2015 (8) TMI 1079 - AT - Income Tax

Disallowance u/s.40(a)(ia)- payment towards commission on which the assessee failed to comply with the provisions of Sec.194H - CIT(A) deleted disallowance - Held that - As can be seen from the facts on record the assessee has executed the work as a sub-contractor to the main contractor M/s.G.Venkata Reddy and Co. who was awarded the work by the principal. Main contractor has handed over the work to the assessee on back to back basis and payments towards execution of work was received by the main contractor from the Government directly and after retaining his margin of 4% the balance amount is remitted to the assessee. Therefore the 4% margin retained by the main contractor cannot be said to be in the nature of commission but the margin/profit retained by the main contractor for having subcontracted work to the assessee. It is also established on record that the assessee never makes any payment to the main contractor. On the contrary the main contractor makes the payment to the assessee after receiving the payments from the Government. Therefore as there is no payment by the assessee to the main contractor only because the assessee has debited the amount to its P&L A/c it cannot be inferred that commission to that extent was paid by the assessee to the main contractor thereby attracting the provisions of section 194H. In the aforesaid facts and circumstances we are of the view that Ld. CIT(Appeals) was justified in deleting the addition made by the Assessing Officer - Decided in favour of assessee.

Summary

Issues:
1. Disallowance under section 40(a)(ia) for non-compliance with Sec.194H regarding commission payment.

Analysis:
The case involved an appeal by the department against an order related to the Assessment Year 2006-07. The main issue was whether the assessee, a partnership firm engaged in transport and civil contracts, was liable for disallowance under section 40(a)(ia) for not complying with Sec.194H regarding commission payments. The Assessing Officer contended that the assessee, acting as a sub-contractor, paid a sum to the main contractor for a sub-contract but failed to deduct tax at source. The Assessing Officer argued that a principal-agent relationship existed, making the assessee liable for TDS under Sec.194H. However, the assessee maintained that no payment was made to the main contractor directly as the main contractor received payments from the Government and then remitted the balance amount to the assessee after deductions. The Ld. CIT(Appeals) deleted the disallowance, emphasizing that the commission mentioned in the agreement was not for services rendered by the main contractor but was a margin retained by the main contractor for subcontracting work to the assessee.

The Tribunal analyzed the facts and concluded that the assessee did not pay any commission to the main contractor directly. The main contractor received payments from the Government and then remitted the balance amount to the assessee after retaining a margin. The Tribunal observed that the margin retained by the main contractor was not in the nature of commission but a profit for subcontracting work. As there was no direct payment from the assessee to the main contractor, the Tribunal upheld the Ld. CIT(Appeals)'s decision to delete the addition made by the Assessing Officer under section 40(a)(ia). The Tribunal dismissed the department's appeal, affirming the Ld. CIT(Appeals)'s order.

In conclusion, the Tribunal dismissed the department's appeal and the assessee's Cross-Objections, as the Ld. CIT(Appeals)'s decision to delete the disallowance under section 40(a)(ia) was upheld. The Tribunal clarified that the nature of the transaction between the main contractor and the assessee did not involve direct commission payments, thereby not attracting the provisions of section 194H.