M/S Pioneer Roadways,, Hyderabad vs Department Of Income Tax

07. The assessee has also filed a Cross Objection supporting the order of the Ld. CIT(Appeals). The only effective ground of the Department is as under:

2 ITA No. 606/Hyd/2014 & C.O.No.60/Hyd/2014 "The Hon'ble CIT(A) ought have sustained the disallowance u/s.40(a)(ia) since the payment was towards commission on which the assessee f ailed to comply with the provisions of Sec.194H".

2. Briefly the facts relating to the aforesaid issue are, the assessee a partnership firm is engaged in the business of transport as well as civil contracts. For the A.Y. under consideration, the assessee filed return of income on 31-10- 2006 Declaring total income of Rs.21,39,370/-. During the assessment proceedings, the Assessing Officer while examining the P&L A/c of contract work noticed that assessee executed the work on sub-contract basis to the main contractors M/s.G.Venkata Reddy and Co., who had obtained the contract from Government. The Assessing Officer noticed that for getting sub-contract from the main contractor, the assessee paid a sum of Rs.25,56,326/- which was debited to P&L A/CIT(A) under the head 'Main Contractor Commission'. The Assessing Officer was of the view that since the payment made was in the nature of commission, the assessee was required to deduct tax at source u/s.194H of the Income Tax Act, 1961 (Act). However, since the assessee had not deducted any tax on such payments, the Assessing Officer called upon the assessee to show cause as to why the payment made should not be dis- allowed u/s.40(a)(ia). Though, the assessee submitted before the Assessing Officer that after getting sub-contract from the main contractor, it starts execution of work and on percentage basis of work completed, it raises bill on main contractor, who in turn claims the payment from the principal i.e., the Government. After receiving the payment from the principal, the main contractor makes payment to the assessee. At the time of making payment, the main contractor makes deduction towards material recoveries/other recoveries such as FSD, TDS (IT), Sales Tax and Surcharge etc., including certain amounts on the 3 ITA No. 606/Hyd/2014 & C.O.No.60/Hyd/2014

royalty on contract amount for awarding contract. Thus, it was submitted that the assessee in fact was not paying any amount to the main contractor. The main contractor himself pays the amount towards work executed by the assessee after retaining his share and the net amount payable was paid to the assessee. Thus, it was submitted that as no service was rendered by the main contractor to the assessee and there is no principal agent relationship between the parties, the provisions of sub-section 194H will not apply. The Assessing Officer, however, did not appreciate the explanation of the assessee and proceeded to hold that there being a principal agent relationship between the assessee and the main contractor and since the main contractor has deducted TDS @1% and the balance amount was deemed to have been paid to the assessee then the assessee should be deemed to have paid commission to the contractor. The Assessing Officer also observed that section 194H does not apply merely to an agent but also to payments received or receivable for any service in the course of buying or selling of goods or in relation to any transactions relating to any asset, valuable article or thing other than securities. On the aforesaid basis, the Assessing Officer dis-allowed the amount of Rs.25,56,326/- by applying the provisions of section 40(a)(ia).

Being aggrieved of such dis-allowance, assessee preferred an appeal before the Ld. CIT(Appeals). Before the Ld. CIT(Appeals) it was contended that the assessee was merely a sub-contractor for the main contractor and it had not made any payment to the main contractor. Explaining the nature of debit to the P&L A/c of Rs.25,56,326/-, it was submitted the main contractor had neither provided any service to the assessee nor received any payment from the assessee. Therefore, there was no liability on the assessee to deduct tax on the sum of Rs.25,56,326/-. In support of such contentions, assessee also 4 ITA No. 606/Hyd/2014 & C.O.No.60/Hyd/2014

relied on certain decisions of the ITAT. The Ld. CIT(Appeals) after considering the submissions of the assessee and examining the facts and material on record, deleted the addition made by the Assessing Officer by observing as under:

"5. I have considered the f acts on record and the submissions of the AR. There is no dispute that M/s.G.Venkata Reddy & Co is a principal contractor which has subcontracted the works to the appellant. The principal contractor had been awarded a contract f or certain works relating to KC Canal, Cuddapah f or a sum of Rs.11,38,62,156/- The principal contractor intern awarded entire works to the appellant for the f ull consideration of Rs.11,38,62,156/-. AS far as the commission payment is concerned, clause 5 of the subcontract agreement between eh appellant and M/s.G.Venkata Reddy & Co., reads as f ollows:

"The principal con tracto r will pay bills to the subcon tracto r af ter deducting royalty (co mmission) @ 4% on the gross bills payable to the subcontractor as consideration f or this agreemen t".

