LEGAL DECISIONS
1) Section 9 of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India
Where a categorical finding of fact has been given by Appellate Tribunal that contract entered into by assessee Dutch company was for less than six months, it becomes absolutely clear that assessee did not have a permanent establishment in India as per Article 5(3) of Treaty of Indo-Dutch DTAA and thus no part of the revenue earned by the assessee was taxable in India.
2) Section 9 read with Section 195 of the Income-tax Act, 1961, read with Article 12 of DTAA between India and Netherlands - Income - Deemed to accrue or arise of India
where applicant Indian company entered into agreement with non-resident company for supplying financial services, namely, invoice processing, monitoring operational execution, SOX (Business Controls - Board) and goods receipts/invoice receipts and other services relating to accounts payable/receivable as well as general accounting and credit management services, consideration paid for such financial services received by applicant would not in the nature of fees for technical services.
3) Section 40(a)(ia) of the Income-tax Act, 1961 - Expenses disallowed - Interest, commission or brokerage etc. payable to a resident
Where in view of the undisputed decade old practice followed by both the assessee and the revenue, the assessee share broker had bonafide reason to belive that tax was not deductible at source under Section 194J on transaction charges paid to stock exchanges, the assessee officer was not justified in invoking Section 40(a)(ia) and disallowing the business expenditure by way of transaction charges incurred by the assessee.
4) Section 194J read with Section 9 of the Income-tax Act, 1961 - Deduction of tax at source - Professional or technical services, fees for
Transaction charges paid by the assessee share broker to the stock exchanges were not fees for managerial service falling under broad head of technical services under section 194J and, therefore, the assessee would be liable to deduct tax at source while crediting the transaction charges to the account of the stock exchange.
5) Section 40(b) of the Income-tax Act, 1961 - Expenses disallowed - Remuneration, interest etc. paid to partner by firm
Where partnership deed stipulates the maximum amount that can be paid as remuneration to the two partners but does not quantity the remuneration payable in a particular year, requirement of Section 40(b)(v) are not satisfied and, hence, remuneration paid to the partners cannot allowed as a deduction under Section 40(b)(v).
6) Section 90 of the Income-tax Act , 1961 read with Article 12 of the Indo-Dutch DTAA – Double taxation agreement – Existence of
Where applicant Dutch company along with Technology and Trademarks License Agreement entered into a Service Agreement with its group company under which applicant will incur cost in providing various operational and other support services for benefit of group companies by drawing its own resources as well as on those available from other Group Companies or third parties and will invoice cost incurred for providing such services on cost to cost basis without charging any mark up, payment to be made by India group of company for cost to be allocated by applicant is taxable in India.
7) Section 139 of the Income-tax Act, 1961 – Return of income
Where assessee filed return electronically, but duly signed copy of ITR-V From posted by it had not been received by Central Processing Centre, and no assessment order was made yet, provision of section 139(9) could be fulfilled by permitting assessee to file a verification of return before Assessing Officer.
8) Section 245R of the Income-tax Act, 1961 read with Article 5 of Indo-Russia – Advance rulings – Procedure on receipt of application
Where question as to whether payment to be made by applicant-resident to non-resident on transaction(s) of off-shore supply is chargeable under the Act is already pending in proceedings against payee-non-resident, entertainment of application for advance rulings is barred by clause (i) of proviso to section 245R(2)
9) Section 271(1)(c) of the Income-tax Act, 1961 - Penalty – For concealment of income
Where merely certain claim of deduction was disallowed and AO has returned no finding of fact that the assessee has filed an inaccurate return, no penalty could be levied on assessee under section 271(1)(c)
10) Section 10B, r.w.s. 32 and section 72 – For hundred percent export-oriented unit eligible for deduction u/s.10B, set-off of unabsorbed depreciation and business loss brought forward from relevant assessment year in which deduction was so claimed for the first time up to A.Y. 2000-01, will be allowed against business income or under other any head of income including ‘income from other sources’, for all assessment year upto assessment year in which deduction was last claimed (i.e., during the tax holiday period).
11) Section 10(23c)(iiiab) – Where the Government legislates law to provide for compulsory contribution by the member societies to an ‘education fund’ which was set apart to be the source of finance for educational institution engaged in the co-operative movement in India, which constitutes indirect financing by the Government, are entitled for exemption u/s.10(23c)(iiiab)
12) Section 2(22)(e) – Advance which carries with an obligation of repayment is covered u/s.2(22)(e). Trade advance/advance given for effective commercial transaction did not fall under the ambit of section2(22)(e). Amount advanced by company to its directors under board resolution, for specific business purpose would not fall under the mischief of section 2(22)(e) of the Act.
13) Section 40(a)(ia), section 194H – Hedging transaction of commodities, if in the nature of derivatives transactions, do not attract the provisions section 194H.
14) Section 28(va), section 55(2)(a) – Consideration received by a shareholder of a company, for transfer of shares of the company, under a share transfer agreement which include non-compete covenant and the assessee is not actively engaged in business is chargeable to tax as capital gains.
15) Section 22, section 23(1)(a), section 23(1)(c) – Annual value of property which could not be let out throughout the previous year needs taken as ‘nil’ in accordance with the provisions of section 23(1)(c).
16) Section 28(i) r.w.s 56 of the Income-tax Act, 1961 – Participation in tender for sale of land demonstrates that business of real estate development is set up during the year.
17) Section 80G of the Income-tax Act, 1961 – After omission of proviso to clause (vi) of section 80G(5), existing approval expiring on or after 1-10-2009 would be deemed to have been extended in perpetuity unless specific withdrawn.
18) Section 36(1)(iii), section 37(1) and section 43B – Interest paid on unpaid purchase consideration – It was held that such interest is governed by the provisions of section 37(1) and not by section 36(1)(iii)- Further held that the provisions of section 43B are not applicable to such interest.
19) Section 143(3), section 292B – Assessment order without AO’s signature is void. The omission to sign the order of assessment cannot be explained by relying on the provisions of section 292B of the Act.
20) Section 271AAA – Immunity u/s.271AAA cannot be denied only because entire tax, along with interest, was not paid before filing of income-tax return or, for that purpose, before concluding the assessment proceedings.
21) Section 147 – Even an assessment completed u/s.143(1) cannot be reopened unless there is fresh material.
22) Section 40(a)(ia) r.w. section 194A – Disallowance of interest for failure to deduct tax at source – payment of disputed amount with interest as per the court order- Interest paid without deduction of tax at source – Whether AO justified in disallowing the same – Held, No.
23) Retention money received pursuant to furnishing of bank guarantee is not taxable until successful completion of the contract and expiration of the guarantee.
24) Section 9 of Income-tax Act, 1961, read with Article 12 of DTA between India and Neatherlands - Income - Deemed to acrue or arise in India.
Income received by Dutch company from Indian diamond propecting company for providing technical services to supply technical data related to geological survey including drawings, plans, maps, etc., to diamond bearing deposits targets but withheld technical knowledge of such data processing would not be fees for technical services within meaning of DTA between India and Neatherlands.
The assessee were engaged in the business of prospecting and mining for diamonds and other minerlas. They have been granted licences by different State Governments for mineral reconnaissance activities. For this purpose, to carry out geophysical survey, the assessee entered into an agreement with a Dutch company Fugro whichi is an expert in performing air borne geophysical services to acquire during data the survey, process data and provide necessary reports.
The Karnataka High Court held the followings;
Issue of Fees for technical services
In terms of agreement/contract between the assessee and Fugro and in view of the facts of the case, it was clear that assesses acknowledge the services of Fugro for conducting survey, taking photographs and providing data information and maps. That was the technical services which the Fugro had rendered to the assessees. The technology adopted by Fugro in rendering those techncal services was not made available to the assessees. The survey report was very clear. Unless the technology was also made available, the assessee were unable to undertake the very same survey independently excluding fugro in future. Therefore, that technical services which was rendered by Fugro was not of enduring in nature. It was case specific. The assessees can make use of the data supplied by way of technical services and put its experience in identifying the location where the diamonds are found and carrying on its business. But the technical services which was provided by Fugro would not enable the assessee to independently undertake any survey either in the very same area Fugro conducted the survey or in any other area. They did not get any enduring benefit from the aforesaid survey. In that view of the matter, though Fugro rendered technical services as defined under Section 9(1)(vii) Explanation 2, it did not satisfy the requirement of technical services as contained in DTAA, Therefore, the liability to tax was not attracted.
Development and transfer of any technical plans or technical design to the assessee
Fugro was enganged in providing services relating to collection and processing of the data. The contract was for providing of services and not for supply of technical desing or plan. Fugro complied the data and processed them for error correction and delivered it to the assessee in a computer readable media. Using this raw Input data provided by Fugro, the assessee would further process same in software technology which were not owned or provided and, thus, by Fugro would generate report to determine probable targets. The reports and maps were are only additional mode of representation of data and it was not a technical plan or design as understood in law. The agreement entered into between the assessees and the Fugro, makes it clear that the information and data to any site on which any work services were performed under the agreement would belongs exclusively to the assessees and the Fugro keep such information strictly confidential.
Page n.80 $
topic of taxation
Analysis of section 36(1)(vii)and 36(1)[viia]of the income –tax Act,1961read with important case laws
Section 3(1)(vii)provides deductions in respect of bad debts written off as irrecoverable in the accounts of the assessee ,while section 36(1)(viia)(a)provides the deduction merely for making provision for bad and doubtful debts up to the prescribed limit. After analyzing section 36(1)(vii)and 36(1)(viia)along with applicable case laws and the opinion of expert advisory committee of ICAI,the author is of the opinion that deduction for creating provision for bad and doubtful debts in relation to advances made by the rural advances is available under section 36(1)(viia), in addition to deduction for bad debts written off as irrecoverable in the accounts of the assessee under section 36(1)(vii)subject to the provisions of section36(2).
Section 36(1)(vii)and section 36(1)(viia)
Section36(1)(vii)of the income- tax Act,1961(the Act) allows deduction in computing the income referred to in section28 subject to the provisions of sub-section (2),the amount of any bad debt or part thereof ,which is written off as irrecoverable in the account of the assessee during the previous year .
Provided that in the case of an assessee to which clause (viia)applies , the amount of the deduction relating to any such debt or part thereof ,shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause .
Explanation .- for the purpose of this clause , any bad debt or part thereof written off as irrecoverable in the account of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee.
Section 36(1)(viia)(a) of the act allows deduction in respect of any provision for bad and doubtful debts made by a scheduled bank [not being a bank incorporated by or under the laws of a country outside India ]or a non-scheduled bank or a co- operative bank other than a primary agricultural and rural development bank;-
“An amount not exceeding seven and one-half per cent (7.5%)of the total income (computed before making any deduction under this clause and chapter VIA) and an amount not exceeding10% of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner.
After studying both the sections ,it reveals that section 36(1)(vii)of the act provides deductions in respect of bad debts written off as irrecoverable in the accounts of the assessee, while section 36(1)(viia)(a)provides the deduction merely for making provision for bad and doubtful debts up to the prescribed limit.
Critical issues relating section 36(1)(vii)and section36(1)(viia)
Now let us discuss some critical issues relating to these sections , along with some important case laws and opinion given by the expert advisory committee of ICAI in this regard;-
1. Whether the deduction under section 36(1)(viia)(a) is allowed for making provision for rural advances only ?
Section 36(1)(viia)(a) has been introduced by finance Act, 1979 in order to promote rural banking .CBDT vide its circular No.258 dated 14th June 1979 clarified the application of the section . circular clarified that the section was introduced in order to promote rural banking and assist the scheduled commercial banks in making adequate provision from their current profits to provide for risks in relation to their rural advances .A rural branch for the purpose of the Act meant a branch of a scheduled bank, situated in a place with a population not exceeding 10,000, according to the last preceding census.
When the section 36(1)(viia)was introduced , the limit for deduction was higher of 10% of total income or 2%of the aggregate average advances made by the rural branches of the banks . limit under the section has further enhanced to 5% of total income and an additional 2%of the aggregate average advances made by the rural branches .this limit was further increased by subsequent amendments in1993 and 2001 and current limit is 7.5% of the total income (computed before making any deduction under this clause and chapter VIA) and an amount not exceeding 10% of the aggregate average advances made by the rural branches of the bank.
In the landmark judgment of honourable supreme court (catholic Syrian bank ltd vs. CIT, thrissur,’Decided on 17-02-2012),it has been laid down that the legislative intent was to encourage the rural advances and the making of provisions for bad debts in relation to such rural branches . CBDT circulars show a trend of encouraging rural business and for providing greater deductions.
