TDS - Section 194C or S. 194-I analysis and interesting learning for assessee and the revenue from litigation in case of Cocacola decided by the Supreme Court.

[DEV KUMAR KOTHARI]

Tax Deduction at source

In the case before the Supreme Court, the matter concerned with TDS u/s 194C or 194-I read with section 201(1A), the controversy arose due to the fact that tax deductor deducted tax considering the payee of warehousing charges as a payment to contractor and therefore, tax was deducted u/s 194C which is at a lower rate as compared to tax deductible u/s 194I if the payment was considered as rent for warehouse, as contended by the revenue.

Revenue's contention

The revenue contended that the tax should be deducted u/s 194-I and therefore, it raised demand for shortfall in amount of TDS and also levied interest u/s 201(1A).  In due course of litigation the matter went before the Tribunal.  The Tribunal also took the view that assessee was in default in respect of the amount of the short deduction of tax and was also liable to pay interest u/s 201(1A) for such shortfall.  Against such order, the assessee preferred an appeal before the High Court and the High Court dismissed the appeal of assessee on 21^st May, 2004.

Rectification petition before the Tribunal

After dismissal of the appeal by the High Court, the assessee preferred a miscellaneous application before the Tribunal and sought rectification of order dated July 12, 2002 of the Tribunal.  In the said petition, assessee did not raise any objection or dispute about earlier order of the Tribunal that assessee was in default, which order was since confirmed by the High Court.  Assessee also did not raise any objection to the order of Tribunal holding that assessee is liable to pay interest.  However, the assessee agitated in rectification petition that the alternative plea raised by the assessee in its grounds of appeal was not considered by the Tribunal, according to alternative plea raised by the assessee, it was contended that the payee of the impugned sum (warehousing charges) has been assessed on its income and the tax due has been recovered from the payee by the revenue authorities and therefore, no further tax could have been recovered or collected from the appellant / tax deductor for the alleged short deduction due to deduction of tax u/s 194C instead of section 194-I.

Tribunal's order on rectification petition

Tribunal found merit and as a matter of fact that alternative grounds of the appellant were not considered while deciding the appeal and therefore, by disposing the miscellaneous application on 13^th September, 2004, the Tribunal considered the ground no.7 in original appeal and accordingly, held that omission to consider that ground at all, constitute a rectifiable mistake u/s 254(2) and therefore, Tribunal recalled its earlier order dated July 12, 2002 for the limited purpose of considering and deciding ground no.7 in the memorandum of appeal.  The department did not challenge this order and therefore, this  has attained its finality.

After recalling the earlier order in relation to ground no.7 and after rehearing the appeal on that ground, the Tribunal held that it was rightly held that the assessee was in default.  However, there could be no recovery of tax alleged to be in default once again from the appellant considering the fact that the payee of warehousing charges namely, Pradeep Oil Corporation had already paid taxes on the amount received from the appellant and has been assessed.  The department had also conceded before the Tribunal that the recovery could not once again be made from the tax deductor where the payee included income on which tax was alleged to have been short deducted in its taxable income and paid taxes thereon and there is no dispute whatsoever that the Pradeep Oil Corporation had already paid the taxes due on its income which he received from the appellant and had also received refund from the tax department.

The High Court's order on appeal against rectification order:

The revenue preferred an appeal before the High Court against the rectification order.  The High Court held that the original order of 12^th July, 2002 of the Tribunal has attained its finality since the appeal filed against the same by the appellant was dismissed by the High Court on 21^st May, 2004 and the point based on ground no.7 was not taken up in the original appeal preferred by the appellant in the High Court.  The High Court also held that the Tribunal's order of 12^th July, 2002 got itself merged into the order passed by the High Court on 21^st May, 2004 dismissing the appeal of the appellant / assessee against the original order of the Tribunal and therefore, High Court came to the conclusion that the Tribunal could not have reopened the matter for any further hearing for rectification of original order.

The appeal against the High Court's order

The appellant / tax deductor filed an appeal before the Supreme Court against the judgment of the High Court holding that Tribunal was not correct in reopening and passing the order of rectification on a miscellaneous application of the assessee u/s 254 (2). The Supreme Court on hearing the appeal held inter alia as follows:-

Order passed by the Tribunal to reopen the matter for further hearing as regards ground no.7 has attained its finality because the department did not challenge the order for recalling the original order to consider ground no.7 and also the order passed on ground no.7 after considering the same for the first time in rectification order.

