IN THE ITAT HYDERABAD BENCH ‘B’
Bhagyanagar Gas Ltd.
Versus
Assistant Commissioner of Income-tax
IT Appeal Nos. 588 & 589 (Hyd.) of 2012
[Assessment years 2007-08 & 2008-09]
September 14, 2012
ORDER
Smt. Asha Vijayaraghavan, Judicial Member
Both these appeals preferred by the assessee are directed against the respective orders of the CIT(A)-II, Hyderabad, for the assessment year 2007-08 and 2008-09. Since identical issues are involved in both these appeals, they were heard together and therefore a common order is passed for the sake of convenience.
ITA NO. 588/HYD/2012 FOR ASSESSMENT YEAR 2007-08
2. The substantial ground raised in this appeal is against the dis allowance of Rs. 1,30,67,866/- made by the AO under Section 40(a)(ia) of the Income tax Act.
3. Briefly the facts of the case are that the assessee company was promoted as Joint Venture Company (JVC) by HPCL and GAIL and the company is engaged in the business of distributing and marketing of CNG, Auto LPG, Natural Gas and any other gaseous fuel in the state of Andhra Pradesh. Bhagyanagar Gas Ltd. (JVC) was incorporated on 22nd August, 2003. It came into existence as a result of strategic business decision to have an entity with Geography Specific Focus to develop gas distribution network. GAIL & HPCL both agreed to contribute capital and certain other resources to functioning of the assessee company.
4. During the course of assessment proceedings, the Assessing Officer had noticed that the assessee paid GAIL and HPCL Rs. 1,30,67,866/- towards reimbursement of the cost of salaries of the employees with HPCL & GAIL who were on deputation to the assessee company and the assessee had not deducted tax from the payment made to the two concerns. The Assessing Officer held that the reimbursement of expenses debited to P&L account represented payment by the assessee to HPCL & GAIL for supply of labor to carry out the work of the assessee company. He noted that this is not a case where there is an employee and employer relationship to attract the provisions of section 192 for the purpose of TDS and this is purely a case where the manpower has been hired for HPCL & GAIL for the purpose of performing a specific job. The payments were not made individually to the persons of HPCL & GAIL but was made to HPCL & GAIL as reimbursement and therefore it is a clear case of payment made for supply of labor for carry out the work and as such fall within the ambit of provisions of section 194C of the IT Act. The Assessing Officer had disallowed the amount of Rs. 1,30,67,866/- u/s 40(a)(ia) for the failure of the assessee to deduct tax at source.
5. On appeal before CIT(A), the assessee submitted as under:-
“6. The assessee’s contention that tax is not required to be deducted from the amounts reimbursed by the appellant to HPCL and GAIL towards salaries of employees deputed by them, the appellant submits that the Assessing Officer ought to have appreciated that the provisions of section 40(a)(ia) apply only to the extent that interest, commission, brokerage etc., mentioned in section 40(a)(ia) remain payable and that the said provision has no application where the amounts of the nature specified in the said section have already been paid and consequently he ought not to have disallowed the amounts towards reimbursement to the extent they were already paid to HPCL and GAIL.”
6. After considering the submissions of the assessee, the CIT(A) disallowed the claim of the assessee on the ground that in the case under consideration it is not a question of reimbursement of salaries but issue is contractual payment made by the appellant to GAIL and HPCL. CIT(A) held that provision of management support to the Assessee, by GAIL and HPCL, the JV partners is part of the MOU and hence supply of the manpower should be considered as payment for services rendered by GAIL and HPCL under the contract and accordingly provisions of Section 40(a)(ia) apply to such contractual payments.