It is clear from the above discussion that the purpose of allowing mere provision of bad debts is to encourage the rural advances. Hence, section 36(1)(viia)(a)allows deduction for the provision for bad debts in relation to rural advances only.
(2) whether there is any double deduction of bad debts written off as irrecoverable under section 36(1)(vii)and provision for bad and doubtful debts (36)(1)(viia)(a)?
Section 36(1)(vii)of the Act allows deduction in respect of any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee during the previous year .the deduction is only subject to the provision of section 36(2).
Section36(1)(viia)(a) of the act allows deduction in respect of provision made for bad and doubtful debts in relation to rural advances up to the specified limit .
Honourable Supreme Court in the case of catholic Syrian bank (supra) had laid down that
Section 36(1)(viia)(a)allows deduction for the provision for bad debts in relation to rural advances only.
CBDT itself has recognized the position that a bank would be entitled to both the deduction. Hence, to prevent the double deduction, the proviso to clause (vii)was inserted , which says that in respect of bad debts on which clause (viia)applies , the deduction on account of actual write off would be limited to the excess of the amount written off over the amount of the provision allowed as deduction under clause (viia). Thus, the proviso to clause (vii) stood introduced in order to protect the revenue.
Further clause (v) in sub- section (1) of section 36 has also been inserted, which says that where debt or part thereof relates to advances made by an assessee to which clause (viia) of sub- section (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause.
Example; In the assessment year 2010-11, an assessee got deduction for the provision made for rural advances under section 36(1)(viia)(a) of rs10 crore.
In the very next year (assessment year 2011-12) , he wrote off bad debts relating to rural advances amounting to Rs 8 crore .then he will not get any deduction under section 36(1)(vii) of actual write off, since the proviso to clause (vii) will be applicable . further ,as per the provision clause (v)of sub-section (1) of section 36 , the amount of actual write off of bad debts relating to rural advance will debited to provision account . Hence the balance of provision account at end of the year will be Rs 2crore.
In assessment year 2012-13, he again wrote off bad debts relating to rural advances amounting to rs3 crores. Now he will get the deduction only for rs1 crore. Under section 36(1)(vii) and virtue of section 36(2)(v) provision account will become nil and the balance rs1crore will be debited to profit $ loss account .
Deduction under section 36(1)(vii) is available only when the amount of bad debt is actually debited to profit $ loss account.
In a nut shell, the author is of the opinion that deduction under clause (vii) is available only when the amount of bad debt is actually debited to profit $ loss account .provision for bad and doubtful debts relating to rural advance for which deduction under clause (viia) has been claimed, there will be no deduction under clause (vii) for actual write off of bad debts relating to rural advance, until or unless there is a balance lying in the provision account made under clause (viia). Hence there is no threat of double deduction.
3. Whether proviso to section 36(1)(vii) restricts the deduction of bad debts in relation to urban branches in excess of provision made?
Proviso to section 36(1)(vii) of the act applies only in the case of an assessee to which clause (viia) applies. Since it is very much clear from the above discussion that deduction under section 36(1)(viia)(a) is applicable only for the advance made by rural branches of the bank ,proviso to section 36(1)(vii)is applicable only for the rural advances .
Honourable supreme court in the case of catholic Syrian bank (supra) stated that the schedule and non-scheduled commercial banks would continue to get the full benefit of write off of the irrecoverable debts under section 36(1)(vii)in addition to benefit of deduction of provision for bad and doubtful debts under section 36(1)(viia). Further, the proviso to section 36(1)(vii)is self indicative in itself and its application limited to bad debts arising out of rural advances only.
4. Whether it is necessary for assessee to establish that the debt has become irrecoverable under section 36(1) (vii)?
Before 01-04-1989, it was obligatory on the part of the assessee to prove that bad debts written off were indeed a bad debt. but the section 36(1)(vii) has been amended w.e.f. 1-4-1989,to remove the obligation on the part of the assessee to , prove that bad debts written off were actually bad debt and mere writing off the bad debt is sufficient .
In the case of CIT Vs. M/s kohli brothers color lab (P) ltd., Allahabad high court stated that the effect of the amendment to section 36(1)(vii) is that it is not necessary for the assesses to establish that the debt had become bad in the previous year and mere writing of the debt as irrecoverable is sufficient . however ,the said entry of write off of the bad debt in the books accounts is not conclusive and the AO is nor precluded from making inquiries as to whether the entries are genuine and not imaginary or fanciful .the AO has the power under section 143(2) to see that the entries are not mere paper work or fake . However, at the same time, the wisdom of the assesses cannot be questioned and no demonstrative or infallible proof of bad debt having become bad is required.
In the case of T.R.F. ltd. Vs. CIT,[2010]190 Taxman 391(sc) honourable supreme court held that this position in law was well settled. After 1st April, 1989, it is not necessary for the assesses to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable.
5. Deduction under section 36(1)(viia)(b)and 36(1)(viia)(c) of the act?
Section36(1)(viia)(b) allows deduction in respect of provision for bad and doubtful debts made by a bank , being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five percent of the total income (computed before making any deduction under this clause and chapter vi-A )
Section 36(1)(viia)(c) allows deduction in respect of provision for bad and doubtful debts made by a public financial institution or a state financial corporation or a state industrial investment corporation an amount not exceeding five percent of the total income (computed before making any deduction under this clause and chapter vi-A.
Since the foreign banks do not have rural branches, they are not entitled to any deduction under section 36(1) (viia) (a). Hence the act was amended to provide the deduction up to 5% of the total income (computed before making any deduction under this clause and chapter VI-A) to all the banks including foreign banks and public financial corporation in term of section 4A of the companies act 1956.
6. Accounting for provision made under section 36(1) (viia)
The expert advisory committee of ICAI stated that merely because section 36(1) (viia) of the income tax Act, 1961lays down the maximum limit of deduction for provision for bad and doubtful debts ,is no round for creating the same if not warranted in the facts and circumstances of the case as per the requirements of schedule vi to the companies Act ,1956.section 36(1)(viia) does not govern the preparation of financial statements for the purpose of presenting a true and fair view of the profit (loss) and the state of affairs of the company .
In view of above, expert advisory committee of ICAI is of the opinion that in case the provision for bad and doubtful debts is not as per the definition of the term ‘provision’ given in part III of schedule vi to the companies Act,1956, the same should be treated as a reserve and where the provision for bad and doubtful debts is required to be treated as reserve ,the same should be shown under ‘Reserve and surplus’ in the liabilities side under a separate sub-head ‘reserve for doubtful or bad debts’ as mentioned in ‘instructions in accordance with which assets should be made out’ as per part I of schedule vi to the companies Act , 1956 . This is applicable on the companies or co-operative societies, to which deduction is allowed under section 36(1)(viia)(c) of the income – tax Act ,1961.since the banking companies prepare their financial statements as per banking regulation Act,1949,this is not applicable to banking companies .
Conclusion
From the study of section 36(1)(vii) and 36(1)(viia) along with applicable case laws and the opinion of expert advisory committee of ICAI, the author is of the opinion that deduction for creating provision for bad and doubtful debts in relation to advances made by the rural advances is available under section 36(1)(viia)in addition to deduction for bad debts written off as irrecoverable in the accounts of the assessee under section 36(1)(vii)subject to the provisions of section 36(2). Further , the proviso to section 36(1)(vii) restrict the deduction only on the advances made by rural branches of the bank i.e. which is covered under section 36(1)(viia)and the assesseee is entitled to get full deduction of bad debts written off as irrecoverable in relation to urban branches .
Date-18\01\2013, page n.-98
Taxability of income from offshore supply of goods to India in a turnkey contract
The last time this topic was discussed in the CA journal was in May 2011 under the heading ‘taxation of EPC contracts – A treatise; However, since then, there have been developments on the said subject and it is felt that the said Article published in May 2011 requires an updation. the authority for advance rulings – Income tax ,in back to back decisions , have held that income received by a non-resident assessee from offshore supply off goods to India under a turnkey contract accrues or arises in India under section 5(2)(b) .An effort is made through this article to examine the taxability of the said income under the provisions of the income –tax Act, 1961,in the light of the findings of the advance ruling with regard to ’look at’ test and ,dissecting approach’.
One of the first fallouts of the findings of the landmark decision of the supreme court of India in the case of Vodafone international holdings BV vs. union of India and Anr (345 ITR 1) has been seen on the ‘income from offshore supply of goods to India in composite /turnkey/ words contracts ‘which are now held to be taxable in India. the authority for advance rulings –income tax (AAR), in back to back decisions , rendered in the case of Alstom transport SA ,in re (251 CTR 193), Roxar maximum reservoir performance WLL , in re (71 DTR 108) and abc , in re (70 DTR 49) , have all , after relying on the observations of Vodafone international holdings BV’s case (supra), held that income received by non- resident assesses from offshore supply of goods to India under a composite /turnkey/works contract [hereinafter referred to as ‘turnkey contract ‘] accrues or arises in India and, therefore ,shall be subject to tax in India.
It is well settled that income can be held to accrue or arise only when the person acquires a right to receive that income .the right to receive an income is generally determined, based on the contractual obligations entered into by the parties .while the Aar appreciates in the aforesaid referred decisions that in a case of contract for offshore sale of goods .the right to receive the income is created outside India, but disputes the said conclusion in case of turnkey contracts.
The taxability of the subject under consideration prior to the aforesaid decisions, was rather found to be settled in favour of the non-resident assesses with both Aar and other judicial forums, upholding the contention of the assessee that income from offshore supply of goods to India under a turnkey contract cannot be said to be taxable under the provisions of income tax Act, 1961 (‘the act’)and/or respective double taxation avoidance agreements (‘DTAA’), which India has entered into with other countries.
The fact patterns which one generally comes across in a turnkey arrangement entered in to between the transacting parties, are as under;
The parties to the turnkey contracts enter in to a single contract, which deals with offshore supply of goods and services and onshore supply of goods and services; or
The parties to the contract enter into separate contract on individual basis for offshore supply of goods, offshore services, onshore supply of goods and onshore services; or
In certain cases , even though single contract is entered for the composite works, the contractor who is awarded the contract assigns /sub-contracts a particular scope of work to the non-resident and / or resident assessee , viz, the contractor assigns the scope of work relating to onshore supply of goods and onshore services to a resident assessee ; or
In certain cases , since the nature of work to be undertaken is complicated , therefore a consortium is formed among non-resident and/or resident contractors to undertake composite work and contact is entered into by the opposite party with the consortium for the scope of work; or
In the certain cases , even though a consortium is formed to undertake the composite work ,but the contracts are entered into, individually by the opposite party with each consortium member for their respective scope of work ;
Separate consideration is earmarked for different scope of work undertaken, viz, offshore services, onshore supply of goods and onshore services; or
A lump sum consideration is decided, for under taking all the works under the turnkey contract;
The aforesaid fact patterns as entered into between the transacting parties are not exhaustive in nature and they may take different forms and arrangements depending upon the requirements and agreement among the parties. the fact pattern which was the subject matter of consideration before the aforesaid AAR rulings was largely in the nature described at point no. 1 and 4 above . however ,if the finding of the aforesaid AAR decisions are something to go by ,then it may be possible to contend that income under consideration shall be taxable in India irrespective of the fact patterns discussed above .
Further, it would be necessary to highlight that even though specific question were raised before the AAR in the cases of ABC, in RE (supra) and Alstom transport SA, in re (supra) as regards to taxability of such income in the context of respective DTAAs, the AAR neither provided any findings nor discussed any articles of the DTAA in order to determine the taxability under the respective DTAAs. However, it has instead, in the conclusions, held that income under consideration shall also be subject to tax under the respective DTAAs.
Section 4, section 5 read with section 9of the Act determines the taxability of income of a non –resident in India. section 4 provides for charging a particular rate of tax ,as enacted by the central government ,to the total income of a non-resident person in the previous year .section 5(2)determines the scope of total income with respect to a non-resident .section 5(2)(b),subject to other provisions of the act ,provides for the following incomes as the total income of a non-resident ,irrespective from whatever source derived;
Income is received in India;
Income is deemed to be received in India [section 7];
Income accrues or arises in India; and
Income is deemed to accrue or arise in India (section 9)
Generally , the income under consideration is neither received in India nor deemed to be received
Date 13/2/2013 page ;-24
11. Assistant director of income tax vs.m/s GE Energy control systems ITAT’c’ Bench Delhi before G.D Agarwal (v.P) and Raj pal yadav (j.m.)
