Himachal Pradesh H.C : The payments made by the assessee i.e. H.P. Bus Stand Management Development Authority, Bus Stand, Shimla to HRTC are not liable for deduction of tax at source as per provisions of Chapter XVII

High Court Of Himachal Pradesh

Pr.CIT vs. H.P. Bus Stand Management & Development Authority

Section 194J

Sanjay Karol, Actg, CJ, And Ajay Mohan Goel, J.

IT Appeal Nos. 26 To 29 Of 2015

September 11, 2017


Sanjay Karol, Actg, CJ – All the appeals stand admitted on following substantial questions of law:

(i) Whether the Hon’ble ITAT has erred in law in holding that the payments made by the assessee i.e. H.P. Bus Stand Management Development Authority, Bus Stand, Shimla to HRTC are not liable for deduction of tax at source as per provisions of Chapter XVII of the I.T. Act, 1961?

(ii) Whether the Hon’ble ITAT has erred in upholding the order of ld. CIT(A) deleting the addition made by AO u/s 40(a)(ia) of the I.T. Act, 1961, especially in view of the judgment of the Hon’ble Punjab & Haryana High Court in the case of P.M.S. Diesel v. CIT [2015] 374 ITR 562/59 taxmann.com 100?

2. The sole issue which arises for consideration is as to whether arrangement arrived at inter se M/s. Himachal Pradesh Bus Stand Management Development Authority (hereinafter referred to as the Development Authority) and Himachal Pradesh Road Transport Corporation (hereinafter referred to as HRTC), can be said to be in the nature of latter providing professional or technical services to the former? Incidentally, what is argued is also that reimbursement of expenditure incurred by the latter would not attract the provisions of Section 194J of the Income Tax Act, 1961 (hereinafter referred to as the Act).

3. Section 194J of the Act provides that any person, not being an individual or Hindu Undivided Family, who is responsible for paying to a resident any sum by way of fees inter alia for professional/technical services shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof, by whatever mode, deduct an amount equal to 10% of the said sum as income tax on income comprised therein. The section does provide for certain explanations with which we are not concerned. Noticeably, the said section itself explains/defines as to what is the meaning of expression “professional services and fees for technical services”.

4. Professional services have been explained to mean services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or such other profession as is notified by the Board for the purposes of Section 44AA of Section 194J of the Act. Explanation 2 to clause (vii) of sub section (1) of Section 9 has been stated to mean the explanation for “fees for technical services”. Now when one examine the said clause, one finds “fees for technical services” to mean any consideration for rendering any managerial, technical or consultancy services, not to include consideration for any construction, assembly, mining or like projects undertaken by the recipient or consideration which would be income of the recipient chargeable under the head ‘Salaries’.

5. It is in this backdrop, we proceed to examine the factual matrix.

6. The Development Authority, an entity established for development and management of bus stands within the State of Himachal Pradesh, was established w.e.f. 01.04.2000. Prior thereto, such work was being carried out by HRTC itself. Since the development authority had no independent establishment and infrastructure of its own to carry out the objects, a decision was taken to have the same executed through the employees of HRTC. This arrangement was to continue till such time the development authority developed its own infrastructure. Since ongoing projects were required to be executed, which was so done in public interest, as per the arrangement arrived at, certain payments were released by the development authority in favour of HRTC. The expenditure was to be shared by way of reimbursement.

7. It is a matter of record that the authority did not deduct any amount in terms of section 194J of the Act.

8. Since the development authority had not deducted the amount of TDS with respect to the amount paid to HRTC, assessment proceedings were initiated and the Assistant Commissioner, Income Tax vide order dated 12.03.2013 (Annexure P-1) computed the income of the assessee by adding the amount paid to HRTC, as a taxable income of the assessee.

9. Aggrieved of the same, the development authority preferred an appeal which was allowed by the Commissioner of Income Tax (Appeals) vide order dated 30.06.2014 (Annexure P-2) in the following terms:

‘5. I have considered the submissions of the appellant and carefully gone through the case history and jurisdictional ITAT order relied upon by the assessee. The Hon’ble ITAT, Chandigarh Bench ‘A’ while deciding the issue of applicability of provisions of section 194j of the Act, in ITA No. 761, 762, 763 & 764/Chd.2012 for the assessment years 2009-10- to 2012-13 vide order dated 31/12/2013, on page 4 to 6 vide para 13 have allowed the appeal of the assessee. The relevant and effective part of the Tribunal’s order is reproduced hereunder:—

“After considering the rival submissions, we find that the assessee authority ………………………..

From the above, it becomes clear that the authority had some full time staff for which it was paying itself. Help of the HRTC was taken in the forum of staff and certain other facilities at pre-defined percentage of salary was reimbursed e.g. salaries of various Divisional Mangers/Regional Managers was to be reimbursed @10%. Similarly in case of Junior Engineer 50% of salary was to be reimbursed. Therefore, the assessee authority was basically not having infrastructure and taking help of HRTC and was reimbursing the expenditure to the HRTC. The provisions of TDS i.e. Section 194j are not applicable if it’s only a case of reimbursement of expenditure. The reason for the same is very clear. For example if HRTC is giving salary to its Divisional Manger, it will deduct full tax and pay the same accordingly. If the assessee authority deduct the tax on account of salary to Divisional Manger then that would amount to double deduction of taxes of the salary of Divisional Manger which is not possible. The assessee is not paying lump sum charges to the HRTC which can be construed as service charge. It is only reimbursement of pre- determined rates…………………

Therefore, we are of the opinion that no tax was required to be deducted u/s 194j. Accordingly, we set aside the order of the ld. CIT (A) and hold that no tax is deducible by the assessee authority.”

