Has the Contentious Issue of Applicability or Otherwise of TDS on Transmission & Wheeling Charges of Power Transmission Companies u/s 194J, 194I & 194C of the Income Tax Act, 1961, finally Settled???
The activity of distribution of electricity by power distribution companies, to end consumers, is preceded by two important intermediate steps – namely production of electricity by power generation companies and its transmission from point of production to the point of distribution, by power transmission companies.
The process of transmission of electricity from the generation point of the power generation company to the distribution point of the power distribution company through the transmission system network of the transmission company, in technical parlance is termed as “Wheeling”.
For availing the benefits of this standard facility viz. the transmission system network of power transmission companies, for the purpose of transmission of electricity from the generation point to the distribution point, the power distribution companies make payment of the Transmission & Wheeling Charges to the transmission companies. The Transmission & Wheeling Charges are determined by concerned State Electricity Regulatory Commissions, which are Regulatory Bodies constituted under the Electricity Regulatory Commission Act.
The issue of applicability or otherwise of TDS on transmission and wheeling charges, has always been a contentious and litigative issue. The Revenue Authorities, have, time and again, subjected the said transmission & wheeling charges, to the deduction of TDS, by the power distribution companies, either under section 194J, or u/s 194I or u/s 194C. Interestingly, this hit and trial approach, makes it amply clear that even Revenue Authorities themselves, are not very clear about the exact nature of the transmission & wheeling charges, so as to apply a standard section for the purpose of TDS deductibility.
It will be worthwhile to examine the applicability or otherwise of TDS on Transmission & Wheeling Charges, under all the stated three sections viz. section 194J, 194I & 194C of the Income Tax Act, as under:
(I) APPLICABILITY OR OTHERWISE OF TDS ON TRANSMISSION & WHEELING CHARGES U/S 194J OF THE INCOME TAX ACT:
The Revenue Authorities, very often, consider “Transmission & Wheeling Charges”, as “Fees for Technical Services”, u/s 194J of the Act.
Explanation to section 194J, defines “technical services”, as:
(b) “fees for technical services” shall have the same meaning as in Expln. 2 to cl. (vii) of sub-s. (1) of s. 9;”
Explanation 2 to Sec. 9(1)(vii) of the Act provides that, “For the purposes of this clause, “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.”
However, there is a need to appreciate & recognize the distinction between “Technical Services” & “Technology Driven Services”.
Technical Service referred to in Explanation 2 to section 9(1)(vii) of the Act contemplates rendering of a technical service to the payer of the fees & not technology driven services.
Installation & operation of sophisticated equipments with a view to earn income by allowing the users to avail the benefits of such equipments does not tantamount to rendering of “Technical Services” within the meaning of Explanation 2 to section 9(1)(vii) of the Act.
Mere collection of a fee for making available a standard facility provided to all those willing to pay for it does not amount to the fees having been received for technical services.
Where a person has developed a technical system consisting of sophisticated instruments and the technical ability and knowledge to operate and maintain the system, it does not result in providing any technical service to others. Rendering of services by using some sophisticated equipments/ technical systems is different from charging fees for rendering technical services.
The power distribution companies make payment of transmission & wheeling charges to the transmission companies, in consideration of availing the benefits of the standard technical facility viz. the Transmission System Network of the transmission companies, for the purpose of transmission of electricity from the generation point to the distribution point and as such by merely making available the benefits of its sophisticated Transmission System Network to the distribution company, the transmission company does not render any “Technical Services” within the meaning of Explanation 2 to section 9(1)(vii) of the Act. Also, the benefits of the said standard facility viz. the transmission system network may be availed by any distribution company within the framework & guidelines of prescribed open access transmission norms.
The Hon’ble Delhi High Court in the case of “CIT vs. Bharati Cellular Limited [175 Taxmann 573 (Del)]”, has categorically held that technical services which are relevant for the purpose of section 194J would be those technical services which involve human interface/element. In other words, the expression ‘technical service’ could have reference to only technical service rendered by a human and that it would not include my service provided by machines or robots.
