The DCIT Circle 3(1), Hyderabad v. M/s. Rithwik Swati Joint Venture, Hyderabad

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B' HYDERABAD BEFORE SHRI G.C. GUPTA VICE PRESIDENT AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER I.T.A. NO. 719/HYD/2010 (ASSESSMENT YEAR 2006-07) DCIT CIRCLE 3(1) HYDERABAD VS. M/S. RITHWIK SWATI JOINT VENTURE HYDERABAD PAN: AAAAR2384K APPELLANT RESPONDENT APPELLANT BY: SMT. K. KAMAKSHI RESPONDENT BY: SHRI P. MURALIMOHAN RAO O R D E R PER CHANDRA POOJARI AM: THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE CIT(A) TIRUPATI DATED 15.2.2010. 2. THE GROUND OF APPEAL RAISED BY THE REVENUE READS AS UNDER: THE CIT(A) ERRED IN HOLDING THAT M/S. RITHWIK SWATHI JOINT VENTURE IS NOT OBLIGATED TO EFFECT TDS ON INTEREST PAYMENT MADE TO M/S. PCL IN SPITE OF THE FACT THAT SUCH EXPENDITURE IS DEBITED TO ITS P& L A/C. THIS IS CONTRAVENTIONS TO PROVISIONS U/S. 194 A OF THE ACT. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A SUB- CONTRACTOR AND ENTERED INTO AN AGREEMENT WITH ANOTH ER COMPANY VIZ. M/S. PCL-INTERTECH LENHYDRO CONSORTIUM JOINT VENTURE ON 16.11.2002 IN CONNECTION WITH EXECUTION OF CIVIL WO RKS OF A DAM SPILLWAY AND POWER HOUSE AT KOTESHWAR AS A SUB CONT RACTOR. IT IS A BACK TO BACK CONTRACT WHEREIN ASSESSEE COMPANY AGREED TO I.T.A. NO. 719/HYD/2010 M/S. RITHWIK SWATI JOINT VENTURE ========================= 2 EXECUTE @ 92.96% OF THE RATES APPROVED BY TEHRI HYD RO DEVELOPMENT CORPORATION LTD. (THDC) EMPLOYER OF TH E HYDRO ELECTRIC PROJECT. ORIGINALLY THDC ASSIGNED THE CONT RACT OF CONSTRUCTION OF CIVIL WORKS OF DAM SPILLWAY AND PO WERHOUSE AT KOTESHWAR TO M/S. PCL-INTERTECH LENHYDRO CONSORTIUM JOINT VENTURE BY AN AGREEMENT DATED 14.11.2002. LATER TH E WORK WAS GIVEN TO THE ASSESSEE COMPANY ON SUBCONTRACT BASIS. AS PER THE TERMS OF AGREEMENT BETWEEN THE ASSESSEE COMPANY AND M/S. PCL-INTERTECH LENHYDRO CONSORTIUM JOINT VENTUR E CLAIMS RECEIVED FROM THDC WILL BE CREDITED TO THE ASSESSEE COMPANY AFTER DEDUCTING 5% OF NET AMOUNT AND THIS 5% WILL B E CREDITED TO THE MAIN CONTRACTOR BY THE ASSESSEE AND ACCORDINGLY THE CREDIT FOR TDS @ 2.04% WILL BE DEDUCTED BY THDC BUT THE CR EDIT GOES TO M/S. PCL-INTERTECH LENHYDRO CONSORTIUM JOINT VEN TURE. LATER ON SOMEHOW THE CONTRACT WAS CANCELLED AND TH E ASSESSEE COMPANY ENTERED INTO ANOTHER AGREEMENT WIT H M/S. PROGRESSIVE CONSTRUCTIONS LTD. ONE OF THE MEMBERS OF JOINT VENTURE AFOREMENTIONED. THE ASSESSEE COMPANY HAS NOT PRODUCED COPY OF AGREEMENT ENTERED WITH M/S. PCL-IN TERTECH LENHYDRO CONSORTIUM JOINT VENTURE. M/S. PROGRESSIV E CONSTRUCTION LTD. REDUCES 0.5% AS A MARGIN FROM NET PROCEEDS RECEIVED FROM M/S. PCL-INTERTECH LENHYDRO CONSORTIU M JOINT VENTURE AND THE BALANCE AMOUNT IS PASSED ON TO THE ASSESSEE COMPANY. TDS CERTIFICATE FILED WITH