ITA NO.3522/DEL/2012
A.Y.2004-5 Dated “11.01.2013
Counsel for revenue /Assessee: sameer Sharma /Rajan vora, Arijit chakraarty and Shri manoneet Dalal
Section 271(1)(c) –No penalty can be imposed if assessing officer has not pointed out any specific fact not disclosed by the assessee or any wrong particulars famished but the assessee . Based on the primary facts disclosed by the assessee inference drawn by the AO could have been drawn.
Facts;
The assessee is a company incorporated in the USA. It was awarded three distinct contracts by a company in India viz., PGCIL.The contracts entered into were for on shore supply of goods and service as well as for off shore supply of goods. The assessee executed only the offshore supply contract and sub –contracted onshore supply and the major part of the onshore service contracts to an Indian party on cost to cost basis with approval of PGCIL. All the above contracts were being carried forward from preceding years .that in AY 2003-04,on the same facts ,the assessing officer had accepted that the assessee was not having any PE in India and ,therefore ,no tax was levied on offshore supply of equipment and services rendered outside India .however ,during the year under consideration ,the assessing officer held that the assessee is having PE in India and accordingly ,taxed the income from offshore supply of hardware equipment and also in respect of payment for onshore services . Since a small Amount was involved, the assessee, with a view to buy peace and end the litigation, did not file any appeal against the assessment order. The AO then levied penalty u/s .271(1) (c) of Rs. 13.12 lakh for furnishing inaccurate particulars of income. On appeal, however, the penalty order was struck down by the CIT (A).
Held:
The tribunal noted that the facts of the year under consideration and of assessment year 2003-04 are identical. In Ay 2003-04 the assessing officer had accepted the assessee’s claim that the assessee company did not have any PE in India. However, on the basis of the same facts in the year under consideration, the assessing officer came to the conclusion that there was a PE. The assessing officer has not pointed out any specific fact which was not disclosed by the assessee or any wrong particulars furnished by the assessee .it were the question of inference to be drawn from the primary facts which were duly disclosed by the assessee.
The tribunal further observed that merely because the assessee’s claim that it was not having a PE in India was not accepted by th revenue in the year under consideration, by itself, will not amount to furnishing of inaccurate particulars regarding the income of the assessee .it further noted that o identical facts , the assessee’s claim that it was not having a pe was accepted by the revenue in the immediately preceding year . in view o the above, the tribunal following the decision of the apex court in the case of reliance petro products Pvt. Ltd. [322 itr 158(sc) ] upheld the order of the cit(A).
12. Yusuf Husain vs. ITO
ITAT Mumbai ‘G’Bench Before rajendra singh (AM) and vivek varma (jm) ITA No. 1133\mum\2012 and ITA No.5490\mum\2011
A.Y.;2006-07.Decided on :11-12-2012.
Counsel for assessee/revenue :C.N.Vaze/mohit jain
Section 246A, rule 45(2)- once the appeal filed by the assessee If found to be legally invalid and dismissed as such, the assessee can file another appeal which has to be considered along with condonation application, and if admitted has to be decided on merit .
Facts:
Aggrieved by the exparte order dated 31-12-2008 passed by the assessing officer (AO) u/s 144 of the act the assessee filed an appeal to CIT (A). The memorandum of appeal was signed by CA, Shri s.u.radhakrishnani, as authorised representative. Since the assessee neither submitted any valid power of attorney not was there any explanation as to why he appeal was not signed by the assessee ,CIT(A)vide order dated 11-10-2010 dismissed the appeal as invalid. Thereafter, the assessee filed a fresh appeal on 7-3-2011 along with application for condonation of delay. the CIT(A)in his order dated 22-12-2011 held that the appeal filed by the assessee against the assessment order had already been adjudicated by CIT(A)and dismissed there was no provision for filing of an appeal when the first appeal had been dismissed . The appeal was also filed beyond the time limit. CIT (A) therefore dismissed the appeal in limine.
Aggrieved, the assessee preferred an appeal to the tribunal.
Held:
once the appeal was treated as invalid, the same became non-est. . the assessee had the right to file another appeal which of course has to be considered as delayed appeal and ,in case delay is condoned , the appeal has to be decided on merit .the tribunal held that the view thaken by CIT(A) does not represent the correct view and therefore , has to be rejected .once the appeal filed by the assessee is found to be legally invalid and dismissed as such , the assessee can file another appeal which has to be considered along with condonation application and, if admitted after due consideration of condonation application ,it has to be decided on merit.
The tribunal restored the matter to CIT (A) for deciding the same afresh after necessary examination in the light of observations made by the tribunal.
As regards the first appeal which was not signed by the assessee, disposal by CIT (A) was considered as just and fair and the same was upheld.
13. Godfrey Phillips India Ltd.Vs. Addl. CIT
ITAT Mumbai’G’Bench
Before I.P.Bansal (JM) and Rajendra Singh (AM) ITA No.7682/mum/2010 and ITA No.8549/mum/2010
A.Y.; 2006-07 and 2007-08.Decided on: 22-10-2012
Counsel for assessee/revenue: yogesh thar/Amar Deep
Section 32, Appendix to income-tax Rules –ups being energy saving device is entitled for higher depreciation @80 %.
Facts:
The assessee claimed depreciation on UPS @ 80% on the ground that it is employed by it as an energy saving device. The claim of the revenue was that the same is not an energy saving device but an energy supply device. Aggrieved, the assessee preferred an appeal to the tribunal.
Held:
The tribunal noted that the issue is covered by the decision of the tribunal in assessee’s own case for A.Y.2002-03 in ITA NO. 2792/m/06; for AY 2003-04 in ITA No. 1071/m/2007; for AY 2004-05 in ITA No.5569//m/2007 and for AY 2005 -06 in ITA No.6964/m/2008. The tribunal noted the following observations in respect of AY 2002-03;
“13. We have heard the rival contentions. Short question is whether UPS is a ‘automatic voltage controller’ falling within the heading of energy saving device in the appendix to the income-tax rules, 1962 giving depreciation rates. Legislature in its wisdom has chosen to show an automatic voltage controller as electrical equipment eligible for 100% depreciation , falling under the broader head of energy saving devices . once legislature deemed that an automatic voltage controller’is a specie fallig within energy saving device, it is not for the assessing officer or Ld CIT(A) to further analyse whether such an item would (sic was)indeed be an energy saving device . in fact it is beyond theit powers . Hence the only question to answer, in our opinion is whether an ups is an ‘Automatic voltage controller’. It is mentioned in the product brochure (paper book page 64 ) that the ups automatically corrected low and high voltage conditions and stepped up low voltage to safe output levels. Thus in our opinion , there cannot be a quarrel that ups was doing the job of voltage controlling automatically. Even when it was supplying electricity at the time of power voltage the voltage remained controlled. Therefore in our opinion, a ups would definitely fall under the head of ‘automatic voltage controller’. We are fortified in taking this view by the decision of jodhpur bench in the case of surface finishing equipment (supra) . as for the decision of the delhi bench in the case of nestle india (supra) referred by the ld. DR, there the question was whether ups could be considered as ‘computer’ for depreciation rate of 60%. There was no issue or question, whether it could be considered as an automatic voltage controller and hence in our opinion that case would not help the revenue here.therefore, we are of the opinion that the assessee was eligible for claming 100% depreciation on ups . disallowance of rs. 6,82,443 therefore stands deleted . ground number 3 is allowed”.
Followings the above mentioned decision, the tribunal decided the issue in favour of the assessee .
This ground was decided in favour of the assessee.
Part C:
TRIBUNAL $AAR INTERNATIONAL TAX DECISIONS
Geeta jani, Dhishat B. Mehta
Chartered accountants
17. TS-906-ITAT-2012(MUM)
YASH RAJ FILMS PVT. LTD VS.ITO
A.Y.:2006-07,Dated:20-12-2012
S/s.9(1)(vii), 195 and 201-payments made abroad for services in respect of arrangement of logistics for shooting of films outside india does not amount to fees for technical services.
Facts:
Yash raj films (taxpayer) is engaged in the business of production of films, the shooting of which is often done outside india. During the relevant previous year , the taxpayer made payments to overseas service providers (osps) for the services availed in connection with the shooting of different films which mainly included arranging for extras , security, locations,accommodation of cast and crew, necessary permissions from local authorities, makeup of the stars, insurance cover ,shipping and custom clearances , obtaining visas. The tax authority considered the payments for obtaining the above services to be in the nature of fees for technical services (FTS) and considered the taxpayer as an assessee-in-default for not withholding taxes.
Held:
considering the nature of the service rendered by OSPs to the taxpayer as spelt out in the relevant agreements , the said services cannot be treated as technical services within the meaning given in explanation 2to section 9(1)(vii).
The said services rendered outside india by the OSPs in connection with making logistic arrangement are in the nature of ‘commercial services’ and the amount received by them from the taxpayer for such services constitutes their business profit which is not chargeable to tax in india in the absence of any permanent establishment (PE) in india of the said services providers . the taxpayer, therefore, is not liableto withhold taxes on the payments made.
18. TS-910-ITAT-2012(MUM)
BOOZ.Allen$Hamilton Ltd.$Co.vs.ADIT
A.Y.:1998-99,Dated:21-12-2012
S/s.4,163-Where necessary RBI approval was not obtained for remitting amounts in foreign exchange and such amount was still payable during the relevant year, such amount cannot be taxed in the hands of recipients , despite the claim for deduction by the payer.
Facts 1:
Taxpayer is a foreign partnership firm established in germany, having a branch office in india through whicha it renders management and technical consultancy services. During the relevant year, taxpayer obtained services from overseas group entities and the consideration for services was shown as ‘payable’ in the books of accounts. However, the actual payments were not made, as reserve bank of india (RBI) approval for the same was not obtained.
The taxpayer was incurring losses and did not have sufficient funds and therefore did not even make an application to RBI seeking its approval to remit the amount. These amounts were debited to profit $ loss account of PE of taxpayer in india and deduction on the same was claimed.
The tax authority treated the taxpayer to be the representative assesseeof the recipient group entities and considered the amounts payable by the taxpayer as income in the hands of recipients. CIT(A) upheld tax authority’s order. Aggrieved, the taxpayer appealed to the tribunal.
Held1:
Income on account of amounts payable by the taxpayer to the overseas group entities could be said to have accrued to the said entities only on receipt of the required approval from RBI and there being no such approval received during the year under consideration, the same could not be taxed as income in that yea Reliance was placed on the Bombay high court decision in the case of kirloskar tractors ltd. [(1998) 231 ITR 849) (BOM)] and in the case of dorr-oliver (india) ltd. [(1998)234 ITR723 (BOM)], wherein it was held that accrual of income takes place only on obtaining of necessary approval required from RBI.
S/s.9,90-in respect of recipient from treaty country, income in the nature of FTS should be ‘paid’ during the relevant previous year to be taxed in the hands of recipients.
Facts 2:
In addition to the above, taxpayer had received certain technical services from other overseas entities, amounts for which were also ‘payable’ during the year. However, the same was not offered to tax on the premise that as per the relevant tax treaties the same was taxable only on actual receipt. The tax authority brought these amounts to tax as FTS in the hands of these overseas entities.
Held 2:
Following the decision of Bombay high court in the case DIT (IT) v. Siemens Aktiengesellschaft [TS-795-HC-2012(Bom)] as well as the decisions of the tribunal in the case of DCIT vs. UDHE GmbH [(1996) 54 TTJ 355 (BOM)] and in the case of CSC technology Singapore pte. Ltd. Vs. ADIT [(2012) 50 SOT 399 (Del)], tribunal held that the amounts payable by taxpayer to the overseas group entities could not be brought to tax in india during the year under consideration as FTS as per the relevant provisions of the tax treaties ,since the same had not been ‘paid’ to the said entities.
19. TS-904-ITAT-2012(Bang)
M/s Bosch ltd vs. ITO
A.Y.:2011-12, Dated: 11-10-2012
S/s. 195A and 206AA- the grossing up of the payment in case of net of tax contracts is to be made at ‘’rates in force’’ and should not be made at the higher rate of 20% specified u/s . 206AA.
