The Allahabad High Court recently observed that there is no power vested with the income tax authority to dissect indivisible contract on the absence of a legal provision.
To set up that thermal power plant, the assessee entered into two sets of contracts. First, with Bharat Heavy Electric Ltd. (“BHEL”) to set up a Boiler Turbine Generator (“BTG”) and the second with Carbery Infrastructure Pvt. Ltd. (“CIPL”) to set up Balance of Plant (“BOP).
Under the assessment order dated 15th January, 2015 passed by the Assistant Commissioner of Income Tax (TDS), Noida for the Assessment Years 2012-2013, 2013-2014 and 2014-2015, demand of short deduction of TDS and the corresponding demand of interest were raised. The Assessment Orders were confirmed in appeal by common order dated 16th March, 2016, passed by the Commissioner of Income Tax.
The counsel for the revenue submitted that, the assessing authority had made a detailed consideration of facts. He found that the assessee had not maintained any account to establish the actual payment made to BHEL for the work of Testing and Commissioning of BTG.
Similarly, it was argued that the assessee had not maintained separate account to establish the payment made to CIPL for Installation and Commissioning of BOP. Since payments for those works performed by the BHEL and CIPL fell under the head “fees for technical services” as defined under clause (b) of sub-section (1) of Section 194J of the Income Tax Act, read with Explanation [2] to clause (vii) to sub-section (1) of Section 9 of the Act, the assessee was liable to deduct the Tax at Source/TDS, at the rate of 10% in terms of Explanation (b) to section 194J of the Income Tax Act.
A Division Bench comprising Justices Shiv Shanker Prasad and Saumitra Dayal Singh observed that “Unless an external (legal tool) was available to the assessing authority under any of the provisions of the Act as may have allowed it the luxury to dissect an otherwise indivisible contract and/or unless an internal tool was seen to exist to allow that exercise to be made, a composite contract could not dissected by the assessing authority.”
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