TMI Blog1995 (3) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... t Petition No. 7807 of 1994), professional associations concerning the legal fraternity, the Madras Bar Association (Writ Petition No. 7803 of 1994) and the Madras High Court Advocates Association (Writ Petition No. 7804 of 1994) have also challenged this impugned circular for the benefit of their member-advocates. The Chartered Accountants Study Circle, a society registered under the Tamilnadu Societies Registration Act, 1975, has chosen to file a writ petition challenging the very circular in order to protect the interests of its members, namely, chartered accountants, in Writ Petition No. 8483 of 1994. The Advertising Club, Madras, which also is a society, registered under the Societies Registration Act, has challenged the circular, for and on behalf of its member constituents who are stated to be advertising agencies rendering professional and creative services to their clients, in Writ Petition No. 12406 of 1994. The Madras Goods Transporters' Association, another society registered under the Societies Registration Act has also challenged the circular in question, for and on behalf of its constituent members comprising various firms and companies who are stated to be engaged i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : " Contracts for rendering professional services by lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc., can also not be regarded as contracts 'for carrying out any work and, accordingly, no deduction of income-tax will be made from payments relating to such contracts. " In Circular No. 93 dated September 26, 1972, which was issued in the form of questions and answers, it has been clarified as follows : "Question 7 : Does the requirement apply in relation to payments made to commission agents for arranging sales or to advertising agents rendering professional services ? Answer : No. Service contracts not involving the carrying out of any work are outside the scope of the provision. " In Circular No. 108, dated March 20, 1973, particularly in paragraph 11(3), it has been stated as follows : " Contracts for rendering professional services by lawyers, physicians, surgeons, engineers, accountants, consultants, etc., cannot be regarded as contracts 'for carrying out any work' and, accordingly, no deduction of income-tax will be made from payments relating to such contracts. " Circular No. 558 dated March 28, 1990, came to be issued thereaf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts would be covered by the provisions of this section since service means doing any work as explained above. (vi) The provisions of this section will not cover contracts for sale of goods. (a) Since contracts for the construction, repair, renovation or alteration of buildings or dams or laying of roads or airfields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labour, income-tax will have to be deducted from payments made in respect of such contracts. Similarly, contracts granted for processing of goods supplied by the Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor. (b) Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Government or any other specified person and the property in suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing payment, therefore, is not required to estimate the income comprised in the payment. (xi) In a case where advance payments are made during the execution of a contract and such payments are to be adjusted at the time of final settlement of accounts, tax will have to be deducted at the time of making advance payments if the total payment is likely to exceed Rs. 10,000. (xii) Where any contractor is the recipient of any amount under a contract but the income of the recipient is not subject to income-tax, such contractor may obtain a certificate from his Assessing Officer under section 194C(4) for receiving payments without deduction of tax at source. (xiii) Every contractor, other than an individual or a HUF (Hindu undivided family), who is responsible for paying any sum to any sub-contractor (who is resident in India), in pursuance of a contract with such sub-contractor for carrying out or for the supply of labour for carrying out, wholly or in part, the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor had undertaken to supply, will be required to deduct income-tax at the rate of one per cent. of such sum. 8. It m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itioners, be brought within the scope of section 194C by means of a circular. It is also contended that the word " contractor " must be understood in the ordinary commercial sense and by no stretch of imagination, can fees paid to advocates, doctors and other professionals be brought within the scope of section 194C. The further contention on behalf of the petitioners is that the decision of the Supreme Court in Associated Cement Co. Ltd.'s case [1993] 201 ITR 435 does not lend support or authority to issue the impugned circular nor is there any comparison between the facts of the case concerned in the decision dealt with by the Supreme Court and the professions under consideration in these cases nor could the principles laid down or the ratio underlying the said decision be of any help or assistance to issue the impugned circular. In substance, it is also contended that the circular has the effect of expanding the words "service contracts" and unauthorisedly attempting to bring in various professionals within the ambit and scope of section 194C. The circular is also stated to be violative of article 14 of the Constitution of India. The circular is said to be also discriminatory in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uded in the said payment and that in the cases on hand for consideration before this court for work done or to be done by the various members of the association, they receive money as and by way of professional fees from one or the other of the various categories of the authorities referred to in the provision in pursuance of an agreement or contract between them, oral or written and, therefore, such cases would fall within the term "work" contemplated in section 194C and the same cannot be said to be confined merely to the categories of "works contract" which is said to, have a special connotation in law, as stated to have been declared by the apex court in the decision in Associated Cement Co.'s case [1993] 201 ITR 435. It is also contended that the ordinary dictionary meaning of the word "service" is work and, therefore, the provisions of section 194C will squarely