Facts:
Taxpayer, an Indian company, entered into repairs contracts with its foreign supplier, a resident in Germany. Further, as per the contracts, taxpayer was required to pay on net-of-tax-basis. The tax authority contended that (a) the payments were in the nature of technical services and constituted FTS, both under the act and the India –Germany DTAA. (b) Also, section 206AA overrides all other provisions of the IT Act and, hence, nonresidents are also required to furnish their PAN to the payer of income (c). Accordingly, in the absence of PAN , higher rate of 20%should be applied and consider net of tax payments grossing up also should be done at 20%.CIT (A) upheld tax authority’s observations. Aggrieved, the taxpayer filed an appeal before the tribunal.
Held:
Section 206AA overrides all the other provisions of the ITL and applies to all recipients of income, irrespective of the recipients’ residential status .Therefore, a nonresident whose income is chargeable to tax in India has to obtain a PAN and provide the same to the payer of income/taxpayer . in the absence of PAN, section 206AA is applicable and tax is required to be withheld at 20%
A literal reading of the grossing up provisions u/s. 195A implies that the income should be increased by the “rates in force” for the relevant tax year and not the rate at which the “tax is to be withheld” by the taxpayer . Meaning and effect has to be given to the expression used in a section, as held by the SC in the case of GE India technology [(2010) 327 ITR 456(SC)]. Thus, the grossing up of the amount is to be done at the “rates in force and not at the rate of 20% specified u/s. 206AA.
20. TS-762-ITAT-2012(HYD)
Swarnandhra IJMII Integrated Township
Devlopment Co. pvt. Ltd. Vs. DCIT
A.Y.: 2007-08, Dated: 31-12-2012
S/s. 92A, 92B- ‘Deemed international transaction’ fiction is not applicable to transactions between Indian entities. Indian jv’s transaction with ‘indian JV partner’ is not hit by transfer pricing provisions.
Facts:
S pvt ltd (taxpayer) is a joint venture company( JV Co), with andhra Pradesh housing board (APHB) and an Indian company (ICo) as JV partners. ICo is a subsidiary of a foreign group (FCo Group) . APHB and ICo are the shareholders of the taxpayer in the ratio of 49:51. The taxpayer jv Co was responsible for the construction and implementation of the housing projects as contemplated by APHB and was bound by the policy framework of the government of Andhra Pradesh (GAP).
During the year, the JV Co entered into transactions with ICO. The transfer pricing officer (TPO) treated these transactions as ‘deemed international transactions; u/s. 92B(2) and held that through the transactions were entered into by the taxpayer with IJMLL, the terms of such transactions were determined in substance between the taxpayer and FCo Group (Associated Enterprise). On appeal, dispute resolution panel (DRP) upheld TPO’s view. Aggrieved, the taxpayer appealed before the tribunal .
Held:
In order to determine deemed associated enterprise relationship u/s.92B(2), the international transaction should be between enterprises wherein at least one of enterprises is a non –resident. In the facts of the case , both the parties are residents and hence the same should not constitute international transaction.
Further on scope of s/s. 92A and 92B(2)the tribunal held as below:
One of the essential limbs/constituents of an international transaction is “associated enterprise”. Section 92B (2) outlines the circumstances under which a transaction between two persons would be deemed to be between associated enterprises . such deeming fiction is in addition to the one created u/s. 92A(2) i.e., parameters of management , control or capital .
Section 92B(2) should be read as an extension of definition of AE u/s. 92A.
u/s. 92A two or more enterprises once determined to be AEs remain so for the entire financial year . however, the fiction embodied in section 92B(2) is transactions specific and does not apply to all transactions between the enterprise.
The legal fiction created u/s. 92B(2) in respect of the specified transaction can be used only for the purpose of examining whether such transaction constitutes an ‘international transaction’ u/s. 92B(1). In case section 92B(1) is not attracted, the fiction u/s. 92B(2) ceases to operate.
IN THE HIGH COURTS
1.Unreported:
35. Reassessment: S/s. 143(1), 143(3), 147 and 148: A.y.2002-03: No distinction to be made while interpreting the words “reason to believe” vis-à-vis section 143(1)and143(3): in the absence of “fresh material” assessment cannot be reopened: change of opinion is not a valid basis for reopening assessment
CIT VS. Oriented craft Ltd. (Del); ITA No. 555 of 2012 dated 12/12/2012:
For the A.Y. 2002-03, the assessee filed the return of income claiming deduction of Rs. 13.35 crore u/s. 80HHC of the income tax Act, 1961. The returned income was accepted by an order u/s. 143(1) of the act. Subsequently, the assessing officer issued notice u/s. 148 of the Act and reopened the assessment on the ground that the sale proceeds of the quota was wrongly considered as export turnover and that it was business profits and 90% there of had to be reduced for computing deduction u/s.80HHC. the assessee challenged the reopening on the ground that there was no “fresh material” as contemplated by the supreme court in the case of CIT Vs. kelvinator of india Ltd; 320 ITR 561 (SC). The tribunal accepted the assessee’s contention and held that the Assessing officer had no jurisdiction to reopen the assessment made u/s. 143(1) of the Act.
On appeal by the revenue, the delhi high court up held the decision of the tribunal and held as under:
“i) section 147 permits an assessment to be reopened if there is “reason to believe”. It makes no distinction between an order u/s. 143(3) or an intimation u/s. 143(1) of the Act. Accordingly, it is not permissible to adopt different standards while interpreting the words “reason to believe” vis-à-vis section 143(1) and 143(3).the department’s argument that the same rigorous standards which are applicable in the interpretation of the expression when it is applied to the reopening of a section 143(3)assessment can not apply to a section 143(1) intimation is not acceptable because it would place an assessee whose return is processed u/s. 143(1) in a more vulnerable position than an assessee.
Latest news on Vodafone judgement-
Vodafone India , formerly Vodafone Essar and Hutchison Essar, is the third largest mobile network operator in India after Airtel and Reliance Communication by subscriber base. It is based in Mumbai, Maharashtra.[1] It has approximately 147.48 million customers as of December 2012.
In July 2011, Vodafone Group agreed terms for the buy-out of its partner Essar from its Indian mobile phone business. The UK firm paid $5.46 billion to its Indian counterpart to take Essar out of its 33% stake in the Indian subsidiary. It will leave Vodafone owning 74% of the Indian business, while the other 26% will be owned by Indian investors, in compliance with Indian law.[2] On 11 February 2007, Vodafone agreed to acquire the controlling interest of 67% held by Li Ka Shing Holdings in Hutch-Essar for US$11.1 billion, pipping Reliance Communications, Hinduja Group, and Essar Group, which is the owner of the remaining 33%. The whole company was valued at USD 18.8 billion.[3] The transaction closed on 8 May 2007. It offers both prepaid and postpaid GSMcellular phone coverage throughout India with good presence in the metros.
Vodafone India provides 2.75G services based on 900 MHz and 1800 MHz digital GSM technology. Vodafone India launched 3G services in the country in the January–March quarter of 2011 and plans to spend up to $500 million within two years on its 3G networks.[4]
Contents
History
Hutchison Essar (1992-2007)
In 1992, Hutchison Whampoa and its Indian business partner – Max Group, established a company that in 1994 was awarded a licence to provide mobile telecommunications services in Mumbai and launched commercial services as Hutchison Max in November 1995. In Delhi, Uttar Pradesh (East), Rajasthan and Haryana, Essar Group was the major partner. But later Hutch took the majority stake.
By the time of Hutchison Telecom's Initial Public Offering in 2004, Hutchison Whampoa had acquired interests in six mobile telecommunications operators providing service in 13 of India's 23 licence areas and following the completion of the acquisition of BPL Mobile that number increased to 16. In 2006, it announced the acquisition of a company (Essar Spacetel — A subsidiary of Essar Group) that held licence applications for the seven remaining licence areas.
Initially, the company grew its business in the largest wireless markets in India — in cities like Mumbai, Delhi and Kolkata. In these densely populated urban areas it was able to establish a robust network, well-known brand and large distribution network – all vital to long-term success in India. Then it also targeted business users and high-end post-paid customers which helped Hutchison Essar to consistently generate a higher Average Revenue Per User (ARPU) than its competitors. By adopting this focused growth plan, it was able to establish leading positions in India's largest markets providing the resources to expand its footprint nationwide.
In February 2007, Hutchison Telecom announced that it had entered into a binding agreement with a subsidiary of Vodafone Group Plc to sell its 67% direct and indirect equity and loan interests in Hutchison Essar Limited for a total cash consideration (before costs, expenses and interests) of approximately $11.1 billion.
Hutch was often praised for its award winning advertisements which all follow a clean, minimalist look. A recurrent theme is that its message "Hi" stands out visibly though it uses only white letters on red background. Another successful ad campaign in 2003 featured a pug named Cheeka following a boy around in unlikely places, with the tagline, "Wherever you go, our network follows." The simple yet powerful advertisement campaigns won it many admirers. Ads featuring the pug were continued by Vodafone even after rebranding. The brand subsequently introduced ZooZoos which gained even higher popularity than was created by the Pug. Vodafone's creative agency is O&M while Harit Nagpal was the Marketing Director during the various phases of its brand evolution.
Vodafone acquires Essar's Stake
On March 31, 2011, Vodafone Group Plc announced that it would buy an additional 33% stake in its Indian joint venture for $5 billion after partner Essar Group exercised an option to sell the holding in the mobile-phone operator. The deal raised Vodafone’s stake to 75%. Essar left the company after it implemented a put option over 22% of the venture. Vodafone exercised its call option to buy an 11% stake.[5]
In 2007, Vodafone granted options to Essar that would enable the conglomerate to sell its entire stake for $5bn, or to dispose of part of the 33 per cent shareholding at an independently appraised fair market value. In January 2011, Vodafone objected to Essar’s plans to place part of its 33% stake in India Securities, a small public company. Vodafone feared the move would give an inflated market value to Vodafone Essar.[6] It had approached the market regulator SEBI and also filed a petition in the Madras High Court.
The final shareholding pattern post this deal was not provided by the company as it was not clear whether Vodafone's stake would exceed the 74 per cent FDI limit. Indian laws don't allow foreign companies to own more than 74% in a local mobile-phone operator. Vodafone has assured it will comply with local rules. Vodafone will have to sell that 1% to some Indian entity, or they’ll have to consider an initial public offering. Vodafone also said that final settlement is anticipated to be completed by November 2011. The completion of the deal would be subject to meeting certain conditions which include Reserve Bank of India's permission as well as valuation of the deal.[7]
Vodafone-Hutchison Tax Case
File:Shaadi.com on Vodafone billboard.jpg
A billboard of Vodafone showing collaboration with Shaadi.com
Vodafone was embroiled in a $2.5 billion tax dispute with the Indian Income Tax Department over its purchase of Hutchison Essar Telecom services in April 2007. It was being alleged by the Indian Tax authorities that the transaction involved purchase of assets of an Indian Company, and therefore the transaction, or part thereof was liable to be taxed in India.[8]
Vodafone Group Plc. entered India in 2007 through a subsidiary based in the Netherlands, which acquired Hutchison Telecommunications International Ltd’s (HTIL) stake in Hutchison Essar Ltd (HEL)—the joint venture that held and operated telecom licences in India. This Cayman Islands transaction, along with several related agreements, gave Vodafone control over 67% of HEL and extinguished Hong Kong-based Hutchison’s rights of control in India, a deal that cost the world’s largest telco $11.2 billion at the time.[9]
The crux of the dispute had been whether or not the Indian Income Tax Department has jurisdiction over the transaction. Vodafone had maintained from the outset that it is not liable to pay tax in India; and even if tax were somehow payable, then it should be Hutchison to bear the tax liability.
In January 2012, the Indian Supreme Court passed the judgement in favour of Vodafone, saying that the Indian Income tax department had "no jurisdiction" to levy tax on overseas transaction between companies incorporated outside India. However, Indian government thinks otherwise. It believes that if an Indian company, Hutchison India Ltd., conducts a financial transaction, government should get its tax out of it. Therefore, in 2012, India changed its Income Tax Act retrospectively and made sure that any company, in similar circumstances, is not able to avoid tax by operating out of tax-havens like Cayman Islands or Lichtenstein. In May 2012, Indian authorities confirmed that they were going to charge Vodafone about
20000 crore (US $3.3 billion) in tax and fines. The second phase of the dispute is about to start.[10]
3G
On 19 May 2010, the 3G spectrum auction in India ended. Vodafone paid 11617.86 million (the second highest amount in the auctions) for spectrum in 9 circles. The circles it will provide 3G in are Delhi, Gujarat, Haryana, Kolkata, Maharashtra & Goa, Mumbai, Tamil Nadu, Uttar Pradesh (East) and West Bengal.[11]
On 16 March 2011, Vodafone launched 3G services in Uttar Pradesh (East) in the city of Lucknow.[12] Vodafone had already launched limited 3G services in Chennai and Delhi earlier, but the Uttar Pradesh (East) launch counts as its first fully commercial launch. This makes Vodafone the fifth private operator (seventh overall) to launch its 3G services in the country following Tata Docomo, Reliance Communications, Airtel and Aircel.
