Income Tax Appellate Tribunal - Ahmedabad
Gujarat State Electricity Corporation ... vs Income Tax Officer on 5 May, 2003
Equivalent citations: (2004)82TTJ(AHD)456
ORDER
B.M. Kothari, A.M.
1. This appeal by the assessee is directed against order dt. 3rd Oct., 2002, passed by the learned CIT(A)-II, Baroda for asst. yr. 2001-02. The assessee has raised the following grounds :
(1) The learned CIT(A)-II, Baroda erred in law and in facts in confirming the order of the learned ITO Ward-3(1), Baroda in holding that the payments made by the appellant-company to GEB (Gujarat Electricity Board) for operation and maintenance of power plant is in the nature of payment made for professional services and not under contractual payments as contemplated under Section 194C. The learned CIT(A)-II, Baroda ought to have held that the payments made by the appellant-company to Gujarat Electricity Board is in the nature of services covered under Section 194(c) of the IT Act.
(2) The learned CIT(A)-II, Baroda further erred in law and in facts in holding and confirming the order of the learned ITO, Ward 3(1), Baroda that the appellant is liable to pay an amount of Rs. 50,90,757 under Section 201(1) of the IT Act, being the amount of tax, which is allegedly short-deducted on payments made to Gujarat Electricity Board.
(3) The learned CIT(A)-II, Baroda ought to have held that the appellant's liability under Section 201(1) for payment of an amount of Rs. 50,90,757 is unjustified and, therefore, should have cancelled the order. The appellant pleads that the order under Section 201(1) determining the payment of an amount of Rs. 50,90,757 deserves to be cancelled.
2. Shri S.N. Soparkar, the learned senior advocate appeared on behalf of the assessee. He submitted that the order passed by the learned AO under Section 201(1) creating a demand of Rs. 50,90,757 on account of alleged short-deduction of tax at source is patently wrong and unjustified.
3. The appellant-company, namely, Gujarat State Electricity Corporation Ltd. (GSECL) is engaged in the business of power generation. The appellant entered into an agreement with Gujarat Electricity Board (GEB) on 14th Oct., 1998, titled as "Operation and maintenance agreement". The entire work relating to operation and maintenance of the power project set up by the appellant-company was entrusted to GEB by virtue of the said agreement as GEB has long-standing experience in operation and maintenance of power plants of similar capacity. He drew our attention to various clauses of the said agreement dt. 14th Oct., 1998, with a view to point out that it was a turnkey project undertaken by the GEB for carrying out the entire work relating to the operation and maintenance of power plants set up by the assessee. The payment made by the appellant-company to GEB as consideration/compensation for looking after the entire work of operation and maintenance of power plant cannot be treated as a payment of fees paid for professional or technical services, as contemplated in Section 194J of the Act. The appellant, therefore, rightly deducted tax at source at the rate of 2 per cent on the sums paid to GEB pursuant to the aforesaid contract in conformity with Section 194C of the Act. The learned counsel contented that the services rendered by GEB in relation to operation and maintenance of the plant cannot be construed as a contract for providing professional services or technical services. The providing of professional services and technical services would enrich the knowledge of the person who acquires such services for utilising the same in his business. However, in the present case, the appellant-company has allotted the entire work of operation and maintenance of power plant to GEB. They are not providing only technical personnel or consultancy but they are themselves carrying out all the activities required for operation and maintenance of power plants. It is a contract for carrying out the business activity of operation and maintenance of power plants which cannot be treated as the agreement for acquiring professional services or technical services only. It is a composite contract for carrying out the operation and maintenance of power project, which can be properly descried a turnkey project for carrying out the operation and maintenance of the plant.
4. The learned counsel drew our attention to the judgment of the Hon'ble Supreme Court in the case of Associated Cement Co. Ltd. v. CIT (1993) 201 ITR 435 (SC) in which scope and meaning of Section 194C of the Act has been explained.
5. The learned counsel submitted that Section 194J defines the expression "professional services and fees for technical services" in the Explanation to Section 194J as under :
"194J. (1) Any person, not being an individual or a HUF, who is responsible for paying to a resident any sum by way of:
(a) fees for professional services, or
(b) fees for technical services, shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to five per cent of such sum as income-tax on income comprised therein :
Explanation : For the purposes of this section :
(a) "Professional services" means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of Section 44AA or of this section;
(b) "fees for technical services" shall have the same meaning as in Expln. 2 to Clause (vii) of Sub-section (1) of Section 9."