RETURN OF INCO ME SHOWS THAT I.T.A. NO. 719/HYD/2010 M/S. RITHWIK SWATI JOINT VENTURE ========================= 3 CONTRACT CHARGES ARE RECEIVED FROM M/S. PROGRESSIVE CONSTRUCTION LTD. 4. ON VERIFICATION OF PROFIT & LOSS A/C. OF THE ASS ESSEE COMPANY FOR A.Y. 2006-07 IT WAS FOUND THAT AN AMOU NT OF RS.1 15 52 282 WAS PAID TOWARDS INTEREST ON MOBILIS ATION ADVANCE ON WHICH TDS WAS NOT DEDUCTED AS PER PROVIS IONS OF SECTION 194A OF THE INCOME-TAX ACT 1961. THE ASSE SSEE WAS ASKED TO EXPLAIN AS TO WHY THE TOTAL INTEREST PAID AT RS.1 15 52 282 CANNOT BE DISALLOWED U/S. 40(A)(IA) AS THE ASSESSEE COMPANY FAILED TO DEDUCT TAX ON THE INTERE ST. SECTION 40(A)(IA) CALLS FOR DISALLOWANCE OF TOTAL PAYMENT T OWARDS INTEREST COMMISSION BROKERAGE CONTRACT CHARGES AND FEES FO R TECHNICAL SERVICES WHICH ARE LIABLE TO TDS IF TDS AMOUNT IS N OT AT ALL MADE OR TDS IS MADE BUT REMITTED BEYOND DUE DATE ME NTIONED UNDER SECTION 200(1) OF THE ACT. IN REPLY THE ASSE SSEE COMPANY STATED AS UNDER: 'DURING THE YEAR WE HAVE DEBITED TO PROFIT & LOSS A/C. TOWARDS INTEREST ON MOBILISATION ADVANCE TO THDC RS.1 15 52 282. THE EXPENDITURE WAS DEDUCTIBLE FROM RA BILL BY FINANCE DEPARTMENT OF THDC WHICH IS A GOVERNMENT OF INDIA ORGANISATION (A JOINT VENTURE OF GOVERNMENT OF INDIA AND GOVERNMENT OF UTTAR PRADESH). THE DEDUCTION TDS IN THIS CASE IS NOT APPLICABLE FOR THE ASSESSMENT YEAR 2006-07. HENCE THERE IS NO QUESTION OF DEDUCTION OF TDS ON THE SAME. THE THDC DEPARTMENT ITSELF DEDUCTED THE INTEREST AND OTHER RECOVERIES AND PAID THE BALANCE AMOUNT. THE MOBILISATION ADVANCE IS RELEASED AND INTEREST RECOVERED BY THDC EVEN THOUGH WE ARE SUBCONTRACTORS TO THDC/PCL.' I.T.A. NO. 719/HYD/2010 M/S. RITHWIK SWATI JOINT VENTURE ========================= 4 5. ACCORDING TO THE ASSESSING OFFICER ASSESSEE IS A COMPANY WHICH IS NOT EXEMPTED BY SECTION 194A FROM DEDUCTION OF INCOME-TAX AT SOURCE WHILE MAKING PAYMENT OF INT EREST. THE ASSESSING OFFICER DID NOT ACCEPT THE ARGUMENT THAT THDC ITSELF DEDUCTED THE INTEREST AND PAID ONLY BALANCE AMOUNT HENCE QUESTION OF TDS DO NOT ARISE. THE ASSESSING OFFICE R OBSERVED THAT AT THE END OF EVERY MONTH THDC EMPLOYER OF PR OJECT RELEASES RA BILL IN THE NAME OF M/S. PCL-INTERTECH LENHYDRO CONSORTIUM JOINT VENTURE CONTRACTOR AFTER MAKING D EDUCTIONS TOWARDS EQUIPMENT ADVANCE MOBILISATION ADVANCE TD S ON CONTRACT CHARGES SECURITY DEPOSIT INTEREST ON ADV ANCE SALES TAX ETC. A CHEQUE IS ISSUED BY THE THDC TO M/S. PC L-INTERTECH LENHYDRO CONSORTIUM JOINT VENTURE WHICH WAS CREDITE D TO THEIR ACCOUNT. THE CONTRACTOR COMPANY - M/S. PCL-INTERTE CH LENHYDRO CONSORTIUM JOINT VENTURE MAKES DEDUCTION O F 5% MARGIN AND BALANCE IS REMITTED TO M/S. PROGRESSIVE CONSTRUCTION LTD. ONE OF THE MEMBERS OF JOINT VENTURE. M/S. PRO GRESSIVE CONSTRUCTION LTD. IN TURN REDUCED 0.5% MARGIN AND M OBILISATION ADVANCES @ 2.5% AND BALANCE IS REMITTED TO ASSESSEE COMPANY. 6. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AR OF THE ASSESSEE FILED A COPY OF CIRCULAR NOTIFICATION NO. SO 3489 DATED 22.10.1970 AND ARGUED THAT AS PER THIS NOTIFI CATION INCOME TAX IS NOT DEDUCTIBLE ON INTEREST PAID TO ANY COMPA NY IN WHICH ALL I.T.A. NO. 719/HYD/2010 M/S. RITHWIK SWATI JOINT VENTURE ========================= 5 THE SHARES ARE HELD BY THE GOVERNMENT. THEREFORE TAX IS NOT DEDUCTIBLE ON INTEREST PAID TO THDC WHICH IS JOINT VENTURE OF CENTRAL GOVERNMENT AND GOVERNMENT OF UP. ORIGINALL Y MOBILISATION ADVANCE WAS RELEASED BY THDC EMPLOYER OF PROJECT TO M/S. PCL-INTERTECH LENHYDRO CONSORTIUM J OINT VENTURE BUT NOT TO ASSESSEE COMPANY. THAT IS WHY THDC IS RECOVERING MOBILISATION ADVANCE AT A PARTICULAR PER CENTAGE INTEREST ON MOBILISATION ADVANCE FROM GROSS AMOUNT PAYABLE TO M/S. PCL-INTERTECH LENHYDRO CONSORTIUM JOINT VENTUR E WHILE MAKING PAYMENT AT THE END OF EVERY MONTH. MOBILISA TION ADVANCE RECEIVED FROM THDC WAS IN TURN RELEASED BY M/S. PCL- INTERTECH LENHYDRO CONSORTIUM JOINT VENTURE AND M/S . PROGRESSIVE CONSTRUCTION LTD. TO SE COMPANY. THERE FORE IT CAN BE SEEN FROM THE GROSS BILL STATEMENT PREPARED BY A SSESSEE COMPANY FOR FINANCIAL YEAR 2005-06 THAT M/S. PROGRE SSIVE CONSTRUCTION LTD. DEDUCTS INTEREST ON MOBILISATION ADVANCE WHILE MAKING PAYMENT TO ASSESSEE COMPANY. 7. THE ASSESSING OFFICER OBSERVED THAT THE 'NOTES T O ACCOUNTS' FILED ALONG WITH RETURN OF INCOME CONFIRM S THIS FACT. IT WAS MENTIONED THERE THAT MOBILISATION ADVANCE WAS R ECEIVED FROM PRINCIPAL CONTRACTORS I.E. M/S. PCL-INTERTECH LENHYDRO CONSORTIUM JOINT VENTURE AND M/S. PROGRESSIVE CONST RUCTION LTD. INTEREST ON MOBILISATION ADVANCE IS TO BE PAI D BY THE ASSESSEE COMPANY TO THE CONTRACTOR I.E. M/S. PROGR ESSIVE I.T.A. NO. 719/HYD/2010 M/S. RITHWIK SWATI JOINT VENTURE ========================= 6 CONSTRUCTION LTD. WHICH IN TURN IS PAYABLE TO THDC. THEREFORE IT IS CLEAR THAT THE COMPANY IS MAKING INTEREST PAY MENT TO ANOTHER COMPANY DUE TO WHICH THIS TRANSACTION ATTRA CTS PROVISIONS OF SECTION 194A OF THE ACT. THEREFORE SUBMISSIONS OF ASSESSEE THAT TAX IS NOT DEDUCTIBLE AT SOURCE ON IN TEREST PAID ON MOBILISATION ADVANCE TO M/S. PCL-INTERTECH LENHYDRO CONSORTIUM JOINT VENTURE. THIS ARGUMENT WAS NOT AC CEPTED BY THE ASSESSING OFFICER AND ACCORDINGLY HE DISALLOWED AN AMOUNT OF RS.1 15 52 282 PAID BY THE ASSESSEE COMPANY TOWA RDS INTEREST ON MOBILISATION ADVANCE U/S. 40(A)(IA) OF THE ACT. 8. ON APPEAL THE CIT(A) HELD THAT SINCE THE ASSESS EE HAS NOT MADE THE PAYMENT TOWARDS MOBILISATION INTEREST AND IT HAS BEEN DEDUCTED BY THE PRINCIPAL THDC WHILE MAKING PAYMENT TOWARDS RUNNING BILL A/C. AND SINCE THE THDC BEING A JOINT VENTURE OF GOVERNMENT OF INDIA AND GOVERNMENT OF UT TTAR PRADESH AS PER CIRCULAR OF CBDT IT IS NOT REQUIRE D TO DEDUCT TDS. AGGRIEVED THE REVENUE IS IN APPEAL BEFORE US . 