apply to the cases of the petitioners and the members of the petitioner-associations. It is also contended that the word " contractor" has been used in section 194C(1) only to denote a resident who does work and accordingly, so long as a person does work and he is paid for such services, he would come within the scope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 194C are also denied and disputed by the respondents. It is also stated that the tax deducted at source is liable to be adjusted at the time of making advance payment of tax and given credit for against the tax liability ultimately determined with a further right in the persons on whose account the same was deducted to get refund in accordance with law on the claimants substantiating the position that they had no such liability under the Act. The percentage of deduction is justified to be reasonable and not arbitrary or discriminatory. It is also contended that sub-section (4) of section 194C provides the procedure for non-deduction or deduction at a lower rate in cases where the recipients produce a certificate to the effect obtained from the Assessing Officer and merely because many of the members of the petitioner-associations or the petitioners themselves cannot get such certificates they have resorted to the method of challenging the circular even at the threshold. As long as section 194C of the Act is valid and justified, there can be no impediment in the deduction as claimed for the respondents and it is contended that no exception can be taken to the procedure envisaged for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, the proposed deduction is quite valid and justified and cannot be objected to. Reliance is also placed on an unreported decision of the Gujarat High Court in Special Civil Applications Nos. 4802, 5288, 5289 and 5414 of 1994, wherein the Gujarat High Court was said to have dismissed a batch of writ petitions challenging the impugned circular by its order dated July 14, 1994, observing that the interpretation of law was not the domain of the Board and the said interpretation by the Board is not binding either on the assessing authority or courts in so far as the question of interpretation of law is concerned. The respondents also contend that the fact that the petitioners or the members of the petitioner-associations are paid consolidated amounts inclusive of other charges by way of reimbursement rather than for services is said to be not a ground for contending that the circular is invalid, that no deduction under section 194C can be made and that it is always open to the persons concerned to raise separate bills for services rendered and for other expenses and that there can be no challenge to the inclusion of the category of services undertaken pursuant to any agreement ei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to supra and contended that the scope of the circular is only to serve as a guideline to ensure uniformity among the various authorities and in order to help them to understand the provisions of the Act in their proper perspective and was necessitated as a follow-up action pursuant to the judgment of the Supreme Court in Associated Cement Co.'s case [1993] 201 ITR 435. Learned counsel also contended that when the provisions of section 194C(1) of the Act on their own force and application get attracted to the cases on hand in respect of the nature of transactions also, there is no need to go into the other aspects of sub-section (2) or the circular orders and, therefore, it is unnecessary for this court to adjudicate on the validity of the circulars. While dealing with the decisions relied upon for the petitioners, learned senior counsel for the Department contended that the various judgments did not advert to the issue from the angle that even under the provisions of the enactment particularly section 194C(1), the liability squarely fastens and the circular, if at all, made only clear what was otherwise obvious and an inevitable consequence of the provisions contained in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out a work should be confined to 'works contract' as was argued on behalf of the appellant. We see no reason to curtail or to cut down the meaning of the plain words used in the section. 'Any work' means any work and not a 'works contract', which has a special connotation in the tax law. Indeed, in the sub-section, the 'work' referred to therein expressly includes supply of labour to carry out a work. It is a clear indication of the Legislature that the 'work' in the sub-section is not intended to be confined to or restricted to 'works contract'. 'Work' envisaged in the sub-section, therefore, has a wide import and covers 'any work' which one or the other of the organisations specified in the sub-section; can get carried but through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the 'work', but for its specific inclusion in the sub-section.... The above decision cannot be of any help to the appellant for it does not lay down that the percentage amount deductible under section 194C(1) should be out of the income of the contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid at a flat rate for loading packed cement bags into wagons or trucks. This rate was fixed on the basis of daily basic wages, dearness allowance, etc., and clause 13 of the agreement stipulated reimbursement by the appellant to the contractor in case of certain increase in the dearness allowance, etc., payable by the contractor to the workmen employed by him. The appellant paid the contractor the amount stipulated at a flat rate as well as amounts by way of reimbursement under clause 13. But the deduction of tax at source made by the appellant under section 194C(1) of the Income-tax Act, 1961, fell short of the deductions required to be made thereunder. On a show-cause notice being issued by the Income-tax Officer, the appellant-company contended that it was not liable to deduct any amount on payments made for loading and unloading as section 194C was applicable only to payments made in execution of 'works contracts' which produce tangible property and not to other works. It was in this context that the Supreme Court observed : 'Thus, when the percentage amount required to be deducted under the sub-section as income-tax is on the sum credited to the account of or paid to a con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ork' either in common parlance or in legal terminology. It will be a total misnomer to describe such professionals as 'contractors' or 'sub-contractors'. if