Income Tax Appellate Tribunal - Chennai
The Director, M/S.Jawaharlal ... vs Department Of Income Tax on 5 September, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH, CHENNAI
BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
AND SHRI V. DURGA RAO, JUDICIAL MEMBER
I.T.A. Nos. 1868 & 1869/Mds/2011
(Assessment Years : 2007-08 & 2008-09)
The Director,
The Income Tax Officer, M/s Jawaharlal Institute of Post
TDS Ward, v. Graduate Meducal Education &
Income Tax Office, Research (JIPMER),
Deivanayagam Pillai Thottam, Administrative Block, JIPMER
Puducherry. complex, Puducherry.
PAN : AAAJJ0846M
(Appellant) (Respondent)
Appellant by : Shri Shaji P. Jacob, Addl. CIT
Respondent by : Shri Philip George, Advocate
Date of Hearing : 05.09.2012
Date of Pronouncement : 18.09.2012
O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
These are appeals filed by the Revenue against an order dated 11.8.2011 of Commissioner of Income Tax (Appeals)-IV, Chennai, for the impugned assessment years. Grounds taken are similar for both the years.
2 I.T.A. Nos. 1868 & 1869/Mds/11
2. Main grievance of the Revenue is that CIT(Appeals) considered relationship between the assessee and M/s Hindustan Latex Limited [later known as HLL Lifecare Ltd.(M/s HLL)] only as that of a Principal to consultant and thus held the assessee to be not bound to deduct tax at source on the payments made by it to M/s HLL, insofar as it related to engineering, procurement & construction work done by M/s L&T Limited. Revenue is also aggrieved that CIT(Appeals) held interest under Section 201(1A) of Income-tax Act, 1961 (in short 'the Act') to be not chargeable relying on the decision of Hon'ble Apex Court in the case of Hindustan Coco-Cola Beverages (P) Ltd. v. CIT (293 ITR 226).
3. Facts apropos are that assessee, better known as JIPMER, is an organization which was declared as autonomous on 14th July, 2007 and prior to that functioning under the Ministry of Health and Family Welfare, Government of India. Assessee had two areas of activities, namely, running of hospital and running of medical college. For these purposes, it was necessary for the assessee to develop infrastructure including various buildings. In order to carry out the 3 I.T.A. Nos. 1868 & 1869/Mds/11 construction work and to ensure completion of its various projects, assessee had entered into an agreement with M/s HLL.
4. During the course of an inspection done by the Revenue, it was noted that assessee was effecting various payments to M/s HLL pursuant to its agreement with it. As per the A.O., assessee was not deducting tax at source on such payments despite the services in the nature of engineering, procurement and construction (EPC) being rendered by M/s HLL. Assessee was required to explain why tax was not deducted at source when such payments were effected to M/s HLL.
5. Reply of the assessee was that what was being paid to M/s HLL was only consultancy charges at the rate of 2% to 3% of the project cost and the said M/s HLL was not the contractor for the work. For consultancy payment made to M/s HLL, assessee submitted that it had deducted tax at source in accordance with Section 194J of the Act. As per the assessee, an obligation for deducting tax under Section 194C, was only where payments were made to a contractor and where there was an element of income in such payments for the payees. Assessee submitted that whatever was paid to M/s HLL was 4 I.T.A. Nos. 1868 & 1869/Mds/11 passed on by them to the ultimate contractor of the work which was M/s L&T, and the payments were only routed through M/s HLL. Assessee argued that consultancy charges to M/s HLL were for various functional roles assigned to it, such as preparation of designs for hospital buildings, receiving bids, scrutinizing and processing the bids for final selection of contractor, providing contractual framework, execution of necessary legal documentation with selected party and supervision of the civil works carried out by civil contractor. As per the assessee, M/s HLL had not participated in the tender for construction work as a bidder at all. The only income arising to M/s HLL was consultancy fee paid by the assessee.
