Income Tax Appellate Tribunal - Chennai
Armour Consultants P. Ltd., Chennai vs Department Of Income Tax on 11 August, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
'D ' BENCH, CHENNAI
[BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT AND
SHRI HARI OM MARATHA, JUDICIAL MEMBER]
I.T.A No. 296 /Mds/2009
(Assessment year : 2005-06 )
The Dy. CIT vs M/s Armour Consultants
Company Circle I(1) P.Ltd
Chennai 2-A, Prakasam Road
T. Nagar
Chennai 600 017
[PAN AADCA2769C ]
(Appellant) (Respondent)
I.T.A Nos. 1331 to 1335/Mds/2009
(Assessment year : 2004-05 to 2008-09)
The ACIT vs M/s Armour Consultants
TDS, Circle I P.Ltd
Chennai T. Nagar, Chennai 600 017
(Appellant) (Respondent)
Appellant by : Shri Anirudh Rai, CIT/DR
Respondent by : Shri V.D.Gopal, Advocate
Date of Hearing : 11-08-2011
Date of Pronouncement : 08-09-2011
ORDER
PER HARI OM MARATHA, JUDICIAL MEMBER:
All the above captioned appeals have been filed by the Revenue in which almost identical issues are involved. Therefore, for :- 2 -: ITA 296, 1331 to 1335/09 the sake of convenience and brevity, we proceed to decide them by a common order.
2. To be brief and specific, we would like to narrate the facts for assessment year 2005-06 in I.T.A.No. 296/Mds/2009. This appeal is directed against the order of the ld. CIT(A), dated 12.11.2008 which further emanates from the order dated 26.12.2007 passed by the ACIT, Company Circle I(1) (Assessing Officer) u/s 143(3) of the Act.
3. The assessee is a limited company and for assessment year 2005-06, it filed its return of income declaring total income of ` 1,38,90,581 as against which the Assessing Officer has computed its income at ` 7,47,62,466/- by making the following two additions:
(i) Data Access Fees of ` 2,21,50,200/- paid to three companies disallowed by applying the provisions of section 40(a)(ia) of the Act.
(ii) The assessee claimed to have paid ` 3,79,90,602/-
to three companies as Business Process Outsourcing(BPO) charges. This amount was also disallowed.
4. Aggrieved, the assessee went before the ld. CIT(A), who has deleted these additions. Now, the Revenue is aggrieved and has raised the following grounds:
:- 3 -: ITA 296, 1331 to 1335/09
"1. The order of the learned C!T(A) is contrary to law and facts and circumstances of the case.
2.1 The learned CIT(A) erred in directing the assessing officer to allow the expenses relating to BPO charges.
2.2. It is submitted that the order relied upon by the C!T(A) in the assessee's own case for the assessment year 2004-05 in ITA No. 868/Mds/06-07 dated 17.1.2008 has not become final and appeal to ITAT has been preferred by the department.
3.1. The learned C!T(A) erred in deleting the disallowance of ` 2,21,50,200/- towards data access fee.
3.2. The learned C!T(A) failed to note that the agreement between the assessee company and other finance companies cast an obligation upon the finance companies to constantly provide information about their customers.
3.3. The learned CIT(A) ought to have seen the implication of the contract namely that it is not a one time supply of data but a continuous process of supply of information on real time basis.
3.4. Assuming but not conceding that the contractor simply lets the employees of the assessee company to use its data base, the learned CIT(A) ought to have seen that in the process the data base gets updated every now and then which will amount to rendering of a service. Such contracts for rendering service would be covered by the provisions of section 194C.
