THE DY. COMMR. OF INCOME TAX, CIR. TDS,, RAJKOT-GUJARAT vs. M/S CLASSIC NETWORK PVT. LTD.,, RAJKOT-GUJARAT

आदेश/O R D E R PER WASEEM AHMED ACCOUNTANT MEMBER: The captioned two appeals have been filed at the instance of the Revenue against the orders of the Learned Commissioner of Income Tax (Appeals)-II, Rajkot [Ld.CIT(A) in short] dated 28/08/2014 and 30/06/2018 arising in the matter of assessment order passed under s.201(1) and 201(1A) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") dated

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19/03/2014 and 11/03/2015 relevant to Assessment Years (A.Ys) 2012-13 & 2013-14.

First, we take up Revenue’s appeal in ITA No. 628/RJT/2014 for Asst. Year 2012-13. The Revenue has raised the following grounds of appeal:

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State Government and other Government bodies. There was a survey operation carried out u/s 133A of the Act dated 17.12.2013 at the office premises of the assessee. The assessee in the year under consideration has incurred certain expenses without deducting the TDS. The details of the expenses on which TDS was not deducted stands as under:

i. Huge labor charges Rs. 9,25,50,559.00 ii. Royalty Rs. 48,38,700.00

3.1 On a question by AO about the non-deduction of TDS, the assessee made reply as detailed under: a. The payment of labout charges made is to ‘various parties’ and not a single partly. b. The payment to each party does not exceed the threshold limit of Rs.30,000/- c. The assessee has maintained cash voucher in respect of such payments. d. Assessee relies on the decision of Hon’ble ITAT, ‘’A’’ Bench, Ahmedabad in the case of M/s.Laxmi Protein Products P. Ltd. for A.Y. 2005-06 & 2008-09, in ITA No.3792, 2582, 2583 and 2584/Ahd/2008. e. As regards, Royalty payment, the same has been made to government agencies.

3.2 However, the AO disregarded the contention of the assessee and held that the assessee as in default for non-deduction of TDS u/s 194C and 194J of the Act. The relevant contents of the AO findings and the demand raised under section 201(1)/(1A) of the Act is set out as under:

10.1 Non-deduction of tax from payments of Labour Charges: As already stated in the foregoing paras, the assessee has made payments of labour charges, royalty, bank guarantee commission without deduction of tax. The assessee debited labour charges expenses under various heads, as already stated above and has not maintained any party wise ledger. The questionnaire dated 27.01.2014 was issued with an intention to identify the labour contractors, who

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were engaged by the assessee to fetch labourers at various project sites of the assessee. In order to prove that assessee ought to have taken services of labour contractors and conveniently did not bring their names on its record for avoiding deduction of tax at source, the following points are relevant: a) In our country, the labourers, in large numbers, are supplied by labour contractors across pan India and the lobourers are not available otherwise. In most of the cases, the labour contractors have their fiefdom and the same cannot be bypassed; b) The labour management is a very tricky issue/subject and is handled best when left to the labour contractors. No prudent businessman/business entity will ever enter such an area and burn its/his/her fingers. Further, the labour management is not restricted to making payment to the labourers; c) The theory that the labourers on their own approach the project site and accordingly they are employed at different project sites may be partially correct in so far as a handful number of labourers. But looking at the volume of payments made by the assessee, the said theory is not applicable in assessee's case; d) Another theory of same set labourers migrating from one project to another project, also does not hold water as the migrant labourers are very few in numbers; e) For hiring labourers, on its own rolls, the business entity is required to have labour license, issued by Labour Commissioner. No such license has been produced/obtained by the asessee. f) It is an unorganized sector. Due to demographic, linguistic and geographic diversity of our courftry, it becomes all the more essential to get labourers through labour contractors for execution of a project in smooth manner, more particularly in projects of the type and nature as that of assessee's g) In this case, the assessee has maintained its accounts only expense head- wise and not labourer/labour contractor-wise. As the accounts are full control of the assessee, there is enough room for structuring the same by the assessee according to its own requirements. Thus the assessee, in this case, has, completely kept the names of all the labour contractors out of its books and accordingly avoided to deduct the tax; h) The number of approximate labourers, engaged by the assessee during the FY 2011-12, was computed by dividing the total gross payment by average payment made to each labourer. As the assessee has kept all the payments below Rs. 20,000, to thwart the incidence of provisions of Section 40A(3) of the I T Act, the average payment per labourer, as per the head-wise expense ledger submitted by the assessee, is taken at Rs. 15,000. Thus it cannot be