6. However, the A.O. was not impressed by the above contentions of the assessee. According to him, the work and responsibility of M/s HLL were so wide and extended upto handing over of constructed building to the assessee after completion. A.O. noted that there were two agreements - one between assessee and M/s HLL and other between M/s HLL and M/s L&T for construction. There was no direct agreement between assessee and M/s L&T. The payment for EPC was not directly made by the assessee to M/s L&T but was made to M/s HLL who had, in turn, effected payment to L&T. According to him, 5 I.T.A. Nos. 1868 & 1869/Mds/11 agreement entered between assessee and M/s HLL fell within the meaning of a "contract" as defined under Section 10 of the Indian Contract Act, 1872. Hence, M/s HLL was only a contractor of assessee and for the payments made to M/s HLL for EPC, it was required to deduct of tax at source as specified under Section 194C of the Act. A.O. also noted that funds placed at disposal of HLL was not merely as a custodian of funds, but, on the other hand, M/s HLL had also derived income on such funds, in the nature of interest. In some cases, according to the A.O., surplus funds were received by M/s HLL when compared to payments effected by it to M/s L&T. He noted that there were two phases for the projects, of which in Phase- I, M/s HLL had earned profit of ` 3,26,72,238/-. Thus, his conclusion was that M/s HLL was executing the contracts as a lump sum contractor for the assessee and M/s L&T was only a sub-contractor.
7. Though the assessee relied on the decision of Hon'ble Apex Court in the case of Hindustan Coco-Cola Beverages (P) Ltd. (supra), A.O. did not accept it for a reason that no documentary evidence was produced by M/s HLL to show that tax due on amounts received by it from assessee stood paid. Thus A.O. considered the assessee to be at default for its failure to deduct tax and raised demand under 6 I.T.A. Nos. 1868 & 1869/Mds/11 Section 201(1) and for interest under Section 201(1A) of the Act, as under for assessment year 2007-08:-
Particulars Total TDS Less Balance Add Net Disburse- Payable TDS paid TDS Interest Demand ment (`) (`) (`) payable u/s u/s 201(1A) 201(1)(`) (`) Consultancy Fees paid to M/s Hindustan Latex Ltd. 7017953 393707 393707 0 17717 17717 Amounts paid to M/s Hindustan Latex Ltd., towards EPC Contract for Phase-I Project. 135877844 3043664 0 3043664 2191438 5235102 Total 142895797 3437371 393707 3043664 2209155 5252819 Demand raised for assessment year 2008-09 was as under:-
Particulars Total TDS Less Balance Add Net Disburse- Payable TDS paid TDS Interest Demand ment (`) (`) (`) payable u/s u/s 201(1A) 201(1) (`) (`) Consultancy Fees paid to M/s Hindustan Latex Ltd. 9528128 981397 536624 444773 272268 717041 Amounts paid to M/s Hindustan 7 I.T.A. Nos. 1868 & 1869/Mds/11 Latex Ltd., towards EPC Contract for Phase-I Project. 774215057 17342417 0 17342417 9657441 26999858 Legal Fees paid to Sh. Arunan 112276 11585 5725 5860 3164 9024 Legal Fees paid to Sh.
Mohan Parasaran 55000 5665 2805 2860 1544 4404 Total 783910461 18341064 499228 17795919 9934417 27730327
8. Against the above demands, assessee moved in appeal before CIT(Appeals). Argument of the assessee was that for assessment year 2007-08, there were no payments whatsoever effected by it to M/s HLL. Reliance was once again placed on the decision of Hon'ble Apex Court in the case of Hindustan Coco-Cola Beverages (P) Ltd.