9. WE HAVE HEARD BOTH THE PARTIES AND ALSO PERUSED THE MATERIAL ON RECORD. IT IS AN ADMITTED FACT THAT TH DC IS A JOINT VENTURE OF GOVERNMENT OF INDIA AND GOVERNMENT OF UP . THE THDC ITSELF DEDUCTED THE INTEREST AND OTHER RECOVER IES OUT OF THE RA BILL AND PAID THE BALANCE AMOUNT TO THE ASSESSEE . THIS FACT HAS BEEN ADMITTED BY THE THDC VIDE THEIR LETTER DAT ED 14.12.2007 WHICH READS AS FOLLOWS: I.T.A. NO. 719/HYD/2010 M/S. RITHWIK SWATI JOINT VENTURE ========================= 7 'TEHRI HYDRO DEVELOPMENT CORPORATION (A JOINT VENTURE OF GOVT. OF INDIA & GOVT. OF U.P.) KOTESHWAR HYDRO ELECTRIC PROJECT KOTESHWAR TEHRI GARHWAL (UTTARANCHAL) PIN: 249 001 NO. 719/CPO/D&PH/THDC/KHEP/DL/ DT. 14/15/12/2007 TO WHOM SO EVER IT MAY CONCERN IT IS CERTIFIED THAT WE (M/S. THDC LTD.) ARE DEBITING THE ACCOUNT OF M/S. RITHWIK SWATHI JOINT VENTURE REGULARLY AT THE END OF EVERY F.Y. AGAINST INTEREST ON MOBILISATION ADVANCE TAKEN BY THEM AND RECOVERING THE SAME BY WAY OF DEDUCTION FROM WORKS BILLS COMMENCING FROM F.Y. 2002-03. FURTHER SINCE THDC IS A PUBLIC SECTOR UNDERTAKING (A COMPANY IN WHICH ALL THE SHARES HELD BY GOVERNMENT OF INDIA & GOVERNMENT OF U.P.) SO NO TAX ON INTEREST IS DEDUCTIBLE AS PER CIRCULAR/NOTIFICATION. DUE TO THE ABOVE MATTER WE ARE DEDUCTING FULL INTEREST FROM GROSS AND ESCALATION BILLS OF M/ S. RITHWIK SWATHI JOINT VENTURE HYDERABAD. SD/- (D.V. SINGH) CHIEF PROJECT OFFICER DAM & POWER HOUSE KHEP KOTESHWAR' 10. HENCE NO PAYMENT HAS GONE OUT OF THE ASSESSEE COMPANY AND THDC ITSELF DEDUCTED THE AMOUNT TOWARDS THE INTEREST. IT IS BEING A JOINT VENTURE OF GOVERNMEN T OF INDIA AND GOVERNMENT OF U.P. IN OUR OPINION THERE IS NO QUE STION OF DEDUCTING THE TDS ON THE IMPUGNED INTEREST AMOUNT. IT IS ALSO A FACT THAT THDC FALLS UNDER THE PURVIEW OF SECTION 1 94A(3)(III)(F) OF THE INCOME-TAX ACT 1961 AND AS SUCH IT IS NOT L IABLE FOR I.T.A. NO. 719/HYD/2010 M/S. RITHWIK SWATI JOINT VENTURE ========================= 8 DEDUCTING TDS. IN OUR OPINION THE CIT(A) HAS TAKE N A CORRECT VIEW ON THE DEDUCTION OF TDS. WE DO NOT FIND ANY I NFIRMITY IN THE ORDER OF THE CIT(A) AND THE SAME IS CONFIRMED. 11. IN THE RESULT THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH FEBRUARY 2011. SD/ - (G.C. GUPTA) VICE PRESIDENT SD/ - (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD DATED 18 TH FEBRUARY 2011 TPRAO COPY FORWARDED TO: 1. THE DY. CIT CIRCLE 3(1) O/O. THE DY. CIT CIRC LE 3(1) 7TH FLOOR B-BLOCK I.T. TOWERS HYDERABAD. 2. M/S. RITHWIK SWATI JOINT VENTURE PLOT NO. 1295 ROAD NO. 63 JUBILEE HILLS HYDERABAD. 3. THE CIT(A) TIRUPATI. 4 THE CIT-3 HYDERABAD 5. THE DR B BENCH ITAT HYDERABAD