Shivgaya Ramkuar Gupta,, Pune vs Assessee

against the separate orders dated 28-06-2013 of the CIT(A)-V,

Pune relating to Assessment Years 2007-08 and 2009-10

respectively. For the sake of convenience, these were heard

together and are being disposed of by this common order.

2. First we take up ITA No.1654/PN/2013 for A.Y. 2007-08 as

the lead case. Facts of the case, in brief, are that the assessee is a

job worker carrying out processing of material on behalf of

customers. He filed his return of income on 26-09-2007 declaring

total income of Rs.12,01,558/-. During the course of assessment

proceedings the Assessing Officer noted that the tax auditor in the

Form No.3CB and 3CD has reported that no TDS was made in

respect of labour charges of Rs.69,23,135/- debited to the profit

and loss account. He therefore asked the assessee to explain as to 2

why the assessee has not disallowed the same at the time of filing

of the return as the said labour charges debited to the profit and

loss account is not allowable u/s.40(a)(ia). It was accepted by the

assessee that no TDS was made in respect of the labour charges

and also the said labour charges were not disallowed at the time of

filing of return. The Assessing Officer, therefore, disallowed an

amount of Rs.69,23,135/- to the total income of the assessee

u/s.40(a)(ia) of the I.T. Act. (similar disallowance has been made by

the Assessing Officer amounting to Rs.43,05,047/- in A.Y. 2009-

10).

3. Before CIT(A) it was submitted that provisions of section

40(a)(ia) are not applicable as no amount was outstanding at the

end of the year. For the above proposition the assessee relied upon

the decision of the Visakhapatnam Special Bench of the Tribunal

in the case of Merilyn Shipping and Transports Ltd. reported in

145 TTJ 1. However, the Ld.CIT(A) following the decision of the

Hon'ble Gujarat High Court in the case of CIT Vs. Sikandar Khan

N. Tunvar order dated 02-05-2013 and the decision of the Hon'ble

Calcutta High Court in the case of CIT Vs. Crescent Export

Syndicate order dated 03-04-2013 held that the decision of the

Special Bench is not the correct law. He accordingly upheld the

disallowance made by the Assessing Officer u/s.40(a)(ia).

4. Aggrieved with such order of the CIT(A) the assessee is in

appeal before us with the following grounds :

"The following grounds are taken without prejudice to each other --

On facts and in law,

1. The learned CIT(A) erred in confirming the disallowance of Rs. 69,23,135/- u/s 40(a)(ia) made by the learned A.O. on the ground that the assessee ought to have deducted TDS on the labour charges paid of Rs. 69,23,135/-.

3 2. The learned CIT(A) erred in holding that --

a. The payment of labour charges by the assessee were in the nature of sub contract payments and hence, the assessee ought to have deducted TDS on the said payments.

b. The assessee had allotted sub contracts to other parties and hence, the assessee was liable to deduct TDS under the provisions of section 194C(2) of the Act.

3. The learned CIT(A) failed to appreciate that the disallowance u/s 40(a)(ia) was not justified for the following reasons -

a. The job work contracts given by the assessee to other parties did not involve the transfer of any obligations or risks attached to the principal contract received by the assessee and hence, the said contracts were not in the nature of 'subcontracts'.

b. The assessee had entered into separate contracts with the other parties for job work which were independent from the principal contract received by the assessee and hence, the said contracts were not in the nature of 'sub contracts'.

c. Since the assessee had not entered into any sub contracts, he was not required to deduct TDS u/s. 194C(2) of the Act and hence, the disallowance u/s. 40(a)(ia) is not justified on the facts of the case.

Without prejudice to the above grounds, the assessee submits the following grounds :

4. The Ld.CIT(A) ought to have appreciated that the disallowance u/s.40(a)(ia) can be made only in respect of the amount payable as at the year end and hence, even if, any disallowance is to be made, the same may be restricted to the amount payable as on 31-03-2007.

5. The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal."

5. The Ld. Counsel for the assessee at the outset submitted

that the issue regarding the disallowance u/s.40(a)(ia) when no

amount is payable at the end of the year is decided against the

assessee by the decisions of the Coordinate Benches of the

Tribunal. However, referring to Ground of appeal No.3 he

submitted that the job work contracts given by the assessee to

other parties did not involve the transfer of any obligations or risks

attached to the principal contract received and therefore the said 4

contracts were not in the nature of sub-contract and therefore the

assessee is not required to deduct TDS u/s.194C(2).