(supra). Further, as per assessee, the agreement between assessee and M/s HLL was titled as "Contract for Consultancy Services" and it was nothing but a simple consultancy agreement. M/s HLL was not responsible for effecting the construction, but, mainly responsible for supervision of work after electing the bidder. M/s HLL was entitled only to 2% of total project cost as consultancy fees. Just for the reason that payments to M/s L&T were routed through M/s HLL would not mean that M/s HLL was the contractor. M/s HLL's duty was only 8 I.T.A. Nos. 1868 & 1869/Mds/11 to scrutinize the bills submitted by M/s L&T and whatever payments they were effecting were on behalf of assessee and after receiving the funds from the assessee. Assessee also brought to the notice of CIT(Appeals) a letter received by it from Ministry of Health & Family Welfare, Government of India, in which it was mentioned that tax was required to be deducted only on consultancy charges. It was also submitted that M/s HLL had duly deducted tax as stipulated under Section 194C of the Act, on the payments effected to M/s L&T, on the bills raised by it. Hence, if the assessee also deducted tax at source, it would have resulted in double deduction. Assessee also pointed out that both the assessee as well as M/s HLL were wholly owned by Government of India and books of both of they were subject to C&AG audit.
9. CIT(Appeals), after considering the above arguments, held that for assessment year 2007-08, there were no payments whatever effected by the assessee to M/s HLL and therefore, there was no question of invoking Section 194C/201(1)/201(1A) of the Act. As for assessment year 2008-09, CIT(Appeals) was of the opinion that there was no contract between assessee and M/s HLL for any construction work. As per the CIT(Appeals), the agreement clearly 9 I.T.A. Nos. 1868 & 1869/Mds/11 mentioned M/s HLL only as a consultant. Had the agreement been one for contract, it would have clearly showed various specifications of construction and stages of construction for effecting payments and raising bills. According to him, the agreement between assessee and M/s HLL was not a construction contract. In any case, as per ld. CIT(Appeals), M/s HLL had deducted tax as specified under Section 194C of the Act while effecting payments to M/s L&T. CIT(Appeals) also relied on the decision of Lucknow Bench of this Tribunal in the case of UPSIDC v. ITO (81 ITD 173). He thus felt that assessee was not liable to deduct any tax at source on the payment effected by it to M/s HLL, but, for the consultancy part and therefore, there was no default on the part of the assessee for fastening on it a liability under Section 201(1) of the Act or for interest under Section 201(1A) of the Act, except for the shortfall of TDS on consultancy charges paid to M/s HLL.
10. Now before us, learned D.R., strongly assailing the order of CIT(Appeals), submitted that in the first place, for assessment year 2007-08, CIT(Appeals)'s finding regarding assessee having not effected any payments to M/s HLL, was not correct. According to him, assessee had credited a sum of ` 13,58,77,844/- and ` 10 I.T.A. Nos. 1868 & 1869/Mds/11 70,17,953/- in the month of March, 2007 in the account of M/s HLL against bill No.P-1014 & P-1015. In support, relevant ledger copies of the assessee for the relevant previous year were also produced. Further, according to him, it was clear that assessee had effected these payments for mobilization and consultancy work of M/s HLL. Sum of ` 13,58,77,844/- was mobilization advance paid to M/s HLL, whereas, ` 70,17,953/- was consultancy advance made to M/s HLL. According to learned D.R., assessee was liable to deduct tax at source at the point of time when the sum was credited in its books in the contractor's account. This having been done in March, 2007, there was failure on the part of the assessee to deduct tax at source and therefore, it was not only liable under Section 201(1), but also for interest under Section 201(1A) of the Act.
