By TIOL News Service

NAINITAL, MAR 24, 2018: THE issue before the Bench is - Whether TDS obligation u/s 194C and not u/s 194-I arises if the assessee enters into contract for exclusive right to use a fleet of trucks for its operational convenience. YES is the verdict.

Facts of the case

The Assessee-company, engaged in the business of petroleum products, had entered into a contract for transporting of its products with a Carrier. The Assessee was deducting tax u/s 194C on the payment made by it to the Carrier under the contracts for transporting. However, the AO was of the view that the case of the Assessee falls u/s 194-I of the Act and it was obliged to deduct tax under such section. However, the view of the AO did not find favour with the first Appellate Authority, who came to the conclusion, on his understanding of the contract, that the tax must be deductible u/s 194C and not u/s 194-I. The decision of the first Appellate Authority had found favour with the Tribunal.

After hearing the parties, the High Court held that,

++ the modern transportation contracts are fairly complex having regard to various requirements, which fall to be fulfilled by the contracting parties. Here, the goods to be transported are petroleum products. The petroleum products are subject to severe control under various laws both having regard to the nature of the product (being highly inflammable), and imperative necessity for keeping up the even tempo of the nation and it is, therefore, that quite clearly the Company has set various conditions on the transporters. In fact, contract appears to us to be a standard contract and the transporters would necessarily have to fall in line. May be they have to sign on the dotted line and the restrictions, which are put therein, are only to be understood in the said vein;

++ the Assessing Officer uses the words “work contract” and he would reason that the Company could have asked the Carrier to provide a fixed quantity of products from one point to another against fixed charges payable to him. This amounts to asking the wrong question and there is reference to identification of particular trucks and he reasons, therefore, that only identified trucks are engaged and therefore, it is established that the Carrier was to provide only those trucks and this becomes part of hiring. The fact that such trucks are to be identified and they alone are to be used cannot detract from there being a contract of transporting the goods. The contract indeed contemplates that certain trucks should conform to certain standards. It has to conform with various laws; the trucks which are to be used by the contractor have apparently been appropriated to the contract. This is apparently to ensure that the Company is assured that loading and unloading of the materials is accomplished as decided by it in keeping with the policy which such Companies have, particularly, having regard to the nature of the product, namely, petroleum product;

++ the Carrier is not paid any idle charges. The Carrier is only paid for actual work of transporting done and the basis for payment is also expressly provided in the contracts. Therefore, the fact that it is specifically identified Trucks cannot detract from the Contract from being one which is best dealt with under Section 194-C of the Act. There is reference to the Trucks being painted, parcels and particular specific colour code, band, logos and advertisement of specified brand name. The fact that in keeping with the contract, the painting of the Trucks as specified and various other logos, advertisements as provided therein would not detract from it being a contract of work, which in its amplified definition of the word ‘work’ takes within it a contract for transportation of the goods.

++ it is not in dispute that the entire operations are done by the Carrier in terms of the contract. He employs the drivers and other personnel; he pays them. He is responsible in respect of the vehicles. All risks are to be undertaken by the Carrier. He only transports them subject to the restriction that he will not use it for any other purposes during the period of the agreement. By the fact that he exclusively uses it for transporting the goods belonging to the Company, one cannot draw the inference that this is a case, which involves the use of the vehicles as such by the Company. Here, one may contrast with the situation where the vehicles are made available by the owner or the person in possession to a Company like the assessee and it passes to its exclusive control and it employs its own employees and maintains it while it is in exclusive possession and does the act of transporting of its products. While this is certainly legally permissible, this is not the situation, which arises in these cases. On the other hand, it is a case, where it is the Carrier, who carries out the transportation work as found by the First Appellate Authority - the finding, which is found affirmed by the decision of dismissal of the Appeals by the Tribunal.

