Aug 13, 2017

No TDS on Transporters

OK, TATA, BYE BYE. This is what transporters are saying to section 194C, the dreaded income tax provision. A recent judgment of Visakhapatnam has quashed mandatory TDS, payable by transport operators on payments to truck owners and drivers.

Relevant Case law

2. Here's how the going has become smooth for transporters, as revealed in the case.

Dy. CIT v. Chennupati Kutumbavathi [2017] 83 taxmann.com 97 (Visakhapatnam - Trib.)

The brief facts of the case were that the assessee carrying on business of transport contractors with ITC Limited, filed his return of income for the assessment year 2007-08 on 31-10-2007 admitting a total income of Rs. 1,07,45,900, out of which the total income from business was Rs. 31,21,937. The return was processed under section 143(1), but the case was selected for scrutiny and notices under sections 143(2) & 142(1) were issued.

During the course of assessment proceedings, the Assessing Officer noticed that the assessee has incurred freight charges of Rs.. 4,43,45,100. To ascertain the correctness of expenditure incurred by the assessee and also to examine the applicability of provisions of section 194C for deduction of tax at source, the Assessing Officer issued a show cause notice and asked for necessary details of expenditure along with TDS particulars. In response, the assessee submitted that he was involved in the business of transport contract and had entered into an agreement with ITC Limited for transport of goods from its manufacturing facilities to various places of customers. To execute contract, he had hired lorries from various parties to be deployed to M/s. ITC Limited, for transportation of goods. The assessee said that the trucks were hired directly from owners/drivers as and when it was required. There was no written or oral contract with the suppliers and the lorries were hired based on requirement from various places and the payment was directly made to drivers or owners of vehicles. Therefore, the provisions of section 194C had no application and hence, the TDS was not deducted on such payments.

The Assessing Officer observed that the assessee had paid freight charges without deduction of tax at source under section 194C, even though the payments exceeded the threshold limit fixed for deduction of tax at source. He further said that the assessee has entered into contract with lorry owners for the purpose of transportation of goods which is evident from the fact that lorry receipts issued by the assessee stipulates a condition that the risk associated with goods is on the drivers till the goods are delivered at specified places. The Assessing Officer further said that the assessee was also liable for constructive or actual damages, goods being lost in transit or goods being damaged or deteriorated. The terms and conditions as appeared in the L/R (Lorry Receipts) specified that the driver or owner of the truck or his agents will be totally responsible and liable for the safety of goods and for any loss, damage, theft, highway robbery, fire and damage arising out of the negligence of the truck crew till such time the goods are delivered. Further, it is also incorporated that in the event of any loss or damage caused to the consignment, the driver/owner of the truck would be responsible to make good the loss to the assessee as valued by him. The signature of owner/driver on the L/R authenticated the acceptance of liabilities of the assessee by the lorry owner/driver. The Assessing Officer further observed that the L/R is the basis for payment of freight, hence, the payment cannot be a hire payment as claimed by the assessee. Therefore, he opined that freight charges paid by the assessee need to be treated as payment to sub-contractors as defined under section 194C(2). Since, the assessee failed to deduct tax at source under section 194C, the total expenditure incurred towards freight charges cannot be allowed as deduction under section 40(a)(ia).

Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). He submitted that the payments were directly made to the drivers or whosoever was in charge of vehicles and the drivers had not undertaken any responsibility of goods except what was stated in the L/R receipts, which is only an assignment of responsibility to the lorry owners for safe movement of goods, and cannot be considered as transfer of risk involved in goods to lorry owners. The Assessing Officer merely relied upon the L/Rs to hold that the payments were coming within the ambit of section 194C. The application of provisions of section 194C was unwarranted.