5.1 Referring to the decision of the Pune Bench of the Tribunal

in the case of Shri Premprakash Vishwakarma vide ITA

No.325/PN/2013 order dated 30-06-2014 he submitted that under

identical circumstances, the Tribunal has deleted the disallowance

made by the Assessing Officer u/s.40(a)(ia) and upheld by the

CIT(A). He submitted that although this argument was not raised

before the lower authorities, however, since this is a legal ground

and assessee denies its liability for deduction of tax u/s.194C(2),

therefore, the matter may be set aside to the file of the Assessing

Officer with a direction to decide the issue afresh in the light of the

decision of the Tribunal in the case of Shri Premprakash

Vishwakarma (Supra).

6. The Ld. Departmental Representative on the other hand

while supporting the order of the CIT(A) submitted that the

arguments advanced by the assessee were not taken before the

lower authorities. Therefore, the same should not be accepted and

the appeal filed by the assessee should be dismissed.

7. We have considered the rival arguments made by both the

sides, perused the orders of the Assessing Officer and the CIT(A)

and the Paper Book filed on behalf of the assessee. We have also

considered the various decisions cited before us. We find the

Assessing Officer in the instant case disallowed an amount of

Rs.69,23,135/- u/s.40(a)(ia) since the assessee has not deducted

TDS on the labour charges paid of the equal amount. We find the

CIT(A) upheld the action of the Assessing Officer on account of

such default in deducting TDS from the labour charges paid. It is

the submission of the Ld. Counsel for the assessee that the job 5

work contracts given by the assessee to other parties did not

involve transfer of any obligations or risks attached to the principal

contract received by the assessee and therefore the said contracts

were not in the nature of sub contracts and therefore there is no

liability on the part of the assessee to deduct TDS u/s.194C(2) of

the I.T. Act. We find an identical issue had come up before the

Tribunal in the case of Pramprakash Vishwakarma (Supra) where

it has been observed as under :

"3.3 Now, the issue arises is as to whether the labour charges paid by the assessee are in the nature of contract awarded by the assessee or sub contract awarded. The customer provides the raw material to the assessee for carrying out certain job work. Since the assessee do not have certain machines and hence, the assessee in turn, gives the contract to other labour contractors to carry out part of the job. Ultimately the assessee is liable for the work carried out by them. This is evident from the purchase order from Jinabakul Forge Pvt. Ltd. for whom the assessee do the job work, wherein it is clearly mentioned that rejection upto 1% is allowed and rejection more than 1% would be to the assessee's account. When the assessee gives the contract to the other labour contractor, it is a contract between the assessee and the labour contractor and the original customer is not at all involved in the same. In case, the labour contractor does not carry out the job or does a faulty job, the assessee is liable to the ultimate customer and not the labour contractor. Accordingly, that the labour contract given by the assessee is in the nature of separate contract of work and therefore, assessee was not liable to deduct TDS under the provisions of section 194C.

3.4 The assessee is fully responsible for executing the main contract and the labour contractor has no relation with the principal Jinabakul Forge Pvt. Ltd. One of the main features for a contract to qualify as a subcontract is that the subcontractor should be eligible not just for the rewards but also risk associated with the execution of the main contract of the principal. The main element of risk of the alleged subcontract is missing in assessee's case and therefore, the payments made by the assessee to various labour contractors for above mentioned works could not said to be as payment to subcontractor. The provisions of section 194C(2) deals with payments to contractors. Accordingly, in case any person responsible for paying any sum to any resident for carrying out any work in pursuance of a contract between the contractor and specified person shall at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct tax at source as stipulated under the provisions of section 194(2) of the Act.

3.5 The provisions of section 40(a)(ia) of the Act deals with the deductibility of amount deductible and relevant clause reads as under:

6 "Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "profits and gains of business or profession".

(a). In the case of any assessee ...

(i).......

(ia) any interest, commission or brokerage [rent, royalty], fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or subcontractor, being resident, for carrying out any work (including supply of labour for carrying out any work) on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or after deduction (has not been paid on or before the due date specified in sub-section (1) of section 139."

3.6 The assessee has in fact, engaged various labour contractors as discussed above for which, the assessee himself was responsible for executing the contract and the labour contractors had no privacy of contract with Principal customer. No risk factor was associated with the alleged subcontract. The whole control of the work was in the hands of the assessee and labour contract was executed under the full control of the assessee himself. For a contract to qualify as a subcontractor, the subcontractor should spend their time and energy and also undertake the risk attached with the main contract. As the element of risk taking was missing, the contract could not be held as subcontract. Accordingly, the payments made to the labour contractors are not in the nature of sub-contracts and hence, there was no obligation on the assessee to deduct TDS on the said payments and consequently, no disallowance could be made u/s. 40(a)(ia) of the Act.

