HCC- L & T PURULIA JOINT VENTURE, MUMBAI V. DCIT 23(1), MUMBAI

ITA 3041/MUM/2010

• Counselvise Citation: 304119914 RSA 2010
• Duration Of Justice: 1 year(s) 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 06-06-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 16-04-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V V SHASTRI
• Assessee Lawyers: H P MAHAJANI
• Section: 194C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH H, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI R.K.PANDA (A .M) ITA NO.1644/MUM/2010(A.Y. 2006-07) ITA NO.3041/MUM/2010(A.Y.2007-08) HCC-L&T PURULIA JOINT VENTURE, HINCON HOUSE, LBS MARG, VIKHROLI (W), MUMBAI 83 PAN:AAAH0710K (APPELLANT) VS. THE JCIT 23(1), 1 ST FLOOR, C-10, PRATYAKSHA KAR BHAVAN, BKC, BANDRA (E), MUMBAI 51. (RESPONRSEDENT) APPELLANT BY : SHRI H.P.MAHAJANI RESPONDENT BY : SHRI V.V.SHASTRI ORDER PER BENCH, ITA NO.1644/M/2010 IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 22/1/2010 OF CIT(A) XXXIII, MUMBAI RELATING T O ASSESSMENT YEAR 2006-07. GROUND NO.1 RAISED BY THE ASSESSEE READS AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANC E OF 15% OUT OF PAYMENTS MADE TO VENDORS COVERED BY THE PROVISIONS OF SECTION 40A(2)(B) OF THE INCOME TAX ACT. THE ADDITION BE D ELETED. 2. THE ASSESSEE IS AN AOP. IT IS A JOINT VENTURE B ETWEEN HINDUSTAN CONSTRUCTION COMPANY LTD. AND LARSEN & TOUBRO LIMIT ED. THE JOINT VENTURE WAS FORMED TO EXECUTE ON A SUB-CONTRACT BASIS FROM THE MAIN CONTRACTOR M/S. TAISEI CORPORATION, THE PURULIA PUMPED STORA GE PROJECT OF WEST BENGAL STATE ELECTRICITY BOARD (WBSEB). IN THE COU RSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT THE AOP HAD PAID HIRE CHARGES TO ONE OF ITS MEMBERS NAMELY RS. 83,32,000/- TO L&T LTD. TOWARDS MACHINERY HIRE CHARGES OF RS. 1,62,30,194/- TO M/S. HINDUSTAN CONSTRUCTION ITA NO.1644/MUM/2010(A.Y. 2006-07) ITA NO.3041/MUM/2010(A.Y.2007-08) 2 COMPANY LTD. ACCORDING TO THE ASSESSEE THE MACHINE RIES THAT WERE TAKEN ON LEASE WERE HIGHLY SPECIALIZED EQUIPMENTS FOR WHICH THERE WAS NO READY HIRE MARKET. THE AOP DID NOT PROCURE THIS MACHINE ON IT S OWN BECAUSE OF HIGH LEAD TIME AND OTHER PROCEDURAL DELAYS IN PURCHASE O F SUCH SPECIALIZED EQUIPMENTS. FURTHER DELAY IN PROCURING THE MACHINE RY WOULD MEAN DELAYED COMPLETION OF THE PROJECT. THE COST INVOLVED ALSO DID NOT JUSTIFY MAKING HUGE INVESTMENT BY THE AOP. THE ASSESSEE POINTED OUT TH AT THE HIRE CHARGES PAID WERE 3% OF THE COST OF THE MACHINERY WHICH A GENERA L PRACTICE IN THE CONSTRUCTION INDUSTRY. 3. THE ASSESSING OFFICER HOWEVER NOTICED THAT IN T HE A.Y 2005-06, 15% OF THE PAYMENTS OF HIRE CHARGES BY THE AOP TO ITS MEMB ERS WAS CONSIDERED EXCESSIVE AND DISALLOWED AS A DEDUCTION BY INVOKING THE PROVISIONS OF SECTION 40A(2)(B) OF THE INCOME TAX ACT, 1961 (THE ACT). T HE ASSESSING OFFICER, THEREFORE, DISALLOWED 15% OF THE HIRE CHARGES PAID TO THE RELATED PARTIES. 4. ON APPEAL BY THE ASSESSEE THE CIT(A) CONFIRMED T HE ORDER OF THE ASSESSING OFFICER FOLLOWING THE ORDER OF THE CIT(A) ON IDENTICAL ISSUE IN A.Y 2005-06. 