4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned C!T(A) may be set aside and that of the Assessing Officer restored. "
5. The first issue of this appeal assails the ld. CIT(A)'s direction to allow the expenses relating to BPO charges. In Ground :- 4 -: ITA 296, 1331 to 1335/09 No.2.2 it has been stated that the ld. CIT(A) has relied on his predecessor's order dated 17.1.2008 in I.T.A.No. 868/Mds/06-07 for assessment year 2004-05 which is in favour of the assessee. The only grudge of the Department is that this order has not become final as further appeal has been preferred against that order. Obviously, apparently and ostensibly this issue stands covered by the Tribunal order dated 26.6.2009 rendered for assessment year 2004-05, and has not been overruled. The judicial propriety demands that the Tribunal order in assessee's own case ha to be respectfully follow. Hence, we see no reason to interfere in this finding of the ld. CIT(A). The assessee-company has utilized infrastructure facility and manpower of three companies viz. M/s Shriram Transport Finance Co. Ltd., Shriram Investments Ltd., and Shriram City Union Finance Ltd. for providing support services in relation to its insurance by entering into outsourcing agreements and paying BPO charges for the work done by them. The Assessing Officer disallowed this claim on similar set of facts in assessment year 2004-05, therefore, he has disallowed in this year as well. This issue has been decided by the Tribunal in assessee's own case vide order dated 26.6.2009, for assessment year 2004-05, in I.T.A.No. 736/Mds/2008. For ready reference, we extract relevant paragraphs 23 to 28 of the Tribunal order: :- 5 -: ITA 296, 1331 to 1335/09
"23. We have considered the rival submissions carefully in the light of material on record. We find that assessee had filed the copies of agreement entered into with the BPO companies (placed at Pages 161 to 188 of the paper book) as well as the nature of services provided vide letters dated 10.8.2006, 21.8.2006 and 26.12.2006 which are placed on the paper book at pages 126 to 157 before the Assessing Officer. The assessee-company is mainly engaged in two segments of business i.e truck insurance business and corporate and retail line of business which has been termed as 'non-truck business'. For truck business, assessee company had to provide services all over the country spread into more than 200 locations. Since assessee-company did not have offices, it had taken the services of three companies for providing office space and other infrastructure. For example, in the agreement entered into with Sriram Transport Finance Co. Ltd, the nature of services to be provided by HP company has been listed as under:
"SUPPORT SERVICES TO BE PROVIDED BY THE HP COMPANY The HP Company hereby agree that it shall provide the following Client Support Services to Armour:
(a) Provide client support services including inspection of Armour customers, collection and payment of premium, mails, co-ordination with insurance COMPANY/policy holders for payment of premium, delivery & collection of insurance policies etc and collection of proposal, vehicle inspection, client background, details regarding truck portfolios as per Armour policies and guidelines.
(b) Provide use of its manpower for market survey and data collection relating to potential business prospects in the topographical area of their respective branches.
(c) Provide use of its manpower for follow up work relating to claims management and all other after sales servicing of clients for Truck business and other retail clients of ARMOUR.
These services shall be provided by the HP Company at its various Branch Offices as set out in Schedule I to this agreement."
:- 6 -: ITA 296, 1331 to 1335/09
24. For this, company agreed to pay a compensation of ` 4,50,000/- per month and the list of branches numbering 41 where such services were to be provided has also been attached. Similarly, in the case of Sriram Investments Ltd., the assessee-company took the services of offices etc at 105 branchs for a compensation of ` 13,90,000/- per month. In various letters written to the Assessing Officer, detailed nature of services have been given and the same was summarized in letter dated 26.12.2006 which reads as under:
• Use of office space and infrastructure available at the specified Branch offices of the HP companies (around 200 locations) such as furniture, fixture and fittings consisting of tables, chairs, cupboards, fans, air conditioners etc. This saves the company from incurring of any capital expenditure and Rent and other regular repair & maintenance expenditure on account of truck insurance business.
• Use of telephone lines and computers, Computer networking, software etc provided for the purpose of truck insurance business at all the locations saving Armour from the Telephone and software development expenses relating to the truck insurance business.
• Use and access of wide range of facilities like typing, mail handling, messenger service and other administrative services [viz. Printing & Stationery, Postage, Travelling & conveyance expenses relating to truck insurance business].
• Use of BPO entity's manpower saving Armour from incurring salary, PF and other employee benefits, staff welfare expenses, Travelling and conveyance expenses etc. • For providing client support services including inspection of Armour customers (truck owners0, collection and payment of premium, mails, coordination with Insurance company/policy holders for payment of premium, delivery and collection of insurance policies etc and collection of proposal, vehicle inspection, client background details regarding truck portfolios as per Armour policies and guidelines.
