TDS deductible on Payment to dealers for providing services to customers in lieu of free service coupons

Mahindra & Mahindra Ltd. Vs DCIT (ITAT Mumbai)

Payments made by the assessee to its dealers for providing free services in lieu of service coupons is not in the nature of any reimbursement of expenditure incurred by such dealers, and is in fact in the nature of payment of consideration pursuant to a contract, as per which the dealer provides such services to the ultimate customers. Accordingly, in our considered view the assessee was obligated to have deducted tax at source at the time of making of such payments towards service coupons to its dealers.

FULL TEXT OF THE ITAT JUDGEMENT

The present appeal filed by the assessee is directed against the order passed by the CIT(A)-5, Mumbai, dated 06.10.2016 which in turn arises from the order passed by the A.O under Sec.143(3) r.w.s 254 of the Income Tax Act, 1961 (for short ‘I-T Act’), dated 31.03.2014 for A.Y. 2007-08. The assessee has assailed before us the order passed by the CIT(A) on the following grounds of appeal :

“Being aggrieved by the order passed by the Commissioner of Income-Tax (Appeals) 5, Mumbai [hereinafter referred to as ‘CIT(A)’], the appellant submits following grounds of appeal for your sympathetic consideration :

(1) Disallowance of Service Coupon of Rs. 35,49,01,000/- u/s.  40(a) (ia)

On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming disallowance of Service Coupon of Rs. 35,49,01,000/- u/s 40(a)(1a), rejecting the Appellant’s contention that tax was not deductible on service coupon under Section 194C.

Without prejudice to the above, the learned CIT(A) ought to have appreciated that since the Appellant was not held to be an assessee in default u/s 201 of the Act, it cannot be held that the Appellant had failed to deduct tax at source in accordance with the provisions of the Act so as to merit disallowance u/s 40a(la) of the Act.

In any event, the time limit for passing an order u/s 201 for the FY 2006-07 (AY 2007-08) having expired, the assessee could not now be deemed to be an assessee in default.

In any event, the learned CIT(A) ought not to have made disallowance u/s 40a(la) in those cases where the payees had filed their returns of income and paid tax due there under for the relevant assessment year, there being thus no subsisting tax liability of the payee which would entitle the Appellant to claim deduction under the proviso to the section at any subsequent point of time.

The addition made by the learned CIT(A) being contrary to the provisions of law be deleted.

Your Appellant reserves the right to add to, alter or amend any of the above grounds of appeal, if felt necessary.”

2. Briefly stated, the assessee company which is engaged in the business of manufacturing of automobile vehicles, tractors etc. had filed its return of income for A.Y. 2007-08, declaring total income at Rs.958,35,15,817/-. Original assessment under Sec.143(3) r.w.s 144C of the I-T Act was completed on 26.10.2010 assessing its total income at Rs.2588,51,62,830/-. The assessee assailed the matter in appeal before the CIT(A), who partly allowed the same. Aggrieved, both the assessee and the revenue filed cross-appeals against the order of the CIT(A) before the Tribunal. The Tribunal while disposing off the cross-appeals, vide its order passed in ITA No. 7999/Mum/201 1, dated 08.06.2012 allowed certain reliefs and restored certain issues to the file of the A.O for fresh adjudication. One of the issue that was set aside by the Tribunal to the file of the AO was the disallowance of the payments made by the assessee to its dealers towards service coupons of Rs.35,49,01,000/- under Sec.40(a)(ia) of the I.T Act.

3. The A.O while giving effect to the directions of the Tribunal, vide his order passed under Sec. 143(3) r.w.s 254, dated 31.03. 2014, had inter alia upheld the disallowance of service coupons of Rs.35,49,01,000/- under Sec.40(a)(ia).

4. Aggrieved, the assessee carried the matter in appeal before the CIT(A), who upheld the disallowance u/s 40(a)(ia) of the payment of Rs. 35,49,01,000/- made by the assessee to its dealers towards service coupons. The CIT(A) while concluding as hereinabove, observed, that a similar disallowance u/s 40(a)(ia) made by the A.O in the case of the ‘sister concern‘ of the assessee was upheld by the Tribunal in viz. M/s Mahindra Navi Star Automobiles Ltd. Vs. DCIT (ITA No.3324 & 4645/Mum/2013, dated 13.05.2016) for A.Ys 2007-08 & 2008-09. It was observed by the CIT(A) that the Tribunal while disposing off the aforementioned appeals of the ‘sister concern‘ of the assessee had upheld the disallowance made by the A.O u/s 40(a)(ia), as it had failed to deduct tax at source u/s 194C at the time of making of payments to its dealers towards the service coupons. On the basis of his aforesaid observations the CIT(A) upheld the disallowance u/s 40(a)(ia) of Rs. 35,49,01,000/- made by the A.O.

5. The assessee being aggrieved with the order of the CIT(A) has assailed the sustaining of the disallowance under Sec.40(a)(ia) of Rs.35,49,01,000/- in appeal before us. Succinctly stated, the value of the service coupons are factored by the assessee into the sale price at the time of sale of vehicles to its dealers for an ascertained price. In turn, the dealer makes onward sales to the customers at a price which includes free service obligations. The service coupons enable the ultimate customer to obtain certain number of services for their vehicles from any of the dealer forming part of the network of the dealers of the assessee across the country. As a matter of fact, the consideration for the services being embedded in the sale price of the vehicle is paid for by assessee at the time of purchase of the vehicle. At the time of availing the free service, the customer presents the service coupon to the dealer, who in turn provides the service for the vehicle without charging for the same. Subsequently, the dealer presents the service coupons to the assessee company, which in turn pays a predetermined sum of money to the dealer. The A.O while framing the assessment was of the view that the payment made by the assessee company to its dealer was pursuant to a contract, as per which the dealer was providing services on behalf of the assessee in lieu of money. In fact, it was also observed by him that as was discernible from the ‘dealership agreement‘, the amount of the service coupon was based on the cars sold by the assessee to the dealers. As such, the A.O holding a conviction that as there was principal-to-agent relationship in the aforesaid transaction, thus the assessee was obligated to deduct tax at source under Sec.194C at the time of making of such payment to the dealers. As the assessee had failed to comply with its statutory obligation and had not deducted tax at source as per the mandate of Sec.194C, therefore, the A.O in the backdrop of his aforesaid conviction disallowed u/s 40(a)(ia) the payment of Rs.35,49,01,000/-that was made by the assessee towards service coupons to its dealers. As observed hereinabove, the CIT(A) on appeal was persuaded to subscribe to the view taken by the A.O and had upheld the aforesaid disallowance made by him u/s. 40(a)(ia).

6. The ld. Authorized Representative (for short ‘A.R‘) for the assessee, at the very outset of the hearing of the appeal submitted, that as the payment made by the assessee company to its dealers for the service coupons was towards reimbursement of expenses incurred by them for providing free services to the ultimate customers, thus no  obligation was cast upon the assessee to deduct tax at source under Sec.194C while making of such payments. The ld. A.R took us through the facts of the case to the extent the same were relevant to the issue under consideration. It was submitted by him that the appeal of the assessee was earlier disposed off by the Tribunal vide its order viz. Mahindra & Mahindra Ltd. Vs. DCIT-2(2), Mumbai (ITA No 7999/Mum/2011, dated 08.06.2012). However, as the issue pertaining to disallowance under Sec. 40(a)(ia) of the payments made by the assessee towards service coupons to its dealers was not adjudicated while disposing off the appeal, therefore, the Tribunal had vide its order passed in M.A. No. 397/Mum/2012, dated 03.10.2012 remitted the matter to the file of the A.O. The ld. A.R drew our attention to the submissions which were made by the assessee before the A.O in the course of the set aside proceedings. The ld. A.R taking us through a sample ‘Invoice‘ that was raised by the assessee on sale of vehicles to its dealer, submitted, that the same included the value of service coupon charges. It was submitted by the ld. A.R that the service coupon charges was a part of the sale price, and the assessee would make a provision for service charges in its books of accounts. The ld. A.R further drawing our attention to a sample ‘dealer agreement‘, submitted that the relationship between the assessee company and the dealer was clearly as that of principal to principal basis. It was further submitted by him that in the aforesaid ‘agreement‘, it was clearly mentioned that the dealer was not to be considered as an ‘agent‘ or ’employee‘ of the company for any purpose. Further, the ld. A.R took us through the observations of the CIT(A) in context of the issue under consideration. It was the claim of the ld. A.R that as reimbursement of expenses did not attract any obligation to deduct tax at source, therefore, the assessee could not be held as being in default for not deducting tax at source under Sec.194C. In nutshell, it was the contention of the ld. A.R that as the assessee was not obligated to deduct any tax at source at the time of reimbursement of the amount of service coupon charges to the dealer, thus no disallowance under Sec. 40(a)(ia) was called for in its hands. Alternatively, it was submitted by the ld. A.R that as the assessee had not been deemed to be an assessee in default under the first proviso to sub-section (1) of Sec.201, therefore, as per the second proviso to Sec. 40(a)(ia) it shall be deemed that the assessee had deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payees referred to in the said proviso. In support of his aforesaid contention the ld. A.R relied on the judgment of the Hon‘ble High Court of Delhi in the case of CIT Vs. Ansal Land Mark Township (P) Ltd. (2015) 377 ITR 635 (Del). Apart there from, it was the claim of the ld. A.R that in case the assessee was still to be held as being in default under Sec.40(a)(ia) then the disallowance, if any, shall liable to be restricted to the extent of 30% only. Further, the ld. A.R in order to impress upon us that no disallowance under Sec. 40(a)(ia) was called for in the hands of the assessee, relied on the judgement of the Hon‘ble Supreme Court in the case of CIT Vs. Kotak Securities Ltd. (2016) 383 ITR 1 (SC).

7. Per contra, the ld. Departmental Representative (for short ‘D.R’) submitted that as the payments made by the assessee company to its dealers for providing services to the vehicles of the customers was a contractual payment, thus the assessee remained under an obligation to deduct tax at source at the time of making of payment/credit of the said amount to the respective dealers. It was averred by the ld. D.R that as the assessee had failed to comply with the aforesaid statutory obligation and had not deducted tax at source as per the mandate of Sec.194C, therefore, the said amount of Rs.35,49,01,000/- was rightly disallowed by the A.O under Sec.40(a)(ia), which thereafter was upheld by the CIT(A).

8. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record and the judicial pronouncements relied upon by them. We find that our indulgence has been sought by the assessee for adjudication of two issues viz. (i) that as to whether the assessee company was obligated to deduct tax at source under Sec. 194C at the time of making payments to its dealers towards the service coupons which were surrendered by the customers with them for availing services of their vehicles from the said dealers; and (ii) that now when the assessee company had not been held to be an assessee in default under the first proviso to sub-section (1) of Sec.201, then whether the amounts paid to the dealers for the service coupons would be liable for disallowance under Sec.40(a)(ia) of the I.T Act.

9. Admittedly, the assessee at the time of making the payments to  its dealers towards the service coupons had not deducted any tax at source. In order to appreciate the issue under consideration, we are of the considered view that it would be relevant to briefly cull out the business model of the assessee company to the extent the same is relevant for adjudicating the present case. The assessee company which is engaged in the business of manufacturing of automobile vehicles, tractors etc., sells its vehicles through a wide network of dealers spread across the country. As a consistent practice in the automobile industry, the purchaser of the vehicle is entitled for availing certain number of free services of the same after it had touched different milestones, which may be reckoned in terms of mileage, lapse of time etc. In sum and substance, the purchaser of the vehicle (or anyone to whom the ownership of the vehicle had subsequently been transferred) redeems the service coupon with a dealer at the time of getting his vehicle serviced free of cost. As observed hereinabove, the value of the service coupons are factored by the assessee into the sale price at the time of sale of vehicles to its dealers for an ascertained price. In turn, the dealer makes onward sales to the customers at a price which includes free service obligations. In nutshell, the customer at the time of purchasing the vehicle pays for the value of the service coupons which is embedded in the sale price itself. As the value of service coupon recovered by the assessee company and forming part of its ‗sale invoices‘ stands credited in its profit and loss account at the time of booking the sales, therefore, a provision is made for the unexpired service coupons appearing at the end of the year. In terms of the aforesaid arrangement, the dealers are obliged to render free services to the customers on surrendering of the free service coupons by them, subject to satisfaction of the time limit/mileage parameters fixed by the assessee company. As at the time of sale of the vehicle, it is not ascertainable as to from which dealer the customer would avail the free services, therefore, for said reason the authorized dealer through whom the vehicle is sold is not paid for the services (value of which is embedded in the sale price of the vehicle sold to the customer) at the time of its sale. In fact, the customer cannot be bound to avail the free services from the specific authorized dealer from whom he had purchased the vehicle and remains at a liberty to avail the services of any of the authorized dealer of the assessee company spread across the country. In terms of the aforesaid arrangement the assessee company enters into a back up contract (appointment) with its dealers, as per which the dealers are obliged to provide free services to a vehicle sold by the assessee through any dealer as long as the same satisfies the conditions of warranty against the service coupon. After the customer had availed the free service from the dealer on surrendering of the service coupon, the latter in turn is paid the predefined amount by the assessee company. As a matter of fact, as the customer had already paid for the free service at the time of purchase of the vehicle (as a part of the cost of the vehicle), therefore, he is not required to pay for the same while availing such services from the dealer. Rather, the dealer who carries out the work of providing service to the customers vehicle is thereafter paid by the assessee company which had already received the consideration for such free services from its customers as a part of it sale price. In sum and substance, as the assessee had already recovered the value of free services at the time of sale of the vehicle, thus the dealer by carrying out the service of the vehicles in lieu of the service coupons, in fact, by so doing discharges the liability or the obligation of the assessee company viz. the manufacturer of the vehicle towards the customers. On a perusal of the aforesaid arrangement, it can safely be concluded that as the dealers provide free services to the vehicles of the customers in discharge of the obligation of the assessee company towards such customers, therefore, the assessee company is the actual beneficiary of the value of the services provided by the dealers. Succinctly stated, as the customer pays for the free service entitlement at the time of purchase of the vehicle, therefore, the assessee company remains under an obligation to provide such free service to the customers as and when such person approaches the authorized dealer for availing of such services. Resultantly, the assessee company in order to honour its commitment made to the customers at the time of sale of the vehicle enters into a back up contract with its dealers spread across the country, as a result whereof, the latter are obliged to provide services to the vehicles that satisfies the conditions of warranty against the service coupons.

10. In the backdrop of our aforesaid deliberations, we are of the considered view that the payments made by the assessee to its dealers for providing free services in lieu of service coupons is not in the nature of any reimbursement of expenditure incurred by such dealers, and is in fact in the nature of payment of consideration pursuant to a contract, as per which the dealer provides such services to the ultimate customers. Accordingly, in our considered view the assessee was obligated to have deducted tax at source at the time of making of such payments towards service coupons to its dealers. As is discernible from the orders of the lower authorities, as the assessee had failed to deduct tax at source as per mandate of Sec.194C, therefore, the lower authorities had rightly concluded that the said amount was liable to be disallowed under Sec. 40(a)(ia) of the I-T Act.

11. Apart there from, we find that the issue as to whether an assessee which is into manufacturing of automobile vehicles etc. remains under a statutory obligation to deduct tax at source under Sec.194C at the time of making of payments to its dealers for providing services to the ultimate customers in lieu of free service coupons surrendered by them, had been deliberated at length by a coordinate bench of the Tribunal viz. ITAT ―B‖ Bench, Mumbai in the case of a ‗sister concern‘ of the assessee viz. Mahindra & Mahindra Automobiles ltd Vs. DCIT, 2(2) viz. (ITA No. 3324 & 4645/Mum/2013, dated 13.05.2016). In the aforesaid case, it was observed by the Tribunal that as the free services provided by the dealers to the ultimate customers was in discharge of the obligation cast upon the assessee company towards the customers to provide such services, therefore, the payments made by the assessee company to the dealers obligated the assessee to deduct tax at source under Sec. 194C at the time of making of such payments to them. The Tribunal in its aforesaid order had observed as under:

“6. We have heard the parties, and perused the material on record.

6.1 We would firstly be required to see if the tribunal‘s order in Hero Motocorp Ltd. (supra) can be said to cover the assessee‘s case in-as-much as, where it is found as so, we may not be required to issue any independent findings. We may firstly begin by reproducing the relevant paras of the impugned order, delineating the respective cases of both the sides, as under:

‘4.3 As regards service coupon commission disallowed by the AO u/s 40(a)(ia) r.w.s. 194C, the facts as stated by the appellant are as under :-

(i) Service coupon amount is fixed class of vehicle-wise. During 2006-07, only LCVs were sold for which the amount of service coupon per vehicle was Rs.2500, as already stated in our earlier communications.

(ii) For HCVs, the sale of which started in subsequent years, the amount of service coupon is Rs.5000/- (Rs.6000/- from June’12 onwards).

(iii) Accounting for service coupon amount happens as under:

(iv) The value of service coupon recovered as part of the Sale Price shown in the Sales invoice is credited to an Income Account styled Service tax Coupon 5 ITA Nos. 3324 & 4645/Mum/2013 (A.Ys. 2007-08 & 2008-09) Mahindra Navistar Automotives Limited vs. Dy. CIT Account. This entry is passed at the time of recording sales to the dealer. A snap shot of the accounting entry passed in the SAP system is given below.

(v) Since full amount of credit is already taken to the P&L Account at the time of booking the sale, a provision is made for the unexpired service coupons at the end of the year.

(vi) In respect of free services the dealer is obliged to render only free service to the customer. In the case of service coupons the customer redeems the service coupon with the dealer on servicing the vehicle. Replacement of parts does not form part of free service. The service coupon is surrendered to the company for payment purposes.

(vii) In the case of a vehicle covered under warranty, the customer brings the vehicle at dealer’s location for replacing the defective part. The dealer then replaces that spare-part from his own stock and uses his own labor for replacing same. Later, the dealer recovers cost of spare as well as labor cost from the assessee through a Warranty claim Debit Note. Presently the dealer can file his claim through the company’s portal which is subsequently settled by the company’s customer care department. Warranty claims when settled are debited to Warranty Provision account and credited to Dealer’s account.

(viii) Where the vehicle is not in warranty, such costs are recovered from the customer.

(ix) Thus the fact remains that the entire amount of recovery for service coupon is offered for tax at the time of booking the sale. A provision is made for unexpired service coupons at the end of the year. Value of such service coupons being part of the sale price itself, it is the customer himself who pays the dealer for the value of the service coupon when he buys the vehicle purchased by the dealer from the company. The provisions of s 194C are not therefore applicable. The dealer does not carry out any work for the company when he services the customer’s vehicle at his service station.

(x) Snap Shot of the accounting entry passed in the SAP system is as under:

4.4 The facts of the case have been considered:

• A perusal of the aforesaid facts clearly shows that amount given by the manufacturer to the dealer in respect of free service coupon is fixed amount as per class of vehicle wise, i.e.,

(i) LCVs – Rs. 2500/- per vehicle,

(ii) HCVs – Rs. 5000/- per vehicle (Rs. 6000 from June 2012 onwards)

• As per the contract, the dealer is obliged to render the requisite services against the free services coupons reimbursable to him at amount of Rs. 2500/- per LCV vehicle and Rs. 5000/- per HCV vehicle (Rs. 6000 from June 2012 onwards).
• Therefore, the said payment of Rs. 2500/- per LCV vehicle and Rs. 5000/-per HCV vehicle (Rs. 6000 from June 2012 onwards), is for carrying out the work by way of contract between the assessee company and the dealer. Hence, a payment for works contract.
• The appellant’s argument that the said amount represents part of the price at which it sells its vehicles to the dealers is not maintainable under the facts and circumstances of the case.
• 6 Since the payment of Rs.213,46,000/- is in the nature of payment to contractor for work assigned by the assessee company to the dealer – the same is certainly covered u/s. 40(a)(ia) r.w.s. 194C.
• 7 The payment of Rs.213,46,000/- made by the appellant to the dealers being in violation of sec. 40(a)(ia) r.w.s. 194C – the disallowance made by the AO is upheld.‘ [emphasis, ours]
• The relevant part of the tribunal‘s order in Hero Motocorp Ltd. (supra), containing its findings, and to which our attention was drawn during hearing, is as under:

‘29.33 When the assessee sells vehicles to its dealers for the ascertained price, the cost of free service obligation on the part of the assessee is embedded in the concluded sale contract and sale price of the vehicle. The dealer, in turn, makes onward sales to the customers at a price which includes free service obligations. The contract between dealer and customer is independent and separate contract. The customer in terms of the sale contract with the dealer approaches the dealer for these free services. It is the customer who avails the service for the cost paid by him as part of the sale price of the vehicle he purchases from dealer during the warranty period. It is the dealer who renders the service to the customer pursuant to independent contract. The fact that the customer can approach any dealer for obtaining free service does not alter the position as it is a case of convenience and mutual arrangement drawn by the company. The reimbursement is not for services rendered by the dealer to the customer but in discharge of the warranty obligation included in the sale price. It is in term of a independent contract of sale which stipulates that the assessee should reimburse the cost incurred by the dealer if and when it performs free services to the ultimate customer. On this factual matrix, it would be wrong to hold that the dealer has rendered technical services as contemplated u/s. 194J to the assessee for which the assessee paid a particular amount to the dealer and non-deduction of tax at source on such payments attracts disallowance u/s. 40(a)(ia). 29.34

The assessing officer relied on Section 194J which reads as follows:

29.42 We also find force in the argument of the assessee that the services in this case are availed by the ultimate customer who has paid the consideration by way of sale price to dealer by a separate transaction of purchase of two wheeler. Service is neither availed by the assessee nor is the payment made by the assessee in consideration of availing a service for itself. As already stated, even if taken as a service availed by the assessee, sec. 194J is not attracted as this is not a technical service.‘

In para 29.43, the tribunal considers the Revenue‘s reliance on Circular 8 of 2009 dated 24.11.2009, concerning tax deductible at source u/s. 194-J, wherein it stood clarified by the Board that the payments made by TPA on behalf of Insurance Company to hospitals are liable for tax deduction at source, before concluding at para 29.45 of its order, which reads as under:

‘29.45 On this factual matrix, and as Sec. 194J is not attracted in this case, we uphold the contentions of the assessee and allow this ground of appeal.‘

Clearly, the said decision stands rendered with reference to whether the impugned payment falls within the purview of section 194J of the Act or not. All the observations by the tribunal must be considered and viewed in that perspective. We may though add that the tribunal also considered the discharge of the payment by the service recipient, in-as-much as it found that the payment was in fact made by the customer, i.e., the person availing the service, as a relevant consideration toward application of s. 194J.

6.2 Section 194C, which stands invoked and applied in the instant case, is reproduced as under (in its relevant part):

“Payments to contractors.

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)………..;

(ii)………..

of such sum as income-tax on income comprised therein.

(2) Where any sum referred to in sub-section (1) is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

Explanation.—For the purposes of this section,—

(i) “specified person” shall mean,—

(a) the Central Government or any State Government; or

(d) any company; or

(ii) …………;

(iii) “contract” shall include sub-contract;

(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.’

As apparent, its scope is materially different (from s. 194J), and envisages:

a) a contract between a resident (contractor) and a specified person in pursuance to which some work is carried out; and

b) credit or payment to the contractor by any person responsible for such work.

6.3 In the present case, we are completely unable to see as to how the terms of the provision, or its‘ parameters, are not met. The customer is charged for the value of some services – in the nature of repairs and maintenance of his vehicle, to be undertaken on it reaching different milestones (reckoned in terms of mileage, lapse of time, etc.), i.e., qua the vehicle purchased from the company manufacturing and selling the vehicles, as the assessee-company, which (services) are though only through its‘ authorized dealers. Clearly, what is carried out, even as held by the ld. CIT(A), is ‘work’ within the scope of the term as defined u/s. 194C. The authorized dealers through whom the vehicle is sold, are not paid for the services (value of which is embedded in the sale price of the vehicle sold to the customer) at the time of it‘s sale. The reason is simple. It is not certain as to which dealer and, rather, from which place – the dealers being spread across the country, the customer may avail all or any of the stipulated services, usually three is number. The customer cannot be bound to a particular dealer, seriously impairing the flexibility and the practicality of the scheme for the provision of such ‘free‘ services. Why, a customer may sell his vehicle to another, so that there is no privity of contract even between the person (who comes for the servicing of his vehicle) and the vehicle manufacturer. The company selling the vehicle, to honor it‘s commitment made to the customer at the time of sale, enters, in turn, in a back-up contract (arrangement) with it‘s dealers. Under this manufacture dealer contract, which in fact forms part of the specimen dealer agreement (PB pgs. 16-35), the dealer is obliged to provide services (in the nature of repair and maintenance services) to the vehicle (from whom-so-ever dealer purchased) that satisfies the conditions of warranty (qua services), against service coupons. The customer thereby only redeems his coupons. Payment/credit is allowed by the vehicle manufacturer on presentation of the service coupons – value of which is predefined, issued by it and received by the dealers from the vehicle owners. It is the vehicle owner who has paid for, and is accordingly the recipient of these services. However, having already paid for the same upfront, i.e., as a composite cost of the vehicle, as evidenced by the service coupons received by him, he is not required to pay for the services again, so that the payment for carrying out the work thereon by the dealer, is made by the manufacturer (assessee-company), who has already received the consideration in its respect from the customer as a part of its‘ (vehicle‘s) sale price. That is, the assessee-company is the person responsible for making the payment to the dealer (contractor) under the circumstances. That it is also the specified person u/s.194C(1) is another matter. How, we wonder, are the ingredients of the section not 11 ITA Nos. 3324 & 4645/Mum/2013 (A.Ys. 2007-08 & 2008-09) Mahindra Navistar Automotives Limited vs. Dy. CIT satisfied? It is not necessary that the payer or the specified person should also be the recipient of the services, i.e., the work carried out in pursuance to a contract, for which payment is being made and received. Equally, it is not incorrect to say that the vehicle manufacturer is the beneficiary of the services in-as-much as the same operate to discharge its‘ liability or obligation under the contract of sale, and which, being an incident of the sale of vehicle, would extend to who-so-ever is the owner of the vehicle for the time being. Whether it could be, strictly speaking, termed as a product warranty; the obligation for undertaking repairs being independent of the sale of vehicle, though incurred at the time of or as a part of the contract of sale, and is accordingly to be honored, is of little moment. As afore-stated, the vehicle manufacturer, as the assessee-company, is the beneficiary of the value of these services in-as-much as the consideration for the same is already received by it in advance, making it is a part of the sale arrangement (of the vehicle). We, accordingly, see no reason as to why the provision of section 194C is not applicable, or how could it be said as not so.

6.4 Section 194J requires deduction of tax at source on fees for technical services, in contradistinction to payment under a work contract u/s. 194C and, thus, is on an altogether different footing. The tribunal found the nature of the repairs as not qualifying for being considered as ‘technical services‘ and, accordingly, the consideration therefor as ‘fees for technical services‘, for which reference stands made to Explanation 2 to section 9(1)(vii). Each of the decisions relied upon by the tribunal in Hero Motocorp Ltd. (supra) are also in the context of section 194J, and not applicable in the instant case. True, the observation in Hero Motocorp Ltd. (supra) with regard to the service recipient (customer) being not the payer for those services, could be said to hold even for the contractual arrangement, but, as stated, each of the observations by the tribunal has to be considered from the stand point and perspective of section 194J. The same, in any case, does not represent the ratio of the decision. As clarified in, inter alia, Goodyear India Ltd. vs. State of Haryana and Another [1991] 188 ITR 402 (SC), a precedent is an authority only for what it actually decides and not what may remotely or even logically follow from it. In fact, the customer receiving the services is the person who finally pays for the same, i.e., at the time of and alongwith the sale price of the vehicle, wherein the cost of the services is embedded. The payer, however, is the vehicle manufacturer (assessee-company), which is the person responsible for making the payments to the dealers, and on whom the law casts an obligation to deduct tax at source u/s. 194C(1), as well as is the person contractually bound to pay the dealer undertaking the services, i.e., for carrying out the work in pursuance of contract therewith (Dealer Agreement). Reference in this context may also be made to answer to Q. No. 9 of Circular 715 dated 08.8.1995 issued by the CBDT.

We thus in terms of our aforesaid observations, and also finding ourselves to be in agreement with the view taken by the coordinate bench of the Tribunal in the case of the ‗sister concern‘ of the assessee viz. Mahindra & Mahindra Automobiles ltd Vs. DCIT, 2(2) viz. (ITA No. 3324 & 4645/Mum/2013, dated 13.05.2016), respectfully follow the same. As the assessee which remained under an obligation to deduct tax at source under Sec.194C had failed to comply with the said statutory obligation, therefore, subject to our observations recorded herein below the provisions of Sec.40(a)(ia) were clearly attracted.

12. We shall now deliberate on the aspect that now when the assessee has not been held to be an assessee in default under the first proviso to sub-section (1) of Sec.201, then, as to whether the disallowance under Sec. 40(a)(ia) can be made in its case, or not. We find that as per the second proviso of Sec. 40(a)(ia), where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum, but is not deemed to be an assessee in default under the first proviso to sub-section (1) of Sec.201, then, for the purpose of Sec. 40(a)(ia) it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee, subject to the condition that the said resident payee satisfies certain conditions viz. (i) has furnished his return of income under Sec.139; (ii) has taken into account such sum for computing income in such return of income; and (iii) has paid the tax due on the income declared by him in such return of income. Further, the assessee shall furnish a certificate to the said effect from an accountant in such form as may be prescribed. As a matter of fact, the second proviso to Sec. 40(a)(ia) provides for an exception wherein the amount on which the assessee has failed to deduct tax at source would not call for any disallowance under Sec.40(a)(ia). In our considered view, the aforesaid second proviso had been made available on the statute to give effect to the judgment of the Hon’ble Supreme Court in the case of Hindustan Coca Cola Beverage Pvt. Ltd. Vs. CIT (2007) 293 ITR 226 (SC). In the aforesaid judgment, it was observed by the Hon‘ble Apex Court that where the payee has already paid the tax, the same would discharge the assessee from the obligation to deduct the same. At this stage, we may herein observe that though the second proviso had been made available on the statute vide the Finance Act, 2012 w.e.f 01.04.2013, however, the same as held by the Hon’ble High Court of Delhi in the case of CIT Vs. Ansal Land Mark Township (P) Ltd. (2015) 377 ITR 635 (Del) shall be applicable retrospectively, i.e even for the years prior to A.Y 2013-14. Further, we find that a similar view had also recently been taken by the Hon’ble High Court of Punjab & Haryana in the case of PCIT Vs. Mobisoft Telesolutions Pvt. Ltd. (2019) 411 ITR 607 (P&H) while disposing off the appeal of the assessee before them for A.Y 2011-12. Be that as it may, we are of the considered view that in case the assessee satisfies the conditions envisaged in sub-section (1) of Sec.201, then it cannot be held to be an assessee in default, and as per the second proviso of Sec. 40(a)(ia) no disallowance would be called for in its hands. We thus for the said limited purpose restore the matter to the file of the A.O for making necessary verifications. In case the assessee is able to demonstrate before the A.O that it had duly complied with the conditions envisaged in the second proviso of Sec.40(a)(ia) r.w.s 201(1) of the I.T Act, then the disallowance to the said extent made under Sec. 40(a)(ia) in its hands shall stand vacated.

13. Insofar the reliance placed by the ld. A.R on the judgment in the case of CIT Vs. Kotak Securities Ltd. (2012) 340 ITR 333 (Bom) is concerned, we find that the same is found to be distinguishable on facts. In the aforesaid case, as both the revenue and the assessee were under a bonafide belief as regards the liability to deduct TDS on transaction charges paid to the Bombay Stock Exchange right from the year 1995 i.e. coming into effect of Section 194J, till the assessment year in question, therefore, it was in the backdrop of the said peculiar facts of the case, it was concluded by the Hon‘ble High Court that no disallowance u/s 40(a)(ia) was called for in the hands of the assessee. In fact, the Hon‘ble High Court while concluding as hereinabove had specifically observed that the aforesaid view was being taken in the backdrop of the peculiar facts of the case as were there before them. We thus in terms of our aforesaid observations are of the considered view that the aforesaid judicial pronouncement relied upon by the ld. A.R being distinguishable on facts would thus not assist the case of the assessee before us.

14. The appeal of the assessee is partly allowed for statistical purposes in terms of our aforesaid observations.

Order pronounced in the open court on 14.05.2019