5. AT THE TIME OF HEARING IT WAS BROUGHT TO OUR NOT ICE THAT IN A.Y. 2005- 06 THIS TRIBUNAL CONSIDERED IDENTICAL ISSUE AND SET ASIDE THE ORDER OF THE CIT(A) AND REMANDED THE ISSUE FOR FRESH CONSIDERATI ON BY THE ASSESSING OFFICER. IN VIEW OF THE ABOVE WE SET ASIDE THE ORD ER OF THE CIT(A) IN THE PRESENT ASSESSMENT YEAR AND REMAND THE ISSUE TO ASS ESSING OFFICER IN THE LIGHT OF THE DECISION THAT MAY BE ARRIVED AT BY THE ASSESSING OFFICER IN 2005- 06. 6. GROUND NO.2 RAISED BY THE ASSESSEE READS AS FOLL OWS: ITA NO.1644/MUM/2010(A.Y. 2006-07) ITA NO.3041/MUM/2010(A.Y.2007-08) 3 ON THE FATS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANC E U/S. 40(A)(IA) OF THE INCOME TAX ACT VARY WITH SECTION 194C OF THE IN COME TAX ACT. 7. AS WE HAVE ALREADY SEEN THE ASSESSEE IS AN AOP. IT WAS EXECUTING AS A SUB-CONTRACTOR THE PURULIA PUMP STORAGE PROJECT OF THE WBSEB ON BEHALF OF THE MAIN CONTRACTOR M/S. TAISEI CORPORATION. THE ASSESSEE AOP AS A SUB- CONTRACTOR IN TURN EXECUTED THE SUB-CONTRACT THROUG H VARIOUS PERSONS (HEREINAFTER REFERRED TO AS SUB SUB-CONTRACTOR). T HE ASSESSEE MADE PAYMENT TO SUB SUB-CONTRACTORS. ACCORDING TO THE ASSESSING OFFICER THE ASSESSEE OUGHT TO HAVE DEDUCTED TAX AT SOURCE ON PAYMENTS MA DE TO THE SUB SUB- CONTRACTORS AND SINCE THE ASSESSEE FAILED TO MAKE D EDUCTION OF TAX AT SOURCE, THE AMOUNTS PAID TO THE SUB-SUB CONTRACTORS CANNOT BE CLAIMED AS DEDUCTION AS AN EXPENDITURE WHICH WAS DEBITED IN TH E P&L ACCOUNT BECAUSE OF THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. THE CIT(A) CONCURRED WITH THE VIEW OF THE ASSESSING OFFICER. 8. THE PLEA OF THE ASSESSEE WAS THAT: A) SUB-SECTION (1) OF SECTION 194C DEALS WITH PAYME NTS MADE BY THE CLIENT TO THE CONTRACTOR. HENCE PAYMENTS MADE BY T HE WEST BENGAL STATE ELECTRICITY BOARD TO M/S. TAISEI CORPORATION, JAPAN WOULD ONLY BE COVERED BY THIS SUB-SECTION, HAD TAISEI CORPORAT ION BEEN A RESIDENT ENTITY. B) SUB-SECTION (2) OF SECTION 194C DEALS WITH PAYME NTS MADE BY THE MAIN CONTRACTOR TO THE SUB-CONTRACTOR. HENCE PAYME NTS MADE BY TAISEI CORPORATION, JAPAN TO THE ASSESSEE JOINT VEN TURE WOULD BE COVERED BY THIS SUB-SECTION. THE ASSESSEE POINTED OUT THAT EXPLANATION 1 TO SEC. 194-C OF THE ACT, WHICH DEFINES THE TERM CONTRACTOR PROVIDES THAT CONTR ACTOR SHALL ALSO INCLUDE A ITA NO.1644/MUM/2010(A.Y. 2006-07) ITA NO.3041/MUM/2010(A.Y.2007-08) 4 CONTRACTOR WHO IS CARRYING OUT ANY WORK IN PURSUANC E OF A CONTRACT BETWEEN THE CONTRACTOR AND THE GOVERNMENT OF A FOREIGN STAT E OR A FOREIGN ENTERPRISE OR ANY ASSOCIATION OR BODY ESTABLISHED OUTSIDE INDI A. THE ASSESSEE BROUGHT TO THE NOTICE OF THE CIT(A), THE OBJECTIVE OF THE S AID DEFINITION AS EXPRESSLY STATED IN PARA 51 OF CBDT CIRCULAR NO.684 DATED 10. 06.1994, WHICH PROVIDED EXPLANATORY NOTES ON THE PROVISIONS OF FIN ANCE ACT 1994, WHICH IS REPRODUCED AS UNDER: 51. SECTION 194C(2) OF THE INCOME TAX ACT CONTAINS PROVISIONS RELATING TO DEDUCTION OF INCOME-TAX AT SOURCE FROM PAYMENTS MADE TO A SUB- CONTRACTOR BY A CONTRACTOR. PRIOR TO THE AMENDMENT MADE BY THE FINANCE ACT, THESE PROVISIONS WERE APPLICABLE ONLY WHERE THE CONTRACTOR WAS A RESIDENT PERSON REFERRED TO IN SEC TION 194C(1) OF THE ACT, THAT IS TO SAY, HE HAD TAKEN A CONTRACT FOR CA RRYING OUT ANY WORK, OR FOR SUPPLY OF LABOUR FOR CARRYING OUT ANY WORK, FROM THE CENTRAL GOVERNMENT