Case Law Details
IN THE ITAT HYDERABAD BENCH ‘B’
Assistant Commissioner of Income-tax, Circle 5(1)
Versus
Kiran Constructions
IT APPEAL NO. 1493 (HYD.) OF 2012
[ASSESSMENT YEAR 2006-07]
JANUARY 18, 2013
ORDER
Chandra Poojari, Accountant Member
This appeal by the Revenue is directed against the order of the CIT(A)-V, Hyderabad dated 12.7.2012 for assessment year 2006-07.
2. The Revenue raised the following grounds:
1. The CIT(A) erred in law and on facts.
2. The CIT(A) erred in holding that prior to 13.7.2006 the machinery hire charges do not attract TDS provisions and are not covered under sec. 194C of the IT Act.
3. The CIT(A) failed to appreciate the nature of transaction, i.e., being predictable periodic and in large numbers are in the nature of contracts only.
3. Brief facts of the issue are that the assessee firm filed its return of income on 30.10.2006 admitting a total income of Rs. 14,92,480. Subsequently, the Assessing Officer reopened the assessment and completed it u/s. 143(3) r.w.s. 147 of the Act determining the total income of the assessee firm at Rs. 59,42,901 by making addition of Rs. 44,50,421 under section 40(a)(ia) of the Act. The fact is that the assessee debited the aforementioned amount under the head “machinery hire charges”. TDS was not deducted. The Assessing Officer observed that provisions of section 194-1 of the Act, even though applicable from 13.7.2006 did not imply that section 194C of the Act was not applicable. Therefore, the case of the assessee shall be within the purview of section 194C of the Act and the addition was made.
4. On appeal, the CIT(A) given the finding that section 194-I of the Act has been in existence since 1994. However, the assessee was not under legal obligation to deduct taxes on the hire charges of machinery. Prior to the amendment w.e.f. 13.7.2006, the Explanation read as under:
“rent” means any payment, by whatever name called. Under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land or any building (including factory building). together with furniture, fittings and the land appurtenant thereto, whether or not such building owned by the payee:”
5. The CIT(A) observed that the subsequent Explanation was as below:
“Explanation.- For the purposes of this section,-
(i) “rent” means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any,-
(a) land; or
(b) building (including factory building); or
(c) land appurtenant to a building (including factory building); or
(d) machinery; or
(e) plant; or
(f) equipment; or
(g) furniture; or
(h) fittings,”
6. The CIT(A) held that from the above, it is clear that the words “Machinery Plant and Equipment” were specifically added w.e.f. 13.7.2006 so that TDS could be deduced on these as well. Further, clauses (a) & (b) of the above mentioned section originally read as under:
“(a) fifteen per cent if the payee is an individual or a Hindu undivided family: and
(b) twenty per cent in other cases:”
Whereas the same clauses were amended w.e.f. 1.6.2007 to reads as below:
“(a) ten per cent for the use of any machinery or plant or equipment;
(b) fifteen per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings where the payee is an individual or a Hindu undivided family; and
(c) twenty per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings where the payee is a person other than an individual or a Hindu undivided family:”
7. The CIT(A) held that from the above, it is further clear that in the year in question, TDS was not supposed to be deducted on machinery hire. Moreover, machinery hire is not a contract for work and cannot be covered under section 194C of the Act. Given the above facts and circumstances, the CIT(A) agreed with the contentions of the assessee and held that no TDS was to be deducted. Accordingly, he deleted the addition u/s. 40(a)(ia) of the Act. Against this, the Revenue is in appeal before us.
8. The learned DR submitted that the assessee is required to deduct TDS on machinery hire charges which the assessee failed to do and being so it is to be disallowed u/s. 40(a)(ia).
9. The learned AR submitted that the assessee is not liable to deduct TDS u/s. 194C of the Act. Only after the amendment w.e.f. 13.7.2006 machinery hire charges are liable for TDS u/s. 194-I of the Act. Being so, he contended that the assessee is not liable for TDS. He relied on the judgement of Madras High Court in the case of CIT v. D. Rathinam [2011] 335 ITR 101 wherein held that hire charges on miller and roller are liable for TDS u/s. 194-I of the Act w.e.f. 1.6.2007. Being so for the A.Y. 2005-06 the assessee is not liable for TDS.
10. We have heard both the parties and perused the material on record. The question here is as to whether the addition made by the AO has rightly been deleted by the learned CIT(A), holding that the provisions of s. 194C of the Act are not attracted. Undisputedly, the transaction herein is taking of machinery on hire by the assessee. As per the AO, Expln. III to s. 194C of the Act is squarely applicable to such a transaction. Expln. III to sub-s. (3)(c) to s. 194C of the Act reads as under :
“For the purpose of this section, the expression ‘work’ shall also include—
(a) & (b)** ** **
(c) carriage of goods and passengers by any mode of transport other than by railways.”