• For market survey and data collection relating to potential business prospects in the topographical area of their respective branches.:- 7 -: ITA 296, 1331 to 1335/09
• For follow-up work relating to claims management and all other after sales servicing of clients for Trucks business and other retail clients of Armour. "
25. In the sample documents, for example, there is a letter dated 24.1.2004, addressed to Shri Jamalbhai Sindhi whereby cheque has been despatched to him by Sriram Transport Finance Co. and copy of this letter has been sent to the assessee company for information. Then in the letter dated 15.11.2003, Sriram Transport Finance Co. Ltd despatched the spot report alongwith photographs to Shri Nitin Khole for doing correction in the report and action has been referred to the assessee company. These kinds of examples clearly show that while providing services of insurance broker, assessee needs a bigger infrastructure for collecting premiums and then delivering policies to various customers. Later on, if any claims are raised then assessee-company had to organize surveyors, get their reports, send the same to the insurance companies and follow up the claims with insurance companies. Last step would be obtaining the cheques and handing over the same to various customers. All these things require big infrastructure and since assessee-company did not have its own offices and manpower, it took the services of associate companies on BPO basis. We find that Assessing Officer has disallowed this claim without examining the details which is not justified.
26. The other factor for disallowance of the claim was application of section 40a(1 a). Prior to 31.3.2004, there was only a section 40a(i) which was split into sub clause (1), 1(a), 1(b) by Finance NO.2 Act 2004 w.e.f 1.4.2005 which means this provision was not applicable during the assessment year 2004-05.
:- 8 -: ITA 296, 1331 to 1335/09
27. The other important observation made by the Assessing Officer was that expenditure has been booked mainly on the basis of journal entries which is again not correct. Copy of accounts of Sriram Transport Finance Co., Sriram Investments Ltd as well as Sriram City Union Finance Ltd [at pages 158 to 160 of the paper book] clearly show that regular payments have been made by the assessee company to these companies from whom BPO services were obtained.
28. As far as observation that such expenses were not reflected in the results filed with IRDA is concerned, we are satisfied with the explanation of the ld. Counsel for the assessee that it was the first year of operation and all these BPO charges were duly reflected in the second half of the year in the returns filed with IRDA. Under these circumstances, we find nothing wrong in the order of the ld. CIT(A) which we confirm."
6. Respectfully following the Tribunal order (supra), we have to allow the expenses relating to BPO charges. Accordingly, we dismiss Ground No.2.1 and 2.2 of the appeal.
7. The next issue taken vide Ground No.3.1 to 3.4 is in relation to disallowance of ` 2,21,50,200/- claimed towards data access fee. The assessee-company is in the business of insurance broking and is registered with the Insurance Regulatory and Development Authority as an insurance broker. In order to get fresh customers, with whom insurance business can be canvassed, the :- 9 -: ITA 296, 1331 to 1335/09 assessee-company, during the year entered into an agreement with three of its sister concerns, viz. M/s Shriram Transport Finance Company Ltd., M/s Shriram Overseas Finance Ltd., and M/s Shriram Investments Ltd. for providing the assessee an access to their customer base. As per the agreement, the assessee-company has approached these Finance Companies to provide periodical access to the data base containing the details of their depositors, debenture- holders and persons who have obtained finance. In turn, the finance companies agreed to provide the same by sharing relevant information, that they have, with the assessee-company. These agreements are for a fixed period of time of one year. As per these agreements, information with regard to the details of persons who have obtained finance, debenture holders and depositors are to be given on a regular basis. The assessee has paid an amount of ` 2,21,50,200/- to these three companies for the above purpose. But the assessee-company did not deduct tax at source(TDS) on these payments. Since the payments have been made in pursuance to a contract for providing access to the customer base of the three finance companies, as per the Assessing Officer, tax ought to have been deducted u/s 194C of the Act. The assessee was show caused as to why not such payments, made without deducting TDS be disallowed :- 10 -: ITA 296, 1331 to 1335/09 u/s 40(a)(ia) of the Act. It was explained by the assessee-company that data access fee is not a specified expense under any of the sections in Chapter XVIIB of the Act dealing with deduction of taxes at source and this fee is paid for the purchase of information and