OR ANY STATE GOVERNMENT, A LOCAL AUTHORI TY, A STATUTORY CORPORATION OR A COMPANY, ETC. [I.E. THE AGENCIES S PECIFIED IN SECTION 194C(1)]. IN THE RECENT PAST, CERTAIN INSTANCES HA D COME TO NOTICE WHERE THE RESIDENT CONTRACTORS ENTERED INTO CONTRAC TS WITH THE GOVERNMENT OF A FOREIGN STATE, ETC. AND PARCELED OU T THE WORK OF SUCH CONTRACTS TO SUB-CONTRACTORS WHO WERE ALSO RESIDENT S. IN SUCH CASES, THE PAYMENTS MADE BY THE CONTRACTORS TO SUB-CONTRAC TORS WERE NOT SUBJECT TO THE REQUIREMENT OF DEDUCTION OF INCOME-T AX AT SOURCE. THE NEED IS TO BRING THESE PAYMENTS ALSO WITHIN THE SCO PE OF DEDUCTION OF INCOME TAX AT SOURCE. 51.2. THE FINANCE ACT HAS, THEREFORE, AMENDED SECT ION 194C (2) OF THE INCOME-TAX ACT, IN ORDER TO PROVIDE THAT THE EXPRES SION CONTRACTOR SHALL ALSO INCLUDE A CONTRACT WHO IS CARRYING OUT A NY WORK(INCLUDING SUPPLY OF LABOUR FOR CARRYING OUT ANY WORK) IN PURS UANCE OF A CONTRACT BETWEEN THE CONTRACTOR AND THE GOVERNMENT OF A FORE IGN STATE OR A FOREIGN ENTERPRISE OR ANY ASSOCIATION OR BODY ESTAB LISHED OUTSIDE INDIA. THE ASSESSEE POINTED OUT THAT IN THE PRESENT CASE T HAT THE CLIENT (MAIN CONTRACTOR) IN THE INSTANT CASE WAS A RESIDENT WHER EAS THE EXPLANATION-1 CONTEMPLATES A CASE WHERE MAIN CONTRACTOR IS A NON- RESIDENT. THUS THE ASSESSEE SUBMITTED THAT THE TDS PROVISIONS ARE DESI GNED TO COVER PAYMENTS MADE BY A CLIENT TO A CONTRACTOR AND THEREAFTER PAY MENTS MADE BY A ITA NO.1644/MUM/2010(A.Y. 2006-07) ITA NO.3041/MUM/2010(A.Y.2007-08) 5 CONTRACTOR TO A SUB-CONTRACTOR. HOWEVER, THESE PRO VISIONS DO NOT REQUIRE DEDUCTION OF TDS ON PAYMENTS MADE BY ONE SUB-CONTRA CTOR TO A PERSON TO WHOM THE WORK HAS FURTHER BEEN DELEGATED. THERE IS NO DOUBT THEREFORE THAT A SUB-CONTRACTOR IS NOT REQUIRED TO DEDUCT TDS UNDE R THE PROVISIONS OF SECTION 194 C. THE ASSESSEE ALSO SUBMITTED THAT TH E ABOVE SUBMISSION IS FURTHER BOLSTERED BY THE RATES ASSIGNED FOR DEDUCTI ON AT EACH LEVEL. A CLIENT IS REQUIRED TO DEDUCT TDS AT 2% (BASIC RATE) FROM P AYMENTS TO THE CONTRACTOR. THEREFORE, THE CONTRACTOR IS REQUIRED TO DEDUCT TDS AT 1% FROM THE PAYMENTS MADE TO THE SUB-CONTRACTOR. IT WAS SU BMITTED THAT AS ONE GOES DOWN CHAIN THE RATE OF TDS DECREASES. IN SUCH SCE NARIO A FURTHER RATE HAS ALSO NOT BEEN PRESCRIBED BY THE LEGISLATURE IN CONN ECTION WITH PAYMENTS MADE BY A SUB-CONTRACTOR TO ANOTHER SUB-CONTRACTOR. IT WAS FURTHER POINTED OUT THAT THE PROVISIONS OF SECTION 194C AS SUBSTITUTED BY THE FINANCE ACT NO.2, 2009 W.E.F. 1/10/2009 CONTAINS A DEFINITION OF CONTRACT IN EXPLANATION (III) WHICH PROVIDES THAT CONTRACT SHAL L INCLUDE SUB-CONTRACT. THUS PRIOR TO THIS AMENDMENT A CONTRACT BETWEEN A S UB-CONTRACTOR AND SUB SUB-CONTRACTOR IS OUTSIDE THE PURVIEW OF SECTION 19 4 C OF THE ACT. 9. THE LD. D.R HOWEVER SUBMITTED THAT THE PAYMENTS CLEARLY FALL WITHIN THE DEFINITION OF PAYMENTS TO SUB-CONTRACTOR AS CON TEMPLATED IN EXPLANATION -1 TO SECTION 194C OF THE ACT AS IT EXISTED PRIOR T O THE SUBSTITUTED SECTION 194C SUBSTITUTED BY FINANCE ACT, 2009 W.E.F. 1/10/2 009. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE PROVISIONS OF SEC.194- C OF THE ACT, AS IT EXISTED AS ON 1-4-2007 IS AS FO LLOWS: 194C. PAYMENTS TO CONTRACTORS AND SUB-CONTRACTORS. --@@(1) ANY PERSON RESPONSIBLE FOR PAYING ANY SUM TO ANY RESIDE NT (HEREINAFTER IN THIS SECTION REFERRED TO AS THE CONTRACTOR) FOR CAR RYING OUT ANY WORK (INCLUDING SUPPLY OF LABOUR FOR CARRYING OUT ANY WO RK) IN PURSUANCE OF A CONTRACT BETWEEN THE CONTRACTOR AND ITA NO.1644/MUM/2010(A.Y. 2006-07) ITA NO.3041/MUM/2010(A.Y.2007-08) 6 (A) THE CENTRAL GOVERNMENT OR ANY STATE GOVERNMENT ; OR (B) ANY LOCAL AUTHORITY ; OR (C) ANY CORPORATION ESTABLISHED BY OR UNDER A CENTR AL, STATE OR PROVINCIAL ACT ; OR (D) ANY COMPANY ; OR (E) ANY CO-OPERATIVE SOCIETY ; OR (F) ANY AUTHORITY, CONSTITUTED IN INDIA BY OR UNDER ANY LAW, ENGAGED EITHER FOR THE PURPOSE OF DEALING WITH AND SATISFYING THE NEED FOR HOUSING ACCOMMODATION OR FOR THE PURPOSE O F PLANNING, DEVELOPMENT OR IMPROVEMENT OF CITIES, TOWNS AND VIL LAGES, OR FOR BOTH ; OR (G) ANY SOCIETY REGISTERED UNDER THE SOCIETIES REGI STRATION ACT, 1860 (21 OF 1860) OR UNDER ANY LAW CORRESPONDING TO THAT ACT IN FORCE IN ANY PART OF INDIA ; OR (H) ANY TRUST ; OR (I) ANY UNIVERSITY ESTABLISHED OR INCORPORATED BY O R UNDER A CENTRAL, STATE OR PROVINCIAL ACT AND AN INSTITUTION DECLARED TO BE A UNIVERSITY UNDER SECTION 3 OF THE UNIVERSITY GRAN TS COMMISSION ACT, 1956 (3 OF 1956) ; OR (J) ANY FIRM ; OR (K) ANY INDIVIDUAL OR A HINDU UNDIVIDED FAMILY, WHO SE TOTAL SALES, GROSS RECEIPTS OR TURNOVER FROM THE BUSINESS OR PROFESSION CARRIED ON BY HIM EXCEED THE MONETARY LIMITS SPECIF IED UNDER CLAUSE (A) OR CLAUSE (B) OF SECTION 44AB DURING THE FINANCIAL YEAR IMMEDIATELY PRECEDING THE FINANCIAL YEAR IN WHICH S UCH SUM IS CREDITED OR PAID TO THE ACCOUNT OF THE CONTRACTOR, SHALL, AT THE TIME OF CREDIT OF SUCH SUM TO THE ACC OUNT OF THE CONTRACTOR OR AT THE TIME OF PAYMENT THEREOF IN CASH OR BY ISS UE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE, WHICHEVER IS EARLIER, D EDUCT AN AMOUNT EQUAL TO (I) ONE PER CENT. IN CASE OF ADVERTISING, (II) IN ANY OTHER CASE TWO PER CENT., OF SUCH SUM AS INCOME-TAX ON INCOME COMPRISED THERE IN : PROVIDED THAT NO INDIVIDUAL OR A HINDU UNDIVIDED FA MILY SHALL BE LIABLE TO DEDUCT INCOME-TAX ON THE SUM CREDITED OR PAID TO THE ACCOUNT OF THE CONTRACTOR WHERE SUCH SUM IS CREDITED OR PAI D EXCLUSIVELY FOR PERSONAL PURPOSES OF SUCH INDIVIDUAL OR ANY MEMBER OF HINDU UNDIVIDED FAMILY. (2) ANY PERSON (BEING A CONTRACTOR AND NOT BEING AN INDIVIDUAL OR A HINDU UNDIVIDED FAMILY), RESPONSIBLE FOR PAYING ANY SUM TO ANY RESIDENT (HEREAFTER IN THIS SECTION REFERRED TO AS THE SUB-CONTRACTOR) IN ITA NO.1644/MUM/2010(A.Y. 2006-07) ITA NO.3041/MUM/2010(A.Y.2007-08) 7 PURSUANCE OF A CONTRACT WITH THE SUB-CONTRACTOR FOR CARRYING OUT, OR FOR THE SUPPLY OF LABOUR FOR CARRYING OUT, THE WHOLE OR ANY PART OF THE WORK UNDERTAKEN BY THE CONTRACTOR OR FOR SUPPLYING WHETH ER WHOLLY OR PARTLY ANY LABOUR WHICH THE CONTRACTOR HAS UNDERTAKEN TO S UPPLY SHALL, AT THE TIME OF CREDIT OF SUCH SUM TO THE ACCOUNT OF TH E SUB-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 AN AMOUNT EQUAL TO ONE PER CENT. OF SUCH SUM AS INCOME-TAX ON INCOME C OMPRISED THEREIN. PROVIDED THAT AN INDIVIDUAL OR A HINDU UNDIVIDED FA MILY, WHOSE TOTAL SALES, GROSS RECEIPTS OR TURNOVER FROM THE BU SINESS OR PROFESSION CARRIED ON BY HIM EXCEED THE MONETARY LIMITS SPECIF IED UNDER CLAUSE (A) OR CLAUSE (B) OF SECTION 44AB DURING THE FINANC IAL YEAR IMMEDIATELY PRECEDING THE FINANCIAL YEAR IN WHICH SUCH SUM IS C REDITED OR PAID TO THE ACCOUNT OF THE SUB-CONTRACTOR, SHALL BE LIABLE TO DEDUCT INCOME-TAX UNDER THIS SUB-SECTION. EXPLANATION I.