7. Aggrieved by the order of the CIT(A), the assessee is in appeal before us.
8. We have heard the arguments of both the parties and perused the record. The assessee is a Joint Venture Company promoted by GAIL & HPCL for distribution and marketing of CNG, Natural Gas, LPG, Auto LPG etc. They had entered into a MOU in connection with the promotion of the JV company viz., the Assessee herein. Under Article 4 of the agreement GAIL and HPCL will contribute management and technical skill in the respective areas of expertise, management support by way of secondment/deputation on request of JVC and enter into the gas purchasing agreement with HVC etc. In short the two companies have undertaken to provide all necessary assistance to the assessee-JV Company.
9. Under Article 14 GAIL and HPCL had agreed to bear the cost of incorporation as well as expenses relating to the business activity except man power cost, administration cost of the employees. However after incorporation of the JVC, all such expenses shall be reimbursed by JVC to the parties with interest. From the above, it can be seen that GAIL and HPCL had agreed to support the assessee in carrying on its business.
10. As part of this agreement GAIL and HPCL deputed their personnel to work for the JVC. Employees so deputed worked for the JVC. The JVC is liable to pay salaries to the deputed personnel. However for administrative convenience, GAIL and HPCL had paid the salaries to the deputed employees and the Assessee reimbursed the amount paid by GAIL and HPCL.
11. GAIL and HPCL deputed their personnel who worked under the control and management of JVC. The employees were carrying out the work of the Assessee as its employees not carrying out the work on behalf of GAIL or HPCL. Salary, cost of these employees are a charge on the profits of the Assessee. Payment by way of salary would not constitute Fees for technical services. Nor can the transaction be viewed as a works contract performed by GAIL and HPCL. Merely because the companies had in an agreement agreed to depute their employees would not mean that it is a works contract. Further the Assessee paid only the salaries of the persons who worked under the control and supervision of the Assessee. Instead of paying the amount to the employees directly, the Assessee reimbursed the amount to GAIL and HPCL who had paid the amount to the employees. This can be viewed as a financial arrangement under which GAIL and HPCL pay to the deputed employees on behalf of the Assessee and the Assessee reimburses the same. It is a reimbursement of amount spent by GAIL and HPCL in payment of persons in the employ of the Assessee and payment for any services rendered by GAIL and HPCL.
12. In our opinion such payment cannot be considered as payment towards work executed by GAIL and HPCL in the course of work contract. In the Case of United Hotels Ltd. v ITO [2005] 2 SOT 267 (Delhi) under similar circumstances, the ITAT, Delhi has held that reimbursement of salary to the deputed personnel would not attract deduction of tax at source. We find that these decisions are squarely cover the issue on appeal. In the following cases it has been held that reimbursement of expenses are not subject to tax deduction at source. The following decisions also support the case of the assessee:
(1) CIT v. Industrial Engineering Projects (P.) Ltd. [1993] 202 ITR 1014 (Delhi)
(2) CIT v. Siemens Aktiongesellschaft [2009] 310 ITR 320
(3) CIT v. Dunlop Rubber Co. Ltd. [1982] 10 Taxman 179 (Cal.)
13. Respectfully following the decision of the co-ordinate bench, we delete the addition made by the AO under Section 40(a)(ia).
14. In this view of the matter the alternate ground raised by the assessee, for applying the ratio of the decisions of the Special Bench of ITAT, Vizag in the case of Merilyn Shipping & Transports v. Addl. CIT [2012] 136 ITD 23, that the amount that has been actually paid by the Assessee to GAIL and HPCL before the previous year ended on 31.03.2007 should not be disallowed under Section 40(a)(ia) is considered academic and hence not decided upon.
ITA NO. 589/HYD/12 FOR AY 2008-09
15. Briefly the facts of the case are that the assessee company filed its return of income for the AY 2008-09 on 24/09/2008 admitting a loss of Rs. 2,61,046/-. During the course of regular assessment proceedings, the Assessing Officer noticed that the company debited an amount of Rs. 1,01,72,133/- towards the reimbursement of the cost of salaries of employees of HPCL and GAIL who are on deputation to the assessee company, the details of which are as under:-