11. As for assessment year 2008-09, learned D.R. pointed out that there was no contract between assessee and M/s L&T ultimate party which was doing the construction work. Assessee had a contract only with M/s HLL and M/s HLL was bound to supervise the work and hand over the building and plant in working condition to the assessee in accordance with EPC. All the payments made by assessee were only to M/s HLL and it was M/s HLL who effected payments to M/s 11 I.T.A. Nos. 1868 & 1869/Mds/11 L&T. M/s L&T was only a sub-contractor and M/s HLL was the main contractor. Assessee had failed to deduct tax at source on payments effected to M/s HLL, but for consultancy charges. May be, only 2% of the total project cost was the fee payable to M/s HLL, but, nevertheless, M/s HLL being the main contractor and all the payments having been made by the assessee to M/s HLL, M/s HLL alone could be considered as the contractor. For the assessee, it was nothing but a turnkey contract undertaken by M/s HLL and the latter was ultimately responsible for the work. Assessee having not deducted tax at source, it was liable for all the consequence that would follow as a defaulter. Assessee was rightly considered one in default under Section 201(1) of the Act and levy of interest under Section 201(1A) was also justified.
12. Per contra, learned A.R. supported the order of CIT(Appeals).
13. We have perused the orders and heard the rival submissions. The main issue is whether M/s HLL was only a consultant or was a contractor. It is required to reproduce the relevant parts of the contract entered between assessee and M/s HLL placed at paper- 12 I.T.A. Nos. 1868 & 1869/Mds/11 book page 17. Relationship between the parties has been defined in clause 1.4, which is reproduced hereunder:-
"Relationship between parties Nothing contained herein shall be construed as establishing a relation of master and servant or of agent and principal as between the client and the consultant. The Consultants subject to this contract shall have compete charge of personnel performing the services and shall be fully responsible for the services performed by them or on their behalf hereunder."
Obligation of M/s HLL, its duties and responsibilities are specified as under:-
"3. Obligation of Consultant 3.1 Performance 3.1.1 The consultant shall perform the tasks/services as per Annexure 'A' with all diligence, efficiency and submit report to the committees by the Client as per Annexure 'B'.
3.1.2 The Consultant shall always act in respect of any matter relating to this contract or to the services as faithful advisers to the Client and shall at all times support and safe guard the Clients legitimate interest in any dealings with third parties.
3.1.3 The Consultant shall not assign this contract or sub contract or any portion of it without the prior written consent of Client.
3.1.4 The Consultant shall pay the taxes, duties, fees, levies and other impositions levied under the applicable law and Client shall perform such duties in this regard to the reimbursement / deduction of such tax as may be lawfully imposed.
3.2 Duties and responsibilities 13 I.T.A. Nos. 1868 & 1869/Mds/11 The Consultant undertakes to carry out the assignment as per Annexure 'A' in accordance with highest standard of professional and ethical competence and integrity, having due regard to the nature and purpose of the assignment and ensure that the staff assigned to perform the services under this contract will conduct themselves in manner consistent herewith.
3.3 Indemnifying the Client by the Consultant Consultant shall indemnify and hold harmless the Client against all and any demands and / or judgement of any nature brought against the Client arising out of the service by the Consultant and its staff under this contract. This obligation will survive the termination of the contract.
3.4 Liability of the Consultant The Consultant shall be liable to the Client for the performance of the services in accordance with provisions of this contract and for any loss suffered by the Client as a result of a default of the Consultant in such performance subject to the following.
(a) The Consultants shall not be liable for any damage or injury caused by or arising out of the act, neglect, default or omission of any persons other than the Consultants. However if Consultant engage some sub agents to perform the contract, then Consultant will be liable for their act or omission or neglect.
The Consultant shall not be liable for any loss or damage caused by or arising out of circumstances over which he had no contract." Payment terms as specified in clause 4.4 is reproduced as under:-
"4.4 Payment: Client shall pay the Consultant A. Consultancy fee:14 I.T.A. Nos. 1868 & 1869/Mds/11
(i) 3% of the total project cost which shall include service tax.
B. Reimbursable: The Client shall reimburse following actual expenses.
(i) Advertisement charges as per
concessional rate charged by DAVP from
Government Department.
(ii) Testing charges if any.
(iii) Legal expenses as per Govt. Rules
including the instructions issued by
Ministry of Law and Justice."