--FOR THE PURPOSES OF SUB-SECTION (2) , THE EXPRESSION 'CONTRACTOR' SHALL ALSO INCLUDE A CONTRACTOR WHO IS CARRYING OUT ANY WORK (INCLUDING SUPPLY OF LABOUR FOR CARRYING OUT A NY WORK) IN PURSUANCE OF A CONTRACT BETWEEN THE CONTRACTOR AND THE GOVERNMENT OF A FOREIGN STATE OR A FOREIGN ENTERPRISE OR ANY A SSOCIATION OR BODY ESTABLISHED OUTSIDE INDIA. EXPLANATION II.--FOR THE PURPOSES OF THIS SECTION, WHERE ANY SUM REFERRED TO IN SUB-SECTION (1) OR SUB-SECTION (2) I S CREDITED TO ANY ACCOUNT, WHETHER CALLED 'SUSPENSE ACCOUNT' OR BY AN Y OTHER OTHER NAME, IN THE BOOKS OF ACCOUNT OF THE PERSON LIABLE TO PAY SUCH INCOME, SUCH CREDITING SHALL BE DEEMED TO BE CREDIT OF SUCH INCOME TO THE ACCOUNT OF THE PAYEE AND THE PROVISIONS OF THIS SEC TION SHALL APPLY ACCORDINGLY. EXPLANATION III.--FOR THE PURPOSES OF THIS SECTION, THE EXPRESSION 'WORK' SHALL ALSO INCLUDE-- (A) ADVERTISING ; (B) BROADCASTING AND TELECASTING INCLUDING PRODUCTI ON OF PROGRAMMES FOR SUCH BROADCASTING OR TELECASTING ; ITA NO.1644/MUM/2010(A.Y. 2006-07) ITA NO.3041/MUM/2010(A.Y.2007-08) 8 (C) CARRIAGE OF GOODS AND PASSENGERS BY ANY MODE OF TRANSPORT OTHER THAN BY RAILWAYS ; (D)CATERING. (3) NO DEDUCTION SHALL BE MADE UNDER SUB-SECTION(1) OR SUB-SECTION (2) FROM-- (I) THE AMOUNT OF ANY SUM CREDITED OR PAID OR LIKEL Y TO BE CREDITED OR PAID TO THE ACCOUNT OF, OR TO, THE CONTRACTOR OR SU B-CONTRACTOR, IF SUCH SUM DOES NOT EXCEED TWENTY THOUSAND RUPEES : PROVIDED THAT WHERE THE AGGREGATE OF THE AMOUNTS OF SUCH SUMS CREDITED OR PAID OR LIKELY TO BE CREDITED OR PAID D URING THE FINANCIAL YEAR EXCEEDS FIFTY THOUSAND RUPEES, THE PERSON RESP ONSIBLE FOR PAYING SUCH SUMS REFERRED TO IN SUB-SECTION (1) OR, AS THE CASE MAY BE, SUB- SECTION (2) SHALL BE LIABLE TO DEDUCT INCOME-TAX UN DER THIS SECTION : PROVIDED FURTHER THAT NO DEDUCTION SHALL BE MADE UN DER SUB-SECTION (2), FROM THE AMOUNT OF ANY SUM CREDITED OR PAID OR LIKELY TO BE CREDITED OR PAID DURING THE PREVIOUS YEAR TO THE AC COUNT OF THE SUB- CONTRACTOR DURING THE COURSE OF BUSINESS OF PLYING, HIRING OR LEASING GOODS CARRIAGES, ON PRODUCTION OF A DECLARATION TO THE PERSON CONCERNED PAYING OR CREDITING SUCH SUM, IN THE PRES CRIBED FORM AND VERIFIED IN THE PRESCRIBED MANNER AND WITHIN SUCH T IME AS MAY BE PRESCRIBED, IF SUCH SUB-CONTRACTOR IS AN INDIVIDUAL WHO HAS NOT OWNED MORE THAN TWO GOODS CARRIAGES AT ANY TIME DURING TH E PREVIOUS YEAR : PROVIDED ALSO THAT THE PERSON RESPONSIBLE FOR PAYIN G ANY SUM AS AFORESAID TO THE SUB-CONTRACTOR REFERRED TO IN THE SECOND PROVISO SHALL FURNISH TO THE PRESCRIBED INCOME-TAX AUTHORITY OR T HE PERSON AUTHORISED BY IT SUCH PARTICULARS AS MAY BE PRESCRI BED IN SUCH FORM AND WITHIN SUCH TIME AS MAY BE PRESCRIBED ; OR (II) ANY SUM CREDITED OR PAID BEFORE THE 1ST DAY O F JUNE, 1972 ; OR (III) ANY SUM CREDITED OR PAID BEFORE THE 1ST