therefore, is not subject to the provisions of section 194C of the Act. The Assessing Officer has opined that as per the written agreement, an obligation has been cast upon the finance companies to constantly provide information of their customers to the assessee-company and it is not one time supply of data/information. So, it is a contract for continuous supply of information on a real time basis. As and when a new customer/depositor/debenture holder is inducted by those companies, the said information is to be passed on to the assessee- company by the finance companies. They have to continuously update the assessee-company with the details. Thus, the contract for supply of information could not be treated as contract for sale of goods as has been claimed by the assessee. It was stated that since the Finance Companies do not have any ownership rights over the information passed on to the assessee-company and consequent to contract, there is no transfer of ownership in the property transferred, this transaction will not amount to a contract for sale or purchase. As per Assessing Officer, section 194C include within its ambit all contracts of work :- 11 -: ITA 296, 1331 to 1335/09 including supply of labour, therefore, supply of information/data has been equated by the Assessing Officer with supply of labour. He has also relied on CBDT Circular No.681 clarifying the payments covered by section 194C which provides for applicability of section 194C to all types of contracts including transport contracts, labour contracts, service contracts etc. Therefore, the Assessing Officer has disallowed this entire amount u/s 40(a)(ia) of the Act and has added back to assessee's income. On the contrary, the ld. CIT(A) has deleted the entire amount holding that the impugned payment is not attracted under section 194C of the Act mainly on the reasoning that giving access to data base does not involve any work and hence, no contract for work can be inferred. Now the Revenue is aggrieved.
8. It was argued by the ld.CIT/DR that as per agreement, the finance companies are required to constantly provide information about their customer base which is a continuous process. It was further argued that even if it is presumed that the contractors simply let the employee of the assessee-company to use its data base, this data base gets updated every now and then and it will amount to rendering of service. Therefore, rendering of service would be covered by the provisions of section 194C. Per contra, apart from relying on :- 12 -: ITA 296, 1331 to 1335/09 the appellate order, the ld.AR has argued that Circular no.681 on which heavy reliance has been placed by the Assessing Officer as well as by the ld. CIT/DR, has since been struck down and quashed by the Hon'ble Bombay High Court while deciding the case of East India Hotels Ltd vs CBDT, 320 ITR 526.
9. We have circumspected the rival submissions vis-à-vis the available facts and evidence before us. There is no dispute with regard to the fact that the finance companies only allow access to information as discussed above and the contract between the parties is regarding access to data base and not for providing information. To put this fact in simple words it can be said that the Finance Companies would not 'provide' information themselves to the assessee-company, but permit access to its data base. The Hon'ble Supreme Court while explaining the term 'work' used in section 194 while deciding the case of Associated Cement Company Ltd vs CIT, 201 ITR 435, has explained as under:
"Work" envisaged in the sub section, therefore, has a wide import and covers "any work" which one or the other of the organizations specified in the sub section can get carried out through a contractor under a contract and further it includes obtaining by any of such organizations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the "work" but for its specific inclusion in the sub section".
:- 13 -: ITA 296, 1331 to 1335/09 So, it becomes amply clear that for a 'work' there has to be 'supply' by the contracting party. But in the given case no supply of information (service/labour) is involved. The employees of the assessee-company are allowed 'access' to data base who themselves search the requisite information if they so require.
10. Moreover, the CBDT Circular on which the Assessing Officer has relied, has been quashed by the Hon'ble Bombay High Court. In the case of East India Hotels Ltd, & Another(supra), CBDT Circular No.681 dated 8.3.1994, has been quashed as under:
" All service contracts' are outside the purview of section 194C of the Income-tax Act, 1961. However, Circular No. 681 dated March 8, 19941, stated that section 194C would apply to all types of contracts including transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labour contracts, material contracts and work contracts. By inserting Explanation III to section 194C the word "work" in section 194C has been expanded so as to include four types of service contracts within the purview of section 194C.