the contention of the Revenue in this regard is accepted, a solicitor or an advocate on record will have to be described as a 'contractor' and counsel briefed by him in the matter a ' sub-contractor'. An interpretation which leads to such a ridiculous result cannot be a proper interpretation of the section. It is a well-settled rule of construction that judgments must be read as a whole and the observations from the judgments should be considered in the light of the questions which were before the court. As observed by the Supreme Court in CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297, it is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete 'law' declared by the Supreme Court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to asc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 194C are clearly in the nature of contemporanea expositio which can legitimately be used as aids in the construction of the said provision. In construing the statute, the courts are entitled to give due weight to the interpretation put upon it by those who are entrusted with the task of construing, executing and applying it. Under the Income-tax Act, the Central Board of Direct Taxes is the highest executing authority and it has been vested with statutory powers to issue orders, instructions and directions to all officers employed in the execution of the Act. The uncontroverted position is that ever since the incorporation of section 194C in the year 1972, it was understood by all concerned including the Central Board of Direct Taxes that its scope was confined to payments made in respect of 'works contracts' and 'labour contracts' and not to payments made on account of professional services. This interpretation was reiterated and acted upon by the Central Board of Direct Taxes from time to time. It is this interpretation which is sought to be departed from by the Central Board of Direct Taxes itself purportedly in the light of the decision of the Supreme Court. We have alr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tution of India, no tax shall be levied or collected except by authority of law. The words 'levy' and 'collection' are words of wide amplitude in the context of this article, so as to cover any process employed to collect any amount purporting to be a tax. If the procedure employed is unauthorised, the process of collection will render it an illegal levy or illegal collection and, hence, unconstitutional." "No doubt, the Supreme Court has said the word 'work' referred to in section 194C has a 'wide import'. But this observation is found in the context of an argument (of the petitioner therein), that the said word 'work' has to be confined to the concept of 'works contract'. The word 'work' has a wider meaning because, it is not to be restricted to the term 'works contract'. The concept conveyed by the word 'work' found in section 194C is not confined, limited or restricted to the concept of 'works contract'. The word 'therefore', in the particular sentence clearly brings out the reason for the statement that the word 'work' has a 'wide import'. From this, it cannot be inferred that the Supreme Court intended to give the word a meaning which the sentence in which it is found does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act. This necessitated an amendment to the Constitution to enable the levy of sales tax on the cost of goods supplied by the contractor, while executing the works contract. The history is narrated in detail, in Builders' Association of India v. Union of India, AIR 1989 SC 1371. The narrow meaning attributed to the word 'work' in section 194C as confined to works contract was rejected by the Supreme Court and in that context, the court held that the term 'any work' is a term of wide import, to include not only the work involved in the works contract, but also the work resulting in other types of contracts where the contract requires, 'carrying out of any work'. One more factor makes the meaning of the section beyond the pale of any doubt. If the term 'any work' in section 194C by itself covers any kind of service, the words found in the bracket, in sub-section (1) of section 194C will have to be treated as otiose or superfluous. Supply of labour to carry out any work, is a concept that falls within the concept of 'service' ; if so, why should Parliament include these words in the bracket, to give an expanded meaning to the term 'any work'. The Supreme Court in Associated Cement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Board has no power to enlarge the scope of the statutory provision. Its powers are conferred to issue administrative instructions. The impugned circulars travel beyond the provisions of section 194C and have no legal force and are liable to be quashed. The authorities functioning under the Income-tax Act are not bound by them. In the result, the two impugned Circulars No. 666 dated October 8, 1993, and No. 681 dated March 8, 1994, are quashed to the extent the said circulars govern payments to commission agents and brokers for the services rendered by them ; further, we declare that section 194C of the Income-tax Act does not operate on such payments and the respondents are restrained from enforcing them accordingly." The Bombay High Court, in the decision reported in Bombay Goods Transport Association v. CBDT [1994] 210 ITR 136, has held as hereunder : We have carefully considered the rival submissions. The controversy, in our opinion, is in a very narrow compass. Section 194C has been in the statute book almost in the same form ever since its inception in the year 1972. It provides for deduction of tax at source on payments made for carrying out any work including supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s negligible, no income-tax will be deductible. In answer to another question it was even clarified that pipeline/pumping charges for use of pipelines owned and operated by port trusts for movement of petroleum products by pipeline from refinery to port installations would not fall within the purview of section 194C of the Act. Again, on October 13, 1972, in a letter written to the petitioner-association itself, it was specifically stated that the provisions of section 194C were not applicable in respect of transport contractors. The same view was reiterated in yet another letter of February 3, 1982. There is no change in the situation during the last 20 years to justify a departure from the above interpretation of section 194C given by the Central Board of Direct Taxes and accepted by the taxpayers. The