In this article, the author has enlightened the nature of expenses incurred for erection and commissioning of lift with regard to the purview of the expression “works contract” in accordance with the provisions of Andhra Pradesh General Sales Tax Act, 1957 & u/s 194C of the Income Tax Act, 1961 and the treatment of excess amount of refund paid by the builder to the buyers of flats, in case no allotment of flat is made by the builder to such buyers, referring to the relevant judgments on the issue by various judicial authorities including the recent judgment of the Hon’ble Cochin Bench of ITAT in the case of Income Tax Officer (TDS), Trivandrum Vs. Beacon Projects (P) Ltd (2014) 49 taxmann.com 173 (Cochin- Trib.)
BRIEF FACTS OF THE CASE OF TRIVANDRUM VS. BEACON PROJECTS (P) LTD (SUPRA)
During the course of survey it was found that amount of Rs. 62.87 Lakhs was paid to M/s Kone Elevators during the financial year 2011-12 without deducting tax at source. The Assessing Officer (A.O.) opined that tax was deductible on the said sum @2%. The contention of the assessee, on the other hand, was that payment was not covered by the expression “Works Contract” and the contract was for a sale, hence, the provisions of Section 194C were not applicable. The A.O. found that in the invoice against which payment was made, it was mentioned that total contract value for design, manufacture, supply, erection, testing and commissioning one passenger lift at Rs. 18,00,000/- and there was no bifurcation of these items. The A.O. concluded that the erection of lift falls under the Explanation to Section 194C and hence the said payment was liable for TDS under the provisions of Section 194C. Furthermore, due to non-deduction of tax at source, on the interest amount paid by the assessee for Rs. 31,37,341/- consisting Rs. 8,23,250/- paid to non- residents on which TDS was deductible u/s 195 @ 30.9% and on the balance amount TDS u/s 194 @10% was liable to be deducted, the assessee was held as assessee in default u/s 201 and 201(1A) of the Act.
Being aggrieved with the order passed by the A.O., the assessee preferred an appeal before CIT (A) wherein reliance was placed on the judgment pronounced by the Apex Court in the case of State of Andhra Pradesh v. Kone Elevators (India) Ltd (SC.) (Civil Appeal No. 6585 of 1999 Dated 17.02.2005) and it was held that the contract concerned was a contract for sale and not for work and hence, the provision of TDS were not applicable. Consequently, the order of the A.O. was set aside by the first appellate authority with regard to the issue of non- deduction of tax at source u/s 194C. Also, with regard to the issue of non- deduction of tax on interest amount paid by assessee, the CIT (A) gave relief to the assessee relying on the judgment of Bombay High Court in the case of CIT V. Tata Services Ltd (1980) 122 ITR 592 / (1979) 1 Taxman 427 wherein it was held that such payment amounts to capital receipt in the hands of recepient. Accordingly, revenue preferred appeal before the Hon’ble Cochin Bench of ITAT against the order of the CIT (A) with regard to both the said issues.
Both of these issues i.e. whether TDS was deductible u/s 194C on the erection of lift and non-deduction of TDS on the interest paid by the assessee, are enlightened below in detail:
1. NATURE OF EXPENSES INCURRED FOR ERECTION AND COMMISSIONING OF LIFT
In the present case, the assessee placed reliance upon the landmark judgment pronounced by the Apex Court in the case of Kone Elevators (India) Ltd (Supra). The question of law which was involved in that case was whether the erection and commissioning of lifts and elevators amounts to contract of sale or a works contract as per Andhra Pradesh General Sales Tax Act, 1957? As in the present case, the issue is the same i.e. nature of expenses incurred for erection and commissioning of lift, although not as per Sales Tax Act of a particular State but as per Income Tax Act, 1961 so as to decide the applicability of TDS provisions of the said Act, it is appropriate to discuss the most relevant arguments that were made before the Hon’ble Court in that case to the extent related with determination of the nature of related expenses.
ARGUMENTS BEFORE THE APEX COURT IN THE CASE OF KONE ELEVATORS (INDIA) LTD (SUPRA)
The Ld. Counsel for the department argued that main object of the contract in question was to sell the lifts and the work done by the assesssee for the installation was incidental to the sale of lifts. It was also stated that the legislature had classified the commodity “lift” under Entry 82 of the first schedule to the Andhra Pradesh General Sales Tax Act, 1957, with the intention that the word “installation” was ancillary to the sale of lifts.
The Ld. Counsel for the assessee, stated that the assessee was engaged in the business of manufacture, supply, erection, installation and commissioning of lifts by undertaking works contracts and that the lifts and elevators were not saleable to the customers as such and certain civil work was necessary to install and commission the lifts and that such civil work included various accessories and components that were required to be taken to site. Therefore, the ownership stands transferred only after completion of such civil work. Consequently, the assessee was claimed to be entitled for deduction of labour charges and was also entitled for composition of tax u/s 5G of the Andhra Pradesh General Sales Tax Act. It was further argued that manufacture, supply, erection, installation and commissioning of lifts came under the definition of “works contract” u/s 2(1) (t) of the said Act.
The Apex Court acknowledged the fact that there is no standard test for determining if a contract is of sale or is in the nature of a works contract and regard has to be given to the terms of a contract on case to case basis considering the circumstances that prevailed. Moreover, as the question before the Apex Court, was in relation to the Andhra Pradesh General Sales Tax Act, the Hon’ble Court referred to the relevant provisions of the Act for the definition of the term “Sale” and “works contract”. Further, the decision in the case of Hindustan Shipyard Ltd V. State of Andhra Pradesh (2001) (119 STC 533) was referred to in which it was held that if the thing to be delivered has any individual existence before the delivery as the sole property of the party who is to deliver it, then it is a sale. If the bulk of material used in construction belongs to the manufacturer who sells the end product for a price, then it clearly indicates that the contract is of sale and not for labour. On the other hand, if the main object of the contract is to avail the skill and labour of the seller though some material and components may be incidentally used during the process of end product being brought into existence by the investment of skill and labour of the supplier, the transaction would be a contract for work and labour.
