INDIAN OIL CORPORATION LTD. MARKETING DIVISION (EASTERN REGION),KOLKATA vs. DCIT, CIRCLE - 58 (TDS)/KOLKATA, KOLKATA

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

Three appeals by the same assessee are directed against the different orders of Commissioner of Income Tax (Appeals)-XVI, Kolkata vide even date i.e. on 02.07.2009. Assessments were framed by DCIT, Circle-58, Kolkata u/s 201(1)/201(1A) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his orders dated 31.03.2008 for assessment years 2002-03 to 2004- 05 respectively.

ITA No.1517-1519/Kol/2009 A.Ys 02-03 to 04-05 Indian Oil Corpn Ltd. Marketing Divn. (E) Region v. DCIT Cir-58 (TDS0 Kol. Page 2 Shri Soumitra Choudhury, L’d Authorized Representative appeared on behalf of assessee and Shri Niloy Baran Som, L’d Departmental Representative appeared on behalf of Revenue.

ITA No.1517-1519/Kol/2009 A.Ys 02-03 to 04-05 Indian Oil Corpn Ltd. Marketing Divn. (E) Region v. DCIT Cir-58 (TDS0 Kol. Page 3 6. For that on the facts of the case, the Ld. CIT(A) was wrong in confirming levy of interest u/s. 201(1A) of the IT Act amounting to Rs.10,36,752/- which is completely arbitrary, unjustified and illegal.

3.1 Facts in brief are that in the present case, assessee is a company owned by Central Government and engaged in oil business. There was a survey on the premises of assessee on 04.11-2004 under section 133A of the Act. During the survey it was observed by AO that assessee has paid terminalling charges to BRPL without Deducting Tax at Source (TDS for short) u/s 194C of the Act. Accordingly, AO issued show cause notice upon the assessee for non-deduction of TDS on the payment of terminalling charges as mandated u/s. 194C of the Act. In response to the notice, the assessee submitted that payment of terminalling charges was in the nature of an element of purchase price of the product i.e. petroleum products. The assessee further submitted that the payment was made to BRPL for the utilization of loading infrastructure owned by BRPL and assessee in support of its claim produced the agreement with BRPL. The terminalling charges which have been paid to BRPL is for evacuating the oil extracted and refined by BRPL which is part of the price for the purchase of the petroleum products. The assessee also furnished the copy of the computation of total income and assessment orders of BRPL to justify that the payee has included the terminalling charges in its income. Accordingly the assessee submitted that

ITA No.1517-1519/Kol/2009 A.Ys 02-03 to 04-05 Indian Oil Corpn Ltd. Marketing Divn. (E) Region v. DCIT Cir-58 (TDS0 Kol. Page 4 the transactions for the payment of terminalling charges are out of the purview of TDS provision. However AO has disregarded the plea of the assessee and while doing so the AO also considered certain clauses of the agreement. The reasons for the rejections are enumerated as under:- i) M/s BRPL written a letter to the assessee that it has not obtained any certificate under section 197/ 197A of the Act but has included the receipt of terminalling charges in its books of account as income. ii) Same terminalling charges were paid to M/s Indian Oil Petronas Pvt. Ltd. after the deduction of TDS. iii) The assessee failed to produce documents to demonstrate that the payee has included the terminalling charges in its income and has paid the tax thereon. The AO also observed from the assessment order submitted along with computation of income that there was outstanding demand of the tax on BRPL for the financial year 2002-03 and 2003-04. It was very clear from the AO order for the assessment year 2004-05 that there was tax deficiency of Rs. 3,82,79,751.00 and assessee failed to file any evidence for the payment of the tax. iv) It was noted that loading infrastructure facilities was 100% owned and operated by BRPL. Therefore it was under the control of BRPL. While using the infrastructure facilities for loading of petroleum products for the assessee, it was operated by BRPL. The payment was made as lump sum consideration. Therefore, it cannot be concluded that terminal charges were paid for hire charges / rental charges for the use of aforesaid infrastructure facilities. The claim of assessee that the terminal charges was paid for storing petroleum products purchased from BRPL is not correct as per the agreement. The agreement explicitly provides for the payment towards marketing rights and for the use of infrastructure facilities.