Mode of payment as found in clause 4.6.1 is reproduced as under:-
"4.6 Mode of payment & submission of bills:
4.6.1 Fee for Consultancy
(a) 15% after approval of RFP document.
(b) 10% on selection of EPC agency and award of work
(c) 5% on completion of foundation.
(d) 5% on completion of civil structure.
(e) 30% on supply of equipments on prorata
basis.
(f) 15% on installation, testing & commissioning
of equipments on pro rata basis.
(g) 15% after completion of the project.
(h) 5% after the completion of defect liability
period.
4.6.2 Project Payment to EPC developer based on the agreement to be executed between the EPC developer and HLL Life Care Ltd. The client shall 15 I.T.A. Nos. 1868 & 1869/Mds/11 make initial deposit with the consultant a sum equal to 10% of the approved project cost immediately after award of work to the Contractor. 4.6.3 The consultant shall make payments to the EPC Developer from the said deposit and adjustment bills will be submitted to JIPMER on 30 days cycle basis, which shall be reimbursed within 30 days of submission of same. 4.6.4 HLL will be submitting quarterly statement of Accounts within one month of incurring the expenditure for making payment to the contractor. 4.6.5 If any interest is earned on advance drawn from the JIPMER by HLL then that will be added towards the advance drawn from JIPMER." Description of services to be rendered by M/s HLL given at paper- book page 29, 30 and 31, forming a part of the agreement is reproduced hereunder:-
"Description of services to be provided by consultants HLL as an In House Consultant will undertake the following activities:-
(a) To provide consultancy for Equipping the Regional Cancer Centre at JIPMER, Puducherry, on turnkey basis at JIPMER, Puducherry.
(b) Preparation of eligibility criteria for bidders.
(c) Preparation of bid documents. (d) Finalizing bid procedures. (e) Floating tenders. (f) Interacting with prospective bidders and furnishing all the
requisite information, including the site visit.
(g) Receiving the bids, scrutinizing and processing the bid for final selection as per the procedure finalized by the Client.16 I.T.A. Nos. 1868 & 1869/Mds/11
(h) Providing the contractual framework along with drafting and execution of necessary legal documentation including the contract between HLL and the selected party.
(i) HLL will also finalize, in consultation with the Client, the scheduled for the entire project giving all specific activities and time frames for completion of the project in the shortest period.
(j) HLL shall monitor all the activities of the EPC/selected bidder and shall be involved through the entire duration of the project. HLL will also be responsible for proper completion, commissioning (including those of equipment which should have properly been tested and inspected as per specification approved by the Client and concerned staff provided proper training.) and handling over of these projects by EPC/to the entire satisfaction of the Client at the end of the defect liability period including settlement of all accounts, obtaining necessary approvals/permissions from all statutory authorities/bodies for and on behalf of the Client through the EPC developer.
(k) HLL will also certify that the project is completed in conformity with the provisions of contract documents.
(l) HLL shall ensure that the works are completed in all manners as per the quality, standards and within the budgeted cost and time.
"penalty at the rate of 0.5% of the consultancy fees per week subjected to 10% ceiling of the total consultancy fees shall be imposed on M/s HLL on account of failure on part of M/s HLL directly attributed to them on following grounds:-
(a) Failure on the part of M/s HLL to furnish to Director, JIPMER, Puduchery, the following documents/ information
(i) Evaluation reports of bids received.
(ii) Cost Analysis Report. (iii) Project schedule finalized with the selected bidder. (iv) Monthly and quarterly project progress report indicating the planned
activities, ongoing activities and completed activities during the period within 15 days of completion of the specified period.
(v) Statement of Funds received from JIPMER and payment released to the contractors.17 I.T.A. Nos. 1868 & 1869/Mds/11
(vi) Submission of detailed design within 45 days of signing of agreement with the contractor.