The CIT(A), opined that the assessee had taken lorries on hire without there being any written or oral agreement. He further felt that as seen from the agreement entered into by assessee with ITC Limited there were a number of responsibilities for assessee and all the risks involved in transport of goods rested with assessee. The Assessing Officer treated the freight payments as payment made to sub-contractors merely on the ground that the lorry receipts indicated that the driver/lorry owners have undertaken the risk associated with goods. The CIT said the goods were loaded and transported at the responsibility of the assessee. He would make advance payment to the lorry driver at the time of loading of goods and after delivery the lorry driver would go back and take the balance amount. Thus, in the whole activity elements of contract were absent and as such the action of Assessing Officer in applying the provisions of section 194C was not approved. Since, it was held that the provisions of section 194C had no application, the provisions of section 40(a)(ia) had also no application. He, accordingly, directed the Assessing Officer to delete additions made towards disallowance of freight charges.

Visakhapatnam Tribunal verdict

3. The issue that came up for consideration before Tribunal was disallowance of freight charges under section 40(a)(ia), for failure to deduct tax at source under section 194C. According to Assessing Officer, there was no need for written agreement, even an oral agreement was sufficient to attract the provisions of section 194C.

The payment made to lorry owners was nothing but a payment made to sub-contractors.

The assessee contended that the risk of transportation of goods rested with him. Therefore, the payments made to the lorry owners cannot be considered as payment made to sub-contractors, as defined under section 194C(2).

The Tribunal said the Assessing Officer disallowed freight charges for failure to deduct tax at source under section 194C. According to the Assessing Officer, the expenditure incurred under the head 'freight charges' is nothing but payment made to sub-contractors which attracts TDS provisions under section 194C(2). The provisions of section 194C talk of a person who is responsible for paying any sum to any sub-contractor in pursuance of a contract with such sub-contractor for carrying out any work undertaken by the contractor. As per the Explanation (iii), the work shall include carriage of goods and passengers by any mode of transport other than by railways. A reading of section 194C(iii), clearly indicates that there should be a contract between the parties for carrying out any work. If there was no contract and the amounts were paid directly for engaging the vehicles temporarily for delivering the goods, it would not fall within the provisions of section 194C.

The Tribunal observed that the Assessing Officer has treated the payments to trucks as payment made to sub-contractors, merely on the ground that the L/Rs issued by the assessee established that the assessee entered into a sub-contract with the lorry owners for transportation of goods.

The Tribunal said that it did not agree with the findings of Assessing Officer for the reason that on perusal of paper book filed by the assessee, it was found that the assessee has furnished sample copies of L/Rs. The terms and conditions mentioned in the L/Rs indicated that the lorry owners or drivers would undertake responsibility of safe movement of goods. The L/Rs further indicated that in the event of any damages to goods, on account of negligence of the truck/lorry owners or drivers, then the lorry owners were liable to bear the cost of goods. The Assessing Officer without appreciating the proper facts, simply came to the conclusion that the L/Rs issued by the assessee indicated that there existed a contract between the assessee and the lorry owners. But, the fact remained that the total responsibility of risk involved in the goods rested with assessee. Therefore, the Tribunal's considered view was that the payments made to lorry owners were not coming within the ambit of the provisions of section 194C.

The assessee relied upon the decision of the Tribunal, Visakhapatnam in the case of Kranti Road Transport (P.) Ltd. v. Asstt. CIT [2012] 18 taxmann.com 124/50 SOT 15 where the coordinate Bench of this Tribunal, under similar circumstances, observed that whenever lorries and trucks were hired by assessee to be used in his business under its own supervision and control, then TDS was not required to be deducted on payment made to the lorries/truck owners.

The question involved in this case whether the assessee was required to deduct the TDS on payment of hire charges made to lorry owners was also examined in the case of Mythri Transport Corpn. v. Asstt. CIT [2010] 124 ITD 40 (Visakhapatnam) and in that case it was concluded that the payments made to tanker owner would not fall in the category of sub-contractor for carrying out the whole or part of contract liable for deduction of tax at source under section 194C.