DAY O F JUNE, 1973, IN PURSUANCE OF A CONTRACT BETWEEN THE CONTRACTOR AND A CO-OPERATIVE SOCIETY OR IN PURSUANCE OF A CONTRACT BETWEEN SUCH CONTRACTOR AND THE SUB-CONTRACTOR IN RELATION TO ANY WORK (INCLUDING S UPPLY OF LABOUR FOR CARRYING OUT ANY WORK) UNDERTAKEN BY THE CONTRACTOR FOR THE CO- OPERATIVE SOCIETY. ITA NO.1644/MUM/2010(A.Y. 2006-07) ITA NO.3041/MUM/2010(A.Y.2007-08) 9 EXPLANATION.FOR THE PURPOSES OF CLAUSE (I), GOODS CARRIAGE SHALL HAVE THE SAME MEANING AS IN THE EXPLANATION TO SUB- SECTION (7) OF SECTION 44AE. WE ARE OF THE VIEW THAT THE CONTENTIONS PUT FORTH O N BEHALF OF THE ASSESSEE HAS TO BE ACCEPTED. EXPLANATION-1 TO SECTION 194C OF THE ACT PROVIDES THAT OR THE PURPOSE OF SUB-SECTION(2) THE EXPRESSION CON TRACTOR SHALL ALSO INCLUDE A CONTRACTOR WHO IS CARRYING OUT ANY WORK IN PURSUA NCE OF A CONTRACT BETWEEN THE CONTRACTOR AND THE GOVERNMENT OF A FORE IGN STATE OR FOREIGN ENTERPRISE OR ANY ASSOCIATION OR BODY ESTABLISHED O UTSIDE INDIA. THUS THE EXPRESSION CONTRACTOR DID NOT INCLUDE WITHIN ITS FO LD A SUB-CONTRACTOR CARRYING OUT ANY WORK IN PURSUANCE OF A SUB-CONTRAC T WITH A SUB SUB- CONTRACTOR. IN OTHER WORDS SUB-SECTION (2) OF SECT ION 194C OF THE ACT APPLIES ONLY TO PAYMENTS MADE BY CONTRACTOR TO SUB-CONTRACT OR BUT DOES NOT APPLY TO A PAYMENT MADE BY A SUB-CONTRACTOR TO A SUB SUB-C ONTRACTOR. THE PROVISIONS OF SECTION 194 C AS SUBSTITUTED BY THE F INANCE ACT 2 OF 2009 W.E.F. 1/10/2009 HAS NOW NOT MADE ANY DISTINCTION B ETWEEN A PAYMENT TO A CONTRACTOR OR SUB-CONTRACTOR AND ALL PAYMENTS FOR C ARRYING OUT ANY WORK IN PURSUANCE OF CONTRACT ARE COVERED WITHIN THE FOLD O F SECTION 194C (1) OF THE ACT. FURTHER EXPLANATION (III) ALSO PROVIDES THAT A CONTRACT INCLUDE SUB- CONTRACT. THUS ON AND FROM 1/10/2009 PAYMENTS MADE BY SUB-CONTRACTOR TO A SUB SUB-CONTRACTOR WOULD ALSO BE COVERED UNDER SECTION 194C OF THE ACT. THE SUBSTITUTED PROVISIONS OF SEC.194-C OF TH E ACT, W.E.F. 1-10-2009 ARE AS FOLLOWS: 194C. PAYMENTS TO CONTRACTORS.--(1) ANY PERSON R ESPONSIBLE FOR PAYING ANY SUM TO ANY RESIDENT (HEREAFTER IN THIS S ECTION REFERRED TO AS THE CONTRACTOR) FOR CARRYING OUT ANY WORK (INCLUDIN G SUPPLY OF LABOUR FOR CARRYING OUT ANY WORK) IN PURSUANCE OF A CONTRA CT BETWEEN THE CONTRACTOR AND A SPECIFIED PERSON SHALL, AT THE TIM E 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 AN AMOUNT EQUAL TO ITA NO.1644/MUM/2010(A.Y. 2006-07) ITA NO.3041/MUM/2010(A.Y.2007-08) 10 (I) ONE PER CENT. WHERE THE PAYMENT IS BEING MADE O R CREDIT IS BEING GIVEN TO AN INDIVIDUAL OR A HINDU UNDIVIDED F AMILY ; (II) TWO PER CENT. WHERE THE PAYMENT IS BEING MADE OR CREDIT IS BEING GIVEN TO A PERSON OTHER THAN AN INDIVIDUAL OR A HINDU UNDIVIDED FAMILY, OF SUCH SUM AS INCOME-TAX ON INCOME COMPRISED THERE IN. (2) WHERE ANY SUM REFERRED TO IN SUB-SECTION (1) IS CREDITED TO ANY ACCOUNT, WHETHER CALLED SUSPENSE ACCOUNT OR BY AN Y OTHER NAME, IN THE BOOKS OF ACCOUNT OF THE PERSON LIABLE TO PAY SU CH INCOME, SUCH CREDITING SHALL BE DEEMED TO BE CREDIT OF SUCH INCO ME TO THE ACCOUNT OF THE PAYEE AND THE PROVISIONS OF THIS SECTION SHALL APPLY ACCORDINGLY. (3) WHERE ANY SUM IS PAID OR CREDITED FOR CARRYING OUT ANY WORK MENTIONED IN