On 23 June 2011 Vodafone launched 3G service in Kerala by joining with Idea in an Intra Circle Roaming agreement. Initially Vodafone 3G services will be available in the following cities in Kerala – Ernakulam, Aluva, Calicut, Koyilandy, Alappuzha, Cherthala, Malappuram and Manjeri. On 28 June 2012, Vodafone launched a new international roaming package under which the users shall have not to pay multiple rentals in the countries they are visiting.[13]
Angel Store
Vodafone Angel Store, is a first of its kind retail concept store, that is completely managed and run by women employees, including security, pantry staff, customer service resources and management level personnel. As of 3 September 2013, there are 16 Vodafone Angel Stores across 14 states of India. Stores are currently operating in Agra, Ahmedabad, Bhubaneshwar, Chennai, Delhi, Goa, Haryana, Hyderabad, Jaipur, Kerala, Kolkata, Lucknow, Mumbai, Mysore, Pune, Shillong and Vadodara.
According to Marten Pieters, Managing Director and CEO, Vodafone India, "The Angel Stores are a part of Vodafone’s commitment to provide our women employees with one of the most secure and productive work environment. Additionally, our women customers feel more welcomed while visiting the store." Vodafone's own research and customer feedback revealed that the Angel Stores help improve the quality of customer service as women generally show greater patience and empathy than men, and are able to act and help in speedy resolution. Vodafone also found that higher productivity and performance parameters recorded in Angel Stores, across locations.
NEW DELHI (Reuters) - A Mumbai court dismissed a petition by Vodafone Group in a tax dispute with the authorities, ruling on Friday that a tax tribunal should examine the matter first, the British mobile company said.
Vodafone said it has almost 12 weeks to review its options and that the Bombay High Court had extended a stay on a final tax demand order by the authorities.
Last year, Vodafone had filed the petition to the Bombay High Court in a transfer pricing dispute after authorities sought to add 85 billion rupees to the taxable income of a unit, Vodafone India Services Pvt Ltd, which provided call centre services to some group companies.
Transfer pricing is the value at which companies trade products, services or assets between units, across borders.
"The Bombay High Court's decision today focused solely on procedure and not on the merits of Vodafone's case," Vodafone said after Friday's court ruling.
Transfer pricing officials in Mumbai declined to comment on the court order.
The dispute relates to accounts for the financial year ending March 2008. Vodafone received another transfer pricing order in February this year over the issue of shares by the same unit. Vodafone has said both disputes are linked.
The cases are separate from a more-than $2 billion tax demand over the British firm's 2007 acquisition of Hutchison Whampoa's Indian mobile phone business.
Vodafone is currently in talks with finance ministry officials to resolve that dispute.
Vodafone’s dispute with the Indian government relates to alleged untaxed capital gains linked to its USD 10.9 billion acquisition of Hutchison Essar in 2007. The government argued that the British firm had concluded the Hutchison deal abroad — in the Cayman Islands — to evade paying taxes. The subsequent case has become one of India’s lengthiest and most high profile corporate legal battles.
Soon after Vodafone concluded its deal with Hutchison Essar in 2007, the Indian Income Tax (IT) department sent a notice to Vodafone Essar with a tax demand of Rs 11,200 crore (USD 2.6 billion), claiming that the merger is taxable as the assets lie in India.
Vodafone contested this claim on the basis that no tax was due as the deal was reached outside India. This led to a five-year court battle which finally concluded in January 2012 with the British company winning what it thought was a final victory in the Indian Supreme Court. However, in May 2012, the then Finance Minister Pranab Mukherjee amended the Income Tax Act, 1961, to impose a retrospective provision for tax on some types of global mergers, including Vodafone’s 2007 acquisition of Hutchinson’s mobile assets in India.
Following this decision, there were serious concerns raised by international and domestic investors amid fears that this move would hurt the overall investment climate in the country. This led the government to appoint a committee under tax expert Parthasarthi Shome to look into the issue. The Shome Committee suggested that either the government withdraw the retrospective tax amendment or waive the penalty. The Finance Ministry also underwent a change of hands in July 2012, with then Finance Minister Pranab Mukherjee becoming the President of India, and P. Chidambaram being appointed as the Finance Minister.
Mr. Chidambaram had indicated that he was committed to resolving the Vodafone tax issue, and that the Ministry was not averse to waive off the interest component on the tax demand that will reduce Vodafone’s liabilities substantially. However, in the past few months a series of legal and political barriers prevented a specific deal for Vodafone from going through, diminishing hopes for a truce between India and the telecom giant.
A breakthrough came on May 15, 2013, when newly appointed Law Minister Kapil Sibal stated that he had forwarded clarifications from the Attorney General of India to the Finance Ministry, according to which the government could start its conciliation talks with Vodafone. Mr. Sibal stated that according to the Attorney General, an out-of-court settlement with Vodafone would have to be given final clearance by the Parliament as the tax demand is based on a law passed by the legislature. The Finance Ministry will now approach the Cabinet for permission to reach a negotiated settlement on the tax dispute. This move, which comes a day after Mr. Sibal assumed additional charge of the Ministry of Law and Justice, is intended to send out a strong signal to foreign investors.
Here is what the Indian media has been reporting on the issue in the past few weeks:
Finance Minister P. Chidambaram sounded confident about finding a way to resolve the Vodafone tax issue, reported The Economic Times Newspaper on March 1, 2013:
“…Finance Minister P Chidambaram today said the final call on the British telecom firm’s offer of conciliation will be taken by the Cabinet… “I have said quite a number of times that I want the issue resolved…I told Vodafone when they met me that I want to resolve it, if you want to resolve it let’s find a way out. I think we will find a way out,” he said in a TV interview. Vodafone had earlier wanted to take India into international arbitration, but after discussions with the Indian government, it offered conciliation on the matter. “We rejected arbitration, so Vodafone has now offered conciliation. The matter will now go to the Cabinet,” Mr. Chidambaram said, and added that conciliation is not binding.
Planning Commission of India Deputy Chairman Montek Singh Ahluwalia says that while India is trying to resolve the issue soon, he is of the opinion that Vodafone took a calculated risk, reports NDTV Profit on March 7, 2013:
“…Planning Commission Deputy Chairman Montek Singh Ahluwalia said there is a good chance that the Vodafone dispute will be resolved soon, underlining that India is a good bet for foreign investment.
“The Vodafone case did not do us any favours. My personal view is that they knew very well that it (Vodafone’s purchase of the Indian operations of Hutchinson Whampoa in 2007) was chargeable to tax, but they decided to take a calculated risk,” Mr Ahluwalia said. “The Finance Minister (P. Chidambaram) is in negotiations to come up with a reasonable compromise and there is a good chance we can put this behind us for good,” he added, while admitting that the $2-billion Vodafone tax dispute had affected global perceptions about the country…”
The government has also mulled settling out-of-court with Vodafone, as reported by Nagender Sharma and Gaurav Choudhury in The Hindustan Times Newspaper on April 21, 2013:
“…The government has sought the views of its top law officer — the Attorney General — on the legal viability of hammering out an out-of-court settlement with British telecom giant Vodafone on its Rs. 11,200-crore tax dispute. This follows a difference of opinion between the finance and law ministries over the move with the latter holding the view that it may not be appropriate to reconcile the matter out-of-court given the changes that were introduced in the Finance Act in 2012.
A final decision will be taken by the Cabinet that will discuss the Attorney General’s views on the matter. “The draft Cabinet note had sought our opinion on whether this matter can be settled through conciliation. Our view, so far, is that it is not permissible without appropriate amendments in the Act,” a senior law ministry official said. A top government official confirmed that the government has received a reconciliation proposal from the company. “They (Vodafone) have written to us proposing conciliation. The government has replied saying that an appropriate authority will examine the request,” the official said, requesting anonymity…”
However, hopes of a truce for Vodafone and India seemed to be fading rapidly, wrote James Crabtree in The Financial Times Newspaper on May 7, 2013:
“…A much-anticipated deal to settle the $2.6bn tax row between the Indian government and Vodafone appears unlikely to happen for at least another year, in a further blow to faltering investor confidence in Asia’s third-largest economy.
India’s Finance Minister Palaniappan Chidambaram told the Financial Times in an interview in January [2013] that he expected that a negotiated solution to conclude the long-running dispute could be reached before April’s annual budget. However, little progress has since been made, according to people familiar with the situation. Tax experts and legal analysts say progress on either front is now highly unlikely until after India’s forthcoming national election in 2014, if at all. “There will be no settlement; it isn’t remotely heading in that direction,” said Arun Giri, the head of Taxsutra, an Indian tax information service. “There is huge resistance from the income tax department to letting Vodafone get off”, Mr. Giri said.
Mr Chidambaram told the FT in January that Vodafone had written to him proposing discussions to solve the dispute. A series of meetings were then held with executives from the business, including the well-connected chairman of its Indian division, Analjit Singh. However, India’s finance ministry has yet to reply to Vodafone’s letter, while objections to a settlement from other government departments, in particular the law ministry, have put the process on hold, according to two people familiar with the developments…”
In what comes as a major breakthrough, Law Minister Kapil Sibal has said that the government would be commencing conciliatory talks with Vodafone, reported The Times of India Newspaper on May 14, 2013:
“…Law minister Kapil Sibal has agreed with finance ministry’s suggestion to start a dialogue to settle the claims, although the matter would have to be cleared by the Cabinet. Sibal, who took additional charge as law minister on Monday, revived the case by seeking a fresh opinion of Attorney General G E Vahanvati on the issue. Vahanvati, who was earlier not in favour of the move, is learnt to have done a U-turn on the matter and now backs the talks. Vahanvati gave his fresh opinion in the light of the finance ministry clarification that the conciliation proposal would not bypass or alter the tax liability under the Income Tax Act.
The finance ministry has also said that any agreement reached with Vodafone would have to be approved by the Cabinet and finally by Parliament as an amendment will have to be made to the Income Tax Act. Ashwani Kumar, who quit on Friday, had gone with the attorney general’s advice and opposed the finance ministry proposal for an out-of-court settlement into one of the most high profile tax rows involving the corporate sector…”
The green signal to Vodafone is being welcomed by foreign investors, but could also prove controversial in the current political environment, reports Live Mint Newspaper on May 14, 2013:
“…On taking over the additional charge of the law ministry after Kumar was sacked last week, Sibal said he would work to ensure that “legal processes and procedures should not be an impediment to economic growth, but must fuel it”.
The move by the government could send a positive signal to foreign investors, who have expressed apprehensions about the aggressive stance by the income-tax department. Though the government deferred the implementation of the general anti-avoidance rules and is said to be considering another look at the retrospective taxation of some overseas transactions, recent tax demands relating to transfer pricing and excise duty payments have again raised doubts about the government’s commitment to provide a non-adversarial tax regime…”
Arvind Kejriwal, leader of the Aam Aadmi Party, has started raising questions on the speed with which the Law Ministry has given its go-ahead for a conciliatory out-of-court settlement, reports Jagran Post Newspaper on May 15, 2013:
“…The Aam Aadmi Party on Wednesday raised questions on the ‘haste’ in which Law Ministry within a day of Kapil Sibal taking charge gave its go-ahead for a conciliatory out-of-court settlement of over Rs 11,000 crore tax dispute with Vodafone that marked a change in stance.