5.1 Respectfully following the decision of the Hon’ble ITAT in the assessee’s own case (supra) and in order to keep up judicial consistency the addition made by the A.O. is not sustainable and the same is ordered to be deleted. The appellant succeeds on this ground of appeal for the assessment years 2009-10, 2010-11 & 2011-12.’

10. The aforesaid view stands affirmed by the Income Tax Appellate Tribunal vide order dated 20.11.2014 (Annexure PA) in an appeal preferred by the revenue.

11. It is a matter of record that in an appeal assailing the order passed in proceedings pertaining to TDS, this Court disposed of the same purely on the issue of low tax effect (IT Appeal No.25 of 2014 titled as CIT v. H. P. Bus Stand Management & Development Authority alongwith connected matters, decided on 21-9-2016).

12. Hence, in effect this Court is called upon to adjudicate the correctness of findings of the Commissioner, reproduced supra, as affirmed by the Tribunal, in deciding the appeal preferred by the assessee.

13. The arrangement inter se the development authority and HRTC was clear and simple. It was by way of a stop gap arrangement. Till such time the authority developed its infrastructure and recruited the staff, the work of development and management was required to be carried out by HRTC. Hence, employees of HRTC were called upon to continue to discharge such duties. It is in this backdrop, two entities decided to share their resources by arriving at an arrangement, whereby salaries of certain staff and other expenditure incurred by HRTC was to be shared proportionately.

14. Such an arrangement arrived at between two entities cannot be said to be that of rendering professional services. No legal, medical, engineering, architectural consultancy, technical consultancy, accountancy, nature of interior decoration or development was to be rendered by HRTC.

Similarly, no service, which can be termed to be technical service, was provided by HRTC to the development authority, so also no managerial, technical or consultancy services were provided. The arrangement was purely simple. The staff of HRTC was to carry out the work of development and management of the development authority till such time, the said authority developed its infrastructure and the expenditure so incurred by HRTC was to be apportioned on the agreed terms. It is only pursuant to such arrangement, the development authority disbursed the payment to HRTC and, as such, in our considered view, no amount of TDS was required to be deducted on the same. It is only a reimbursement of an expense so incurred by HRTC.

15. In this regard, our attention is also invited to the decision rendered by a Two Judge Bench of High Court of Delhi at New Delhi in ITA No.627/2012 & ITA No.507/2013 on 15.07.2015 titled as CIT v. DLF Commercial Project Corpn., relevant portion of which reads as under:—

’18. The assessee has correctly relied upon this Courts ruling in Industrial Engineering Projects Pvt. Ltd., (supra). A Division Bench of this Court in that case specifically held that “reimbursement of expenses can, under no circumstances, be regarded as revenue receipt” and therefore, it is not liable to income tax. The Court relied upon the Supreme Courts decision in CIT v. Tejaji Farasram Kharawalla Ltd. [1968] 67 ITR 95, where the Court had held that it is only the amount that exceeds the expenditure incurred by the agent that would be liable to tax. More recently, this Court in Fortis Health Care Ltd.(supra) has also held that amount received towards reimbursement of expenses is not taxable under the Act.

19. In the instant case, it is undisputed that M/s DLF Land Ltd. had deducted TDS on the payments made by it under various heads on behalf of the assessee. Further, it is also not disputed that the assessee deducted TDS on the service charge paid by it to M/s DLF Land Ltd. on the reimbursement expenses. In such circumstances, this Court holds that the entire amount paid by the assessee to M/s DLF Land Ltd. is entitled to deduction as expenditure.

20. In arriving at the aforesaid conclusion, this Court derives support from the Gujarat High Courts decision in CIT v. Gujarat Narmada Valley Fertilizers Co. Ltd. [Tax Appeal No. 315 of 2013, dated 25-6-2013], where the facts were similar to those in the present case. The Court therein rejected the revenues contention that non- deduction of TDS on reimbursement expenses would lead to disallowance of such reimbursement expenditure. The Court noted that the payee therein had already deducted tax on the various payments made by it to third parties (such as towards transport charges and other charges). Since the payments made by the assessee therein were only for the reimbursement of expenses incurred by the payee on behalf of the assessee, the Court held that no TDS was required to be deducted by the assessee. A special leave petition preferred by the revenue against the High Courts decision was dismissed by the Supreme Court on 17.1.2014 (in SLC CC No. 175 of 2014). This Court is also supported in its reasoning by the text of Section 194C (TDS for “work”) and Section 194J (TDS of income from “professional services”- the latter expression defined expansively by Section 194J(3) Explanation (a). Neither provision obliges the person making the payment to deduct anything from contractual payments such as those made for reimbursement of ITA Nos. 627/2012 & 507/2013 Page 11 expenses, other than what is defined as “income’. The law thus obliges only amounts which fulfill the character of “income” to be subject to TDS in such cases; for other payments towards expenses, the deduction to those entitled (to be made by the payee) the obligation to carry out TDS is upon the recipient or payee of the amounts.’

16. Hence, substantial questions of law are answered accordingly. All the appeals stand disposed of.

[Citation : 400 ITR 451]