Central Board of Direct Taxes has reviewed the above instructions and changed the interpretation given by it and acted upon it for more than two decades only on the basis of certain observations of the Supreme Court in the case of Associated Cement Co.'s case [1993] 201 ITR 435. According to the Central Board of Direct Taxes, some of the issues raised in the circulars issued by it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 210 ITR 152, a Division Bench of the Bombay High Court has held as hereunder : " We have considered the submissions of Mr. Bharucha, learned counsel for the petitioners. We had occasion to deal with the scope and ambit of section 194C of the Act in regard to fees paid to professionals like solicitors, advocates, chartered accountants, etc., in Writ Petition No. 1052 of 1994-Chamber of Income-tax Consultants v. CBDT [1994] 209 ITR 660, filed by the Chamber of Income-tax Consultants and others. We have delivered judgment in the above case on July 14, 1994. In the above judgment, we have set out the provisions of section 194C of the Act and have dealt at length with various circulars issued from time to time both by the Ministry of Finance and by the Central Board of Direct Taxes in regard to the applicability of the provisions of section 194C. We had also occasion to deal with the said section in another Writ Petition No. 1277 of 1994--Bombay Goods Transport Association v. CBDT [1994] 210 ITR 136, filed by the Bombay Goods Transport Association challenging the very same circular of the Central Board of Direct Taxes dated March 8, 1994, with regard to the applicability of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts. It was this contention that was repelled by the Supreme Court. In other words, as aforesaid, the Supreme Court merely affirmed the interpretation put by the Central Board of Direct Taxes on section 194C of the Act to include not only works contracts but also labour contracts. Following the ratio of the above two decisions of this court, we hold that the impugned circular of the Central Board of Direct Taxes, dated March 8, 1994, is illegal and without jurisdiction in so far as it requires deduction at source from payments made to advertising agencies for professional services rendered by them." I have carefully considered the submissions of learned counsel appearing on either side in the light of the various decisions relied upon and the relevant provisions of the Act. The plea of the respondent based upon the decision of the Division Bench of the Gujarat High Court in All Gujarat Federation of Tax Consultants v. CBDT [1994] 76 Taxman 307 may be considered first. I have been taken through the said judgment but in my view a disposal of that type will do no real or effective justice to the parties who approached the court at least in the type of cases before us. The threat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income-tax on the income comprised therein. The mere fact that the word "a resident" otherwise meant to refer to a person who is a resident in India within the meaning of section 6, has been referred to in section 194C as the contractor, does not have the effect of dispensing once and for all with the element of contract from consideration for the purpose of identifying the nature of work or the quality of work which alone is sought to be roped into the area of consideration for inclusion in the words "any work" used in the provision. The words "any work" take their colour from the words "contractor" and "contract" and the gamut of the words "any work" gets crystallised and confined in the process of consideration to the category and quality of work involving activities which are predominantly physical and tangible in juxtaposition with activities involving an intellectual aspect playing a dominant role as in the vocations of lawyer, doctor, architect or chartered accountant. The words "any work" used in section 194C(1), therefore, cannot be construed divorced from their context and the texture inbuilt in the provisions themselves and the other conglomeration of words and phrases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Supreme Court for its consideration and it is purely on surmises and assumptions that the Central Board of Direct Taxes thought that the court in that case also must be considered to have decided such an issue, by implication. There is no warrant whatsoever for this premise of assumption. As a matter of fact, the observations of their Lordships of the Supreme Court : ". . . further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the 'work', but for its specific inclusion in the sub-section", would go to show that the words "any work" did not carry such wide import as now sought to be ascribed to it by the impugned circular and at any rate the ratio of the decision of the Supreme Court does not lend support for such wide construction. The fact that the services of professionals like lawyers, tax practitioners, solicitors, chartered accountants, etc., are obtained may be and at times are appointed under resolutions of the board or orders passed by the governing executive authorities to secure their services for the authorities concerned does not by itself alter the char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... need to decide some of the other incidental issues raised before me at the time of hearing of these writ petitions. On the view expressed by me as to the scope and ambit of section 194C(1), it becomes inevitably necessary to declare that the impugned Circular No. 681 dated March 8, 1994, issued by the Central Board of Direct Taxes in so far as it purports to issue directions in paragraphs 7 and 8 in derogation of the scope of section 194C shall stand hereby quashed as being violative of articles 14 and 265 of the Constitution of India and opposed to section 194C of the Act, in so far as it requires deduction at source from payments made by way of professional fees to advocates, solicitors, chartered accountants, tax practitioners, etc., for the services rendered by them. So far as "transport contracts" are concerned, my conclusion is that the impugned circular is illegal and without jurisdiction in so far as it casts an obligation for deduction of tax at source under section 194C in respect of contracts for mere carriage of goods which do not include any other services like loading and unloading and are not in any way connected with any work to be performed by the carrier. So ..... X X X X Extracts X X X X X X X X Extracts X X X X
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