3.7 We find that ITAT, Pune Bench in the case of Mr. Vijay Ramchandra Shirsth (supra) had occasion to decide the same issue which was dealt as under:

"5. Having heard the rival contentions and having perused the material on record, we find that the assessee was awarded the contract on the basis of participation in various tenders. For executing the contract, the assessee had to engage the services of outside parties in various works. To be precise, the assessee engaged the services of outside parties for centring, tiling and fabrication work and tiling works, for which payments exceeded Rs.50,000 in each case. The assessee is carrying on civil work in individual capacity.

5.1. The provisions of section 194C(2), deals with payments to contractors . Accordingly, in case any person responsible for paying any sum to any resident for carrying out any work in pursuance of a contract between the contractor and specified person shall at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct tax at source as stipulated under the provisions of section 194(2) of the Act.

The provisions of section 40(a)(ia) deals with the deductibility of amount deductible and relevant clause reads as under:

"Notwithstanding ........."

7 5.2. The issue before us is whether payment has been made for centring, tiling and fabrication work amounts to payment to contractor or sub-contractor so as to invoke provisions of section 194C (2) for the purpose of TDS and allowability of same as per provisions of Section 40(a)(ia) of the Act. We find from the sample copy of tender document of Saguna where in one of the condition between the principal and the assessee in respect of the contract to be executed is that the assessee was prohibited to subcontract any part of his work without written permission of architect/company. There is nothing on record to suggest that any such written permission or other work was claimed by the assessee. Even the remand report in this regard was called for in A.Y. 2006-07, However, the CIT(A) concluded by stating that the assessee could not take shelter of this clause and the payments made were payments towards subcontracting. This approach of the revenue is not justified because the burden is on the revenue to establish that the assessee, in fact, has violated the terms of conditions of subcontracting the contract granted by the principal.

The assessee has in fact engaged various agencies as discussed above for which, the assessee itself was responsible for executing the contract and alleged agencies of subcontract had no privacy of contract with principal. No risk factor was associated with the alleged subcontract. The whole control of the work was in the hands of the assessee and alleged subcontract work was executed i.e. centring, tiling and fabrication work under the full control of the assessee itself. There are no such discretion with alleged subcontractor for executing the above works. They were executing the work as per requirement of tender under full control and supervision of assessee. This view is fortified by the decision in the case of Myhtri Transport Corporation vs. ACIT, 124 ITD 40(Vishakhapatnam), wherein the Tribunal has held that for a contract to qualify as a subcontractor, the subcontractor should spend their time and energy and also undertake the risk attached with the main contract. As the element of risk taking was missing, the contract could not be held as subcontract. While passing the above said order, the Tribunal has taken into consideration the decision reported in 163 ITR 702 (Himachal).

Similarly, in the case of R.R. Carrying Corporation vs. ACIT, 126 TTJ 2240(/CTK), it has been held by the Tribunal that the AO has to establish that relationship was that of a contractor and subcontractor. There was no written nor real agreement to substantiate the view taken by the AO and therefore, it cannot be held to be a contract. We are aware of the fact that the agreement can be oral but the essence of contract lies on the fact whether assessee had the control of the work i.e. the manner in which the work has to be done. In case it lies with the assessee then it is not the subcontract so as to attract the provisions of section 194C(2) of the Act and subsequently the rigour of section 40(a)(ia) would not come into play for executing centring, tiling and fabrication through different persons. In instant case, the control lies with the assessee and the alleged subcontractor are merely executing the work of centring and fabrication under the full control of the assessee itself. Even nomenclature used by parties as subcontract does not change the real spirit of contract. Under facts and circumstances, revenue authorities were not justified in making disallowance by invoking provisions of section 40(a)(ia) of the Act.

Same is directed to be deleted. Similar disallowance has been made in the year 2006-07. Facts being similar so following same reasoning, disallowance in question are directed to be deleted."

8

In view of above discussion, we find that in the case of Vijay Ramchandra Shirsth (supra), the Tribunal has decided the issue in favour of assessee by following the decision of Cuttack Bench in the case of R.R. Carrying Corporation vs. ACIT, 126 TTJ 2240(/CTK) and in turn, the same got strength from the decision in the case of Myhtri Transport Corporation vs. ACIT, 124 ITD 40 (Vishakhapatnam), wherein the Tribunal has held that for a contract to qualify as a subcontractor, the subcontractor should spend their time and energy and also undertake the risk attached with the main contract. As the element of risk was missing, the contract could not be held as subcontract.