SUB-CLAUSE (E) OF CLAUSE (IV) OF THE E XPLANATION, TAX SHALL BE DEDUCTED AT SOURCE (I) ON THE INVOICE VALUE EXCLUDING THE VALUE OF MAT ERIAL, IF SUCH VALUE IS MENTIONED SEPARATELY IN THE INVOICE ; OR (II) ON THE WHOLE OF THE INVOICE VALUE, IF THE VAL UE OF MATERIAL IS NOT MENTIONED SEPARATELY IN THE INVOICE. (4) NO INDIVIDUAL OR HINDU UNDIVIDED FAMILY SHALL B E LIABLE TO DEDUCT INCOME-TAX ON THE SUM CREDITED OR PAID TO THE ACCOU NT OF THE CONTRACTOR WHERE SUCH SUM IS CREDITED OR PAID EXCLU SIVELY FOR PERSONAL PURPOSES OF SUCH INDIVIDUAL OR ANY MEMBER OF HINDU UNDIVIDED FAMILY. (5) NO DEDUCTION SHALL BE MADE FROM THE AMOUNT OF A NY SUM CREDITED OR PAID OR LIKELY TO BE CREDITED OR PAID TO THE ACC OUNT OF, OR TO, THE CONTRACTOR, IF SUCH SUM DOES NOT EXCEED TWENTY THOU SAND RUPEES : PROVIDED THAT WHERE THE AGGREGATE OF THE AMOUNTS OF SUCH SUMS CREDITED OR PAID OR LIKELY TO BE CREDITED OR PAID D URING THE FINANCIAL YEAR EXCEEDS FIFTY THOUSAND RUPEES, THE PERSON RESP ONSIBLE FOR PAYING SUCH SUMS REFERRED TO IN SUB-SECTION (1) SHALL BE L IABLE TO DEDUCT INCOME-TAX UNDER THIS SECTION. (6) NO DEDUCTION SHALL BE MADE FROM ANY SUM CREDITE D OR PAID OR LIKELY TO BE CREDITED OR PAID DURING THE PREVIOUS YEAR TO THE ACCOUNT OF A CONTRACTOR DURING THE COURSE OF BUSINESS OF PLYING, HIRING OR LEASING GOODS CARRIAGES, ON FURNISHING OF HIS PERMANENT ACC OUNT NUMBER, TO THE PERSON PAYING OR CREDITING SUCH SUM. (7) THE PERSON RESPONSIBLE FOR PAYING OR CREDITING ANY SUM TO THE PERSON REFERRED TO IN SUB-SECTION (6) SHALL FURNISH , TO THE PRESCRIBED ITA NO.1644/MUM/2010(A.Y. 2006-07) ITA NO.3041/MUM/2010(A.Y.2007-08) 11 INCOME-TAX AUTHORITY OR THE PERSON AUTHORISED BY IT , SUCH PARTICULARS, IN SUCH FORM AND WITHIN SUCH TIME AS MAY BE PRESCRI BED. EXPLANATION. FOR THE PURPOSES OF THIS SECTION, (I) SPECIFIED PERSON SHALL MEAN, (A) THE CENTRAL GOVERNMENT OR ANY STATE GOV ERNMENT ; OR (B) ANY LOCAL AUTHORITY ; OR (C) ANY CORPORATION ESTABLISHED BY OR UNDER A CENTR AL, STATE OR PROVINCIAL ACT ; OR (D) ANY COMPANY ; OR (E) ANY CO-OPERATIVE SOCIETY ; OR (F) ANY AUTHORITY, CONSTITUTED IN INDIA BY OR UNDER ANY LAW, ENGAGED EITHER FOR THE PURPOSE OF DEALING WITH AND SATISFYING THE NEED FOR HOUSING ACCOMMODATION OR FOR THE PURPOSE O F PLANNING, DEVELOPMENT OR IMPROVEMENT OF CITIES, TOWNS AND VIL LAGES, OR FOR BOTH ; OR (G) ANY SOCIETY REGISTERED UNDER THE SOCIETIES REGI STRATION ACT, 1860 (21 OF 1860) OR UNDER ANY LAW CORRESPONDING TO THAT ACT IN FORCE IN ANY PART OF INDIA ; OR (H) ANY TRUST ; OR (I) ANY UNIVERSITY ESTABLISHED OR INCORPORATED BY O R UNDER A CENTRAL, STATE OR PROVINCIAL ACT AND AN INSTITUTION DECLARED TO BE A UNIVERSITY UNDER SECTION 3 OF THE UNIVERSITY GRAN TS COMMISSION ACT, 1956 (3 OF 1956) ; OR (J) ANY GOVERNMENT OF A FOREIGN STATE OR A FOREIGN ENTERPRISE OR ANY ASSOCIATION OR BODY ESTABLISHED OUTSIDE INDIA ; OR (K) ANY FIRM ; OR (L) ANY PERSON, BEING AN INDIVIDUAL OR A HINDU UND IVIDED FAMILY OR AN ASSOCIATION OF PERSONS OR A BODY OF INDIVIDUA LS, IF SUCH PERSON, (A) DOES NOT FALL UNDER ANY OF THE PRECEDING SUB-CL AUSES ; AND (B) IS LIABLE TO AUDIT OF ACCOUNTS UNDER CLAUSE (A) OR CLAUSE (B) OF SECTION 44AB DURING THE FINANCIAL