Brief about Case
The assessee company was incorporated on 31.05.2005 pursuant to the reorganization of the Maharashtra State Electricity Board. The assessee purchases power from various sources and distributes and sells to its consumers. For the purpose of transmission of power, it has entered into ‘Bulk Power Transmission Agreement’ (BPTA) with Maharashtra State Electricity Transmission Company Limited (MSETCL) and Power Grid Corporation of India Ltd (PGCIL). During the course of survey conducted on 18.12.2008, it was noticed that the assessee had made payment to MSETCL and PGCIL under the BPTAs without deducting tax at source. A.O. found the payment to be in the nature of ‘Fees for technical services’ as mentioned in section 194J and accordingly the assessee was treated in default u/s 201(1) of the Act. Being aggrieved with the assessment order, the assessee filed an appeal before the CIT(A) who dismissed the appeal of the assessee preferring to an alternate interpretation to that of the AO, namely, the Wheeling and Transmission (WT) Charges constituted ‘rent’ and thereby inviting application of section 194-I of the Act. Being aggrieved the assessee filed an appeal before the ITAT. The Tribunal allowed the appeal of the assessee by relying on the Tribunal, Mumbai ‘H’ Bench order dated 30th November, 2011 in the case of Chhattisgarh State Electricity Board (CSEB) being ITA No.20 to 23/BLPR/2010 and an order dated 17th November, 2011 in the case of GRIDCO Ltd. in ITANo.404/CTK/2011 passed by the Cuttack Bench.
Substantial Question of Law
The revenue proposed the following questions to be substantial question of law.
(a) Whether on the facts and in the circumstances of the case and in law, the Income Tax Appellate Tribunal was justified inholding that the payments of wheeling and transmission charges made by the assessee to entities like Maharashtra State Electricity Transmission Company Limited (MSETCL) and Power Grid Corporation of India Limited (PGCIL) for the use of transmission lines or other infrastructure i.e. plant, machinery and equipment could not be termed as rent under the provisions of section 194I of the Act and consequently the provisions of sections 201 and 201(1A) could not be applied ?
(b)Without prejudice to the above, whether on the facts and in the circumstances of the case and in law, payment of WT charges to entities like MSETCL and PGCIL should have been treated as fees for technical services and tax should have been deducted at source u/s.194J of the Act from the payments ?
(c) Whether on the facts and in the circumstances of the case and in law, the Income Tax Appellate Tribunal was justified inholding that payments made for use of transmission lines could not be considered as rent under section 194I without properly appreciating the factual and legal matrix brought out by the Assessing Officer in the assessment order wherein, in respect of payment of WT charges made without deduction of tax at source made without deduction of tax at source, the Assessing Officer had treated the assessee in default under section 194J as well as 194I which was modified by the CIT(A)as payment covered under section 194I only and the same was not appealed further by the Revenue as there was no loss of revenue as the rates of TDS for the sections 194I and194J were the same ?
(d) Whether on the facts and in the circumstances of the case and in law, the Income Tax Appellate Tribunal was justified in mechanically following the earlier order of the ITAT in the case of Chhattisgarh State Electricity Board without appreciating that the law in this new area was evolving as is evidence from the recent decision of the Authority of Advance Ruling dated 27th August, 2012 in the case of Ajmer Vidyut Vitran Nigam Limited as reported in (2012) 24 Taxmann.com 300 where it has been held that WT charges are fees for technical services?
Submission on behalf of Revenue
It was submitted that whether WT charges are treated as rent or fees for technical service, tax should have been deducted at source under Sections 194I or 194J, as the case maybe. Since the rate of tax under section 194I and194J is the same, the choice was only which section to attribute the deductions to. Explanation to Section 194I clarifies that “rent means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of land, building, plant, machinery, equipment etc either separately or together. Thus the MSETCL and PGCIL, transmission system fits the description of equipment and machinery and the payment being made for the said use of the system amounted to rent. Alternatively, that facility for transmission of electricity through the transmission lines amounted to payment of fees for technical services. Explanation 2 of Section 9(vii) provides that fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “salaries”. Reliance was placed on various judicial decisions and interpretations in analyzing meaning of ‘rent’ and ‘fees for technical service’.
Submission of the Assessee
The Ld. Counsel appearing on behalf of the assessee submitted that the revenue’s appeal does not raise any substantial question of law. The questions posed by the revenue could not have arisen from the order of the tribunal. He submitted that before the tribunal, the revenue had proceeded only on the basis that tax was deductible at source under section 194I and the alternate case under Section 194J was never pleaded. It was never case of the revenue that payment of transmission charges amounted to fees for technical services. That perusal of the order of the Tribunal would reveal that no such case of payment of fees for technical services was ever made out. This is purely an after thought. Further in the case of Chhattisgarh State Electricity Board no appeal had been filed by the revenue and the revenue accepted the decision of the tribunal which was followed by the tribunal in the case of the present assessee as well. He further submitted that even an expanded definition of the expression “rent” cannot destroy the original meaning of the word. Even assuming the WT charges are to be considered as rent, the charge or levy must ex-facie bear characteristics of rent as normally understood. He submitted that the revenue’s contention that electricity distribution involved lending of machinery and equipment is completely unsustainable. Merely drawing power and carrying power through transmission lines and transmission system would not amount to renting up equipment or its charge as rent. Thus, the test which would apply is whether the WT charges would amount to rent as generally understood in law.
Held by Court
The Hon’ble Court pronounced that the payment of WT charges neither amounts to rent nor fees for technical services. It was held necessary and appropriate to consider the definitions and the provisions of the Bulk Power Transmission Agreement. As far as relationship inter se MSEDCL and MSETCL is concerned, this is a Principal to Principal arrangement. The agreement refers to terms and conditions for distribution of electricity. The amount of consideration payable by the transmission licensee, namely, MSETCL is based on a tariff that is determined by MERC from time to time by issuing Tariff Orders on the terms and conditions of Tariff Regulations 2003. MSETCL gets its rights as Transmission Licensee by means of what is known as a ‘Transmission License’ which is the authority granted to it by MERC. It is thus seen that MSETCL is merely a licensee of the STU / transmission system. However, by virtue of clause (iv) of the BPTA it is MSETCL’s obligation to maintain the transmission system in accordance with section 40 of the Electricity Act, 2003. The assessee MSEDCL a distribution license receives operating procedures from MSETCL with respect to dealing with operation interfaces. This includes round the clock communication between the two for handling defaults, disputes, safety rules and procedure, seeking permits for the work of planning even partial or total shutdown, monitoring of transmission and general maintenance. MSETCL as transmission licensee is to provide for superintendence for maintenance and provide skilled personnel for respective tasks. Clause 8 provides that tariff, billing and payment shall be governed by procedure and rules provided by the STU and the tariff issued by MERC. The transmission charge will fluctuate depending on MERC transmission licence conditions and the transmission license issued to MSEDCL and supply and demand parameters. The payment by assessee MSEDCL can not be termed as rent for simple reason that the payment is not being made only to utilise any identified equipment or machinery orplant let alone land, building, furniture or equipment. The contention of the revenue that WT charges should be construed as rent notwithstanding its nomenclature has no merit. Since the charge in the present case is not only for accessing transmission lines of the STU but it is to access up to 8,672 mega watts during financial year 2008-09 in case of this agreement (See clause 4 (iv)of BPTA dated 12th January 2009), subject to availability of the elements of the transmission system. The charge payable by MSEDCL is determined by MERC and not MSETCL. Ownership is anon issue considering the Explanation to Section 194I. MSEDCL merely collects the amount in its capacity as a licensee of the system based on the license granted to it by MERC. Furthermore ,we find that capacity that the assessee is entitled to utilise forgiven financial year is limited to what would be accessed at different times to different extents. Moreover, as stated above MSETCL is merely a transmission licensee. The expression of transmission licensee is defined in schedule I of the definition of BPTA and which reads as under:-
“‘Transmission Licensee’ or ‘Licensee’ means the entity towhom the Transmission License is granted by MERC. ”
A grant of such license does not, therefore, entail that the licensee MSETCL will be vested with the right to collect WT charges as directed by MERC. In our view, the expression rent would also entail an element of possession. In each of the instances contemplated by the explanation to Section 194-I, we see in them an element of possession, be it land, building (including factory building), land appertaining to a building, plant, equipment, furniture or fittings. The person using it has some degree of possessory control, at least momentarily, although it cannot entrust the user title to the subject matter of the charge. Even the mere right to “use” is vested with an element of possessory control over the subject matter. In the present case, WT charges are bereft of such possessory control and hence in our view, completely outside the purview of the Explanation to Section 194-I.Thus, quite apart from the fact that the revenue has not challenged the decision of the Tribunal in the previous years, we believe that the issue involved deserves consideration on merits. There is nothing on record to support the revenue’s contention that the WT charge assumes the character of rent. We are in agreement with the assessee that the expression ‘rent’ must be conceptually understood. The concept of rent under the IncomeTax Act does not encompass, in our view, the WT charges payable by the assessee especially when the assessee is discharging a public function.
No ‘service’ is being provided by the MSETCL or the STU. No doubt, MSEDCL as transmission licensee is required to provide superintendence, maintenance and repairs to the system. However, no such service is rendered by the MSETCL to MSEDCL. MSETCL is obliged to maintain the system by value of operation of law under the Electricity Act. The revenue itself is confused and unsure as to the nature of the charge. The focus of the revenue is only the requirement of deduction of tax whether under Section 194-I or Section 194-J.This approach is erroneous. The revenue contends that the WT charges could be rent or fees for technical services but in our view it is neither. Keeping the said interpretation into effect into effect, we find that while interpreting the expression ‘rent’ in the present scenario, we must bear in mind that taking into account the functioning of MSEDCL which is a public utility, it will not be appropriate to equate the transmission charges or wheeling charges to rent or fees for technical service.