By TIOL News Service

HYDERABAD, APRIL 29, 2013: THE issues before the Bench are - Whether the hiring of machineries for the purpose of using them in the assessee’s business amounts to a contract for carrying out any work as contemplated u/s 194C; Whether mere hiring of a machinary can be regarded as payment made for a contract for carrying out any work attracting the provisions of section 194C; Whether mere providing of the machinery without any manpower can be termed as carrying out of any work by the plant and machinery owners and Whether when a contract is for machinary hire and not for carrying out any work, the provision of section 194C get attracted. And the verdict goes against the Revenue.

Facts of the case

Assessee firm had filed its ROI on 30.10.2006 admitting a total income of Rs. 14,92,480. During assessment, the AO had reopened the assessment and completed it u/s. 143(3) r.w.s. 147 determining the total income of the assessee firm at Rs. 59,42,901 by making addition of Rs. 44,50,421 u/s 40(a)(ia). The assessee had debited the aforementioned amount under the head "machinery hire charges" and TDS was not deducted. The AO observed that provisions of section 194I, even though applicable from 13.7.2006 did not imply that section 194C was not applicable. Therefore, the case of the assessee shall be within the purview of section 194C and the addition was made. On appeal, the CIT(A) had observed that section 194-I had been in existence since 1994. However, the assessee was not under legal obligation to deduct taxes on the hire charges of machinery. Prior to the amendment w.e.f. 13.7.2006, the explanation read as under: "rent" means any payment, by whatever name called. Under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land or any building (including factory building). together with furniture, fittings and the land appurtenant thereto, whether or not such building owned by the payee:" The CIT(A) held that from the above, it was clear that the words "Machinery Plant and Equipment" were specifically added w.e.f. 13.7.2006 so that TDS could be deduced on these as well. It was further held that in the relevant year, TDS was not supposed to be deducted on machinery hire. Moreover, machinery hire was not a contract for work and cannot be covered u/s 194C. Thus, the CIT(A) had agreed with the contentions of the assessee and held that no TDS was to be deducted. Accordingly, CIT(A) had deleted the addition u/s. 40(a)(ia).

Before Tribunal, the DR had submitted that the assessee was required to deduct TDS on machinery hire charges which the assessee failed to do and being so it is to be disallowed u/s. 40(a)(ia). On the other hand, the AR had submitted that the assessee was not liable to deduct TDS u/s. 194C. Only after the amendment w.e.f. 13.7.2006 machinery hire charges were liable for TDS u/s. 194-I. Being so, he contended that the assessee was not liable for TDS. He relied on the judgement of Madras HC in the case of CIT v. D. Rathinam (2011-TIOL-150-HC-MAD-IT) wherein held that hire charges on miller and roller are liable for TDS u/s. 194-I w.e.f. 1.6.2007. Being so for the A.Y. 2005-06 the assessee was not liable for TDS.

Held that:

++ in CIT vs. Poompuhar Shipping Corporation Ltd., the assessment year involved was 1994-95. Explanation III to s. 194C was incorporated w.e.f. 1st July, 1995. In CIT vs. Poompuhar Shipping Corporation Ltd, the HC held that the Explanation is prospective and not retrospective. The year under consideration is 2005-06. Therefore, the Expln. III to s. 194C of the Act is directly applicable. As per the Explanation, "work" shall also include carriage of goods or passengers by any mode of transportation other than railways. The expression used in s. 194C(1) is "any work", including supply of labour for carrying out any work. The work in the present case, for which, payments were made by the assessee, was hiring of machinery. In CIT vs. Poompuhar Shipping Corporation Ltd., payment of hire charges for taking temporary possession of ships was held not to fall within the provisions of s. 194C. It was held that hiring of ships for the purpose of using them in the assessee’s business did not amount to a contract for carrying out any work as contemplated in s. 194C;

