The Kolkata bench of the Income Tax Appellate Tribunal (ITAT) held that the tax deducted at source under Section 194C(2) of the Income Tax Act, 1961 shall not be applicable when there is no contractual or sub-contractual relationship exists between the joint venture and its constituencies.
The assessee Joint Venture (JV) was formed by RAMKY Infrastructure Ltd and ECI Engineering & Construction Ltd in the name of RAMKY-ECI (JV). National Highways & Infrastructure Development Corporation Ltd. (NHIDCL) awarded the work of execution of the development of a road project at Kohima, Nagaland, assessee being the successful bidder.
For this purpose, an internal agreement was entered into between the two JV partners i.e. RAMKY and ECI. This internal agreement laid down the terms and conditions for the execution of work and the understanding between the two JV partners for the work awarded by NHIDCL.
According to this agreement, ECI shall execute 100% work as detailed in the drawing specification and other information furnished in the contract agreement. RAMKY will be compensated by an amount equivalent to 2.25% of the corresponding gross bills received from NHIDCL.
ECI shall get the necessary registration done and shall secure approvals required by relevant authorities on behalf of RAMKY ECI (JV) and shall bear all associated costs. All statutory compliances are the responsibility of ECI. The penalties and damages if any, imposed by NHIDCL on account of violations, ECI shall bear such payments. The agreement is to expire if the JV has not been awarded the contract and also in case, the contract is awarded, after work has been completed in entirety.
The Assessing Officer passed an order under Section 201(1A) of the Income Tax Act for determining the total amount payable at Rs.20,08,126/- which includes tax deductible under Section 194H of the Income Tax Act of Rs.4,55,663/- and interest under Section 201(1A) of the Income Tax Act at Rs.15,52,463/-.
The counsel submitted that there is no contract and sub-contract relationship between the assessee JV and ECI. Since there is no agreement between the assessee and its constituent ECI in the nature of the sub-contract agreement, provisions of Section 194C(2) of the Income Tax Act are not applicable and, therefore, assessee JV is not liable to deduct tax at source for the payment made to ECI.
The Two-member bench comprising of Rajpal Yadav (Vice-President) and Girish Agrawal (Accountant member) held that both the parties have divided the contract work between themselves and have executed their share of work at their own risk.
It was concluded that there is no merit in the presumption made by the Assessing Officer that the JV is the main contractor and the constituents are the subcontractors. Accordingly, it held that the question of deduction of tax at source under Section 194C(2) of the Income Tax Act does not arise.
Therefore, it was concluded by the bench that the assessee JV was not liable to deduct tax at source and, therefore, it cannot be held to be in default under Section 201(1) of the Income Tax Act and liable to be charged interest under Section 201(1A) of the Income Tax Act. Thus, the appeal of the assessee was allowed.
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