The words "carrying out any work" in section 194C are limited to any work which on being carried out culminates in a product or result. The word "work" in section 194C has to be understood in a limited sense and would extend only to the service contracts specifically included in section 194C by way of Explanation III. Section 194C would apply to payments for carrying out the work such as constructing buildings or dams or laying of roads and :- 14 -: ITA 296, 1331 to 1335/09 air fields or railway lines or erection or installation of plant and machinery, etc. In all these contracts, the execution of the contract by a contractor/sub- contractor results in production of the desired object or accomplishing the task under the contract.
The facilities or amenities made available by a hotel to its customers do not constitute "work" within the meaning of section 194C. Consequently, Circular' No. 681, dated March 8, 1994 , to the extent it holds that the services made available by a hotel to its customers are covered under section 194C is bad in law and is liable to be quashed. "
So, when the circular itself does not survive, the main basis of reliance by the Assessing Officer, to arrive at his conclusion, also goes to winds, and the reason becomes futile.
11. Above all, the Hon'ble Madras High Court while rendering the decision in the case of Skycell Communication Ltd, 251 ITR 53, has categorically stated that the paying companies should render service involving labour and/or skill, which are singularly absent in the assessee's case. In this case, three companies have done nothing or rendered no service to the assessee-company and hence cannot come under the term 'carrying out any work' which is the main ingredient for applying the provisions of section 194C.
:- 15 -: ITA 296, 1331 to 1335/09
12. It is clearly evident from the assessment order [from page 3 of his order] that no service has been rendered by other companies to the assessee-company. The bonafides of the payment have not been disputed or doubted. As we have explained above, any contract for service will not fall u/s 194C as is evident from the Hon'ble Bombay High Court's decision rendered in the case of East India Hotels Ltd. & Another (supra). We have gone through the relevant portion of the agreement extracted by the Assessing Officer and the language of the agreement is plain and no interpretation is required. The agreement requires the Finance Companies to provide access to their data base to the assessee-company, for a stipulated consideration. 'Any work' defines carrying out 'any work' as per the specification of the person who has given the contract for work. But in the given case, the assessee's staff only visit the premises of the payee companies and after accessing the data base, the business interest of the assessee- company is served. These companies apart from providing access to the data base, which they prepare for themselves, do not provide any other information or do not do some or any other work for the assessee-company. They make the data base for their own use and they do not provide any other information or do any other work for the assessee. They do not make the data base tailor-made to the :- 16 -: ITA 296, 1331 to 1335/09 specifications or requirements of the assessee-company and payee companies' staff is also not utilized even for collecting the requisite information. The Finance Companies are basically engaged in hire purchase and financing of old or new lorries. They maintain the list of their customers who purchase new or old lorries under lease or hire purchase agreement through these three companies. They also maintain the record of their depositors, debenture holders and persons who have obtained finance from them. The assessee is engaged in the business of arranging insurance for lorries to be purchased by the customers of these three payee companies. The depositors, etc. may also go for some type of insurance either medi claim or for household goods etc. In connection with its insurance work the assessee needs details such as name and address of the buyer and seller and asset details etc. to arrange the insurance for them and for access to such data base of the payee companies the assessee-company makes the payment. This exercise facilitates the work of the payee companies as they also want the vehicles which they are going to finance should have insurance cover. Normally, the payee companies are not obliged to render any services to the assessee-company. It is the case of the Assessing Officer that payee companies have rendered 'services' as part of their obligation to the assessee-company. Thus, all the :- 17 -: ITA 296, 1331 to 1335/09 conditions of section 194C except that there is a contract/agreement between the parties, no other conditions are satisfied. Here the work is to be carried out as per the terms and conditions and specification of the contractee. The companies are simply letting the employees of the assessee-company to use their data base prepared for their own consumption. So, the work is done/carried out by the assessee- company itself with the help of the data base maintained by the payee companies. Under these circumstances, one can safely conclude that there cannot be any obligation on the part of the assessee-company to deduct tax u/s 194C or under any other provision of Chapter XVIIB while making the payments to the payee companies. Hence, the provisions of section 40(a)(ia) are not at all applicable and the payments cannot be disallowed thereunder. Accordingly, we do not find any infirmity in the finding of the ld. CIT(A) who has taken a similar view. Thus, the appeal of the Revenue stands dismissed.