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said that the computation of number of labourers employed by the assessee at_30i850Jabourers, is a pure guess work. i) The sample cash vouchers, maintained in respect of each expense head, shows that the same is a computer print out, on pre-printed stationery, bearing signature of the alleged payee. However, none of the vouchers has been countersigned by any authorized official of the company. Further, it comes to question that how the illiterate labourers have signed the vouchers. This clearly indicates that the all vouchers are fabricated to suit the specific needs of the assesee company i.e. to mask the name and identity of labour contractors. Copy of a sample voucher is annexed to this order. j) The intention of the legislature, in inserting section 194C, is not only to collect tax but also to contractual payments, mainly in identifying potential assesses. k) The assessee, in para 3.1 of its letter dated 18.01.2014, has admitted that the payments had been made to 'Makadam', a local phrase/term for labour contractor. Further, in para 5 of letter dated 18.03.2014, the assessee has admitted association supplies the labourers. l) The assessee's submission that the directors, themselves, are making payment to each and every labourer, on weekly basis seems to be farfetched and away from reality. m) The assessee has not maintained any record, other than cash vouchers, in respect of payment of labour charges and hence failed to produce the same on the pretext that the same is voluminous. During the course of survey too, the assessee did not produce any such record. This goes to show that the assessee has completely structured the cash vouchers in its record to keep the identity of labour contractors undisclosed. 10.2 From the above, it is clear that the assessee failed to deduct tax from labour charges payment made to 'unknown' labour contractors, whose details have not been brought on record by the assessee in its books or in response to this office letter dated 27.01.2014. In view of this, I treat assessee company deemed to be in default for non-deduction of tax u/s 194C, in respect of payment of Labour Charges of Rs. 46,27,52,793. As the assessee has not made available the PANs of the labour contractors, the rate of TDS is adopted at 20%, in terms of Section 206AA. The total default is worked out at Rs. 9,25,50,559. 11. Non-deduction of tax from payment of Rovaltv: As already stated above, the assessee had made royalty payment of Rs. 48,38,700, without deduction of tax. In the absence of any details, I treat assessee company deemed to be in default for non-deduction of tax u/s 194J, in respect of payment of royalty of Rs. 48,38,700. As the assessee has not made available the PANs of the payees, the rate of TDS is

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adopted at 20%, in terms of Section 206AA. The total default is worked out at Rs. 9,67,740. 12. As regards, judicial decisions of Hon'ble ITAT, A Bench, Ahmedabad, in the case of M/s Laxmi Protein Products P Ltd, relied upon by the assessee, it is stated that the facts of the present case are distinguishable from the case law cited and hence the same is not applicable in this case. 13. The assessee is also liable to pay interest of Rs 3,36,66,587, computed @ 1% of the above defaults, for the period from 01.04.2011 to March' 2014, in terms of Section 201(1A). This interest liability will continue to persist till the assessee deducts and deposits the tax into government account. 14. Total TDS default amount aggregates to Rs. 12,71,84,886/-(Rupees Twelve Crore Seventy One Lac Eighty Four Thousand Eight Hundred Eighty Six only), including interest thereon, as computed in para 13 above. The summary of default is as under: Sr.No. Nature of Section Default Amt. Interest Total Payment 1. Contract 194C r.w.s 9,25,50,559 3,33,18,201 12,58,68,760 206AA 2. Royalty 194J 9,67,740 3,48,386 13,16,126 Total 9,35,18,299 36,66,587 12,71,84,886

3.4 Thus the AO raised the demand for the tax & interest for Rs. 9,35,18,299/- & Rs. 36,66,587/- respectively under section 201(1)/(1A) of the Act.