Circular No.275/201/95-IT (B) dated January 29, 1997, issued by the Central Board of Direct Taxes should put an end to the controversy because the circular declares that no demand visualized u/s 201(1A) should be enforced if the tax deductor had satisfied the officer-in-charge of TDS that the taxes due had been paid by the deductee / payee.

However, this will not alter the liability to charge interest u/s 201(1A) till the date of payment of taxes by the deductee - assessee or the liability for penalty u/s 271C of the Act.

In this case the appellant had paid the interest u/s 201(1A) and there is no dispute that the tax due had been paid by the deductee - assessee (M/s Pradeep Oil Corporation).

It was not disputed before the Supreme Court that the circular is applicable to the facts/situations on hand.

The Tribunal came to the right conclusion that the tax once again could not be recovered from the appellant (deductor - assessee) since the tax has already been paid by the recipient of income).

The Supreme Court did not consider it necessary to go in details as to whether the Tribunal could have  opened the appeal to rectify the mistake of omission claimed by assessee /appellant as mistake  on the face of record and therefore, the Supreme Court held that we do not wish to express any  view on this aspect.

And therefore, the Supreme Court set aside the judgment of the High Court by which the High Court had held that the Tribunal was not correct in recalling its original order to decide the ground no.7, which was not considered by Tribunal while deciding the appeal originally.

Weaknesses in proceedings on part of assessee

On careful consideration of the facts and circumstances involved in the above litigation, we can learn from the weaknesses in preparation, presentation arguments as follows:-

The assessee should have immediately filed an application for rectification of the original order of the Tribunal dated 12^th July, 2002 pointing out the fact that the ground no.7 was not considered.  It was very likely that the Tribunal could have considered the same and decided the issue in favor of assessee and therefore, further litigation could have been avoided.

When the appeal was filed before the High Court against the original order, the assessee should have also taken a ground that the Appellate Tribunal was wrong in not considering at all the ground no.7 preferred by the assessee.  It is likely that in that situation the High Court would have referred the matter back to the Tribunal for consideration of the ground no.7.

Vital contentions not raised by tax deductor:

The tax deductor should have contended that section 194 I was not at all applicable because factually any property was not let-out by the warehousing company to the tax deductor. The property that is warehouse remained in control and use of the tax deductee (Pradeep) in his business of warehousing. The situation did not involve a case where warehouse was allowed to be used by the tax deductor. Therefore precondition for applicability of S. 194 I was not satisfied. In this regard the tax deductor could rely on circulars of the board issued in relation to Cinema Houses, and Hotels, in which it has been held that when there is no letting out of property, S. 194 I will not apply. Recently board has also issued circular stating that in case of Cold Storage charges S. 194 is  not applicable and tax need to be deducted u/s 194C.  See annexure containing Circulars and observations in relation to warehousing. In fact assessee was not even required to deducted tax u/s 194C because in case of warehousing there is no 'works contract', the charges are mainly for facilities of warehouse. The warehouse does not carry any work on goods stored. Material handling is incidental to storage and not carried as a 'works contract'.

TDS deducted and paid has only been allowed credit:

The tax deductor should also have contended that the revenue has allowed credit to the tax deductee only for the amount of tax deducted u/s 194C and therefore, the tax deductee was liable for payment of tax, installment of advance tax and interest for delays in payment of installments of advance tax and tax, if any after considering the amount for which the tax deductor deducted tax u/s 194 C and not on the basis of tax alleged to be deducted u/s 194 I.. Once it is found that the other party is not allowed credit for tax, which as per revenue, should have been deducted, the revenue cannot demand for short tax deduction and interest on the same. When alleged short tax deduction is not due (which is equal to principal sum), cannot be recovered, how interest can be recovered on it?

 However, it appears that the tax deductor failed to argue on this line.

Weaknesses on behalf of the revenue

The revenue did not challenge the order of Tribunal for recalling its original order to consider ground no.7. Therefore, the order of the Tribunal recalling the original order on limited issue to consider ground no.7 attained finality.

The revenue challenged the order of Tribunal deciding the ground no.7 in favor of assessee and the High Court interfered with it and the Supreme Court held that it was not permissible because the order passed to recall the original order was not challenged by the revenue.  Therefore, we learn from this order that in case, the Tribunal passes the order for recalling its original order, it should be challenged if the party concerned consider that if the relief which the Tribunal may allow after rehearing, the matter is to be challenged.

