REGULUS INFRASTRUCTURE MANAGEMENT CONSULTANCY PVT LTD ,BANGALORE vs. INCOME TAX OFFICER WARD-5(1)(4), BANGALORE

These are appeals filed by the assessee against the orders of the Commissioner of Income-tax (Appeals) - V, Bengaluru both dated 31.7.2017 relating to the Assessment Years 2013-14 and 2014-15.

The assessee is a company engaged in the business of providing management services such as housekeeping and security services to malls, residential and commercial buildings. For assessment year 2013-14, assessee filed return of income declaring Nil income and claimed that loss of Rs.5,75,490 and unabsorbed depreciation of Rs.4,20,131, in all a sum of Rs.9,95,622/- has to be allowed to be carried forward for set off against income for subsequent Assessment year. For assessment year 2014-15, return of the income was filed declaring loss of Rs.2,03,303 and unabsorbed depreciation of Rs.4,63,021 in all a sum of Rs.6,66,324/- has to be allowed to be carried forward for set off against income of subsequent Assessment year.

The plea of the assessee before the AO was that (i) the sum paid to M/s Gangothri Water Supply was not claimed as a deduction by the assessee in computing income from business. (ii) The Assessee was obliged as per the agreement with its clients to provide water by purchasing water at actual cost. The clients of the Assessee reimburse the cost of procuring water. Since water was purchased to provide the same to the client, there was no obligation to deduct tax at source at the time of making payment for purchase of water. The further submissions of the assessee was that as per the Karnataka VAT Act, 2003 ['the KVAT Act], purchase of water is in the nature of purchase of 'goods' and accordingly ought not to attract the provisions of section 194C of the Act. The learned AO grossly erred in considering supply and sale of water as a 'service' that has the element of implicit contract. As per the KVAT Act, 'Goods' means all kinds of movable property (other than newspaper, actionable claims, stocks and shares and securities) and includes livestock, all materials, commodities and articles (including goods, as goods or in some other form) involved in the execution of a works contract or those goods to be used in the fitting Out, improvement or repair of movable property, and all growing crops, grass or things attached to, or forming part of the land which are agreed to be severed before sale or under the contract of sale. Water has been classified as 'Goods' in the KVAT Act and as per entry number 54 of the first schedule [dealing with exempted 'goods'] of the KVAT Act, water, other than (i) aerated, mineral, distilled, medicinal, ionic, battery and de-mineralised water; and (ii) water sold in sealed containers are exempted from VAT. Further, aerated water has also been classified as input tax restricted 'goods' in the fifth schedule of the KVAT Act. 'Goods' not falling in the first schedule or in schedule 2. 3 or 4 are taxable at the rate of 14.5%. As such, water, not covered by the first schedule, is taxable under the KVAT Act at 14.5%. Accordingly, as supply of water is essentially in the nature of supply of goods for sale and as per the CBDT Circular No. 13/2006, dated 13th December 2006, wherein it has been clarified that the provisions of section 194C would apply in respect of a contract for supply of any article or thing as per prescribed specifications only if it is a contract for work and not a contract for sale, the payment in question does not fall within the ambit of Sec.194C of the Act and therefore there was no obligation on the part of the Assessee to deduct tax at source.

The Assessing Officer however rejected the claim of the assessee as above and added sum paid to M/s Gangothri Water Supply to the total income of the assessee by invoking the provisions of sec. 40(a)(ia) of the Act. On appeal by the assessee, the CIT(A) upheld the order of the AO. The CIT(A) found that in AY 2013-14, the Assessee had collected more sum from its clients than what it had paid towards the water charges to Gangothri Water Supply and such excess was shown as income in its profit and loss account which proved that though the Assessee has not shown gross receipts and payments but has shown the net receipt on purchase of water. He therefore held that the Assessee had impliedly claimed water charges as deduction while computing its income from business. The CIT(A) held that the purpose of Section 40(a)(ia) is to ensure the recovery of tax. Therefore, the action of the Assessing Officer invoking provisions of Sec.40(a)(ia) was upheld by the CIT(A). On the argument of the Assessee that the sum paid to Gangothri Water supply was a payment for purchase of water and therefore provisions of Sec.194C of the Act will not apply, the CIT(A) held since the Assessee collected amount in excess of the purchase price of water, it was not a case of contract of supply but a contract for carrying out work.

Similar order was passed by the CIT(A) for assessment year 2014-15 also, though there was no excess price received by the Assessee from its clients over and above the sum the Assessee paid to Gangotri Water supply.

Aggrieved by the orders of the CIT(A), assesee has preferred the present appeals before the Tribunal.

The grounds of appeal raised by the assessee reads as follows:-

In support of the plea for admission of additional ground, it has been submitted he assessee filed its return of income showing a loss of Rs.9,95,622/- for the assessment year 2013-14. The Assessing Officer completed the assessment on 16.3.2016 determining the total income at Rs 33,92,700. The assessee filed a rectification application under section 154 of the Income Tax Act, 1961 on 11.04.2016 for non- consideration of loss for the year of Rs.9,95,622/The same is yet to be disposed off. Aggrieved by the order of the Assessing Officer, the assessee preferred an appeal to the Commissioner of Income Tax, Appeals V, Bangalore. Ground of appeal 3 was in respect of the Assessing Officer's action in not setting off the returned loss against the addition made. The Commissioner of Income Tax, Appeals while disposing off the appeal did not adjudicate ground 3 on the contention that this ground was miscellaneous and general in nature and did not need separate adjudication. The assessee preferred an appeal before the honourable income tax appellate tribunal. Due to oversight, the action of the Commissioner of Income Tax, Appeals in not adjudicating ground 3 was not included in the grounds of appeal filed. Accordingly, the assessee has justified it claim for admission of the additional grounds of appeal.

I have heard the submissions of the ld AR and ld DR. As far as the question whether the money paid to M/s Gangothri Water Supply was claimed as a deduction by the assessee in computing income from business is concerned, I find from the ledger account of water charges from the period 1/4/2012 to 31/3/2013 (a copy of which placed at page 7 to 11 of the assessee’s paper book) for assessment year 2013- 14, that the assessee had purchased water from M/s Gangothri Water Supply. The assessee as per the terms of the agreement with a client had to supply water to the commercial establishment of the customer. Perusal of the ledger account of water charges shows that there were 3 customers to whom the assessee had debited the cost of water procurement from M/s Gangothri Water Supply namely – 1) NXP Semiconductors India Pvt. Ltd., 2) Pace Micro Technology (India) Pvt. Ltd., 3) Philips Electronics India Ltd.,

A copy of the agreement between the assessee and Philips Electronics India Ltd., is available at page No.92 to 116 of the assessee’s paper book. As per this agreement, the assessee has to render various services to Philips Electronics India Ltd., as set out in exhibit A in the agreement. The assessee has to maintain adequate supply of water to the commercial establishment. Clause 4.2 of the agreement on supply of water reads as follows:-

I find from the aforesaid clause in the agreement that the assessee has to supply water and the actual cost in providing water alone can be recovered by the assessee form the client. In other words, there is no element of consideration over and above the actual cost of procuring water are reimbursed by the client. In the ledger account of water charges, the total money paid or payable to M/s Gangothri Water Supply was sum of Rs.33,92,698/-. Whereas the assessee has received from 3 of his clients for whom water was supplied, a sum of Rs.31,84,684/-. There is thus an excess sum of Rs.91,986/- received by the assessee. It is from this entry that the Revenue authorities have concluded that the assessee was getting a markup on supply of water. In my opinion this conclusion drawn by the Revenue authorities cannot be sustained. It is clear from the terms of the agreement between the assessee and his client that water charges will be recovered at actuals by the assessee from his clients. As to why there is difference between the amount received by the assessee from the clients and the amount paid to M/s Gangothri Water Supply was explained by the ld counsel for the assessee as an excess payment received which the clients did not claim from the assessee. In assessment year 2014-15, there is no such excess and the debit and credit in the water charges account tally. This proves the case of the assessee and there is no markup in procuring and supplying water by the assessee to his clients and, therefore, I am of the view that the contention put forth by the assessee that the water charges paid to M/s Gangothri Water Supply was never claimed by the assessee as a deduction in the profit and loss account and, therefore, the same cannot be subject matter of addition u/s 40a(ia) of the Act, has to be accepted. I am therefore of the view that the addition made in both the assessment years cannot be sustained and the same is directed to be deleted.

As far as the argument of the ld AR that the provision of sec. 194C of the Act are not attracted in a case of transaction of sale, I am of the view that the contentions to be put forth by the ld counsel for the assessee in this regard are also acceptable. Section 194C Explanation (iv) which defines ‘work’ for the sec. 194C of the Act specifically excludes supply of a product according to the requirements of the customers by using material purchased from a person other than such customers. Water in the present case was purchased by the assessee not from the customers but from a 3rd party and supplied to its clients. Therefore, the price paid for purchase of water in my view cannot be construed as a payment for payment to a contractor for carrying out any work.

I am therefore of the view even on this basis the impugned disallowance u/s 40a(ia) of the Act cannot be sustained. I, therefore, allow the appeals of the assessee for assessment year 2013-14 and 2014-15 also.

As far as additional ground of appeal