Applying the above tests in the case of Kone Elevators India Ltd (Supra) and after referring to the contract entered into by the assessee in that case, it was held that as the customer was required to do the actual work at site for installation of lift and the assessee was not required to undertake the installation of lift if the site was not kept ready by the customer, the contract happened to be in the nature of sale and not works contract within the meaning of Andhra Pradesh General Sales Tax Act, 1957.
Now, if the nature of expenses incurred for the erection and commissioning of lift is to be analysed in the light of the Income Tax Act, 1961, so as to decide the applicability of Section 194C of the Act, due regard needs to be given to the definition of “work” as prescribed by Clause (iv) of the Explanation to Section 194C, which is reproduced as under:
“Explanation.—For the purposes of this section,—
(iv) “work” shall include—
(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
(c) carriage of goods or passengers by any mode of transport other than by railways;
(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 product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.]
The aforestated definition of “works” as prescribed by the Income Tax Act, 1961, make it amply clear by way of clause (e) that in case a product is supplied according to the requirement or specification of the customer by using the material which is purchased from that customer himself, then only it will amount to “work” within the meaning of that clause so as to attract the provisions of Section 194C making it liable for the tax deduction at source at the rate prescribed therein. Moreover, in the case of erection and commissioning of lifts, although the desired product is supplied according to the requirement and specification of the customer but the lift is not purchased from such customer and generally it is the vendor only who provides the lift as well as the labour to enable the erection and commissioning of the lift so as to make the product usable. Hence, in such a case, there is no contract for “work” but for sale only as per I.T. Act. Further, the supply of labour is made just for the sake of putting the product in the workable condition and thus, such supply of labour or technical know- how is incidental to the main contract which is in the nature of sale of goods.
Furthermore, the finding of the Apex Court regarding the fact that there is no sole test to find out if a contract is for work, holds good irrespective of the fact that the nature of expenses is to be determined in the context of Sales Tax Act of a particular state or for the purpose of Income Tax Act, as in the present case. Therefore, it has to be decided on case to case basis referring to the circumstances of each case in the light of the provisions of the relevant Act.
2. TREATMENT OF EXCESS REFUND MADE BY THE BUILDER TO THE BUYERS IN CASE OF NON ALLOTMENT OF FLATS
BRIEF FACTS OF THE PRESENT CASE
The assessee had shown the “excess payment refund” under the head direct expenses and thus, claimed the same as an allowable expenditure without the deduction of tax at source on the said payment to the buyers of flats. While explaining the said sum, the assessee stated that some payments were received by the assessee from the customers as booking amount but due to non-fulfillment of payment schedule by the said customers, the assessee received request from those customers to refund the amount paid by them. After some time, the assessee got new customers to whom the flats were sold at a higher rate than the previous price. The assessee, in order to make good relationship with the original buyers refunded their money with a margin on which no TDS was deducted. The A.O. concluded that expenses debited in profit and loss account were to be treated as interest and was thus, liable for TDS u/s 194A of the Income Tax Act, 1961.
On appeal, CIT (A) opined that the assessee is acting as an agent between the old and new customers. CIT (A) relied upon the judgment pronounced by the Hon’ble Bombay High Court in the case of Tata Services Ltd (Supra), in which it was held that the excess amount received on transfer of right in a property is in the nature of a capital receipt, and hence the provisions of Section 194A were not applicable. Following this decision of the Bombay High Court, the CIT (A) deleted the addition made by the A.O. Consequently, the revenue filed appeal before ITAT.
ARGUMENTS BEFORE THE ITAT
The counsel for the assessee placed reliance on the Kerala Apartment Ownership Act, 1983 and argued that the original owner relinquished the right over the flats for which they entered into agreement and thus, it is a capital gain in the hands of the purchaser and hence, it cannot be treated as interest payment by the assessee which is liable for TDS u/s 194A of the Income Tax Act, 1961. On the other hand, revenue was of the view that expenses debited in the profit & loss account cannot be treated as refund.
The Cochin Bench of the ITAT, referred to the provisions of Section 2(28A) of the Act, which is reproduced below for the sake of ready reference:
‘(28A) “interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.’
This above mentioned definition of interest was given the due importance by the ITAT in so far as it aims to bring into its ambit any sum which is payable in any manner and therefore, such sum need not be necessarily termed as interest only and even includes any sum payable in any manner in respect of any money borrowed or debt incurred which includes deposit, claim or other similar right or obligation as well. Furthermore, even service fee or other charge in respect of the money borrowed or debt incurred or in respect of any credit facility which has not been utilized is also included in the definition of “interest” for the purpose of I.T. Act.
It was observed that the statutory definition of interest as provided by Section 2(28A) of the Act, intends to cover amounts which may not otherwise be regarded as interest, for the purpose of statute. Moreover, in the present case, the assessee had obligation towards the customers who had advanced money to the assessee for purchase of flats, and as an obligation in relation to deposit is expressly covered by the said section, the excess amount paid by the assessee to those customers was held to be in the nature of interest and was thus, liable for TDS u/s 194A. Accordingly, the decision of the CIT (A) was quashed stating that in the present case, the ITAT was not concerned with the nature of receipt in the hands of recipient and hence, the judgment pronounced in the case of Tata Services Ltd (Supra) was not relevant here. Therefore, the order of the A.O. was restored setting aside the order passed by CIT (A).