Undecided issue

The Supreme Court has not decided by an express and firm opinion, the  issue whether the Tribunal could rectify its order in a miscellaneous application made after dismissal by High Court of an appeal from the order of Tribunal. Therefore, whether the order of the Tribunal merged with the order of the High Court on all issues including such issues or grounds which were not considered by the Tribunal in original order still remain undecided.

Annexure to the article:

CIRCULAR NO. 1/2008  DATED 10-1-2008

1. Representations have been received from various quarters regarding applicability of the provisions of Section 194-I to cooling charges paid by the various customers to the owners of cold storages.  It has been represented that the cold storage owners provide a composite service, which involves preservation of essential food items including perishable goods at various temperatures suitable for specific food items for required periods and storage of goods being incidental to the activity of preservation.  The cooling of goods is controlled through mechanical process. The customer brings its packages for preservation for a required period and takes away its packages after paying cooling charges. The customer does not hire the building, plant/machinery etc. in any manner and does not become a tenant of any kind.

2. The matter has been examined.  The main function of the cold storage is to preserve perishable goods by means of a mechanical process, and storage of such goods is only incidental in nature.  The customer is also not given any right to use any demarcated space/place or the machinery of the cold store and thus does not become a tenant. Therefore, the provision of 194-I is not applicable to the cooling charges paid by the customers of the cold storage. 

3. However, since the arrangement between the customers and cold storage owners are basically contractual in nature, the provision of section 194-C will be applicable to the amounts paid as cooling charges by the customers of the cold storage. This may be brought to the notice of the Assessing Officers under your charge. 

F.No.275/59/2007-IT (B)

Circular no.  736 dated 13.02.1996 about Cinema Halls:

Representations have been received from the various quarters regarding applicability of the provisions of section 194-I of the Income-tax Act to the sharing of the proceeds of film exhibition between film distributors to a film exhibitor owning a cinema theatre. The matter has been examined by the Board and the Board are the view that the provisions of section 194-I are not attracted to such payment because:

(i) The exhibitor does not let out the cinema hall to the distributor;

(ii) Generally, the share of the exhibitor is on account of composite services; and

(iii) The distributor does not take cinema building on lease or sub-lease or tenancy or under any agreement of similar nature.

You are requested to bring these instructions to the notice of Assessing Officers under your charge.

General circular no. 718 of 22.08.1995  on S.194 I

In this circular vide answer to Question no. 3 it is stated that warehousing charges are subject to TDS u/s 194 I. The question and answer are reproduced below:

Query No. 3 : Whether the tax is to be deducted at source from warehousing charges ?

Answer : The term "rent" as defined in Explanation (i) below section 194-I means any payment by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any building or land. Therefore, warehousing charges will be subject to deduction of tax under section 194-I.

Comments and applicability of circular to warehousing charges:

Cold storage is warehousing in cool, controlled and air-conditioned atmosphere. The type of warehousing is different, but in essence it is storage of goods similar to in case of warehousing. In warehouses also goods are kept by the warehouse keeper, without letting out any portion to the customer (say tea co). The customer does not get any key for any particular store room. There is no use of space by the customer. The space is used by warehouse owner/ operator in their business of warehousing. The customer does not become a tenant, lessee or licensee of any space in the warehouse.

There is distinction between letting out of godowns and warehousing. In case of letting out of godowns/ store rooms the tenant has control over godowns / store rooms and pays rent. In case of warehousing, there is no letting out of any property.

Ware housing / storage facilities not a case of simple letting out of property:

In ware housing business  the owner and / or operator of warehouse  provides facilities to other parties to keep their goods in the  warehouse for certain period of time, charges storage charges and the agreement is governed by understanding between parties and some trade customs and practices . The salient features of the arrangement are as follows:-

(i) The owner or operator of the warehouse holds goods on behalf of others in the ware house / storage space and therefore, he is in capacity of bailee of goods stored in his warehouse age by others who are owners of such goods who are bailor of such goods. Thus the contract is a commercial contract involving bailment of goods, to be kept in ware house for certain period.

(ii) The owner of goods is a bailor of goods.

(iii) For storage certain charges are to be paid by bailor of goods to the bailee (ware house /storage).

(iv) Charges are paid as agreed.  The charges are fixed based on requirement of space and duration of holding goods in ware house.  The agreement may provide for certain minimum charges and minimum / maximum duration.

(v)  As per agreement and trade practice, the warehouse has to maintain proper environment at prescribed level of temperature and humidity, and properly maintain the space in proper condition of repair and cleanliness, safe, secure, insured etc.