At a press conference, AAP’s Arvind Kejriwal and Prashant Bhushan also alleged that Sibal has a ‘conflict of interest’ in the case involving Vodafone as his lawyer son Amit ‘continues to defend’ Hutchinson, which had a partnership with the British telecom major…”
Despite the pending issue on retrospective taxes, as well as uncertainty with regard to spectrum allocation, Vodafone declared in April, 2013 that it would be investing USD 1 billion in India in financial year 2013-14, reports NDTV Profit :
“…We are committed and will invest another $1 billion in India in FY 14 for capacity building,” said Marten Pieters, Managing Director and CEO of Vodafone India…He, however, hinted that investments in India might not continue if Vodafone Group did not get returns from its investments…”
Salient features -TDS ON CONTRACT PAYMENTS SECTION 194C
This section provides that tax is to be deducted at source against payments made to contractors/subcontractors. The followings are the salient features of the section as it stands today:
So, it is the dominant object which would determine the nature of the contract. If the dominant object is to transfer the chattel as chattel then it would be a contract of sale even though goods might have been manufactured as per the requirement and specification of the client. Hence, section 194C would not be applicable. On the other hand, if the dominant object is to carry out a work, it would be a works contract even though some material might have been used in the execution of the contract. In such cases, section 194C would be attracted
- TDS is to be made at the prescribed rate where payment is made for carrying out any work (including supply of labour for carrying out any work) by a contractor;
- Such work must be in pursuance of a contract (including sub contract) between the contractor and a specified person as defined in the Explanation;
-The recipient of payment must be a resident of India;
- TDS is to be made at the time of credit to the account of contractor or at the time of payment in cash or by cheque or draft or by any other mode whichever is earlier;
- TDS is to be made @ 1% where payment is to be made to an individual or a HUF and @ 2% in other cases;
- Where TDS is required to be made for the work of manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from the customer, TDS shall be made on the invoice value excluding the value of material, if such value is mentioned separately in the invoice and where value of the material is not mentioned separately in the invoice then TDS shall be made on the whole of invoice value (sub section 3);
- No TDS is required to be made by an individual or a HUF where payment is required to be made to the contractor for the work carried out for the personal purpose of such individual/HUF(sub section 4);
- No TDS is to be made where sum credited or paid or likely to be credited or paid does not exceed Rs.30000/-. However, if aggregate of the amount of such sums credited or paid or likely to be credited or paid in the financial year exceeds Rs.75,000/-, TDS is required to be made (sub section 5);
- No TDS is to be made where such sum is credited to the account of or paid to the contractor in the course of business of plying, hiring or leasing of goods carriages if the PAN is furnished by the contractor. Goods carriage shall mean as defined under Motor Vehicle Act 1988.
- The word “work” in this section would include—
- advertising;
- broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
- carriage of goods and passengers by any mode of transport other than railways;
- catering;
- Manufacturing or supplying a product according to the requirement or specification of a customer by using the 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 the material purchased from a person, other than such customer.
Interpretation of the expression “carrying out any work (including supply of labour for carrying out any work)”
The major controversy between the tax payers and the department throughout had centered round the interpretation of the expression “carrying out any work (including supply of labour for carrying out any work)”. At this stage, it would be appropriate to refer the first circular No 86 dated 29.5.72 wherein it was clarified by the CBDT that section 194C would apply only in relation to ‘works contracts" and "labour contracts" and would not cover contracts for sale of goods. In the said circular, it was made clear that the contracts for rendering of professional services by lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc., could not be regarded as contracts ‘for carrying out any work" and, accordingly, no deduction of income-tax need to be made from payments relating to such contracts.
In another circular bearing No. 93, dated September 26, 1972, it was stated that service contracts not involving the "carrying out of any work" are outside the scope of section 194C. It further clarified that the provisions of section 194C will not be applicable to transport contracts. This circular, inter alia, states that a transport contract cannot ordinarily be regarded as a "contract for carrying out any work" and, as such, no deduction in respect of income tax is required to be made from payments made under such a contract. In the case of a composite contract involving transport as well as loading and unloading, the entire contract will be regarded as a "works contract" and income tax will have to be deducted from payments made thereunder. Where, however, the element of labour provided for loading and unloading is negligible, no income-tax will be deductible.
The expression “carrying out any work (including supply of labour for carrying out any work)” was also the subject matter of interpretation by the courts.
Associated Cement Co. Limited-vs-CIT 201 ITR 435 SC: in this case, the assessee entered into contract with a contractor for supply of labour for loading and unloading of goods. The question before the court was whether assessee was required to deduct tax at source from the payments made to the contractor. The apex court observed as under:
"Any work" means any work and not a "works contract", which has a special connotation in the tax law. Indeed, in the sub-section, the " work " referred to therein expressly includes supply of labour to carry out a work. It is a clear indication of the Legislature that the "work" in the sub-section is not intended to be confined to or restricted to " works contract”. Work envisaged in the sub-section, therefore, has a wide import and covers "any work" which one or the other of the organisations specified in the sub-section can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with contractor, for carrying out its work which would have fallen outside the" work ", but for its specific inclusion in the sub-section.”
However, the above decision was misunderstood by the revenue as well as some High Courts. The CBDT, considering the SC judgment, was of the view that such expression is of widest import and, therefore, would include all types of contract. Accordingly, it issued a circular No 681 dated 8.3.94 wherein it was stated that in view of SC judgment, section 194C would apply to all types of contracts including transport contracts, labour contracts, service contracts, advt. contracts, broadcasting contracts, telecasting contracts, material contracts and works contracts. This led to filing of various writ petitions before various high courts.
In the meantime, Finance Act 1995 also amended the section wef 1.7.95 by inserting Explanation III by which the expression ‘work’ included the followings:
– advertising;
– broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
– carriage of goods and passengers by any mode of transport other than railways;
– catering.
The apex court, in the case of Birla Cement Works-vs-CBDT 248 ITR 216 has clarified by holding that the contract for carriage of goods simpliciter would not fall u/s 194C. It was pointed out that the earlier decision in case of Associated Cement Co has been misunderstood by the CBDT. The ratio of that decision was explained as under:
“It is evident that Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC), was not in respect of transport contracts. The controversy therein was deduction of tax at source from payments made for loading and unloading of goods. The question whether the expression "carrying out any work" would include therein carrying of the goods or not, was not in issue in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). That is precisely the question in the present case. The decision in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC) has not been correctly understood by the Central Board of Direct Taxes. It would not be correct to come to the conclusion, as the Central Board of Direct Taxes did, that the question involved is covered by the decision in the case of Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC).”
Thus, the court held that the expression "Carrying out any work" would not include carriage of goods. Accordingly, the impugned circular to the extent it related to transport contracts was quashed. The carriage of goods would be covered only from 1.7.95 because of insertion of Explanation III which was held to be prospective.
At this stage, it would be appropriate to mention that various High Courts also declared that the circular No 681 dated 8.3.94 was illegal to the extent it included various service contracts within the scope of section 194C of the Act. It is not necessary to discuss those decisions in detail since most of the said services have been brought within the net of TDS provisions. However, some important decisions are being discussed where important observations have been made on the interpretation of the said expression.
S. R. F. Finance Limited-vs-CBDT 211 ITR 861 (Del):
The issue before the court was whether payments made to broker/commission agent would fall within the scope of section 194C. Considering the various circulars and the various amendments proposed and dropped, it was observed:-
“One more factor makes the meaning of the section beyond the pale of any doubt. If the term "any work" in section 194C by itself covers any kind of service, the words found in the bracket, in sub-section (1) of section 194C will have to be treated as otiose or superfluous. Supply of labour to carry out any work, is a concept that falls within the concept of "service"; if so, why should Parliament include these words in the bracket, to give an expanded meaning to the term "any work". The Supreme Court in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 clearly pointed out that but for the specific inclusion of those words (i.e., "including supply of labour for carrying out any work"), in section 194C, obtaining of supply of labour for carrying out the work would have fallen outside the word "work". The concluding part of the Supreme Court observation quoted above brings out the true purport of the term "any work" in section 194C.
"Any work", certainly is a term of wide import ; but it is not so wide as to comprise within its scope the obtaining of the supply of labour to carry out the work, because, the latter concept is essentially, a concept falling within the sphere of "services". However, the term "any work" is wide enough to cover any kind of work which one can get carried out through another. The essentiality is that, it should be a "work" which is to be "carried out".
In view of the above observations, it was held that act of broker/commission agent amounts to act of service and thus outside the purview of section 194C. This decision has been quoted just to emphasis the importance of expression in the section. Otherwise, such payments are now covered by section 194H.
East India Hotels-vs-CBDT 320 ITR 526 (Bom):
The issue before the court was whether services provided by a hotelier would fall within the scope of the said expression. The court answered in negative by observing as under:
“The expression “carrying out any work” in section 194C is limited to any work which on being carried out culminates in to a product result. In other words, the word “work” in section 194C is limited to doing something with a view to achieve the task undertaken or to carry out an operation which produces some result.”
“The services rendered by a hotel to its customers by making available certain facilities/amenities like providing multilingual staff , 24 hour service for reception, telephones, select restaurants, bank counter, beauty saloon, barbar shop, car rental, shopping centre, laundry, health club, business centre services etc do not involve carrying out any work which results into production of the desired object and therefore, would be outside the purview of section 194C of the Act.”
Kurukshetra Darpans (P.) Limited-vs-CIT 169 Taxman 344 PH
In this case, the assessee was a cable network operator who was in the business of distributing cable connections to the customers and charged subscription fee from them. The appellant-assessee entered into a contract with the licensor of various TV channels for local cable distribution system.(A Y 2006-07) It is relevant to mention here that these licensors are not the owners of the TV channels and they only have the exclusive right to market and distribute satellite based television service to various customers and users of the service. In the above-mentioned contract, the assessee was referred to as subscriber or affiliate as he was to pay the subscription to another party referred to as the licensor. These channels are telecasted from abroad and the assessee becomes an affiliate or subscriber of the licensor by entering into an agreement for payment of subscription. The question before the court was cable operator was required to deduct tax u/s 194C. the court held as under:
“15. From the recital of the agreement itself, it is clear that the service that the assessee-subscriber is availing is the receipt of ‘telecasting signals’ from the licensor or the company. The expression ‘service’ has also been referred to mean the TV channel which is dealt with by the licensor or the company. Therefore, what the assessee has transacted for with the licensor or company certainly includes within its ambit broadcasting and telecasting facility. The essence of the contract is to obtain broadcasting and telecasting of TV channels and thereafter its distribution amongst ultimate customers through the cable network of the assessee.”
16. Another plea of the assessee/subscriber was that the licensor or the person to whom the assessee is making payment by itself does not do the work of broadcasting and telecasting and is therefore outside the purview of section 194C of the Act. This argument deserves to be negated at the threshold. As we have pointed out earlier what the assessee-subscriber is looking for is to obtain the telecast signals from the licensor, which is enough to deduce that the impugned contract involves broadcasting and telecasting of TV signals. Moreover, the licensor or the company, as is evident from the specimen agreement on record, in the business of distribution of satellite based TV channels and has exclusive rights to market and distribute said services in India, the service that is referred to in the agreement is the broadcasting and telecasting of TV signals.
Comment: in the case of cable network, no broadcasting is involved as mentioned in the judgment. However, the judgment would apply since telecasting is involved. It is, however learnt that a SLP has been admitted on this issue by the Supreme Court.
Entertainment One India Ltd-vs-ITO(tds) 126 ITD 491(Mum)
The assessee made advances to the producers who approached the assessee with the film projects. AO was of the view that assessee should have deducted tax u/s 194C. The tribunal was of the view that agreement was merely a finance agreement and there was no relationship as that of principal and contractor. Hence, section 194C was not applicable.
Works contract/job work
There is no dispute that works contract (including job work) are covered within the scope of section 194C of the Act. But there has always been disputes between the tax payers and the department whether a particular contract is a works contract or contract of sale. The hon’ble Supreme Court has decided such issue in many cases. It would be appropriate to refer the decision in the case of State of Himachal Pradesh –vs- Associated Hotels, AIR 1972 SC 1131; [1972] 29 STC 474 (SC) wherein the court observed in para 9 as under:-
"The difficulty which the courts have often to meet with in construing a contract of work and labour, on the one hand, and a contract for sale, on the other, arises because the distinction between the two is very often a fine one. This is particularly so when the contract is a composite one involving both a contract of work and labour and a contract of sale. Nevertheless, the distinction between the two rests on a clear principle. A contract of sale is one whose main object is the transfer of property in, and the delivery of the possession of, a chattel as a chattel to the buyer. Where the principal object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one of work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of materials, nor the value of the skill and labour as compared with the value of the materials, is conclusive, although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract is in substance one for work and labour or one for the sale of a chattel."
"From the decisions earlier cited it clearly, emerges that such determination depends in each case upon its facts and circumstances. Mere passing of property in an article or commodity during the course of the performance of the transaction in question does not render it a transaction of sale. For, even in a contract purely of work or service, it is possible that articles may have to be used by the person executing the work and property in such articles or materials may pass to the other party. That would not necessarily convert the contract into one of sale of those materials. In every case the court would have to find out what was the primary object of the transaction and the intention of the parties while entering into it. It may in some cases be that even while entering into a contract of work or even service, parties might enter into separate agreements, one of work and service and the other of sale and purchase of materials to be used in the course of executing the work or performing the service. But, then in such cases the transaction would not be one and indivisible, but "would fall into two separate agreements, one of work or service and the other of sale."