ITA No.1517-1519/Kol/2009 A.Ys 02-03 to 04-05 Indian Oil Corpn Ltd. Marketing Divn. (E) Region v. DCIT Cir-58 (TDS0 Kol. Page 5 v) Infrastructure facilities for the loading of the products is owned and operated by BRPL. vi) As per agreement the infrastructure facilities was controlled and operated by BRPL while loading products and therefore it is not proper to say that BRPL allowed the assessee to utilize infrastructure facilities. vii) The terminalling charges paid by assessee is not forming part of purchase price and analogy can be drawn with carriage inward and loading and unloading charges which are having correct nexus with the purchase, in fact, these charges remained altogether separate charges from the purchase price. viii) As per the agreement, it appears that there is no contemplation of any payment of market price but the nature of payment for terminal charges is alone mentioned for despatching of products. Therefore, the dominant character and nature of such payment as per the agreement was for loading of said products. ix) As per the agreement with BRPL the assessee was to make the payment for the marketing rights and for availing the infrastructure facility for loading of the petroleum products. But the payment made during the year to BRBL cannot be bifurcated between the above two services. However it is very much glaring that the payment is made towards the use of infrastructure facilities as the assessee has debited the entire amount as terminalling charges.

In view of above, AO inferred that assessee has failed to deduct TDS as required u/s. 194C of the Act. The AO further observed that similar payment was made to M/s Indian Oil Petronus Pvt. Ltd. (IOPPL for short) during the financial years 2001-02, 2002-03 & 2003-04 without deducting TDS as IOPPL submitted the certificate of non-deduction of TDS issued by Income Tax Department to IOPPL under section 197 of the Act. Therefore, argument

ITA No.1517-1519/Kol/2009 A.Ys 02-03 to 04-05 Indian Oil Corpn Ltd. Marketing Divn. (E) Region v. DCIT Cir-58 (TDS0 Kol. Page 6 raised by assessee cannot be accepted that payment is not in the nature of work contracts and therefore not allowable due to non deduction of TDS.

In view of above, AO has held that assessee is in default within the meaning of Sec. 201(1) of the Act and accordingly charged interest u/s. 201(1A) of the Act.

The assessee before the ld. CIT(A) pleaded that there was an agreement between BRPL and the assessee-company. As per clause 8.4 of agreement, the payment was to be made for the marketing rights vested with IOC and also loading of products through loading infrastructure which is owned and operated by BRPL. The assessee-company agreed to compensate the BRPL a lump sum of 14 crores per annum. That in the balance sheet of BRPL for the financial year 2001-02 at page 255 in Schedule ‘N’ which can be seen that BRPL has taken the said income as fees for marketing rights. That the financial year 2002-03 at page no. 198 BRPL has written off the said amount as terminal charges / fees for marketing right amounting to Rs.6.20 crores. That in the financial year 2003-04 at page 127 the BRPL in his balance sheet in Schedule ‘N’ has shown reimbursement of infrastructure cost from IOC at 10.51 crores, therefore from the balance sheet of BRPL it can also be very well said that these amounts were not terminal charges but reimbursement of infrastructure cost as well as fees for marketing rights. That these payments