The said judgment of the Hon’ble Delhi High Court, has been affirmed by the Hon’ble Supreme Court in 193 Taxman 97(SC).
Without prejudice to above analysis, this aspect can be looked at, from another perspective also.
The respective State Governments, confer the status of “State Transmission Utility (STU), to the concerned power transmission companies.
Sec. 39 of the Electricity Act, 2003 mandates the STU to undertake various functions wherein sub-s. (2) of s. 39 provides as under ;
“(2) The functions of the STU shall be—
(a) to undertake transmission of electricity through intra-state transmission system;
(b) to discharge all functions of planning and co-ordination relating to intra-state transmission system with—
(i) Central transmission utility;
(ii) State Governments;
(iii) Generating companies;
(iv) Regional power committees;
(vii) any other person notified by the State Government in this behalf;
(c) to ensure development of an efficient, co-ordinated and economical system of intra-State transmission lines for smooth flow of electricity from a generating station to the load centers;
(d) to provide non-discriminatory open access to its transmission system for use by—
(i) any licensee or generating company on payment of the transmission charges; or
(ii) any consumer as and when such open access is provided by the State Commission under sub-s. (2) of s. 42, on payment of the transmission charges and a surcharge thereon, as may be specified by the State Commission” :
Further, Sec. 34 provides that every transmission licensee shall comply with such technical standards of operation and maintenance of transmission lines, in accordance with grid standards as may be specified by authority. These grid standards are described in Indian electricity code prescribed by Central Electricity Regulatory Commission.
From the aforestated provisions of the Electricity Act, 2003, it becomes clear that all the entities involved in generation, transmission and distribution of electricity are discharging their respective statutory functions and are complying with the directions of State Load Dispatch Centre and the Regulatory Commission for achieving the economy and efficiency in the operation of power system and therefore question of any entity rendering any technical service to another does not arise.
The aforesaid views also get fortified by the decision of the Hon’ble Delhi High Court in the case of CIT vs. Delhi Transco Ltd. (62 taxmann.com 166 ) (Del) (2015), wherein the Hon’ble Delhi High Court vide para no. 34 & 35, has held as under:-
“34. To reiterate, by virtue of the BPTA agreement between DTL and PGCIL there is transportation of the electricity from PGCIL to DTL, through the equipment and network required statutorily to be maintained by PGCIL through its technical personnel using technical expertise. This, however, does not result in PGCIL providing technical services to DTL. Therefore the wheeling charges paid by DTL and PGCIL for such transportation of electricity cannot be characterized as fee for technical service.
35. The ultimate conclusion of the ITAT is therefore not erroneous. Accordingly the question framed by the Court is answered in the negative i.e., against the Revenue and in favour of the Assessee. Since the same question is involved in all the AYs in question, all these appeals are dismissed affirming the impugned order of the ITAT, but in the circumstances with no order as to costs.”
Against the aforesaid decision of the Hon’ble Delhi High Court in the case of CIT vs. Delhi Transco Limited (Supra), the Revenue Authorities, went in Appeal before the Hon’ble Supreme Court of India in SLP(C) No. 853/2016 in the case of CIT(TDS) vs. Delhi Transco Limited, which has since been dismissed by the Apex Court vide its order dated 22/01/2016 by holding as under:-
“We find no reason to entertain this Special Leave Petition, which is, accordingly dismissed.”
Therefore, the present legal position, in relation to the applicability of TDS on Transmission & Wheeling Charges, u/s 194J of the Act, stands settled and concluded by the aforestated dismissal of Special Leave Petition (SLP), of Revenue Authorities, by the Hon’ble Apex Court in SLP(C) No. 853/2016 in the case of CIT (TDS) vs. Delhi Transco Limited, and as such the transmission & wheeling charges, can’t be considered as “Fees for Technical Services” so as to attract TDS applicability u/s 194J of the Act.