(vi) No letting out - In course of arrangement for warehousing, the owners of ware house / storage do not let out any premises to the owners of goods.  The owners of goods do not have any control over the premises.  Control over the premises remains with the warehouse/ storage owner.  Therefore, the charges payable for warehousing are not in nature of rent for letting out of any property- building or land.

(vii) The charges are for providing the space, maintaining suitable atmosphere as per specifications and necessity for goods kept, safe keeping, security and handling charges etc.  In the course of this activity, the ware house may deploys labor, buildings, plant and machinery, provides electricity for lighting, material handling etc.  Therefore, the activity of ware housing / storage is a business activity and it is not a simple letting out of properties.

Thus we find that as in case of cold storage for warehousing in cool and air-conditioned atmosphere, the customer of a warehouse brings its goods / packages for storage for a required period and takes away its goods / packages after paying warehousing charges.  The customer does not hire the building, plant/machinery etc . in any manner and does not become a tenant of any kind.

Therefore, S. 194 I is not applicable in case of warehousing charges.

In view of the above discussion it is also felt that the earlier circular of the board stating that tax is required to be deducted from warehousing charges u/s 194 I needs to be modified because the precondition of letting out of property as appears from the meaning of 'rent' even at the time of issue of circular  as prescribed in the explanation to S. 194 I has not at all been examined. The said answer is thus contrary to the meaning of rent as provided in S. 194 I by way of explanation which presupposes letting out of property by owner to tenant and use of let out property by the tenant. Whereas in case of warehousing there is no case of let out of property.

From here need not be printed.

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[Hindustan Coca Cola Beverage P. Ltd. v. CIT [2007] 293 ITR 226(SC) = 2007 -TMI - 1676 - SUPREME COURT OF INDIA]

Deduction of tax at source - rent - warehousing charges - assessee deducting tax at 2 per cent. treating them as contractual payments - Assessing Officer holding that payment was rent and passing order for recovery of difference in tax and interest - payee paying full tax on warehousing charges - Appellate Tribunal - decision that assessee has only to pay interest - valid Income-tax Act, 1961, ss. 194C, 194-I, 201(1A) - Circular No.275/201/95-IT(B) dated January 29, 1997.

Appellate Tribunal - rectification of mistake - miscellaneous application that ground no decided - made after dismissal by High Court of appeal from order of Tribunal - maintainability - not decided - Income-tax Act, 1961, s. 254(2).

The assessee paid warehousing charges to Pradeep Oil deducting tax at source at 2 per cent. on the basis that they were in the nature of contractual payments.  The Assessing Officer, however, treated the warehousing charges as rent as defined in section 194-I of the Income-tax Act, 1961, and called upon the assessee to pay the shortfall and interest on the amount of tax alleged to be short deducted.  The Appellate Tribunal also took the same view and upheld the levy under section 201(1A). After the High Court had dismissed its further appeal therefrom, the assessee preferred a miscellaneous application before the Appellate Tribunal to decide the alternative contention, specifically raised as one of the grounds in the appeal, that, since Pradeep Oil had paid the tax, no further tax could be recovered from it on the same income.  The Appellate Tribunal held that there was a mistake in its earlier order and recalled it for the limited purpose of deciding the particular ground raised by the assessee.  The Department did not challenge this order of the Appellate Tribunal.  The Appellate Tribunal held that, though the assessee was rightly held to be an assessee in default, there could be no recovery of the tax alleged to be in default once again from the assessee since Pradeep Oil had already paid the tax on the amounts received from the assessee.  The High Court, on appeal, held that, after the original order attained finality, since the appeal filed therefrom had been dismissed by the High Court, the Appellate Tribunal could not have reopened the matter.  On appeal to the Supreme Court:

Held, (i) that since the Department did hot challenge the order of the Tribunal recalling its earlier order, that order attained finality and the High Court could not interfere with the final order;

(ii) without deciding the question whether 5the Appellate Tribunal could have reopened the appeal for rectifying an error apparent on the record, that in view of Circular No.275/201/95-IT(b) dated January 29, 1997, and since the assessee had paid the interest under section 201(1A) and there was no dispute that the tax due had been paid by the deductee (Pradeep Oil), he Appellate Tribunal came to the right conclusion that the tax could hot be recovered once again from the assessee.

Decision of the Delhi High Court in CIT v. Hindustan Coca Cola Beverages P. Ltd. 2006 -TMI - 13543 - (DELHI High Court) reversed on different grounds.