ITA No.1517-1519/Kol/2009 A.Ys 02-03 to 04-05 Indian Oil Corpn Ltd. Marketing Divn. (E) Region v. DCIT Cir-58 (TDS0 Kol. Page 7 made to BRPL were in the nature of compensation for using the loading infrastructure as well as the fees for marketing right paid to BRPL, therefore, these moneys were not paid to BRPL for doing any contract job, therefore, 194C of the Act is not attracted and the assessee was not liable to deduct TDS. Hence, no TDS was deducted by the assessee-company. That in the earlier years, similar payment was made to BRPL on which no TDS was deducted and the Department has accepted this as marketing fees. Therefore AO was wrong in holding these payments as terminal charges and was wrong in holding that the assessee-company was liable to deduct TDS u/s. 194C of the IT Act and thereby raised the demand u/s. 201(1) and 201(1A) which is arbitrary unjustified and illegal. Considering the submission made by assessee, L’d CIT(A) disregarded the plea taken by assessee by further observing as under:- “7. I have considered the submission of the appellant and perused the copy of the agreement as well as other documents filed by the appellant. As far as the appellant’s contention regarding applicability of provisions of section 194C of the Act on payment of Terminling charges is concerned, it is seen that the AO has made an exhaustive and detailed analysis of the agreement between M/s BRP Ltd and the appellant, in his order dated 31.03.2008. On perusal of agreement and the reasons given by the AO I agree with the Assessing Officer that the provisions of section 194C of the Act were applicable on the payment of Terminalling Chargers to M/s BRP Ltd. and M/s IBP Ltd. and the appellant was required to deduct the tax at source on such payment. From the submission of the appellant before the AO vide letter dated 12.02.2008, it is seen that the appellant has made payment of similar nature to M/s Indian Oil Petronus Ltd. on account of Terminalling charges. For Financial years 2001-02 & 2002-03, the said company has obtained nil deduction certificate from the concerned officer and hence no deduction was made by the appellant in those years. However, in FY 2003-04 the appellant itself has deducted the tax on the payment of Terminalling Charges to M/s Indian Oil Petronus Ltd. in view of above, I uphold the view of the AO that the provisions of section 194C of the Act were applicable on payment of Terminalling Charges. The ground nos. 2, 3 & 4 are dismissed.”

Being aggrieved by this order of L’d CIT(A) assessee came in second appeal before us.

ITA No.1517-1519/Kol/2009 A.Ys 02-03 to 04-05 Indian Oil Corpn Ltd. Marketing Divn. (E) Region v. DCIT Cir-58 (TDS0 Kol. Page 8 5. Before us Ld. AR filed three copies of Paper Books comprising pages 1 to 271 respectively and L’d AR drew out attention on page 20 of the PB where the clause 8.4 of the Agreement with the assessee and BRPL is recorded and relevant extract is reproduced below:- “8.4 In consideration of the Marketing Rights vested with OOC and also the loading of Products through the loading infrastructure owned and operated by BRPL, IOC hereby agrees to compensate BRPL a lumpsum amount of Rs.14 crores per annum. This amount shall be payable in four equal quarterly installments. Each installment will be paid on the 15th of the mid month of each quarter.

8.4.1 This quantum of lump-sum amount is payable for each year for period of 5 years. Thereafter the said amount shall be escalated at the rate of 55% (compounded) per year for the balance period of the Agreement.”

L’d AR further submitted that only a lump-sum consideration was paid through the loading infrastructure facilities owned and operated by BRPL, the payment of terminal charges was paid for availing infrastructure facilities. Therefore, this transaction is not covered under the provision of Sec. 194C of the Act. He again submitted that in case revenue was to cover the aforesaid payment of terminalling charges under the net of TDS then at the most it can be covered u/s 194-I of the Act. However, it is pertinent to note that, the provision as stated in section 194-I came into force with effect from 1-6-2007 and dispute in the present case relate to the AYs 2002-03, 2003-04 & 2004-05 respectively. So the amendment u/s 194-I is not applicable for relating Assessment Years.

On the other hand, L’d DR submitted that provision of Sec. 194C of the Act is very much applicable in relation to assessee’s appeals and he relied on the orders of Authorities Below.