(II) APPLICABILITY OR OTHERWISE OF TDS ON TRANSMISSION & WHEELING CHARGES U/S 194I OF THE INCOME TAX ACT:
The meaning of Rent as specifically provided by Explanation to section 194I of the Act is as follows:
Explanation to S. 194I : For the purposes of this section,-
“(i) “rent” means any payment , by whatever name called, under any lease, sublease, 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
whether or not any or all of the above are owned by the payee.”
It is clearly evident that the key words in this definition are “for the use of”. In other words, to consider any payment as rent u/s 194I, it must be towards the use of any particular asset.
The Revenue Authorities, contend that the transmission & wheeling charges, paid by distribution companies to transmission companies, are consideration towards the use of plant & machinery i.e. transmission system network of the transmission companies, and as such are liable for deduction of TDS u/s 194I of the Act.
However, this contention of the Revenue Authorities, ignores one basic fact that in order to use any plant & machinery or equipment, so as to come under the purview of TDS applicability u/s 194I of the Act, one has to have the physical possession or custody of the same. In other words one can’t use anything which one does not possess.
The transmission system networks apart from being owned, managed, controlled & operated by the transmission companies, are always in the physical custody and possession of transmission companies only and not the distribution companies. Thus, the availment of the benefits of a standard facility i.e. transmission system network of the transmission companies, by the distribution companies, can’t be considered as “use” of the same by the distribution companies, so as to attract TDS liability u/s 194I of the Act.
Reliance can be placed on the judgment of the Hon’ble Bombay High Court, in the case of “CIT vs. M/s Maharashtra State Electricity Distribution Company Ltd., in ITA No. 336 of 2013, dated 8.5.2015, wherein the Hon’ble Bombay High Court, has held that,
“36.The argument of the revenue that payments to MSETCL amounts to rent cannot be accepted. According to the Black’s Law Dictionary, ‘Rent’ is defined as consideration paid for periodical use or occupancy of property. Various types of rent are contemplated such as ceiling rent, crop rent, ground rent, etc. Even taking the widest possible definition of rent, in our view the WT charges cannot be considered as rent. It is well settled that the Court may in its discretion construe the legislative provisions so as giving effect to the intended use and applying the test of contextual interpretation. We are of the view that the expression ‘rent’ used in Section 194-I does not apply to WT charges or any other part thereof.
37. 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. “
Similar reliance can be placed upon the Judgement of the Honourable Authority For Advance Ruling in the case of “Dell International Services India (P) Ltd. (2008) 305 ITR 37.
The relevant extracts of the key observations & findings of the Hon’ble Authority in this regard are as follows:
“12.8. The word ‘use’ in relation to equipment occurring in (iv.a) is not to be understood in the broad sense of availing of the benefit of an equipment. The context and collocation of the two expressions ‘use’ and ‘right to use’ followed by the words “equipment” suggests that there must be some positive act of utilization, application or employment of equipment for the desired purpose.
If an advantage is taken from sophisticated equipment installed and provided by another, it is difficult to say that the recipient/customer uses the equipment as such. The customer merely makes use of the facility, though he does not himself use the equipment.”
The Hon’ble ITAT Mumbai Bench, in the case of Chattisgarh State Electricity Board (CG State Power Holding Co. Ltd. vs ITO (TDS), 143 TTJ 151, has also categorically held that,
“17. ….When control of the asset (transmission lines in the present case) always remains with the PGCIL, any payment made to the PGCIL for transmission of power on the transmission lines and infrastructure owned controlled and in physical possession of PGCIL cant be said to have been made for the use of these transmission lines or other related infrastructure.
Viewed in this perspective, Section 194I has no application so far as the impugned payments for transmission of electricity is concerned.”
Therefore, in view of aforesaid legal and factual propositions, transmission & wheeling charges, paid by the power distribution companies, for availing the benefits of transmission system networks of power transmission companies, can’t be considered as rent for use of such network, so as to attract TDS applicability u/s 194I of the Act.