TDS as per section 194C is required to be deducted when the payments are made to the contractor for carrying out the work, i.e., carriage of goods and passengers by any mode of transport other than by railways subject to other conditions prescribed under section 194C but whenever the lorries and trucks are hired by the assessee for its own use in any manner under its own control and supervision, the TDS is not required to be deducted on payment made by the contractor to the lorry/truck owners. In the instant case, the assessee has hired the trucks/lorries for transporting the consignment booked by it under its own supervision and control with all responsibilities and liabilities. Therefore, the hiring of truck and lorries cannot be called to be the work as per definition given in Explanation 3 to section 194C and consequent thereto, the assessee is not liable for deduction of TDS on payment to lorry/truck owners as per section 194C. Therefore, there was no merit in the order of Commissioner (Appeals) and it was to be set aside.

The assessee also relied upon the decision of Hon'ble High Court of Punjab & Haryana, in the case of CIT (TDS) v. United Rice Land Ltd. [2008] 174 Taxman 286/[2010] 322 ITR 594 where it was observed that in the absence of any oral or written agreement between the assessee and the transporters for carriage of goods, freight charges paid to the lorry owners were not coming within the ambit of provisions of section 194C.

In considering the ratios of case laws discussed above, the Tribunal was of the view that the expenditure incurred by the assessee under the head 'freight charges' did not come within the ambit of provisions of section 194C, as the assessee neither entered into any oral or written agreement with the assessee nor took vehicles on regular contract basis. The assessee had taken vehicles on mere hire basis to be deployed in the places where he has undertaken transport contract with M/s. ITC Limited. The risk associated with the goods till transportation to the destination was with the assessee. The lorry owners/drivers had not undertaken any responsibility of risk in the goods. Therefore, the Tribunal was of the view that the payments made to lorry owners were not liable for TDS as per the provisions of section 194C, and consequently, the expenditure incurred under the head 'freight charges' was also not liable for disallowance under section 40(a)(ia). The CIT(A) had rightly deleted additions made by the Assessing Officer. The Tribunal did not find any error in the order of the CIT(A). Hence, the Tribunal was inclined to uphold the CIT(A) order and dismiss the ground raised by the revenue.
No TDS on Transporters

Transporter – In Driver's Seat

4. The judgment has removed the abnormal load, which has been placed on transporters.

The income tax department has been seeing contracts, where there were none.

For years, the transporters have been protesting the cumbersome and harsh burden, but to no avail.

In the unorganized truck industry, to ask for TDS for truck dealings is foolish. Seeing the alacrity with which transporters have been asked for TDS, the feeling was that next, the tax department may even ask for TDS from truck drivers and helpers.

The Visakhapatnam verdict has truly placed the transporters in top gear.

Truck Verdict Overturns Previous Rulings

5. The Chennupatti Kutumbavathi judgment (supra) has shown thumb to many cases, which wrongly held that TDS is payable by transporter, whenever he hires trucks:–

♦ ITO v. Gopal S. Rajput [2016] 65 taxmann.com 294/156 ITD 827 (Mum. – Trib.): The assessee paid transport charges to intermediaries, who were not transporters, for hiring trucks. He, thus, managed his business. The AO wanted to know whey TDS had not been deposited. The Court in this case, favoured the Revenue saying that though there was no written contract between the assessee and intermediaries, a contract may be oral, quasi and implied too. According to Indian Contract Act, 1872 a contract can be express or implied. As there was implicit contract, the assessee was bound to pay TDS.

♦ Smt J. Rama v. CIT [2010] 194 Taxman 37/[2012] 344 ITR 608 (Kar.): The assessee was providing vehicles to companies and had derived income. She was hiring such vehicles. The Court gave judgment saying: "Law does not stipulate the existence of a written contract as a condition precedent for invoking the provisions of section 194C with respect to payment of TDS."

♦ CIT v. Maruti Subray Patil [2015] 63 taxmann.com 28/235 Taxman 147/[2016] 383 ITR 504 (Kar.): The Karnataka High Court upheld that section 194C is attracted, by transporter and section 40(a)(ia) allowance is also, hence, not allowed. The assessee pleaded that his accountant had made a mistake by writing "freight paid" instead of hire charges paid. But, the Court dismissed plea.