ITA No.1517-1519/Kol/2009 A.Ys 02-03 to 04-05 Indian Oil Corpn Ltd. Marketing Divn. (E) Region v. DCIT Cir-58 (TDS0 Kol. Page 9 We find from the assessment order, AO that assessee’s transactions were very much attracted towards the provisions of Sec. 194C of the Act and non- deduction of TDS has made assessee in default of Sec. 201(1) of the Act and accordingly assessee is liable to pay interest to Sec. 201(1A) of the Act. However, in appellant order, L’d CIT(A) has also confirmed the action of AO. Now the issue arise before us is as to whether payment made by assessee for availing infrastructure facilities amounts to work contract as mentioned under section 194C of the Act. The fact reveals from the copy of Agreement between assessee and BRPL, that payment was made for availing the infrastructure facilities and as such, there was no work contract of the nature as specified u/s. 194C of the Act. It is also pertinent to note that Legislative has brought amendment to Sec. 194-I of the Act for making such transactions subject to TDS but which came into force with effect from 1-6-2007 only. The dispute in the instant case relate to the period prior to the amendment u/s 194-I of the Act. At this juncture it is important to produce the relevant provisions of section 194-I of the Act which reads as under : “[Rent. 194-I. Any person, not being an individual or a Hindu undivided family, who is responsible for paying to –a resident] any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier. [deduct income-tax thereon at the rate of – [(a) two per cent for the use of any machinery or plant or equipment; and (b) ten per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings;)] Provided that no deduction shall be made under this section where the amount of such income or, as the case may be, the aggregate of the amount of such income credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed [one hundred and eighty thousand rupees]: [Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a)

ITA No.1517-1519/Kol/2009 A.Ys 02-03 to 04-05 Indian Oil Corpn Ltd. Marketing Divn. (E) Region v. DCIT Cir-58 (TDS0 Kol. Page 10 or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such income by way of rent is credited or paid, shall be liable to deduct income-tax under this section:] [Provided also that no deduction shall be made under this section where the income by way of rent is credited or paid to a business trust, being a real estate investment trust, in respect of any real estate asset, referred to in clause (23FCA) of section 10, owned directly by such

Explanation – For the purposes of this section,- business trust.] [(i) “rent” means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any,- (a) land; or (b) building (including factory building): or (c) land appurtenant to a building (including factory building): or (d) machinery; or (e) plant; or (f) equipment; or (g) furniture; or (h) fittings, whether or not any or all of the above are owned by the payee;]

(ii) where any income is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credited of such income to the account of the payee and the provisions of this section shall apply accordingly.]

From the plain reading of the section, we find that the rent paid for availing the infrastructure facility are subject to TDS under section 194-I of the Act which is effective from 1.6.2007. In the case on hand the disputes relate to the years before the insertion of the provisions of section 194-I of the Act. For making a transaction subject to TDS under section 194-C of the Act there has to be written or unwritten works contract. Now it is important to understand the meaning of works contract in the context of infrastructure facility used by the assessee. From the facts we find that in the instant case the assessee was buying the petroleum products from BRPL. Besides the above the loading services were also provided by BRPL in connection with the purchase of the petroleum product. For the loading services the assessee was making the

ITA No.1517-1519/Kol/2009 A.Ys 02-03 to 04-05 Indian Oil Corpn Ltd. Marketing Divn. (E) Region v. DCIT Cir-58 (TDS0 Kol. Page 11 payment separately to BRPL. The petroleum products were purchased by the assessee in bulk and regular basis for which loading facility was provided by BRPL. The assessee for availing the loading facility was making the payment to the same party from which he was buying the products i.e. BRPL. Thus the loading facility was intricately linked with the every purchase of the products. It was not possible for the assessee to purchase the products without availing the infrastructure facility of BRPL. Thus in our view it shall not be inappropriate to treat the expenses on infrastructure facility at par with the purchase. The method for the payment of infrastructure facility and entering into a separate agreement cannot be the sole basis to treat the transaction independent of the purchase. However we find that in many cases Hon’ble courts have held that the loading charges are very much covered under section 194C of the Act including the judgment of Hon’ble Supreme Court in the case of Associated Cement Company Ltd. vs. CIT (1993) 61 CCH 0273 ISCC (1993) 111 CTR 0165 : (1993) 201 ITR 0435 : (1993) 67 TAXMAN 0346, the facts of the case are as under :