With due respect, in my view, it was a case of sub contract for transportation of goods. The admitted fact was that truck owners transported the goods and delivered the goods at necessary destination at the instance of the assessee. How it could be said that assessee did not pass on the responsibility under the contract. Therefore, it could not be considered as contract for hiring of vehicles
So, it is the dominant object which would determine the nature of the contract. If the dominant object is to transfer the chattel as chattel then it would be a contract of sale even though goods might have been manufactured as per the requirement and specification of the client. Hence, section 194C would not be applicable. On the other hand, if the dominant object is to carry out a work, it would be a works contract even though some material might have been used in the execution of the contract. In such cases, section 194C would be attracted. This test has been applied by the courts/tribunal in various cases mentioned below.
This can be explained by giving two examples. A wants his office to be renovated. He enters into a contract with B under which B agrees to execute the work of painting and polishing with his own material. In such a case, the dominant object is the execution of work irrespective of the fact that property in goods passes in the course of executing the work. Hence, it will be a case of works contract and the provisions of section 194C would apply.
Take another example where A wants to purchase uniforms for its employees. So, he enters into a contract with B under which B is required to supply the uniform as per the specification provided by A. B purchases the material from the market and prepares the uniforms as per the specification and delivers the same to A against payment. In such a case, the dominant object is purchase of chattel as chattel irrespective of the fact that supply is to be made as per the specification of the customer. Hence, section 194C would not apply.
The judicial view on this issue may be noted from the following decisions:
CIT-vs-Glenmark Pharmaceuticals Ltd 324 ITR 199(Bom): In this case, assessee entered in to a contract with other party under which the other was required to supply the goods as per its requirements and specification. The other party purchased the material from the market and then manufactured the desired item. No TDS was made while making the payments. AO was of the view that assessee should have deducted the tax u/s 194C. The court held:-
“The expression “carrying out any work” in section 194C would not include a case where (i) where the property in the article or thing passes to the customer upon delivery, and (ii) the material that was required was not purchased/sourced from the purchaser/customer, but was purchased or independently obtained by the manufacturer from a person other than the customer.
The rationale behind this was that where a customer provides the material, what the manufacturer does is to convert the material in to a product desired by the customer, the contract essentially involves work of labour and not a sale.”(page 218)
It is also held that even the revenue had this view consistently which is apparent from the CBDT circular no 86 dated 29.5.72, circular No 108 dated 20.5.73 as well as the clarification regarding the word ‘work’ in section 194C in the Memorandum explaining the provisions of the Finance Bill 2009. (page 216-17of 324 ITR). The memorandum explains as under:
“—-To bring clarity on this issue, it is proposed to provide that work shall not include mfg or supplying a product according to the requirement or specification of a customer by using raw material purchased from a person other than such a customer as such a contract is a contract for sale. This will, however, not apply to a contract which does not entail manufacture or supply of an article or thing (e.g. a construction contract). It is also proposed to include mfg or supplying a product according to the requirement or specification of a customer by using raw material purchased from such customer within the definition of such work.”
Accordingly it was also held that assessee was not required to deduct the tax at source u/s 194C. It was also held that the amendment made in Explanation III to section 194C was clarificatory and would apply retrospectively.
This view has also been taken by the courts and the tribunal in the following cases:
BDA Ltd 281 ITR 99 (Bom)
CIT-vs- Dabur India Ltd 283 ITR 197 (Del)- (supply of corrugated boxes were to be made with some labels printed on the same)
CIT-vs-Seagram Mfg. Pvt. Ltd. 221 CTR 509 (Del)-( a contract of sale packing material on principal principal basis)
CIT-vs-Reebok India Co 306 ITR 124 (Del)- (agreements with various manufacturers who manufacture the said items according to the specifications, drawings and designs provided by the assessee.)
CIT-vs- Girnar Food & Beverages P Ltd. 306 ITR 23 (Guj)
CIT-vs-Markfed 304 ITR 17 PH—(purchase of printed material)
Tuareg Marketing (P) Limited—vs—ACIT 122 TTJ 343 Del (supply of kitchenware as per specification and brand name of assessee)
Whirlpool Of India Limited-vs-JCIT 109 TTJ 994(Del)
ITO(TDS)-vs-Milan Dairy Foods (P) Ltd 7 SOT 901 (Del) & Bangalore Distt Co-op Milk producers Societies union 11SOT 539(Bang)—(Purchase of packing material as per specification of customer-not a work contract)
Power Grid Corp of India-vs ACIT 13 SOT 347 (Hyd)
ITO-vs- Varun Beverages Ltd 35 SOT 443 (Agra)(supply of glass bottles, plastic crates etc)
Section 194C—vs—section 194 I (Hiring of ships, vehicles etc)
Before and after the insertion of section 194I, disputes have arisen on the issue whether mere hiring of vehicle would fall within the ambit of section 194C. The judicial view is that mere hiring of vehicle would not fall within the ambit of section 194C.
CIT-vs-Poompuhar Shipping Corporation Ltd 282 ITR 3(Mad): In this case, assessee was engaged in shipping business. It took on hire a ship which was used by it in its business. It paid the hiring charges without deducting the tax at source. The case of the revenue was that section 194C was applicable since Explanation III was clarificatory and had retrospective effect. The court noted that it was not the case of the Revenue that the assessee entered into the said contract with the shipping company for transport of coal from one place to another. Hence, the court was of the view that mere hiring of ships for the purpose of using the same in the assessee’s business would not amount to a contract for carrying out any work as contemplated in section 194C. It was also held that the said Explanation was not retrospective.
The above decision has been followed by the Tribunal in DCIT-vs-Satish Aggarwal And Company 124 TTJ 542(Amr). It has been held that payments made against mere hiring of trucks would not fall within the scope of section 194C. The following observations are noteworthy:
“12. 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.”
Mythri Transport Corporation-vs-ACIT 124 TTJ 970(Vishakha)
In this case, the assessee was engaged in the business of transporting goods. It took on hire trucks from different parties and used them in its business for carrying goods of its clients. The hiring charges were paid without deduction of tax at source. AO was of the view that the assessee should have deducted tax at source u/s 194C. The tribunal held that it was a case of mere hiring of trucks and therefore, section 194C was not applicable. The tribunal held as under:
”8.5 It is not established by the Revenue that other lorry owners, from whom the vehicles were hired, have also been fastened with any of the abovesaid liabilities. In a sub-contract, a prudent contractor would include all the liability clauses in the agreement entered into by him with the sub-contractor. The assessee has also claimed before the tax authorities that the responsibility in the whole process lies with it only. Though the passing of liability is not the only criteria to decide about the existence of sub-contract, yet this contention of the assessee read with the liability clauses of the work order, cited above, supports its submission that the individual vehicle owners are simple hirers of the vehicles.
the instant case, there is no material to suggest that the other lorry owners involved themselves in carrying out any part of the work undertaken by the assessee by spending their time, energy and by taking the risks associated with the main contract work. In the absence of the abovesaid characteristics attached to a sub-contract in the instant case, the payment made to the lorry owners stands at par with the payments made towards salaries, rent, etc. Hence the reasoning of the tax authorities, which is stated in para 8.3 supra, to hold that the payment made for hired vehicles is a sub-contract payment, in our opinion, is not correct and not based on relevant considerations.”
ACIT-vs-Accenture Services (P) ltd 44 SOT 290 (Mum)
In this case, the assessee deducted tax at source u/s 194C against payments made for hiring of vehicles for transportation of its employees. Under the contract, it was the responsibility of the transporter to provide the staff for running the vehicles as well as for ensuring all legal and operational obligations. The AO treated such payment for hiring of equipment falling u/s 194I and therefore passed an order u/s 201(1) for short deduction of tax. The CIT(A) as well as the Tribunal have held that it was a transport contract falling u/s 194C. Section 194I was held to be not applicable since no hiring was involved.
Similar view has been taken by the tribunal in the case of Tata AIG General Insurance Co 43 SOT 215(Mum) by observing that no particular car was provided but it was merely an arrangement for transportation of its employees and therefore section 194C would apply and not section 194I.
DCIT-vs-Japan Airlines 93 ITD 163 (Del) & Singapore Airlines 7 SOT 84 (Chennai)
Payment to AAI for landing and parking— in the case of Japan Airlines, the tribunal observed as under:
“The Airport Authorities of India simply granted permission to landing and parking. It did not grant any exclusive right or interest to J.A.L. in any specific portion of land or building. It granted a license and also provided certain other facilities not necessarily for use of land but for safe landing and parking in pursuance of the guidelines referred to above. Hence, the payments made by the assessee cannot be termed as payment of rent so as to be covered within the purview of section 194-I of the Act”
The above view has been followed by the Chennai bench of the tribunal. However, it is to be noted that the tribunal in the case of Japan Airlines further held that landing & parking charges fall u/s 194C. With due respect, it is submitted that AAI did not carry out any work for the airline. It was a case of mere use of a facility which does not fall within the scope of section 194C as held by the hon’ble Delhi HC in the case of East India Hotels(supra).
Sub section(2)-old provision (Sub contract)—(privity of contract)
Shree Choudhary Transport Company-vs- ITO 225 CTR 125(Raj):-
“In our view, on the language of s. 194C(2), and the fact that the goods received were sent through truck owners by the appellant, and there was no privity of direct contract’ between the truck owners and the cement factory. According to the contract between the appellant and the cement factory, it was the appellant’s responsibility to transport the cement, and for that the appellant hired the services of the truck owners, obviously as sub-contractors. In that view of the matter, we do not find any error in the impugned order of the Tribunal.”
Solan District Truck Operators Transport Co-operative Society 227 CTR 299(HP)
Facts: The assessees were registered societies/AOP constituted by the truck operators. These societies entered into contracts with the companies such as cement manufacturers for transport of the goods of the companies. The company which had entered into contract with the assessee deducted 2 per cent of the amount paid on account of TDS in terms of s. 194C(1) of the IT Act, 1961. Thereafter, the assessee society paid the amount received by it to the members of the society who had actually carried the goods. However, out of the amount paid a nominal amount of Rs. 10 or Rs. 20 was deducted for administrative expenses of running the society and is known as "Parchi charges". The assessee did not retain any other amount except for the "Parchi charges" and the entire amount received by it from the company was paid to the members.
Held:
“the entire language of s. 194C(2) which clearly indicates that the payment should be made to the resident who is a sub-contractor. The concept of sub-contract is intrinsically linked with s. 194C(2). If there is no sub-contract then the person is not liable to deduct tax at source even if payment is being made to a resident.
13. To understand the nature of the contract, it would be relevant to mention that in the present cases the assessee societies were created by the transporters themselves. The transporters formed the societies or unions with a view to enter into a contract with the companies. The companies enter into contract for transportation of goods and material with the society. However, the society is nothing more than a conglomeration of the truck operators themselves. The assessee societies have been created only with a view to make it easy to enter into a contract with the companies as also to ensure that the work to the individual truck operators is given strictly in turn so that every truck operator has an equal opportunity to carry the goods and earn income. The society itself does not do the work of transportation. The members of the society are virtually the owners of the society. It may be true that they both have separate juristic entities but the fact remains that the reason for creation of the society was only to ensure that work is provided to all the truck operators on an equitable basis. A finding of fact has been rendered by the authorities that the societies were formed with a view to obtain the work of carriage from the company since the companies were not ready to enter into a contract with the individual truck operators but had asked them to form a society.
14. Admittedly, the society does not retain any profits. It only retain as nominal amount as "parchi charges" which is used for meeting the administrative expenses of the society. There is no dispute with the submission that the society has an independent legal status and is also contractor within the meaning of s. 194C. It is also not disputed that the members have a separate status but there is no sub-contract between the society and the members. In fact if the entire working of the society is seen it is apparent that the societies have entered into a contract on behalf of the members. The society is nothing but a collective name for all the members and the contract entered by the society is for the benefit of the constituent members and there is no contract between the society and the members.”
In view of the above observations, it was held that there was no sub contract as such and consequently, the union was not required to deduct the tax at source. However, it is pointed out that SLP has been admitted by the SC and the matter is still pending.