♦ Ratan J. Batliboi v. Asstt. CIT [2012] 24 taxmann.com 96/138 ITD 355 (Mum. – Trib.): The Mumbai Tribunal ruled that when assessee contractor gets work done through another though under his supervision and control, there exists a relationship between contractor and sub-contractor, requiring applicability of section 194C.

TDS for transporters is wrong

6. Let us examine why TDS must not be thrust on transporter, who has been burdened with this onerous duty.

♦ NO CONTRACT, THEN WHY TDS: Section 194C explicitly states that the proviso applies only in cases, where there is a contract. As transporters merely hire trucks, why must they be roped in, under section 194C? Unless there is a contract in black and white, it is not fair to target transporters. It is not essential that Indian Contract Act be applied verbatim to income tax matters.

♦ NO SUB-CONTRACTOR RELATIONSHIP: In ITO v. V. Rama Nand & Co. [1987] 163 ITR 702/30 Taxman 434, the High Court of Himachal Pradesh had defined a sub-contractor as 'one who enters into contract with contractor for carrying out work undertaken by contractor.' If truck owners and drivers are not undertaking a contract with transporter nor signing a contract to do his entire work, where is the relationship between sub-contractor and contractor?

♦ RESPONSIBILITY REMAINS: The entire responsibility is that of transporter, certainly, not the truck owner or driver's. In Dy. CIT v. Reez Karakkattil Raghavan [2013] 29 taxmann.com 295/140 ITD 598, the Cochin Tribunal pronounced that responsibility remains with transporter. The carriage of goods is not entrusted to truck owner.

  In Ratnakar Sawant, Dinesh M Shah & Co. v. ITO [2012] 22 taxmann.com 218 (Mum.), the Tribunal held that until and unless risk and responsibility of contract undertaken by assessee is shifted to sub-contractor, it cannot be said that the persons were sub-contractors of assessee. Here, who takes full risk? The transporter. Who holds full responsibility? The transporter. Therefore, how can section 194C be brought into action?

♦ RANDOM BASIS: There is no regularity in transactions, which showed that no contract exists. Trips are not made continuously. Rates are different.

♦ NOT WORKS CONTRACT: A very interesting argument is that Section 194C says "carrying out any work," explicitly but, by carrying goods, no work to goods is done. In Bombay Goods Transport Association v. CBDT [1994] 210 ITR 136/76 Taxman 334 (Bom.) a significant judgment was given, that carrying out any work would not include carrying of goods. In Calcutta Goods Transport Association v. Union of India [1996] 219 ITR 486 it was held that carrying on work means doing something to conduct work to completion. By transporting goods, the truck owners and drivers were not completing production of goods.

Where road was smooth

7. In some cases, transporters have been lucky, to get favourable verdicts. They dismissed TDS imposition, much to the relief of transport owners.

♦ United Rice Land Ltd. (supra): The assessee, who was a rice exporter transferred rice from Samana Bahi to Kandla and used hired trucks for the purpose. The AO said there was an agreement with parties through which trucks were arranged. Therefore, TDS was essential, which assessee did not comply with. The Punjab & Haryana High Court held that there was no oral or written agreement between assessee and transporters. The relevant portion of the order extracted below reads:—
  'The Assessing Officer had held the assessee liable for deduction of tax only on the assumption that it was having agreement with the parties through whom trucks were arranged for transportation of goods. However, the Commissioner (Appeals) had recorded a finding of fact that there was neither any oral or written agreement between the assessee and the transporters for carriage of goods, nor had it been proved that any sum of money regarding freight charges was paid to them in pursuance of a contract for a specific period, quantity or price. That finding of fact was recorded by the Commissioner (Appeals) after considering the certificates furnished by the transporters. The Tribunal had also recorded a finding of fact that the department had not controverted the said finding of the Commissioner (Appeals) even before it. While recording the finding of fact, the Tribunal had clearly stated that nothing had been brought on record by the Assessing Officer to prove that there was any written or oral agreement between the alleged parties for carriage of the goods. In view of that, no interference was called for with the finding of fact recorded by the Tribunal. The appeal, being without merit, was to be dismissed.'

