TMI Blog2011 (6) TMI 818X X X X Extracts X X X X X X X X Extracts X X X X ..... d hire charges to one of its members namely ₹ 83,32,000/- to L T Ltd. towards machinery hire charges of ₹ 1,62,30,194/- to M/s.Hindustan Construction Company Ltd. According to the assessee the machineries that were taken on lease were highly specialized equipments for which there was no ready hire market. The AOP did not procure this machine on its own because of high lead time and other procedural delays in purchase of such specialized equipments. Further delay in procuring the machinery would mean delayed completion of the project. The cost involved also did not justify making huge investment by the AOP. The assessee pointed out that the hire charges paid were 3% of the cost of the machinery which a general practice in the construction industry. 3. The Assessing Officer however noticed that in the A.Y 2005-06, 15% of the payments of hire charges by the AOP to its members was considered excessive and disallowed as a deduction by invoking the provisions of section 40A(2)(b) of the Income Tax Act, 1961 (the Act). The Assessing Officer, therefore, disallowed 15% of the hire charges paid to the related parties. 4. On appeal by the assessee the CIT(A) confirmed the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k in pursuance of a contract between the contractor and the Government of a foreign state or a foreign enterprise or any association or body established outside India. The Assessee brought to the notice of the CIT(A), the objective of the said definition as expressly stated in Para 51 of CBDT Circular No.684 dated 10.06.1994, which provided Explanatory Notes on the Provisions of Finance Act 1994, which is reproduced as under: 51. Section 194C(2) of the Income Tax Act contains provisions relating to deduction of income-tax at source from payments made to a subcontractor by a contractor. Prior to the amendment made by the Finance Act, these provisions were applicable only where the contractor was a resident person referred to in section 194C(1) of the Act, that is to say, he had taken a contract for carrying out any work, or for supply of labour for carrying out any work, from the Central Government or any State Government, a local authority, a statutory corporation or a company, etc. [i.e. the agencies specified in section 194C(1)]. In the recent past, certain instances had come to notice where the resident contractors entered into contracts with the Government of a foreign Sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payments clearly fall within the definition of payments to sub-contractor as contemplated in Explanation -1 to section 194C of the Act as it existed prior to the substituted section 194C substituted by Finance Act, 2009 w.e.f. 1/10/2009. 10. We have considered the rival submissions. The Provisions of Sec.194- C of the Act, as it existed as on 1-4-2007 is as follows: 194C. Payments to contractors and sub-contractors.--@@(1) Any person responsible for paying any sum to any resident (hereinafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and- (a) the Central Government or any State Government ; or (b) any local authority ; or (c) any corporation established by or under a Central, State or Provincial Act ; or (d) any company ; or (e) any co-operative society ; or (f) any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the sub-contractor, shall be liable to deduct income-tax under this sub-section. Explanation I.--For the purposes of sub-section (2), the expression contractor shall also include a contractor who is carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the Government of a foreign State or a Foreign enterprise or any association or body established outside India. Explanation II.--For the purposes of this section, where any sum referred to in sub-section (1) or sub-section (2) is credited to any account, whether called Suspense account or by any other other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. Explanation III.--For the purposes of this section, the expression work shall also include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 44AE. We are of the view that the contentions put forth on behalf of the assessee has to be accepted. Explanation-1 to section 194C of the Act provides that or the purpose of sub-section(2) the expression contractor shall also include a contractor who is carrying out any work in pursuance of a contract between the contractor and the Government of a foreign state or foreign enterprise or any association or body established outside India. Thus the expression contractor did not include within its fold a sub-contractor carrying out any work in pursuance of a sub-contract with a sub subcontractor. In other words sub-section (2) of section 194C of the Act applies only to payments made by contractor to sub-contractor but does not apply to a payment made by a sub-contractor to a sub sub-contractor. The provisions of section 194 C as substituted by the Finance Act 2 of 2009 w.e.f. 1/10/2009 has now not made any distinction between a payment to a contractor or sub-contractor and all payments for carrying out any work in pursuance of contract are covered within the fold of section 194C (1) of the Act. Further Explanation (iii) also provides that a contract include subcontract. Thus on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely to be credited or paid during the financial year exceeds fifty thousand rupees, the person responsible for paying such sums referred to in sub-section (1) shall be liable to deduct income-tax under this section. (6) No deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, on furnishing of his Permanent Account Number, to the person paying or crediting such sum. (7) The person responsible for paying or crediting any sum to the person referred to in sub-section (6) shall furnish, to the prescribed income-tax authority or the person authorised by it, such particulars, in such form and within such time as may be prescribed. Explanation.- For the purposes of this section,- (i) specified person shall mean,- (a) the Central Government or any State Government ; or (b) any local authority ; or (c) any corporation established by or under a Central, State or Provincial Act ; or (d) any company ; or (e) any co-operative society ; or (f) any authority, constituted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of payments made to sub sub-contractors. Therefore, the disallowance made under section 40(a)(ia) is directed to be deleted. 11. In the result, appeal in ITA No.1644/M/2010 is partly allowed. ITA NO.3041/MUM/2010: 12. This is an appeal by the assessee against the order dated 30/3/2010 of CIT(A) XXXIII, Mumbai relating to assessment year 2007-08. Grounds of appeal raised by the assessee read as follows: 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the disallowance of 15% out of payments made to vendors covered by the provisions of section 40A(2)(b) of the Income Tax Act. The addition be deleted. 2. On the fats and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the disallowance u/s. 40(a)(ia) of the Income Tax Act vary with section 194C of the Income Tax Act. 13. These grounds are identical to the grounds raised and considered by us while deciding appeal of the assessee for A.Y. 2006-07. For the reasons stated therein the order of CIT(A) with regard to the disallowance under section 40A(2)(b) of the Act is set aside and the issue is remanded to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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