11. In CIT v. Poompuhar Shipping Corpn. Ltd. [2006] 282 ITR 3, the assessment year involved was 1994-95. Explanation III to s. 194C of the Act was incorporated w.e.f. 1st July, 1995. In Poompuhar Shipping Corpn. Ltd. (supra), the Hon’ble High Court held that the Explanation is prospective and not retrospective. The year under consideration is 2005-06. Therefore, the Expln. III to s. 194C of the Act is directly applicable. As per the Explanation, “work” shall also include carriage of goods or passengers by any mode of transportation other than railways. The expression used in s. 194C(1) is “any work”, including supply of labour for carrying out any work. The work in the present case, for which, payments were made by the assessee, was hiring of machinery. In Poompuhar Shipping Corpn. Ltd. (supra), payment of hire charges for taking temporary possession of ships was held not to fall within the provisions of s. 194C of the Act. It was held that hiring of ships for the purpose of using them in the assessee’s business did not amount to a contract for carrying out any work as contemplated in s. 194C of the Act.
12. Explanation III to s. 194C of the Act not being applicable to the assessment year under consideration before the Hon’ble High Court in Poompuhar Shipping Corpn. Ltd. (supra), the applicability thereof was not gone into by their Lordships, holding that the said Explanation would be applicable prospectively w.e.f. 1st July, 1995, the date on which it was introduced.
13. Explanation III to s. 194C is applicable to the assessment year before us. However, it does not apply to the facts of the present case. This is so because the provisions of s. 194C of the Act are applicable to payments for carrying out any work in pursuance of a contract. Now, in keeping with Poompuhar Shipping Corpn. Ltd. (supra), under s. 194C, tax is to be deducted when a contract was entered into for carrying out any work. In the present case, like therein, there was no contract between the assessee and the owners of the machinery to carry out any work. The assessee hired the machinery belonging to the plant and machinery owners for a fixed period, on payment of hire charges. The hired machinery were utilised by the assessee in its business of civil construction. There was no agreement for carrying out any work or to transport any goods or passengers from one place to another. The assessee simply hired the machinery on payment of hire charges. Like in Poompuhar Shipping Corpn. Ltd. (supra), here also, it is not the case of the Department that the assessee entered into any contract with the plant and machinery owners for transportation of goods or passengers from one place to another. Thus, the hiring of machinery for the purpose of using them in the assessee’s business would not amount to a contract for carrying out any work, as contemplated in s. 194C of the Act, as held in Poompuhar Shipping Corpn. Ltd. (supra).
14. For carrying out any work, manpower is the sine qua non and without manpower, it cannot be said that work has been carried out. Under s. 194C of the Act “carrying out any work” is the substance for making a payment relating to such work, liable for deduction tax at source. The provisions of s. 194C are attracted only where any sum is paid for carrying out any work including supply of labour for carrying out any work. In the present case, it is not the case of the Department that the machinery taken on hire by the assessee from the plant and machinery owners were supplied by the plant and machinery owners to the assessee along with manpower, i.e., drivers and/or conductors/operators. The machinery were undeniably put to use by the personnel of the assessee. Thus, nothing has been brought on record by the Department to the effect that manpower was provided along with the machinery to the assessee by plant and machinery owners. Mere providing of the machinery without any manpower cannot be termed as carrying out of any work by the plant and machinery owners, for which, any payment was made by the assessee.
15. The Department has not disputed the case of the assessee that the payment was made for hiring charges regarding hiring of machinery. As explained in Poompuhar Shipping Corpn. Ltd. (supra), hiring is a contract by which one gives to another temporary possession and use of property other than money for payment of compensation and the latter agrees to return the property after the expiry of the agreed period. Therefore, when the assessee entered into a contract for the purpose of taking temporary possession of machinery from the plant and machinery owners, it did not amount to the assessee entering into any contract for carrying out any work. Once the contract was not for carrying out any work, as per Poompuhar Shipping Corpn. Ltd. (supra), the provisions of s. 194C are not attracted.