++ in the present case, like therein, there was no contract between the assessee and the owners of the machinery to carry out any work. The assessee hired the machinery belonging to the plant and machinery owners for a fixed period, on payment of hire charges. The hired machinery were utilised by the assessee in its business of civil construction. There was no agreement for carrying out any work or to transport any goods or passengers from one place to another. The assessee simply hired the machinery on payment of hire charges. Like in CIT vs. Poompuhar Shipping Corporation Ltd., here also, it is not the case of the Department that the assessee entered into any contract with the plant and machinery owners for transportation of goods or passengers from one place to another. Thus, the hiring of machinery for the purpose of using them in the assessee’s business would not amount to a contract for carrying out any work, as contemplated in s. 194C, as held in CIT vs. Poompuhar Shipping Corporation Ltd.;

++ 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. In the present case, it is not the case of the Department that the machinery taken on hire by the assessee from the plant and machinery owners were supplied by the plant and machinery owners to the assessee along with manpower, i.e., drivers and/or conductors/operators. The machinery were undeniably put to use by the personnel of the assessee. Thus, nothing has been brought on record by the Department to the effect that manpower was provided along with the machinery to the assessee by plant and machinery owners. Mere providing of the machinery without any manpower cannot be termed as carrying out of any work by the plant and machinery owners, for which, any payment was made by the assessee. Therefore, when the assessee entered into a contract for the purpose of taking temporary possession of machinery from the plant and machinery owners, it did not amount to the assessee entering into any contract for carrying out any work. Once the contract was not for carrying out any work, as per CIT vs. Poompuhar Shipping Corporation Ltd., the provisions of s. 194C are not attracted;

++ from the above provisions it is clear that the said provisions are applicable when the contract is entered into (i) for carrying out any work and (ii) supply of labour to carry out any work. Therefore, the main condition prescribed in s. 194C is that there must be carrying out of any work whether tangible or intangible. In the instant case, the assessee was not under an obligation to carry out the work as it was not under the control of the lender and the possession of the machinery temporarily was passed to the assessee after entering into agreement with the lender. Therefore, in the present case, taking of the machinery and equipment on hire would not amount to a contract for carrying out any work as contemplated in s. 194C. The said contract i.e. taking of machinery and equipment on hire also cannot be treated with a contract for supply of labour. Therefore, the provisions of s. 194C were not applicable to the facts of the assessee's case, as such no disallowance was called for under s. 40(a)(ia). Furthermore, the CBDT vide Circular No. 681, dt. 8th March, 1994 vide cl. 7(iii) clarified that the provisions of s. 194C of the Act would not apply in relation to payments made for hiring or renting of equipments etc;

++ as in the present case the contract was a machinery hire contract and not a contract for carrying out any work, therefore, the provisions of s. 194C were not applicable to the facts of the present case and since the provision of s. 40(a) (ia) comes into picture only when the tax is deductible at source under Chapter XVII-B (in the present case under s. 194C of the Act). As we have already mentioned that the provisions of sec. 194C were not applicable to the facts of the present case, therefore, the AO was not justified in making the disallowance under s. 40(a)(ia) r/w s. 194C. In that view of the matter, we do not see any valid ground to interfere with the findings of the learned CIT(A) on this issue. As regards to the applicability of the provisions of s. 194-I, as invoked by the AO in the present case is concerned, it is noticed that the said provisions are applicable for the payment of rent and tax is to be deducted at source on payment of specified rent, meaning of "rent" for the purposes of this section has been mentioned in the Expln. (i) appended to s. 194-1. In the Expln. (i), the words "machinery or plant or equipment" has been added w.e.f. 13th June, 2006 by the Taxation Laws (Amendment) Act, 2006. Earlier these were not included in the definition of the "rent" for the purposes of s. 194- I . Therefore, the provisions of this section i.e. 194-1 are not applicable to the facts of the present case because the previous year relevant to the assessment year under consideration ends on 31st March 2006 while insertion of the words "machinery or plant or equipment" has been made effective from 13th July, 2006 i.e. much after the end of the previous year relevant to the assessment year under consideration. Therefore, the provisions of s. 194-1 are also not applicable to the facts of the present.

(See 2013-TIOL-290-ITAT-HYD)