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TMI Blog2014 (4) TMI 904X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest on mobilisation advance' for non-compliance of TDS provisions, when it is a fact that the assessee has paid 'interest' to the JV, which is a separate entity." 2. Briefly the facts relating to the disallowance of expenditure of Rs. 58,42,152/- u/s 40(a)(ia) of the Act representing hire charges in respect of hire purchase agreements, are that the appellant is a contractor firm, executing contract works. The assessee e-filed its return of income for the AY 2008-09 on 01/10/2008 declaring total income at Rs. 2,22,13,140/- on a total turnover of Rs. 67,21,04,989/-. The Assessing Officer noted that the assessee had claimed expenditure of Rs. 58,42,152/- towards hire charges against hire agreements and the payments were made to L&T finance and SREI Finance towards purchase of tippers, machinery and other equipment. While completing the assessment u/s 143(3), the Assessing Officer had disallowed the said amount of Rs. 58,42,152/- u/s 40(a)(ia) on the ground that the assessee had failed to deduct tax on the hire charges made to the above two concerns u/s 194A/194I of the Act. Aggrieved, the assessee carried the matter in appeal before the CIT(A). 3. Before the CIT(A), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the Board, in respect of finance charges accruing or arising to HP Finance Companies for the limited purpose of taxability under Interest tax Act given in Sec 2(7) of the Interest tax act; it is not applicable to hire charges paid by the firms to hire Purchase Finance Companies. 3.3 The AR of the Assessee submitted that in finance transactions other than hire purchase, the companies providing finance have no power to seize the machinery in case of any default in discharging finance charge payments, but have to approach courts for seizure of assets. But in the case of hire purchase finance, the HP companies can seize the machinery and auction the same without interference of the Courts, in case of defaults. So the amount of hire charges paid to HP Companies is not interest with in the meaning given in the Act. Hence, the provisions of 194A are not applicable to the nature of payments made by the assessee and the circular referred by the AO is not applicable to assessee's case. 3.4 The AR of the Assessee submitted that further the AO held if the nature of payment made by the assessee is not interest. It would amount to rent, which is hit by Sec 1941 with effect from A.Y. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he submission that the concerned payments are out side the purview of section 194A is acceptable. The alternative measure adopted by the AO that in case the payment of hire purchase finance charges are not interest then such charges have to be treated as rent paid on providing assets was also correctly countered by the AR, as in case of assets provided on rental basis the owernship of the assets lie with the person who has rent such assets, where as in hire purchase the appellant is the owner of the assets. Thus, it is a case where the finance charges paid by the appellant are not covered either by the provisions of section 194A or the provisions of section 1941. If the impugned payments are thus not covered either by the provisions of section 194A or the provisions of section 194I, then application of the provisions of section 40(a)(ia) are not at all applicable and as such the submission of the AR that the AO has erred holding the appellant in default in not subjecting payment of finance charges to TDS and consequently further holding that the provisions of section 40(a)(ia) are attracted as not correct. In view of the above observations, the CIT(A) held that there is no default ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods or to become its owner by payment in full of the stipulated hire and the price for exercising the option. This class of hire purchase agreement must be distinguished from transaction in which the customer is the owner of the goods and with a view to finance his purchase he enters into an arrangement which is in the form of a hire purchase agreement. In this case, the learned Tribunal had admittedly held that there is a hire purchase agreement factually. Therefore, we affirm the judgment and order of the learned Tribunal. The appeals fail and they re accordingly dismissed." 5.1 In view of the above judgment, the payment made by the assessee on account of hire purchase transaction and payment of finance charges/hire charges cannot be construed as interest so as to deduct TDS u/s 194A of the IT Act. Accordingly, to that extent, the CIT(A) justified in observing that section 40(a)(ia) is not applicable. However, we find that insertion of Explanation 1 to section after amendment of section 194A by Taxation Laws (Amendment) Act, 2006, with effect from 13/07/2006, payment by the assessee towards hire charges on hire purchase agreement to be liable for TDS u/s 194I of the Act. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For the utilisation of Mobilization advance, interest is to be paid as such interest to the share of M/s. R. Balarami Reddy &Co is Rs. 39,72,000/-. The nature of payment no doubt is interest but it is paid both the firm of JV, contributing the proportion of interest with reference to Mobilization advance taken and is paid to the Govt. of Maharastra. 8.1 Further, the AR submitted that the case law referred by the learned Joint Commissioner of Income Tax in CIT Vs Centary Building Industrial (P) Limited 293 ITR 194 has no applicability to your petitioner's case since in the cited case the company borrowed funds and given to its directors and the honourable Supreme Court observed that though the loans were merely routed through company because there were the two transactions one between the creditor and Company and the other between company and Directors, it was held that tax should have been deducted. In the case cited by Learned JClT that the directors of the assessee company borrowed loan from creditors of company and the whole transaction are not recorded in the assessee company, but recorded as loan in Directors books as loans. On survey, the department detected taking of lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the deductees, so that where this could be shown to have been so, there can be no liability for deduction itself. In this case the JV (deductee) has discharged and paid all the tax liability at the point of time where liability for deduction of TDS arises. Hence, even by virtue of the above decision of the Supreme Court, no liability to deduct TDS arises and hence provisions of section 40(a)(ia) have no application is also quite convincing. In these circumstances, it is held that there was no default committed by the appellant and accordingly it is held that the Assessing Officer has wrongly applied the provisions of section 40(a)(ia) in as much as the payment of interest on mobilisation advance is concerned. In the circumstances, this ground of appeal is also treated as allowed." 10. Aggrieved by the order of the CIT(A), the revenue is in appeal before us. 11. We have heard both the parties, perused the record and gone through the orders of the authorities below. In our opinion, this payment of interest is the income of the JV and if this included as income in the JV as income, assessee has not deducted the tax in view of the amended provisions of section 40(a)(ia) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shing works according to the taste and requirement of customers. It is only one of the many business techniques normally adopted by a business man to improve his sales, since it will be very difficult for customers to identify the polishing people and get the work done by themselves. Hence, we are of the view that it may not be correct to argue that the contract existed between the customers and the polishing people. In fact, the customer may not have any contact with the polishing people in this type of transactions. Hence, it is hard to believe the claim of the assessee that he has acted as mere conduit pipe between the customers and polishing people. Accordingly, the claim that the assessee stands in a fiduciary capacity is also liable to be rejected. In this kind of factual situation, in our view, the existence or absence of profit element in the polishing works does not make any difference. 7.2 The Ld Counsel, by placing reliance on the decision of special bench in the case of Meryline Shipping and transports (supra) contended that the provisions of sec. 40(a)(ia) shall apply only to amount payable and not to the amount paid. However, the Hon'ble Gujarat High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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