6. The AO has not held that the payment made by the appellant to GEB was a payment by way of fees for professional services. The AO has observed that the payment made to GEB pursuant to agreement dt. 14th Oct., 1998, to operate and maintain two power generation plants, each of over 200MW capacity, in fact, are technical services and not ordinary contractual payment as contended by the assessee. What is covered in Section 194C is a work contract and what is envisaged within the definition of "technical services" has been defined in Expln. 2 to Section 9(1)(vii). The said Explanation excludes "consideration for construction, assembling, mining or like project". The type of work enumerated in agreement dt. 14th Oct., 1998, do not come within the excluded categories specified in Expln. 2 to Section 9(1)(vii). The AO has treated such payments a payment made for technical services as defined in Section 194J. He has nowhere observed that such payment can be regarded as payment for professional services. The learned CIT(A) while confirming the order of the AO has casually mentioned in para. 3.3 of his order that the dispute in the present appeal is whether the amount paid to GEB under the said agreement is towards works contract or towards the fees for professional services. The learned CIT(A) has held that the AO was justified in concluding that the amount paid to GEB towards fees for professional/technical services attract the provisions of Section 194J. The very definition of "professional services" given in Expln. (a) to Section 194J shows that the professional services means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or profession of accountancy or technical consultancy or such other profession as is notified by the Board for purpose of Section 44AA. The services rendered by GEB for carrying out operation and maintenance of power plants cannot be treated as professional services as contemplated in the aforesaid provisions. The payment made to GEB also cannot be treated as fees for technical services as GEB not only provided services of their skilled and experienced persons but carried out all activities required for operation and maintenance of power plants. The payment made in pursuance of such a contract clearly comes within the ambit and scope of Section 194C of the Act. The appellant, therefore, rightly deducted the tax at source at the rate of 2 per cent as per Section 194C.
7. The learned counsel further contended that the appellant remained under a bona fide belief that the payments made by them to GEB pursuant to the aforesaid contract are covered by Section 194C and not 194J and, therefore, they deducted the tax at source at the rate of 2 per cent. Such bona fide belief entertained by the assessee also justifies the cancellation of demand created by the impugned order under Section 201 passed by the AO in view of the judgment of Hon'ble Gujarat High Court in the case of ITO v. Gujarat Narmada Valley Fertilizers Co. Ltd. (2001) 247 ITR 305 (Guj). The appellant-company is an undertaking of the State Government of Gujarat and there is no material on record to show that such a belief was not honest and bona fide belief on the part of the assessee.
8. The learned counsel further, contended that GEB to whom the payments have been made pursuant to contract dt. 14th Oct., 1998, was undergoing heavy losses. A copy of the return of income submitted by GEB for asst. yr. 2001-2002 shows that they have declared a loss of Rs. 21,61,70,25,880, No tax is payable by GEB. On the other hand, they are entitled to refund of total amount of tax deducted at source at the rate of 2 per cent. In fact, the appellant-company could approach the AO under Section 194C(4) or under Section 194J(2) for issuing a certificate for non-deduction of 'tax at source. The learned counsel drew our attention to the judgment of the Hon'ble Gujarat High Court in the case of CIT v. Rishikesh Apartments Co-op. Housing Society Ltd. (2002) 253 ITR 310 (Guj) and the judgment of the Hon'ble Madhya Pradesh High Court in the case of Gwalior Rayon Silk Co. Ltd. v. CIT (1983) 140 ITR 832 (MP). It has been held in the aforesaid judgments that if the persons on whose behalf tax was to be deducted and paid under Section 194C of the Act, had paid more amount of tax by way of advance tax than what was payable and had also paid tax on self-assessment, there was no question of levying any interest on the assessee under Section 201(1A). In the present case, there is no tax liability of GEB, which is undergoing heavy losses. It is very clear from the provisions of Section 4 of the Act, which is charging section, that the tax has to be paid on the income of the assessee as per the provisions of the Act. The said tax can also be deducted at source in accordance with the provisions of Section 190 of the Act and as provided under Chapter XVII of the Act. The said amount is to be deducted by way of tax by the person who has to make payment to the concerned person (payee) and as per the provisions of Section 199 of the Act such amount of TDS is paid towards the amount of tax payable by the payee. If the person on whose behalf tax was to be deducted at source had no tax liability, it would not be proper on the part of the Revenue to levy any interest under Section 201(1A). The learned counsel thus strongly urged that the orders passed by the AO and the CIT(A) should be set aside and the demand created under Section 201 should be cancelled.