++ the reference to Clause 4(a) to 4(d), namely, that the Trucks will be made available at all time during the agreement at the loading stations would not take it out from the purview of transporting contract. The age of the Truck and the other clauses referred to and all conditions, which the parties have, are to ensure that the assessee’s interest is best protected and it does not detract from it being a Contract for transporting. Clauses 5(a) to (e), under which the contract Carrier is bound to make payments to its employees have been brushed aside, and due importance has not been given to these clauses in the context of the Contracts in question. Coming to Clause 6, the Court notice that the Assessing Officer refers to the billing cycle and comes to the conclusion that there is an agreement for hiring. He reasons that in a work contract, such type of clause could not have been included, which otherwise would have been in plain text mentioning therein that a minimum of such amount will be paid for transporting a particular quantity of product from a particular location to another within a time frame. This understanding of the payment mechanism evolved by the parties in the Contract betrays lack of understanding of the nature of the rights of the contracting parties to evolve suitable payment mechanism, which is acceptable to both the parties. One thing is clear, what is paid to the assessee is transport charges. The methodology for payment is self evident from the perusal of Clause 6 of the contract. The payment mechanism itself is premised on the rationale that the Carrier will get paid for the shortest route for carrying the goods at the rates, which have been indicated in the contract.

++ it is a clear case of Contract of transport. In fact, the Court notice that the Assessing Officer has not referred to Clause 6(g), which, in fact, would detract against the Contract being one of use of the vehicles by the Company as the Assessing Officer has proceeded on the erroneous basis that irrespective of work done by the Carrier, it will get paid, which is not the case. The Assessing Officer has, in fact, not referred to Clause 8. It reveals that the Carrier is responsible for loading and discharging of the tank trucks. No doubt, the instructions of the Company with regards to the sale is binding on the Carrier. This clause for the reason that it is unlike the situation prevailing in the facts, which were considered by the Kerala High Court in the case of Central Board of Direct Taxes vs. Cochin Goods Transport Association. Before the Kerala High Court, it was simply a case of transporting and there was no loading and unloading. Therefore, the case of the assessee was that it would not fall under Section 194-C. This argument was repelled. That is to say even an ordinary contract for transport would suffice to bring it within the purview of Section 194-C. In this case, the contract itself provides that the Carrier is saddled with the liability to do the loading and discharging of the tank trucks. Therefore, it goes a step further where it undertakes also to carry out the loading and the unloading of the products, be it from the loading center or the point of delivery.

++ it is mentioned that the Carrier shall not be entitled to assign, subrogate, sublet or part with its right title and interest under the Agreement for any reason whatsoever or change the ownership of / their right on the tank trucks. According to the officer, it shows that it was only deputed to the services of the company within the period and there was no right to change ownership of the tank trucks during the period of the agreement. This is only an additional restriction, which has been put on the Carrier, who is a transporter to ensure that there is no disruption for the reasons which are relevant to Clause 13 in transporting and the supply of the petroleum product, which is an essential commodity. This again, would not transform what is a contract for transporting goods into one for use. The reference to Clause 13( b) relating to prohibition of change in the constitution of the firm without previous consent has been overemphasized and given importance that it does not deserve.

++ the fixed period of two years under Clause 15 again will not detract it from being a Contract for transport. The Assessing Officer may be correct in reasoning that it is the responsibility of the operator to act as per the needs of the Assessee Company, who can change the location of the operator, and the Company has also reserved the right to use the tank trucks on their return trip based on company’s own operational convenience. None of these aspects would have anything to do with the question as to whether what is involved is a contract for transportation of the goods or whether it is a contract for use of the goods. The conditions like maintaining the tank trucks in sound mechanical condition and having all the fittings up to the standards laid down by the Company from time to time would not make it a contract for use. Where the Carrier under the contract was undoubtedly obliged to maintain the requisite number of trucks of a particular type subject to various restrictions and conditions, but it was under the obligation to operate the Trucks for the purpose of transporting the goods belonging to the Company. Therefore, the Court would think that use of the words “exclusive right to use the truck” found in Clause 1 and also in Clause 6(e) may not by itself be decisive of the matter.

(See 2018-TIOL-513-HC-UKHAND-IT)