YEAR IMMED IATELY PRECEDING THE FINANCIAL YEAR IN WHICH SUCH SUM IS C REDITED OR PAID TO THE ACCOUNT OF THE CONTRACTOR ; (II) GOODS CARRIAGE SHALL HAVE THE MEANING ASSIGN ED TO IT IN THE EXPLANATION TO SUB-SECTION (7) OF SECTION 44AE ; (III) CONTRACT SHALL INCLUDE SUB-CONTRACT ; (IV) WORK SHALL INCLUDE (A) ADVERTISING ; (B) BROADCASTING AND TELECASTING INCLUDING PRODUCTI ON OF PROGRAMMES FOR SUCH BROADCASTING OR TELECASTING ; ITA NO.1644/MUM/2010(A.Y. 2006-07) ITA NO.3041/MUM/2010(A.Y.2007-08) 12 (C) CARRIAGE OF GOODS OR PASSENGERS BY ANY MODE OF TRANSPORT OTHER THAN BY RAILWAYS ; (D) CATERING ; (E) MANUFACTURING OR SUPPLYING A PRODUCT ACCORDING TO THE REQUIREMENT OR SPECIFICATION OF A CUSTOMER BY USING MATERIAL PURCHASED FROM SUCH CUSTOMER, BUT DOES NOT INCLUDE MANUFACTURING OR SUPPLYING A P RODUCT ACCORDING TO THE REQUIREMENT OR SPECIFICATION OF A CUSTOMER BY USING MATERIAL PURCHASED FROM A PERSON, OTHER THAN SUCH CUSTOMER. IN THE PRESENT CASE WE ARE CONCERNED WITH A.Y 2006 -07 AND, THEREFORE, PAYMENTS BY A SUB-CONTRACTOR TO SUB SUB-CONTRACTOR WOULD NOT BE COVERED UNDER THE PROVISIONS OF SECTION 194 C(2) OF THE ACT . WE THEREFORE, AGREE WITH THE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE AND HOLD THAT THERE IS NO OBLIGATION TO DEDUCT TAX AT SOURCE ON THE PART OF T HE ASSESSEE IN RESPECT OF PAYMENTS MADE TO SUB SUB-CONTRACTORS. THEREFORE, T HE DISALLOWANCE MADE UNDER SECTION 40(A)(IA) IS DIRECTED TO BE DELETED. 11. IN THE RESULT, APPEAL IN ITA NO.1644/M/2010 IS PARTLY ALLOWED. ITA NO.3041/MUM/2010: 12. THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 30/3/2010 OF CIT(A) XXXIII, MUMBAI RELATING TO ASSESSMENT YEA R 2007-08. GROUNDS OF APPEAL RAISED BY THE ASSESSEE READ AS FOLLOWS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANC E OF 15% OUT OF PAYMENTS MADE TO VENDORS COVERED BY THE PROVISIONS OF SECTION 40A(2)(B) OF THE INCOME TAX ACT. THE ADDITION BE D ELETED. 2. ON THE FATS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANC E U/S. 40(A)(IA) OF THE INCOME TAX ACT VARY WITH SECTION 194C OF THE IN COME TAX ACT. ITA NO.1644/MUM/2010(A.Y. 2006-07) ITA NO.3041/MUM/2010(A.Y.2007-08) 13 13. THESE GROUNDS ARE IDENTICAL TO THE GROUNDS RAIS ED AND CONSIDERED BY US WHILE DECIDING APPEAL OF THE ASSESSEE FOR A.Y. 2 006-07. FOR THE REASONS STATED THEREIN THE ORDER OF CIT(A) WITH REGARD TO T HE DISALLOWANCE UNDER SECTION 40A(2)(B) OF THE ACT IS SET ASIDE AND THE I SSUE IS REMANDED TO THE ASSESSING OFFICER FOR FRESH CONSIDERATION. THE DIS ALLOWANCE UNDER SECTION 40(A)(IA) OF THE ACT CHALLENGED IN GROUND NO.2 IS D ECIDED IN FAVOUR OF THE ASSESSEE. 14. IN THE RESULT, BOTH THE APPEALS BY THE ASSESSEE ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 24 TH DAY OF JUNE, 2011. SD/- SD/- (R.K.PANDA ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 24 TH JUNE.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RH BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.1644/MUM/2010(A.Y. 2006-07) ITA NO.3041/MUM/2010(A.Y.2007-08) 14 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 14/6/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 15/6/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER