TDS liability of a builder for sub-contracting of main contract is 1% u/s 194C

RELEVANT PARAGRAPH

6. We have heard rival submissions and perused the orders of the authorities below. Copies of Registration Certificate under Kerala Value Added Tax and Form ST-2 under Service Tax Act placed at pages 20 and 21 clearly mentions that assessee has been registered as a works contractor doing construction of residential complex. If we look at the Contract agreement placed at pages 2 to 9, the pertinent clause runs as under:

“AND WHEREAS the Second Party entrusted the First party to develop the said land and construct Three four storied buildings thereon consisting of flats for persons intending to purchase undivided share with right to construct specified flats at their expense. According to the plan prepared there are four flats each in the ground, first, second and third floors of each Block. Of these two flats are on the front from south to north marked A and D and the other two are on the backside of A and D apartments marked B and C respectively. The Ground floor consists of four flats of 873 sq.ft. each and the balance area is kept as car parking for 16 cars. The First and Second floor consists of four flats each, with A and D apartments having a super built up area of 1472 sq.ft. and B and C apartments having 1443 sq. ft. each. The Third Floor consists of four flats each with A and D apartments having a super built up area of 16007 sq. ft. and B and C apartments having 1572 sq. ft. each.

AND WHEREAS the land owners have got building permit and approved plan from Corporation of Kochi for construction of the said four storied buildings in the said land with right of way over the 5 metre wide private road on its south leading to the 5.5 metre wide private road which leads to public road for all kinds of traffic and for taking all kinds of connections.

AND WHEREAS the Second Party has purchased from the owners 1472/70,000 undivided share equivalent to 1.55 cents in the said 73.785 cents of land in Sy. No. 56/8-A, 56/9, 56/10 and 56/11 in Edappally South Village together with right to construct Flat no. 3S-A from south in the Second Floor of the Third Block called Kent Illam. Apartments and proportionate share in the common area and common facilities and a covered car parking area marked C.P.2. as per Saie Deed No.2866/2005 of Edappally Sub Registry.

AND WHEREAS the Second Party wants to entrust the construction of flat and covered car parking area and the proportionate share of the common areas and common facilities and the First Party agreed to construct the same according to approved plan for a total consideration cost of Rs.l3upee Thirteen Lakhs Twenty four thousand and Eight hundred only).”

7. It is clear from the above pre-ample that the first party being the assessee, has been entrusted with the construction of flats by the second party, who is purchaser, on the undivided share in the land owned by the land owners. Clause (1) of this agreement runs as under:

“The First party hereby agrees to construct as Building Contractors for the Second party the aforesaid Three bed room apartment having super built up area of 14 72 sq.ft. (including undivided share in the common areas) marked Flat No.3-S.A. from the south of the Second Floor of the aforesaid 3rd Block and covered car park No. C.P.2 in the Ground Floor and proportionate share in the common areas and common facilities within 15 months from this date for a total construction cost of Rs. 13,24,800/- (Rupees Thirteen Lakhs Twenty-four thousand and Eight hundred only).”

8. The above clause clearly clarifies the position that the assessee being a building contractor had agreed to construct the flats for the ultimate purchasers, and if we see the specification which is given at the fag end of this agreement, it clearly shows the type of work and the items that must be used for the work. This being so, in any case, assessee cannot be considered the owner of the land but only a builder doing the construction work.

9. If we look at section 194C of the Income-tax Act, sub section 2 thereof runs as under:

“Any person (being a contractor and not being an individual or a Hindu undivided family) responsible for paying sum to any resident (hereafter in this section referred to as the sub-contractor) in pursuance of a contract with the sub-contractor for carrying out, or for ‘, the supply of labour for carrying out, the whole or any Clause (1) of the agreement entered into by the assessee and M/s. Slipa Constructions, Kochi runs as under:

“In consideration of the payment to be made to the Sub-contractor for work to be executed by him, the Sub­ Contractor hereby covenants with the Employer that the Sub Contractor shall and will duly provide, execute and complete work shall do and perform all other acts and things in Sub Contract mentioned or described or which are to be implied there from or may be reasonably necessary for completion of work and at the said times and in the manner and subject to the terms and conditions or stipulations mentioned in Sub Contract. “

Therefore, in our view, there is no doubt that assessee was only sub contracting the work after having initially obtained the main contract for building the flat from the owner of the land as well as from the ultimate purchasers.

11. In the case of K. Raheja Development Corporation Vs State of Karnataka (2005) 5 RC 105), the Honourable Apex Court has held that even if the appellant was the owner, to the extent that it had entered into agreement to carry out construction activity on behalf of someone else for cash, deferred payment or other valuable consideration, it would be carrying out a works contract. Therefore, we are of the opinion that the assessee had only sub contracted the various work to various parties and was under obligation to deduct 1% tax for payments made to such sub contractors as per sub section (2) of section 194C. Learned Assessing Officer, committed an error when he concluded that the assessee was the owner and tripartite agreement entered into by the assessee with the land owners and purchasers was nothing but a sale agreement for a reasoning- that the ultimate purchaser had no say in the execution of work, till the flat was transferred. Such a clause would not convert the assessee who is essentially a builder to the position of the owner of such land. Various flat owners had agreed to purchase the flat at different rates and therefore Assessing Officer’s conclusion that flats were priced at a fixed rate also does not stand to reason. As for the view that sub contract could emerge only from a pre-existing contract, there is no doubt that the tripartite agreement was entered into on 24- 5-2005 whereas various sub contracts were entered into only thereafter. Thus, in our view, the assessee had correctly deducted at 1% tax at source as stipulated under sub section (2) of section 194C. It could not have been considered as an assessee in default. The demands raised on it for all the years u/s 201(1) and 201(1A) therefore stand deleted.

NF