Aggrieved Assessee preferred an appeal before the Ld. CIT(A).

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4.1 The assessee has been making the payments to the individual laborers without deducting the TDS consistently. There was no disallowance made even in the assessment framed under section 143(3) of the Act and the search & survey assessments. Accordingly, the assessee was under the bona fides belief that the provisions of TDS are not attracted to the payment made to the laborers.

4.2 The assessee in support of its claim also furnished the affidavit affirming the facts and the situations which were found during the assessment proceedings.

4.3 There was no evidence found during the survey proceedings suggesting that the assessee has hired the services of the Labour contractors.

4.4 The assessee regarding the Royalty payment submitted that it had paid Royalty only of ₹8.50 lakhs to the government which is not subject to TDS under section 194J of the Act. As such, the remaining amount represents the payment of the sales tax. The assessee also claimed that all the details were filed before the AO during the assessment proceedings.

“4.10 It can thus be seen that the appellant has been consistently arguing that no labour contractors were employed. Even in the order u/s.201(l)/201(lA), the AO himself has mentioned in para-10.2 of the order u/s.201(1) that the assessee has failed to deduct tax from labour charges payment made to 'unknown' labour contractors whose details have not brought on record by the assessee. Unfortunately, the AO himself has also not brought any details on record to prove that such labour contractors did exist. The mere contention of unusualness of the practice followed by the appellant cannot ipso facto lead to the conclusion arrived

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at by the AO. The arguments put forward by the AO are strong and well articulated. However, doubt or suspicion has to be taken ,to the logical end through proper enquiries and investigation and by bringing on record tangible material to prove such doubt or suspicion as legally tenable. The AO has also relied upon the findings of a survey by an NGO. The survey is regarding labourers working at construction sites in Ahmedabad city. The assessee's sites are essentially rural and thus the findings of the survey cannot be said to be strictly applicable to the appellant's case. 4.11 As regards the affidavit filed by the appellant and the evidentiary value thereof nothing new has been mentioned by the appellant in the affidavit and it is just reconfirming of the stand taken before the A.O. during the proceedings u/s.201(l). Therefore, the AO's arguments in this regard that the affidavit does not constitute evidence do not require to be adjudicated separately. 4.12 After the detailed discussion, it would be very relevant and pertinent to correlate the findings with the actual section of the I. T. Act, 1961, The AO has held that the appellant has not deducted tax which it was required to deduct U/S.194C. The relevant portion of S.194C is as under:- "Payment to contractors 194C (I) Any person responsible for paying any sum to any resident (hereafter 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 the specified person, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash................................................" S.194C presupposes existence of a payer and a payee. In the present case, the identity of the payee / payees is not established at all. The payee is supposed to get benefit of tax deducted at source from its tax liability. What the AO is implying is that tax at the prescribed rate should be deducted on the entire labour payment as number and identity of payees is unascertained. The question will then arise is to who will claim the benefit of the tax deducted. In the absence of the contractors, if it is assumed that each labourer would have to claim the benefit of TDS, it is seen that payment made to each labourer is less than the prescribed threshold limit and thus tax is not required to be deducted at all. The AO's arguments thus stand defeated on all counts. 4.13 Thus, in the present case, no concrete evidence regarding the existence of the labour contractor has been brought on record by the A.O. Therefore, I have no choice but to come to the conclusion, that the findings of the A.O. are based on mere conjectures and surmises. It is also verified from records that none of the payments exceed the monetary limits as prescribed U/S.194C. In light of this conclusion and findings, it is held that the appellant was not required to deduct any tax on the labour payments made. The addition u/s.201(1) in this regard is directed to be deleted.

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I have gone through the details filed by the appellant. The AO is directed to verify these details while giving effect to this appeal order. In case of royalty paments, if the payment has been made to the government, there is no requirement of TDS and the assessee shold not be held to be in default for the same. As regards the sales tax payment, the question of TDS does not arise.”

Being aggrieved by the order of Ld. CIT(A) Revenue is in appeal before us.

7.1 The Ld. AR further claimed that there was an assessment u/s 143(3) of the Act in the subsequent years, but there was no disallowance on account of non-deduction of TDS.

7.2 The Ld. AR also claimed that the payment made by the assessee was not subject to TDS by the operation of law as the payment did not exceed the limit as specified u/s 194C of the Act. Therefore, there was no liability of TDS on the assessee u/s 194C of the Act.

7.3 Regarding the royalty expenses, the assessee reiterated the submissions as made before the ld. CIT-A.

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9.1 From the preceding discussion, we note that there is no dispute that the assessee has not been deducting any TDS for the last several years, and no disallowance on account of non-deduction of TDS was made by the Revenue including in the assessment framed under section 143(3) of the Act for the earlier & subsequent years. Thus, in our considered view, the assessee was under the bonafide belief that it is not liable for the deduction of TDS u/s 194C of the Act. Therefore, the assessee is not liable for TDS u/s 194C of the Act. In this regard, we find support and guidance from the judgment of Hon’ble Gujarat High Court in the case of Gujarat Narmada Valley Fertilizers Company Ltd. reported in 247 ITR 305, wherein it was held as under: “In the facts and circumstances of the case, no substantial question of law could be said to have arisen in this case in respect of the order passed by the Tribunal. Though the High Court's attention was invited by both the counsels to several decisions of the Supreme Court, of the High Court as well as of other High Courts, it was not necessary to deal with them in the present case. It may be that the ambit 2nd scope of the first part of section 201(1) and the proviso may be different. At the same time, however, it could not be said that the Tribunal had committed an error of law in considering the circumstances including the circumstances that even though notices were issued in 1993-94, the matter was not pursued further and that a rectification order was passed in favour of an employee. Ultimately, it could not be gainsaid that the liability was that of the employees. Even in respect of an

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individual employee, when an order of rectification was made by the authorities and deduction was made, the Tribunal could not be said to be wrong in recording a finding that there was an honest and bona fide belief on the part of the assessee that with regard to other allowances also the case would not fall under section 201 if the amount was not deducted at source. It was stated at the bar that from 1997-98, the company had started deducting the amount of tax at source from the amounts which were to be paid to its employees in respect of disputed allowances. For the foregoing reasons, without entering into larger question and without laying down any principle of law, it was to be held that by allowing appeals and setting aside the orders passed by the authorities below, the Tribunal had not committed any error of law and no substantial question of law arose for consideration of the High Court. The appeals, therefore, deserved to be dismissed and were, accordingly, dismissed”.

9.2 We also note that there was no evidence brought on record by the ld. DR evidencing that there was the involvement of a middleman between the assessee and the contractor.

9.3 The ld. DR has also not brought anything on record contrary to the finding of the ld. CIT-A regarding the royalty payment. As such it was claimed that the royalty was paid only for the sum of Rs. 8.50 lacs, and the balance was paid toward the sales tax liability.

In view of the above, we find no reason to take a view contrary to the order of ld. CIT(A). Hence, the ground of appeal of the Revenue is dismissed.

Coming to ITA No. 375/RJT/2015 for the A.Y 2013-14

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discussion, please refer to the relevant paragraph. Respectfully following the same, the ground of appeal of the Revenue is dismissed.

In the result, the appeal of the Revenue is dismissed.

Order pronounced in the Court on 27/06/2019 at Ahmedabad.

-Sd- -Sd- (Ms MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 27/06/2019 Manish