Section 194C of the Income-tax Act, 1961 - Deduction of tax at source

Last updated: 24 September 2007

Court :
IN THE Itat, delhi bench ‘I’

Brief :
Section 194C of the Income-tax Act, 1961 - Deduction of tax at source - Contractors/ Sub-contractors, payments to - Assessment years 1997-98 to 2001-02 - Assessee-company which was dealing in car, spares and services of vehicles - Entered into a business collaboration agreement with a company ‘D’ - Pursuant to said agreement ‘D’ had agreed to use its premises for purposes of assessee’s business in mutual interest and had installed in its premises various machinery and equipments for servicing of vehicles and had decorated same for display, repair and parking of vehicles and had also provided qualified staff like manager and supervisor whose salaries were also borne by ‘D’- Whose salaries were also borne by ‘D’ - Assessee made certain payments ‘D’ for said services and treating same as payment to contractor deducted tax - Whether since payment made to ‘D’ was contractual payment pursuant to business collaboration agreement, assessee was justified in deducting tax at source under section 194 C - Held, yes FACTS The assessee-company which was a dealing in car, spares and services of vehicles had manufactured by Maruti India Ltd. It entered into a business collaboration agreement with a company one D. D was in possession of certain premises and it had agreed to use the same in the assessee’s business under the aforesaid agreement in mutual interest. Pursuant to the agreement, the assessee made payment to D and treating the same as payment to contractor deducted tax at source under section 194C. The Assessing Officer held that in substance the payment in question was towards hire charges by way of rent for the premises of ‘D’ utilized in the assessee’s business of dealership of the car and, therefore, the assessee should have deducted tax at the rate of 20 per cent on such payment under section 194-I. The Assessing Officer further treated the assessee as ‘assessee in default’ for failure to deduct tax at source and, accordingly, levied interest under section 201(1). On appeal, the Commissioner (Appeals) interpreting the agreement held that the assessee was to pay commission to ‘D’ at the rate of Rs.1000 per vehicle sold. He, accordingly, treated the payment as commission within the meaning of section 194H. He also held that if the payee had offered the income and taxes had been paid, the demand should not be enforced against the assessee. On revenue’s appeal to the Tribunal:

Citation :
Income-tax Officer, Ward 49(2), New Delhi v. Bhasin Motors India (P.) Ltd. N.k. karhail, judicial member And Deepak R. Shah, accountant member It appeal Nos. 2940 to 2944 (Delhi) of 2005 [Assessment years 1997-98 to 2001-02]

In the instant case the payee D was in possession of certain premises and it had agreed to use the same in the assessee’s business under the collaboration agreement in mutual interest. The payee had installed in its premises various machinery and equipments for servicing of the vehicles. The payee had also decorated for the display, repair and parking of the vehicles. The qualified staff like manager and supervisor were provided by the payee and their salaries were also borne by the payee. Similarly, the servicing of the vehicles were done exclusively by the staff of payee. Accordingly, it could not be said that the assessee merely to use the premises had made the payment. While the authorized dealership of the vehicles remained with the assessee, since it is was not having qualified staff for sales and supervision of sales staff as well as servicing of vehicles, it had availed the services of ‘D’. The payment was quantified on the basis of number of vehicles sold and number of vehicles serviced. Thus, it was a mode of sharing revenue between the two parties. However, in such a circumstance, it could not be said that the payment was either as rent simpliciter or as commission. Thus, the same could not be considered as rent within the meaning of section 194-I or as commission within the meaning of section 194H. Therefore, the payment by the assessee to ‘D’ was contractual payment pursuant to the business collaboration agreement. hence, the assessee was obliged to deduct tax under section 194C only which it had done. Thus, no further liability under section 201(1) could be fastened on the assessee. [Para 3] Hence, the instant appeal was liable to be dismissed. [Para 4]