(vii) A declaration to the effect that all statutory requirements needed to execute the project will be obtained by M/s HLL through EPC developer from the concerned authorities.
(b) Failure in timely payment to EPC Developer within stipulated time.
(c) Failure on the part of Consultant to show diligence in timely reporting/MIS.
(d) Failure on the part of Consultant to furnish quality assurance documents, test results and certificates of materials within 15 (fifteen) days of the agreed upon time/deadline.
(m) HLL shall be fully responsible for the technical inspection, supervision and monitoring of all the structural and civil engineering works of these projects.
(n) HLL shall also settle all contractual disputes with the selected bidder including arbitration, if any as well as attend meetings in connection with any dispute or Arbitration.
(o) HLL shall also carry out such other duties as may be required of it in the post-contact stage on these projects in terms of the agreement, signed with the EPC agency."
14. A reading of above clauses clearly show that M/s HLL was getting fee for consultancy only. Project payments for EPC development were given to M/s L&T based on the agreement executed by EPC developer, viz. L&T and M/s HLL. M/s HLL was to effect the payments to EPC developer from the deposits given by the assessee and adjustment bills were submitted to the assessee on a 30 day cycle basis. It was clearly a reimbursement that was in the 18 I.T.A. Nos. 1868 & 1869/Mds/11 contemplation. The agreement clearly shows that what was due to M/s HLL was only fee for consultancy. For the construction rendered by the ultimate contractor, the payments though effected by M/s HLL was only on behalf of assessee, on a reimbursement basis out of deposits given by the assessee to it and M/s HLL could not have made any profits on such payments to M/s HLL. If at all M/s HLL had made some profits, it was against the terms of the agreement between assessee and M/s HLL but that by itself will not place it in the position of the main contractor for the EPC work. Understanding between the parties was that M/s HLL was only to act as consultant. Description of services to be provided by M/s HLL also show that it was only a consultant and its main work was to process the bills, select successful bidder and supervise the work. On the consultancy charges paid by the assessee to M/s HLL, it had deducted tax albeit at lower rate. In our opinion, in the face of the above clauses in the agreement, which have been reproduced above, we cannot say that M/s HLL was a contractor for the assessee. M/s HLL was only a consultant. Finding of CIT(Appeals) that there was no contractor and contractee relationship as in a works contract, is correct, in our opinion. Consideration receivable by M/s HLL for the consultancy 19 I.T.A. Nos. 1868 & 1869/Mds/11 work was a percentage of project cost and nothing more. We are, therefore, of the opinion that assessee could not have been fastened with a default of the nature specified in Section 201(1) of the Act for non-deduction of tax, on the payment effected by it to M/s HLL, insofar as it related to work done by M/s L&T. Nevertheless, for assessment year 2007-08, on one of the payments due to M/s HLL, namely, consultancy charges of ` 70,17,953/-, tax was deductible at source on the date of credit to the said party which was in the month of March, 2007. Therefore, on this amount, assessee was liable to pay interest under Section 201(1A) of the Act. But for this, we are of the opinion that since assessee was not liable to deduct tax at all, there was no question of fastening on it a liability to pay interest under Section 201(1A) of the Act. In this view of the matter, we are of the opinion that the order of CIT(Appeals) could not be faulted.
15. In the result, Revenue's appeals are dismissed subject to our observation relating to interest under Section 201(1A) on non- deduction of tax at source with regard to consultancy charges for assessment year 2007-08.
20 I.T.A. Nos. 1868 & 1869/Mds/11The order was pronounced in the Court on Tuesday, the 18th of September, 2012, at Chennai.
sd/- sd/-
(V.Durga Rao) (Abraham P. George)
Judicial Member Accountant Member
Chennai,
Dated the 18th September, 2012.
Kri.
Copy to: (1) Appellant
(2) Respondent
(3) CIT(A)-IV, Chennai-34
(4) CIT, TDS, Chennai
(5) D.R.
(6) Guard file