(III) APPLICABILITY OR OTHERWISE OF TDS ON TRANSMISSION & WHEELING CHARGES U/S 194C OF THE INCOME TAX ACT:
The Revenue Authorities contend that, if transmission & wheeling charges, can’t be considered as either fees for technical services u/s 194J or rent u/s 194I of the Act, then alternatively, they may be considered as “consideration towards any work carried” u/s 194C of the Act, within the limb of “consideration towards carriage of goods or passengers by any mode of transport other than by Railways.”
However, it needs to be appreciated that transmission of electricity or wheeling via the transmission system network of a power transmission company is a process and it can’t be considered as carriage of goods, simplicitor. Also, treating the transmission system network of the transmission companies, as mode of transportation, will be highly presumptuous.
The Hon’ble Cuttack ITAT, in the case of GRIDCO Ltd vs ACIT 49 SOT 363 had observed as under:
“Further the scope of Section194C was extended by inserting Explanation III by including the specific items within its provision. Accordingly by inserting Explanation III to section 194c w.e.f. 1.7.1995, the provisions relating to deduction of tax at source has been enlarged by bringing some of the service contracts within the provisions of Section 194C. In a way by inserting Explanation III the word work in Section 194C has been extended so as to include four types of service contracts within the purview of section 194C. Therefore, Section194C now covers only four types of services beyond what was original enacted i.e., advertising, broadcasting and telecasting including production of programs for such broadcasting or telecasting, carriage of goods and passengers by any mode of transport other than by railways, and catering. Undisputedly the transmission and wheeling charges are not covered in this amendment. Accordingly it could not be said that transmission charges or wheeling charges require deduction of tax at source u/s.194C of the Act.”
CONCLUSION: For the sake of brevity, the above stated comprehensive analysis may be summed up as under:
(i)Transmission & Wheeling Charges can’t be considered as Fees for Technical Services u/s 194J of the Income Tax Act as installation & operation of sophisticated equipments with a view to earn income by allowing the users to avail the benefits of such equipments does not tanta amounts to rendering of “Technical Services” within the meaning of Explanation 2 to section 9(1)(vii) of the Act. Rendering of services by using some sophisticated equipments/ technical systems is different from charging fees for rendering technical services.
The present legal position, in relation to the applicability of TDS on Transmission & Wheeling Charges, u/s 194J of the Act, stands settled and concluded by the dismissal of Special Leave Petition (SLP), of Revenue Authorities, by the Hon’ble Apex Court in SLP(C) No. 853/2016 in the case of CIT (TDS) vs. Delhi Transco Limited, and as such the transmission & wheeling charges, can’t be considered as “Fees for Technical Services” so as to attract TDS applicability u/s 194J of the Act.
(ii) Transmission & Wheeling Charges can’t be considered as Rent u/s 194I of the Income Tax Act, as if an advantage is taken from sophisticated equipment installed and provided by another, it can’t be construed that the recipient/customer uses the equipment as such. The customer merely makes use of the facility, though he does not himself use the equipment. The transmission system networks are owned, controlled, operated and physically possessed by transmission companies, and as such the availment of benefits of the standard facility viz. transmission system network, by power distribution companies, can’t be construed as use of such facility so as to attract TDS liability u/s 194I of the Act. There are several judgements of ITAT & High Courts (as mentioned supra), in this regards, so present legal position is also more or less settled in this regards.
(iii) Applicability or Otherwise of TDS on Transmission & Wheeling Charges u/s 194C of the Act: The transmission of electricity via the transmission system network of transmission companies, being a systematic process, ought not to be considered as merely carriage of goods simplicitor and the transmission system network, ought not to be treated as mode of transport, so as to attract TDS liability u/s 194C of the Act.
If Transmission of Electricity is to be considered as “Work in relation to Carriage of Goods” so as to warrant deduction of TDS under section 194C of the Act, then on the same footing, Distribution of Electricity may also have to be considered as “work” so as to require deduction of TDS u/s 194C, from our electricity bills. But this cannot be so.
However, at present there are a very few legal precedents in this regards.
So, Friends, i do hope that this article will bring much more clarity and concreteness on the contentious & litigative issue of applicability or otherwise of TDS on Transmission & Wheeling Charges.