"6. It is, thus, clear f rom the terms of the agreement itself that the contract was awarded on a back-to-back basis with the principal contractor retaining 4% of the gross amount as its own margin. The commission ref erred to in the agreement was not f or any services rendered by the principal contractor and the retention of the 4% is not in the nature of payments ref erred to in section 194H. The appellant was entitled to the net amount out of gross receipts af ter deduction of 4% and the debiting of this amount as commission to the P&L A/CIT(A) does not change the nature of the transactions between the principal contractor and the appellant. The dis-allowance u/s.40(a)(ia) is, theref ore, directed to be deleted since there was no liability cast on the appellant f or deduction u/s.194H".

3. We have heard the submissions of the parties and perused the orders of the Revenue authorities as well as other materials on record. As can be seen from the facts on record, the assessee has executed the work as a sub-contractor to the main contractor M/s.G.Venkata Reddy and Co., who was awarded the 5 ITA No. 606/Hyd/2014 & C.O.No.60/Hyd/2014

work by the principal. It is also evident that depending on the percentage of work completed, assessee raised bill on the principal contractor. It is also not disputed that the principal makes the payment to the main contractor i.e., M/s.G.Venkata Reddy and Co. The main contractor after making certain recoveries from the bills raised and retaining 4% of the gross amount, remits the balance amount to the assessee. From this it is clear that the so called commission is never paid by the assessee to the main contractor.

4. On the other hand, it is to be noted, main contractor has handed over the work to the assessee on back to back basis and payments towards execution of work was received by the main contractor from the Government directly and after retaining his margin of 4% the balance amount is remitted to the assessee. Therefore, the 4% margin retained by the main contractor cannot be said to be in the nature of commission but the margin/profit retained by the main contractor for having sub- contracted work to the assessee. It is also established on record that the assessee never makes any payment to the main contractor. On the contrary, the main contractor makes the payment to the assessee after receiving the payments from the Government. Therefore, as there is no payment by the assessee to the main contractor, only because the assessee has debited the amount to its P&L A/c, it cannot be inferred that commission to that extent was paid by the assessee to the main contractor thereby attracting the provisions of section 194H. In the aforesaid facts and circumstances, we are of the view that Ld. CIT(Appeals) was justified in deleting the addition made by the Assessing Officer. Accordingly, we uphold the order of Ld. CIT(Appeals) by dismissing the grounds raised by the Department.

6 ITA No. 606/Hyd/2014 & C.O.No.60/Hyd/2014 In the result, the appeal of the Department is dismissed.

5. The cross-objections of the assessee merely supports the order of Ld. CIT(Appeals). In view of our decision in department's appeal (supra), upholding the order of Ld. CIT(Appeals), assessee's Cross-Objection has become infructuous and accordingly dismissed.

In the result, both the department's appeal and assessee's Cross-Objections are dismissed.

Pronounced in the open court on 13-02-2015

Sd/- Sd/- (J. SUDHAKAR REDDY ) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 13-02-2015 TNMM

Copy to:-

1) The Income Tax Officer, Ward - 6(3), 6-C, I.T.Towers, A.C.Guards, Masabtank, Hyderabad.

2) M/s Pioneer Roadways, 8-2-268/A/1, Plot No.654, Road No.3, Banjara Hills, Hyderabad.

3) CIT(A)-IV, Hyderabad

4) CIT-III, Hyderabad

5) The Departmental Representative, I.T.A.T., Hyderabad.