16. In the instant case, it is not in dispute that the machines and equipments taken on hire by the assessee were utilized in the business at the discretion of the assessee and payments under the contract accrued with reference to the time length of the usage of the machines and not with reference to the quantum of any work done. Therefore in the present case, the lender neither had any work obligation nor any command, control and possession of the machines after they were temporarily handed over to the assessee on hire basis. In the instant case, the provisions in the contract for drivers, operators and helpers along with the specific machines and meeting all the operating and maintenance costs by the lender were incidental and subservient to the hiring of the machinery and equipment. Therefore, the arrangement was purely a contract for the hiring of the machinery and equipment. However, the AO invoked the provisions of s. 194C of the Act and was of the view that the tax was deductible under the said section from the payments made by the assessee to the lender. While doing so the AO observed that the said agreement was not a pure and simple machinery hire agreement and the lender besides giving machines also supplied labour and helpers for carrying out the work. Now we have to see as to whether the provision of s. 194C of the Act were applicable to the facts of the present case. The relevant provisions contained in the said section i.e. 194C of the Act read as under:
“194C. (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a 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 an amount equal to-
(i) one per cent where the payment is being made or credit is being given to an individual or an HUF;
and the work has been defined in cl. (iv) of the Explanation appended to s. 194C which read as under:
‘(iv) ‘work’ shall include-
(a) advertising;
(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;
(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 product according to the requirement or specification of a customer by using material purchased from a person, other than such customer’.”
17. From the above provisions it is clear that the said provisions are applicable when the contract is entered into (i) for carrying out any work and (ii) supply of labour to carry out any work. Therefore, the main condition prescribed in s. 194C is that there must be carrying out of any work whether tangible or intangible. In the instant case, the assessee was not under an obligation to carry out the work as it was not under the control of the lender and the possession of the machinery temporarily was passed to the assessee after entering into agreement with the lender. Therefore, in the present case, taking of the machinery and equipment on hire would not amount to a contract for carrying out any work as contemplated in s. 194C of the Act. The said contract i.e. taking of machinery and equipment on hire also cannot be treated with a contract for supply of labour. Therefore, the provisions of s. 194C of the Act were not applicable to the facts of the assessee’s case, as such no disallowance was called for under s. 40(a)(ia) of the IT Act.
18. On a similar issue the Hon’ble Madras High Court in the case of Poompuhar Shipping Corpn. Ltd. (supra) has held as under:
“Under s. 194C of the IT Act, 1961, the tax is to be deducted when a contract is entered into for carrying out any work in pursuance of a contract between the contractor and the entities mentioned in sub-so (1) of S. 194C. The term ‘hire’ is not defined in the IT Act. So, we have to take the normal meaning of the word ‘hire’. Normal hire is a contract by which one gives to another temporary possession and use of property other than money for payment of compensation and the latter agrees to return the property after the expiry of the agreed period.”
19. It has further been held as under:
“The hiring of ships for the purpose of using them in the assessee’s business did not amount to a contract for carrying out any work as contemplated in s. 194C.”
20. In the instant case also the assessee took the machinery and equipment on hire for carrying out the specific work so the hiring of machinery and equipment did not amount to contract for carrying out any work as contemplated in s. 194C of the Act as per the ratio laid down by the Hon’ble Madras High Court in the aforesaid referred to case.
21. Furthermore, the CBDT vide Circular No. 681, dt. 8th March, 1994 vide cl. 7(iii) clarified that the provisions of s. 194C of the Act would not apply in relation to payments made for hiring or renting of equipments etc.
22. As in the present case the contract was a machinery hire contract and not a contract for carrying out any work, therefore, the provisions of s. 194C of the Act were not applicable to the facts of the present case and since the provision of s. 40(a) (ia) comes into picture only when the tax is deductible at source under Chapter XVII-B (in the present case under s. 194C of the Act). As we have already mentioned that the provisions of sec. 194C of the IT Act were not applicable to the facts of the present case, therefore, the AO was not justified in making the disallowance under s. 40(a)(ia) r/w s. 194C of the Act. In that view of the matter, we do not see any valid ground to interfere with the findings of the learned CIT(A) on this issue. As regards to the applicability of the provisions of s. 194-1 of the Act, as invoked by the AO in the present case is concerned, it is noticed that the said provisions are applicable for the payment of rent and tax is to be deducted at source on payment of specified rent, meaning of “rent” for the purposes of this section has been mentioned in the Expln. (i) appended to s. 194-1 of the Act. In the Expln. (i), the words “machinery or plant or equipment” has been added w.e.f. 13th June, 2006 by the Taxation Laws (Amendment) Act, 2006. Earlier these were not included in the definition of the “rent” for the purposes of s. 194- I of the Act. Therefore, the provisions of this section i.e. 194-1 of the Act are not applicable to the facts of the present case because the previous year relevant to the assessment year under consideration ends on 31st March 2006 while insertion of the words “machinery or plant or equipment” has been made effective from 13th July, 2006 i.e. much after the end of the previous year relevant to the assessment year under consideration. Therefore, the provisions of s. 194-1 of the Act are also not applicable to the facts of the present.
23. In the result, Revenue appeal is dismissed.
