872 - Where both parties to an agreement are under a mistake as to a matter of fact, essentially to the agreement, the agreement is void - The formats of the agreement entered into with the partners and the styling of accounts prepared by them are products of mistakes of fact, and therefore, the agreement is not to be relied on to hold that the assessee is acting in the status of contractors vis-a- vis sub-contractors. The question of TDS in the present case cannot be considered only on the basis of the agreements entered into between the assessee and its partners - The liability u/s 194C(2) is cast on the assessees only when they are in fact and in substance acting in the relationship of contractors and sub contractors - When the said provision relating to deduction of tax at source is not applicable for the assessee for the reasons stated above, violation u/s 40(a)(ia) does not arise - Payments made under the nomenclature of "sub- contractors" are not liable to be disallowed. There is no sub-contract between JV and the constituents and since the JV has been formed only to procure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upervise the performance of the Contracts and the execution of the works. (b) To appoint Project Manager from employees nominated by HINDUSTAN, who along with his contract management staff, shall subject to the overriding authority of the Executive Committee, to execute and carry out the Contract works. (c) To prepare, maintain, control, supervise, books of accounts, profit and loss account, balance sheet of the joint venture, open, maintain and operate joint venture's banking accounts; (d) Prepare budgets and control thereof; d) Prepare budgets and control thereof; (e) Materials and sub-contracts will be procured by the Joint venture. 6) The parties shall second to the joint venture employees as required by the Project Manager for the satisfactory execution of the Contract works. 7) The parties shall be jointly and severally liable to the Employer for the performance of the contract. 8....... 9. This agreement will become null and void upon occurrence of anyone of the following events. i. the JV being rejected for pre-qualification. ii. The JV being prequalified, but not winning the project. iii. The JV winning the project and the parties enter into detailed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... awarded certain infrastructure contracts. The aggregate contract receipts were Rs. 115,79,10,993/- of which receipts of Rs. 111,09,23,018/- were transferred to HES and RIPL in the proportion of 60 0 /0 and 40 0 /0 respectively. The balance receipts of Rs. 4,,69,87,975/- was credited to the P L account extracts of which are reproduced below: Profit loss account for the year ending 31.3.2009 Particulars Amount (Rs) Particulars Amount (Rs.) To subcontract 4,04,84,647 By Gross contract receipts 4,69,87,975 To other expenses 68,55 088 By other income 3,51,760 To net profit transferred 17,17,086 47339735 4,73,39,735 7. The Assessing Officer directed the appellant to explain why TDS had not been made on the sub-contract expenses of Rs. 111,09,23,018/-. The assessee submitted that the appellant was a JV formed on 16-08-2004 with the sole purpose to win contracts and not to make profits, that the entire work allotted to JV was entrusted to JV members for execution, that the relationship between JV and its members was not that of a contractor and sub contractor and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pages 1 to 4 of the paper book to submit that the JV formed on 16/08/2004 with the following constituents, namely, 1. M/s Hindustan Engineers Syndicate 2. M/s Ratna Constructions. The object of the JV was to procure contracts from various Governments, as under: 1. to prepare and submit tender pre-qualification bids and tenders to the owner, and 2) to agree the contract with the owner, and 3) to execute the project works in accordance with the contract and the ratio of the participation in the joint venture is as follows: Hindustan : 60% Ratna : 40% This agreement will become null void upon occurrence of any one of the following events: i. the JV being rejected for pre-qualification. ii. the JV being prequalified, but not winning the project iii. the JV winning the project and the parties enter into detailed JV agreement/shareholders agreement. 12. The learned counsel submitted that later on the said JV was converted into a partnership firm vide Deed of Partnership dated 31 st day of August, 2007, which shall come into force from 8 th day of November, 2004 and the partners are i) M/s HES Infra Pvt. Ltd.(formerly Hindustan Engineers Syndicate) and ii) M/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1122/H/2010, dt. 31/12/2012. 12.5 The learned counsel submitted that as per the partnership deed, which was essentially a JV agreement, the JV constituents were jointly and severally liable towards the owner for the execution of the contract commitments. In terms of the JV agreement, the contract works obtained by the JV was executed by its constituents in the given ratio of 60 : 40. In respect of one contract the work was given on sub contract basis to a third party, for a sum of Rs. 4,04,84,647/- and tax deducted on it. The other contract receipts of Rs. 111,09,23,018/- were transferred to the JV constituents in the agreed ratio and the works relating to such contract receipt were carried on by the constituents in their own capacity. These receipts and expenses on the execution of this contract were disclosed in the returns of income of the constituents and tax paid by them on the profits thereon. The JV had neither retained any commission nor gained any profit on these contract receipts. 