EMC-vs-ITO 37 SOT 31
Assessee an event manager assigned the job of art work and photography to others but did not deduct tax at source against payment made to them. AO was of the view that TDS should have been made u/s 194C (1) since clients of assessee had deducted tax u/s 194J. The assessee contended that it was a case u/s 194C (2) since part of work was assigned to others. However, copies of agreements with the clients not produced by assessee. Hence, the tribunal was of the view that nature of contract was to be seen in the light of treatment given by the clients. Accordingly, the tribunal has confirmed the view of AO since assessee was rendering only professional services u/s 194J.
Comment: With due respect, in my view, the nature of contract should have been determined by the nature of work assigned by the assessee to the other party and not by the treatment given by the client for TDS purposes.
Kavita Chug-vs-ITO 44 SOT 95 (Kol)
Assessee engaged in transport business did not own any trucks. Requisition was made on daily basis from the market for transportation of goods to various destinations. The ‘A’ contented that she never passed her responsibility to truck owners who only delivered goods at necessary destinations at the instance of assessee. The AO found that 83 truck owners were paid more than Rs.50,000/- each. Since no TDS was made, he disallowed the deduction u/s 40(a)(ia). The tribunal held that it was a case of hiring vehicles and therefore, outside the purview of section 194C. Hence, disallowance u/s 40(a)(ia) was not justified.
Comment: With due respect, in my view, it was a case of sub contract for transportation of goods. The admitted fact was that truck owners transported the goods and delivered the goods at necessary destination at the instance of the assessee. How it could be said that assessee did not pass on the responsibility under the contract. Therefore, it could not be considered as contract for hiring of vehicles.
City Transport Corporation-vs- ITO 13 SOT 479 (Mum)—
Assessee engaged in business of transporting goods entered into contract with two companies for transporting goods from their factory to any place in India. It did not own any truck but hired the same from different transporters for executing the contract. The freight in respect of each truck was decided at the time of actual dispatch of goods and payment in each case did not exceed Rs.20,000/-. Relying on the circular no 715 dated 8.8.95, it was held that each trip was under a separate contract and there was nothing to show that more than one trip was under the same contract. Hence, no TDS was to be made u/s 194C.
ACIT-vs-Manish Dutt 46 SOT 130(Mum)(URO)
In this case, the assessee was engaged in the business of dubbing work in his own studio comprising of various dubbing equipments. Whenever, assessee’s studio could not be used, he used to give the work of dubbing to other studios as a sub contractor. The assessee deducted tax u/s 194C @ 2% but AO was of the view that he should have deducted tax @ 20% u/s 194I. The CIT(A) as well as the Tribunal have held that it was a contract for work falling u/s 194C since the assessee had utilized the dubbing services which was in the nature of getting work done through a sub contractor.
Comment: full judgment is not reported and therefore, complete facts are not available. If the studio as such is handed over to the assessee for use by the assessee as per his wishes, in my view, it will be a case u/s 194I but if the possession of the studio continues with the owner and only the work is assigned to be performed by the other party then the case would fall under section 194C.
Sands Advertising Communications-vs-DCIT 37 SOT 179 (Bang)—
Assessee was an advertising agency involved in activity of advertising in print media. Its sister concern ‘T’ was in similar business but was an accredited agency. The assessee entered in to an agreement with ‘T’ under which all ads created/developed by the assessee for its clients were to be released to print media through ‘T’ for which certain consideration was to be made to T. The AO was of the view that section 194C was applicable while the stand of assessee was that T was only a routing agency and not a sub contractor. It was held by the tribunal that section 194C is applicable only when payment is to be made to an advertising agency and not when payment is made by ad agency to print media as clarified in the Circular no 715 of 95. Hence, no TDS was required to be made.
Glaxo Smithkline Consumer Healthcare Ltd –vs- ITO 12 SOT 221 (Del)- held that payments made to clearing & forwarding agent fell under 194C & not u/s 194J.
Other aspects:
Contractual payment-vs-payment to daily wage workers: the hon’ble Delhi high court in the case of CIT-vs-Dewan Chand 178 Taxman 173 confirmed the view of the Tribunal that payments made to daily wage workers could not be considered as contractual payments u/s 194C.
CIT-vs-United Rice Land Ltd 322 ITR 594 PH: Carriage of goods or passengers on various occasions must be under a contract which is a requisite condition for applying the provisions of section 194C. Where different trucks were hired on different times independently and the payment of freight did not exceed Rs.20,000/- in respect of each truck, it was held that section 194C was inapplicable.
Following the aforesaid decision, the PHC held in the case of Bhagwati Steels 326 ITR 108 that where the payment was made for purchase of goods (inclusive of freight charged separately) for which there was no separate contract for carriage of goods, the provisions of section 194C could not be applied.
Any person responsible for paying any sum: In the case of Cargo linkers 179 Taxman 151/218 CTR 695, the hon’ble DHC held as under:-
“We are in agreement with the order passed by the Tribunal which has mainly decided an issue of fact, namely, the nature of the contract between the parties concerned. It has also been found as a matter of fact that the contract is actually between the exporter and the airline and the assessee is only an intermediary. Therefore, it is not a "person responsible" for deduction of tax at source in terms of s. 194C of the Act.”
ITO-vs-Rama Nand And Co. And Others 163 ITR 702 HP: in this case, the trial court found that payment was made for purchase of timber and therefore the assessee could not be said as contractor. For the similar reason, the persons to whom payments were made could not be considered as sub contractor. Hence, there was no force in the complaint of the ITO.
It would also be useful to refer the Board Circular 715 of 1995 wherein following clarifications have been given:
Question 1 : What would be the scope of an advertising contract for the purpose of section 194C of the Act ?
Answer : The term "advertising" has not been defined in the Act. During the course of the consideration of the Finance Bill, 1995, the Finance Minister clarified on the floor of the House that the amended provisions of tax deduction at source would apply when a client makes payment to an advertising agency and not when an advertising agency makes payment to the media, which includes both print and electronic media. The deduction is required to be made at the rate of 1 per cent. It was further clarified that when an advertising agency makes payments to their models, artistes, photographers, etc., the tax shall be deducted at the rate of 5 per cent. as applicable to fees for professional and technical services under section 194J of the Act.
Question 2 : Whether the advertising agency would deduct tax at source out of payments made to the media ?
Answer : No. The position has been clarified in the answer to question No. 1 above.
Question 3 : At what rate is tax to be deducted if the advertising agencies give a consolidated bill including charges for art work and other related jobs as well as payments made by them to media ?
Answer : The deduction will have to be made under section 194C at the rate of 1 per cent. The advertising agencies shall have to deduct tax at source at the rate of 5 per cent. under section 194J while making payments to artistes, actors, models, etc. If payments are made for production of programmes for the purpose of broadcasting and telecasting, these payments will be subjected to TDS at 2 per cent. Even if the production of such programmes is for the purpose of preparing advertisement material, not for immediate advertising, the payment will be subjected to TDS at the rate of 2 per cent.
Question 4 : Whether tax is required to be deducted at source on payments made directly to the print media/Doordarshan for release of advertisements ?
Answer : The payments made directly to print and electronic media would be covered under section 194C as these are in the nature of payments for purposes of advertising. Deduction will have to be made at the rate of 1 per cent. It may, however, be clarified that the payments made directly to Doordarshan may not be subjected to TDS as Doordarshan, being a Government agency, is not liable to income-tax.
Question 5: Whether a contract for putting up a hoarding would be covered under section 194C or 194-I of the Act ?
Answer : The contract for putting up a hoarding is in the nature of advertising contract and provisions of section 194C would be applicable. It may, however, be clarified that if a person has taken a particular space on rent and thereafter sublets the same fully or in part for putting up a hoarding, he would be liable to TDS under section 194-I and not under section 194C of the Act.
Question 6: Whether payment under a contract for carriage of goods or passengers by any mode of transport would include payment made to a travel agent for purchase of a ticket or payment made to a clearing and forwarding agent for carriage of goods ?
Answer : The payments made to a travel agent or an airline for purchase of a ticket for travel would not be subjected to tax deduction at source as the privity of the contract is between the individual passenger and the airline/travel agent, notwithstanding the fact that the payment is made by an entity mentioned in section 194C(1). The provisions of section 194C shall, however, apply when a plane or a bus or any other mode of transport is chartered by one of the entities mentioned in section 194C of the Act. As regards payments made to clearing and forwarding agents for carriage of goods, the same shall be subjected to tax deduction at source under section 194C of the Act.
Question 7 : Whether a travel agent/clearing and forwarding agent would be required to deduct tax at source from the sum payable by the agent to an airline or other carrier of goods or passengers ?
Answer : The travel agent, issuing tickets on behalf of the airlines for travel of individual passengers, would not be required to deduct tax at source as he acts on behalf of the airlines. The position of clearing and forwarding agents is different. They act as independent contractors. Any payment made to them would, hence, be liable for deduction of tax at source. They would also be liable to deduct tax at source while making payments to a carrier of goods.
Question 8 : Whether section 194C would be attracted in respect of payments made to couriers for carrying documents, letters etc. ?
Answer : The carriage of documents, letters etc., is in the nature of carriage of goods and, therefore, provisions of section 194C would be attracted in respect of payments made to the couriers.
Question9: In the case of payments to transporters, can each GR be said to be a separate contract, even though payments for several GRs are made under one bill ?
Answer : Normally, each GR can be said to be a separate contract, if the goods are transported at one time. But if the goods are transported continuously in pursuance of a contract for a specific period or quantity, each GR will not be a separate contract and all GRs relating to that period or quantity will be aggregated for the purpose of the TDS.
Question 10 : Whether there is any obligation to deduct tax at source out of payment of freight when the goods are received on "freight to pay" basis ?
Answer : Yes. The provisions of tax deduction at source are applicable irrespective of the actual payment.
Question 11 : Whether a contract for catering would include serving food in a restaurant/sale of eatables ?
Answer: TDS is not required to be made when payment is made for serving food in a restaurant in the normal course of running of the restaurant/cafe.
Question 12 : Whether payment to a recruitment agency can be covered by section 194C ?
Answer : Provisions of section 194C apply to a contract for carrying out any work including supply of labour for carrying out any work. Payment to recruitment agencies are in the nature of payments for services rendered. Accordingly, provisions of section 194C shall not apply. The payment will, however, be subject to TDS under section 194J of the Act.
Question 13: Whether section 194C would cover payments made by a company to a share registrar ?
Answer : In view of the answer to the earlier question, such payments will not be liable for tax deduction at source under section 194C. But these will be liable to tax deduction at source under section 194J.
Question 14: Whether FD commission and brokerage can be covered under section 194C ?
Answer : No.
Question 15: Whether section 194C would apply in respect of supply of printed material as per prescribed specifications ?
Answer : Yes.
Question 16: Whether tax is required to be deducted at source under section 194C or 194J on payment of commission to external parties for procuring orders for the company’s product ?
Answer : Rendering of services for procurement of orders is not covered under the provisions of section 194C. However, rendering of such services may involve payment of fees for professional or technical services, in which case tax may be deductible under the provisions of section 194J.
Question 17 : Whether advertisement contracts are covered under section 194C only to the extent of payment of commission to the person who arranges release of advertisement, etc., or whether deduction is to be made on the gross amount including bill of media ?
Answer : Tax is to be deducted at the rate of 1 per cent. of the gross amount of the bill.
Question 18: Whether deduction of tax is required to be made under section 194C for sponsorship of debates, seminars and other functions held in colleges, schools and associations with a view to earn publicity through display of banners, etc., put up by the organisers ?
Answer : The agreement of sponsorship is, in essence, an agreement for carrying out a work of advertisement. Therefore, provisions of section 194C shall apply.
Question 19 : Whether deduction of tax is required to be made on payments for cost of advertisements issued in the souvenirs brought out by various organisations ?
Answer : Yes.
Question 28 : Whether the services of a regular electrician on contract basis will fall in the ambit of technical services to attract the provisions of section 194J of the Act ? In case the services of the electrician are provided by a contractor, whether the provisions of section 194C or 194J would be applicable ?
Answer: The payments made to an electrician or to a contractor who provides the service of an electrician will be in the nature of payment made in pursuance of a contract for carrying out any work, Accordingly, provisions of section 194C will apply in such cases.
Question 29 : Whether a maintenance contract including supply of spares would be covered under section 194C or 194J of the Act ?
Answer : Routine, normal maintenance contracts which include supply of spares will be covered under section 194C. However, where technical services are rendered, the provision of section 194J will apply in regard to tax deduction at source
Question 30 : Whether the deduction of tax at source under section 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses ?
Answer : Sections 194C and 194J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.
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