♦ Kranti Road Transport (P.) Ltd. (supra) : The coordinate bench of Visakhapatnam Tribunal, under similar circumstances, observed that whenever lorries and trucks were hired by assessee to be used in his business under its own supervision and control, then TDS was not required to be deducted on payment made to the lorries/truck owners.

The relevant portion of the order extracted below:—

"In the provisions of section 194C, the word 'work' has been used and the said word 'work' has been defined under Explanation 3 according to which the expression 'work' includes advertising, broadcasting, telecasting, carriage of goods and passengers by any mode of transport other than by railways and catering. For the purpose of impugned controversy, the carriage of goods and passengers by any mode of transport other than by railways is considered to be the work which can be assigned to the contractor or sub-contractor for its carrying out.

In the instant case, the assessee was a transporter and booked the consignment of different parties for its transportation. Sometimes, the assessee hired the trucks and lorries of others for the transportation of the consignment booked by it. The assessee has made out a case that he had simply hired the lorries and trucks to transport its consignment under own control and supervision. The movement of trucks and lorries are governed by the assessee itself and not the truck owners. Truck owners simply hire out their trucks for use by the assessee against certain hire charges. The revenue has not made out a case that the assessee has engaged or hired the trucks for transportation of the consignment booked by it under the control and supervision of truck owners. Therefore, the assessee had not assigned any work to the lorry/truck owners as per provisions of section 194C."

♦ CIT v. Prashant H Shah [2013] 29 taxmann.com 296/216 Taxman 287 (Guj.): The Gujarat High Court pronounced in this case that wherever relationship between transporter and assessee is not that of sub-contractor and contractor, section 194C is not attracted.

♦ Sukhwinder Singh v. Department of Income Tax [ITA No. 801/Chandigarh/2011]: The assessee hired trucks, when needed but was held to be at fault for not paying TDS, by the Assessing Officer. The Tribunal held that as he showed proof that he was paying for diesel, tanker repair, new tyres and even loan interest of financing regarding such trucks, it was evident there was no contract.

♦ ITO v. Bhoruka Roadlines Ltd. [2009] 117 ITD 311 (Mum.): The Assessing Officer, in this case, thought that the assessee was in negotiation with supplier of trucks. Hence, he felt there existed a contract between assessee and agent and questioned why TDS had not been paid. In reality, the company was negotiating with truck owners and drivers. The supplier was getting commission, and that too, from truckvalas. As there was no contract, there was no question of TDS being paid.

Draconian Effect

8. First, the transporter who just hires trucks is asked to pay TDS, which is downright abominable. Second, if he does not render TDS, the whole sum shown as hire charges is added back to his income and taxed. Third, he is asked why the amount from transaction is not shown as gross receipts in profit and loss account. The transporter protests that he is not getting any large sum like gross receipts, but a small commission, because it's not a contract. This is, of course, turned down and he's asked to recast the entire profit and loss account. The wheels of TDS trample on.

Conclusion
9. Though trucks are the second largest transport system in the country, the transporters have suffered a lot thanks to TDS, the tormentor. The Board has passed a lot of confusing circulars on the subject. Circular No. 715, dated 8-8-1995 states prerequisite for deduction of tax is contract for carriage of goods. But, Circular No. 433, dated 25-9-1985 says that implied contract attracts TDS under Act. The Board should make it crystal clear that TDS will not be imposed on transporters.

It's heartening that the Visakhapatnam case has removed the bee from the bonnet, by declaring that TDS does not have to be deposited by transporters. The truckers, need not have any truck with TDS, any longer.

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