13. We may mention that the appeals in I.T.A.Nos.1331 to 1335/Mds/2009 for assessment years 2004-05 to 2008-09 arise out of the common order of the ld. CIT(A) dated 9.6.2009. But in two assessment years 2005-06 and 2006-07, similar grounds regarding application of section 194C on account of access to data base of the :- 18 -: ITA 296, 1331 to 1335/09 payee companies from which similar information is gathered by the assessee-company, have been raised.
14. This issue stands decided in the same manner as we have done while adjudicating appeal in I.T.A.No. 296/Mds/2009 for assessment year 2005-06 herein-above in favour of the assessee, by holding that provisions of section 194C and consequently provisions of section 40(a)(ia) would not be applicable to these impugned payments. Apart from the above issue, in all these years, one more common issue is involved. Before we discuss and decide the issue, we would like to narrate the common facts of the case.
15. In fact, these appeals are in relation to orders passed u/s 201(1) and 201(1A) of the Act vide orders dated 14.5.2008 by the ACIT, TDS Circle I, Chennai. The assessee-company failed to deduct TDS to the tune of ` 2,21,50,200/- and ` 1,59,79,000/- for financial years 2004-05 and 2005-06 respectively on the payments made to three concerns of Sriram Group viz. M/s Shriram Transport Finance Co. Ltd., M/s Shriram Overseas Finance Ltd. and M/s Shriram Investments Ltd. The assessee had entered into an agreement with the above three concerns for providing access to their customer data base by :- 19 -: ITA 296, 1331 to 1335/09 means of a contract/agreement dated 1.4.2004. As per this agreement, the assessee-company had access to the data base of the above mentioned finance companies which contains details of their depositors and debenture holders and persons who have obtained finance as we have discussed in the former part of this order. As we have already held such payments could not fall under any other provisions of Income-tax Act, including 194C and 40(a)(ia), therefore, these issues stand decided in favour of the assessee and the grounds raised in this regard in the appeals of the Revenue stand dismissed.
16. The Assessing Officer has initiated action against the assessee-company for non-deduction/under-deduction of TDS during the financial year 2003-04 , 2004-05, 2005-06, 2006-07 and 2007-08 and has raised a demand of ` 9,81,485/- in each of the years. Aggrieved, the assessee preferred appeal before the ld. CIT(A), who, in turn, has deleted these demands and hence, the Revenue is now aggrieved.
17. We have carefully considered the facts of these cases in the light of rival submissions. It is an undisputed fact that the assessee- company namely, M/s Armour Consultants has paid charges to M/s :- 20 -: ITA 296, 1331 to 1335/09 Shriram Transport Finance Co. Ltd., M/s Shriram City Union Finance Co. Ltd and M/s Shriram Investments Ltd. for using their manpower which is subject to TDS after deducting TDS u/s 194C 2%. In other words, these three finance companies supplied their labour force to the assessee-company for which consideration was paid to them. But in the opinion of the Assessing Officer, these payments were on account of existence of relationship between the parties of a Principal and Agent and therefore, section 194H would apply leading to deduction of TDS @ 5% as against 2% deducted by the assessee- company. The ld. CIT(A) has treated this contract for supply of labour as 'works contract' and upheld the deduction of tax @ 2%. The Revenue is aggrieved.
18. It was argued by the ld.CIT/DR that the provisions of section 194H would apply to the facts of this case. But we are unable to find out that the relation of Principal and agent exists between the parties.
19. We have examined the issue from various angles and have treaded through the provisions of section 194C and 194H. But in our considered opinion, the provisions of section 194H would not apply to :- 21 -: ITA 296, 1331 to 1335/09 the facts of the given case. Hence, the conclusion drawn by the ld. CIT(A) is correct and warrants no interference. Accordingly, all the issues raised in these appeals stand decided in favour of the assessee and against the Revenue.
20. To summarize the result, all the appeals filed by the Revenue stand dismissed.
Order pronounced in the open court on 08-09-2011.
Sd/- Sd/-
(DR. O.K. NARAYANAN) (HARI OM MARATHA)
VICE-PRESIDENT JUDICIAL MEMBER
Dated: 08th September, 2011
RD
Copy to:
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR