Execution of outsourced transportation work by third parties without assistance of outsourcer is sub-contract liable to TDS

Brief of the case:

Himachal Pradesh High Court in the case of M/s Palam Gas Service Vs. CIT held that execution of outsourced transportation work without any assistance from the outsourcer is a clear case of sub-contracting making the person outsourcing his contract liable to deduct tax on the payments made to sub-contractors u/s 194C.
Facts of the case:

• The assessee is engaged in the business of purchase and sale of LPG cylinders under the name of M/s Palam Gas Service. During the course of assessment proceedings, it was noticed by the Assessing Officer that the main contract of the assessee for carriage of LPG was with the Indian Oil Corporation.
• The assessee had received the total freight payments from the IOC Rs. 32,04,140/-.The assessee in turn, got the transportation of LPG done through 3 persons, namely Bimla Devi, Sanjay Kumar and Ajay to whom he made the freight payment amounting to Rs. 20,97,689/-.
• The A.O. observed that the assessee had made a sub-contract with these three persons and, therefore, he was liable to deduct tax at source from the payment of Rs. 20,97,689/-. On account of his failure to do so, the said freight expenses were disallowed by the A.O. as per the provisions of Section 40 (a) (ia) of the Act.
• The appeal made by the assessee against the order was rejected by both CIT (A) and ITAT.
• Aggrieved by the same assessee is in appeal before the High Court.

Contention of the Assessee:

• The provision of Section 194C (2) is not applicable to the assessee’s case as the payments were made under an independent contract between him and the truck owners. Therefore, his case fall within the purview of Section 194C (1) of the Act.
• It was also argued the payments could not be disallowed u/s 40(a) (ia) because they were already paid and not remain unpaid (payable) at the year end.

Contention of the Revenue:

The original tender for transportation was in the name of the assessee but assessee instead of arranging transportation on his own chosen to outsource the same to the above mentioned three person for a consideration. These three persons without any other assistance from the assessee executed the outsourced work. This is a clear case of sub-contracting.

Issue before the High Court:

Whether an individual assessee making payment to transporters for execution of his outsourced contract with other person could be deemed as payment made to sub-contractors in a case when there is no formal agreement between the individual and transporters executing the outsourced work?

Held by Hon’ble High Court:

• High court concurred with the findings of ITAT that the tender for carriage of LPG from IOC was in the name of the assessee himself and that he got the transportation of LPG done through 3 persons to whom he made freight payment amounting to Rs. 20, 97,689.
• As regards, the transportation done by such three persons the assessee was not under any obligation to arrange anything such as the drivers, fuel, accessories etc. rather the truck owners had incurred all the expenses related to the transportation of the LPG and the assessee had made the payment to them not on the basis of individual trips of the trucks but for the entire work deal.
• As such the facts clearly indicate that the assessee has outsourced his contractual work obtained from IOC to the above mentioned three persons which is nothing but sub-contract and cannot be termed as independent contract as the assessee had not entered into formal agreement with these persons to prove the independence of the contract between him and those three persons,
• In result the appeal of assessee was dismissed.