4. In the case before us, there is no written or real agreement to substantiate the view taken by the Assessing Officer and therefore, it could not be held to be a contract. We are aware of the fact that the agreement can be oral but the essence of contract lies on the fact whether assessee had the control of the work i.e. the manner in which the work has to be done. In case it lies with the assessee then it is not the subcontract so as to attract the provisions of section 194C(2) of the Act and subsequently the rigour of section 40(a)(ia) would not come into play for executing work of roughing and finishing of job work. Under the facts and circumstances, the authorities below were not justified in making disallowance u/s.40(a)(ia). The same is directed to be deleted. Before parting with this decision we want to make it clear that the alternative plea taken by the assessee on legal issue goes academic. So, we are not addressing the same. However, the assessee is at liberty to raise the same as and when need arises."

7.1 Since the argument that the assessee is not liable to deduct

tax u/s.194C(2) is advanced before us for the first time and the

lower authorities have no occasion to decide the issue from this

angle, therefore, we in the interest of justice, deem it proper to

restore the issue back to the file of the Assessing Officer with a

direction to decide the issue afresh in the light of the decision of

the Tribunal cited (Supra) and in accordance with law. Needless to

say the Assessing Officer shall give due opportunity of being heard

to the assessee. We hold and direct accordingly. Ground of appeal

No.3 by the assessee is accordingly allowed for statistical purposes.

8. Since the Ld. Counsel for the assessee has conceded that the

issue of disallowance u/s.40(a)(ia) when no amount is payable at

the end of the year is against the assessee, therefore, ground of

appeal No.4 by the assessee is dismissed.

9

9. Grounds of appeal No. 1, 2 & 5 being general in nature are

dismissed.

ITA No.1655/PN/2013 (A.Y. 2009-10) :

10 The grounds raised by the assessee are as under :

"The following grounds are taken without prejudice to each other --

On facts and in law,

1. The learned CIT(A) erred in confirming the disallowance of Rs.43,05,047/- u/s 40(a)(ia) made by the learned A.O. on the ground that the assessee ought to have deducted TDS on the labour charges paid of Rs. 43,05,047/-.

2. The Ld.CIT(A) ought to have appreciated that the disallowance u/s.40(a)(ia) can be made only in respect of the amount payable as at the year end and hence the same may be restricted to the amount payable as on 31-03-2009.

3. The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal."

11. Facts in brief are that the Assessing Officer disallowed an

amount of Rs.43,05,047/- u/s.40(a)(ia) for non-deduction of tax,

the details of which are as under :

1. Labour Charges Rs.42,35,766/-

2. Account writing charges Rs. 24,000/-

3. Audit Fees Rs. 45,281/-

--------------------

TOTAL Rs.43,05,047/- --------------------

In appeal the Ld.CIT(A) upheld the disallowance made by the

Assessing Officer. Aggrieved with such order, the assessee is in

appeal before us.

12. After hearing both the sides, we find the amount of

Rs.42,35,766/-disallowed u/s.40(a)(ia) are identical to the facts in

ITA No.1654/PN/2013. Following the reasons stated while 10

deciding the said appeal we restore the issue of disallowance

u/s.40(a)(ia) on account of labour charges paid at Rs.42,35,766/-

without deducting TDS to the file of the Assessing Officer for fresh

adjudication in the light of the directions given therein.

13. So far as the disallowance u/s.40(a)(ia) on account of non

deduction of tax from account writing charges Rs.24,000/- and

audit fees Rs.45,281/- nothing was brought to our notice by the

Ld. Counsel for the assessee so as to take a contrary view.

Therefore, the order of the CIT(A) upholding the disallowance

u/s.40(a)(ia) on account of account writing charges and audit fees

is upheld. Grounds raised by the assessee are accordingly partly

allowed.

14. In the result, both the appeals filed by the assessee are

partly allowed for statistical purposes.

Pronounced in the open court on 26-06-2015.

Sd/- Sd/- (VIKAS AWASTHY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER

satish Pune Dated: 26th June, 2015

Copy of the order forwarded to :

1. Assessee 2. Department 3. CIT(A)-V, Pune 4. CIT-V, Pune 5. The D.R, "A" Pune Bench 6. Guard File

By order // True Copy //

Senior Private Secretary ITAT, Pune Benches, Pune