“2. The facts which have led to the need for our decision on the said question, are briefly these : The Associated Cement Co. Ltd., the appellant, issued a letter dt. 5th Nov., 1973 to Mr. S.P. Nag, contractor, Jhunakpani containing the terms and conditions of a contract of loading packed cement bags from its Packing Plants Nos. 1 and 2 into wagons or trucks. Under cl. 12 of those terms and conditions, there was a stipulation that the contractor shall be paid a sum for his work at a flat rate of 41 paise for each tonne of cement handled in Packing Plant Nos. 1 and 30 paise for each tonne of cement handled in Packing Plant No. 2. Clause 13 thereof, which contained a recital that the rate of loading in cl. 12 had been worked out on the basis of daily basic wages of Rs. 2.35 paise, D.A. of Rs. 1.21 paise and H.R.A. of Rs. 0.50 paise, per day per worker stipulated a term of reimbursement by the appellant to the contractor of the difference in D.A. over the amount of Rs. 1.21 paise and annual increment, etc., payable from month to month to every worker by him as per the Second Wage Board Recommendation. As the contractor carried out his work according to the terms and conditions in the contract during the years 1973-74 and 1974-75, the appellant made payments of the sums payable to him under cl. 12 of the contract and the sums reimbursable to him under cl. 13 thereof. But the deductions made under s. 194C(1) of the Act by the appellant out of the sums paid or reimbursed to the contractor fell short of the deductions required to be made thereunder. As the appellant took the stand that it was not liable to deduct any amount under s. 194C(1), out of the sums paid on its behalf to the contractor as per cls. 12 and 13 of the contract,

ITA No.1517-1519/Kol/2009 A.Ys 02-03 to 04-05 Indian Oil Corpn Ltd. Marketing Divn. (E) Region v. DCIT Cir-58 (TDS0 Kol. Page 12 the ITO, Jamshedpur, served on the Principal Officer of the appellant a notice dt. 30th March, 1978 to show cause as to why action should not be taken against the appellant under ss. 276B(1), 281 and 221 of the Act in respect of asst. yrs. 1973-74 and 1974-75 for short deductions out of the sums paid to contractor without observing the requirement of s. 194C(1) of the Act. Another notice dt. 8th May, 1978, relating to the asst. yrs. 1974-75 to 1977-78 of a similar nature, was also served on the Principal Officer of the appellant. The appellant, although impugned both the said notices in a Writ Petition filed under Articles 226 and 227 of the Constitution before the High Court of Judicature at Patna, that Writ Petition was dismissed by the High Court by its order dt. 8th March, 1979. The appellant has, therefore, filed this appeal by special leave before this Court seeking the quashing of the notices which it had unsuccessfully impugned before the High Court, in its Writ petition.”

However, we find that the facts in the above case are different from the case in hand. In the former case the loading charges were paid by the assessee by employing the labour and their rate was fixed on the basis of quantity. However, in the case on hand, the rate lump sum consideration was fixed for the infrastructure facility. No direct labour was involved in the case on hand.

6.1 The claim of the assessee that other companies to whom identical payments were made by the assessee have furnished the form 197/197A of the Act for non-deduction of tax, in our view the mere furnishing of form 197A of the Act cannot change the character of the transactions.

The ld. AR also submitted that in the earlier years the identical payments were made for the availing of infrastructure facilities but no disallowance was warranted. The ld. DR failed to bring anything on record contrary to the arguments advanced by the ld. AR.

6.2 Therefore, in our considered view, the provision of Sec. 194C, in the instant case is not applicable to the assessee. Accordingly, we reverse the orders of Authorities Below and grounds raise by assessee are allowed. AO is directed accordingly.

ITA No.1517-1519/Kol/2009 A.Ys 02-03 to 04-05 Indian Oil Corpn Ltd. Marketing Divn. (E) Region v. DCIT Cir-58 (TDS0 Kol. Page 13 amounting to Rs.1,79,847/- was terminalling charges and attracting the provisions of section 194C of the Act.

11 Next inter-connected issue raised by assessee in grounds No.6 & 7 is that L’d CIT(A) erred in confirming the action of AO on account of levy of interest u/s. 201(1A) of the Act for an amount of ₹ 10,36,752/-

ITA No.1517-1519/Kol/2009 A.Ys 02-03 to 04-05 Indian Oil Corpn Ltd. Marketing Divn. (E) Region v. DCIT Cir-58 (TDS0 Kol. Page 14 Coming to assessee’s appeals No. 1517-1518/Kol/2009 for AYs 02-03 & 03-04.