12.6 Further, the learned counsel submitted that the JV was formed for the purpose of winning contract which was intended to be executed by an d for the benefit of the JVs constituents. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich there was no liability to deduct tax on the appellant. 12.12 Finally, the learned counsel submitted that since the entire amount transferred to the constituents had already been paid to them and no amount remained payable as on 31.3.2009, sec. 40(a)(ia) did not apply in view of the decision in the case of Merilyn Shipping and Transport Vs. ACIT 146 TTJ 1 (Visakha SB). 12.13 The main arguments advanced by the learned counsel for the assessee that the assessee as well as its partners are assessed to tax on a regular basis and they have also filed their income-tax returns and assessments have been completed in their cases as well and they have paid taxes on their income which included the income arose to them out of contracts awarded by assessee. Therefore, the case of the learned counsel is that even though technically taxes have not been deducted by the assessee, taxes have already been paid by its partners and, therefore, no liability subsists in the hands of the assessee to make good for the non-deduction of tax at source and as a consequence, invoking of provisions of law contained in section 40(a)(ia) is not justified. 13. The learned DR, on the other hand, submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h for the execution of the contract and not merely for the obtaining of the contract was expressly provided for. 13.4 The learned DR submitted that the terms of the partnership deed therefore go to establish the fact that the firm had been created not for the sole purpose of obtaining the contract but also for executing it. The learned DR referred the order CIT(A)-II. Hvderabad in her order dtd. 10.1.2003 in the appellant's own case for the A.Y. 2009- 10 has held that the JV had been formed only to procure contract works from the Government to submit that the conclusion given is not agreeable. 13.5. The learned DR submitted that in assessee's case the work has admittedly not been carried out by the appellant directly but was awarded to the partners. It is also an admitted fact that the partners have credited these receipts to their P L account. Such crediting of the sub-contract receipts by the sub-contractors in their P L etc is the normal practice and does not prejudice the stand of the Assessing Officer. 13.6. Further, it is submitted that the mere fact that the contract receipts have been credited by the partners in their books is not a relevant factor in taking a decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infrastructure Projects Pvt. Ltd. are not sub-contracts, per- se, but, they are partners of M/s Hindustan Ratna JV. These partners might have entered into agreements with the partnership firm wherein they are partners so as to execute the works. The partners might have maintained their books of account as if they are paying and receiving monies from the partnership firm where they are partners. As always admitted, the format of an agreement or the style of accounts by themselves do not decide the true character of relationship of parties in a business and the nature of transactions relating to the business. What is to be applied is the rule of Pith (Form) and substance. One has to see the real nature of the relationship and character of transactions, necessarily looking beyond the formalities of agreements and accounts. For that matter for calculation, it is not the format of agreements and the manner of accounting alone that decide the issue. The deciding factor is the real intention of the parties, the actual conduct of the parties and the nature of activities and the overall relationship of the concerned parties. 15. In the present case, the modus of obtaining the Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only when they are in fact and in substance acting in the relationship of contractors and sub contractors. Dehors the agreements and accounts, when it is found that they are acting jointly, for the purpose of their contract business, there cannot be a relationship of contractor and sub- contractor and there may not be an occasion to invoke Section 194C(2). When the said provision relating to deduction of tax at source is not applicable for the assessee for the reasons stated above, violation uls.40(a) (ia) does not arise. If that is the case, payments made under the nomenclature of "sub- contractors" are not liable to be disallowed. 19. It is also useful to refer to Section 70 of the Contract Act which deals with the obligation of the person enjoying the benefit of non- gratuitous act. In other words, it is the case of 'Unjust Enrichment'. For the mistakes and follies committed by the assessees, it may not be justified on the part of the Revenue to insist that the assessees were making payments to sub-contractors and they were bound by Section 194C(2) and consequently by Section 40(a)(ia). 20. Therefore, if the payments are recorded by the assessee as sub-contract payments' as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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