9. The learned Departmental Representative strongly supported the order of the CIT(A). He drew our attention to the elaborate reasons given in the penalty order. The learned Departmental Representative pointed out that Clause 2.1.7 reproduced in the penalty order clearly indicates that GEB (described as the operator in the agreement dt. 14th Oct., 1998) has all the skills and capacity necessary, to perform or cause to be performed the assignment in a proper, timely and professional manner, utilising sound engineering principles, project management. Likewise he drew our attention to certain clauses in the said agreement where it is clearly stated that GEB will provide services and will also provide personnel etc., which are required to operate and maintain power plants. The learned Departmental Representative pointed out these clauses in the agreement with a view to highlight that GEB had mainly provided services which come within the ambit of technical services rendered by GEB to the appellant-company for carrying out their business of generation of power and selling electricity produced in their power plants. The provisions of Section 194J(2) are clearly attracted. The learned Departmental Representative also drew our attention to the judgment of the Hon'ble Bombay High Court in the case of Pentagon Engineering (P) Ltd v. CIT (1995) 212 ITR 92 (Bom) relied upon by the CIT(A) in the order passed by him. The Hon'ble Bombay High Court in the said judgment has held that Section 201(1A) relating to levy of interest for delayed payment of TDS was mandatory and there was no precondition of consideration of "reasonable cause" for non-payment in time of tax deducted at source under Section 192 of the Act. The learned Departmental Representative thus strongly supported the order of the CIT(A).
10. We have carefully considered the submissions made by the learned representatives of the parties and have gone through the orders of the learned Departmental Authorities. We have also gone through all the judgments cited by the learned representatives.
11. The operation and maintenance agreement executed between GSECL (appellant-company) and GEB on 14th Oct., 1998, relates to operation and maintenance of 200MW, Gandhinagar unit-5. The said agreement has been executed for a period of 30 years commencing on the effective date. The operating periods covered by the said agreement have been classified as Period I which commenced from the date of start of trial operation upto the start of commercial operation. The period II shall commence from the date of the start of the commercial operation of the plant and shall terminate on the expiry of the term of 30 years of this agreement, The period I commenced from 17th March, 1998, and continued till 10th Oct., 1998. The period II commenced from 10th Oct., 1998, and will remain in force for the entire term of 30 years from the effective date of this agreement. GEB has been described as "The operator" in the said agreement the assessee has been described as "The owner". The preamble of the said agreement is reproduced below :
"Whereas the owner is setting up a power project of 210 MW Gandhinagar Thermal Power Station, Unit-5, And whereas the owner will sell all of the net electricity produced by the Plant as per the terms of the Power Purchase Agreement (PPA) executed between Gujarat State Electricity Corporation Ltd. and Gujarat Electricity Board dt. 22nd Jan., 1997.
And whereas throughout the commercial operation of the Plant, the owner requires a qualified, competent and experienced operator to perform the operation & maintenance of the plant.
And whereas the operator has long-standing experience in operation and maintenance of power plants of similar capacity.
And whereas the operator is willing to provide the services on the terms and conditions setforth hereinafter.
And whereas both the owner and the operator have agreed to follow the PPA between Gujarat State Electricity Corporation Ltd. and Gujarat Electricity Board dt. 22nd Jan., 1997, without violating any requirement/provision of the said PPA.
Now, therefore, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged the Parties hereto, intending to be legally bound, hereby agree as follows : .............."
The activities required to be carried out by GEB in relation to period II, which is applicable for the year under consideration have been enumerated in para 4.3.2 of the said agreement, which is reproduced below :
"4.3.2 During Period 2 :
The operator shall operate and maintain the facility including such offsite facilities in accordance with prudent engineering and operating practices, and procedures and in accordance with the terms of the PPA. The operator's service in Period 2 shall include, but not limited to, the following required for safe and healthy running of the facility :
(i) Operate and maintain the plant/facility in accordance with the terms of the PPA overriding and standard of prudent utility practices.
(ii) carry out all performance tests from time to time as required under the provisions of the PPA.
(iii) provide technical advice and support to the owner, regarding operation and maintenance issues.
(iv) maintain record of quantity and quality of fuel received from the fuel supplier.
(v) maintain record of quantity and quality of water received from Gujarat Electricity Board.
(vi) advise the owner on taking appropriate insurance policies and make arrangement for the same.
(vii) maintain record and data required to be maintained under the PPA.
(viii) maintain the premises and the facility in good condition, except for reasonable wear and tear which does not adversely affect the efficient or proper utilisation thereof, including paining, or cleaning the exterior of the facility and make all authorised repairs and replacement.
(ix) maintain all fire protection and safety equipment,
(x) anti-erosion measures, maintain landscaping in good condition.
(xi) hire, train, administer, supervise the workforce necessary to perform operation, maintenance and inspection work.
(xii) keep the owner apprised of the operator's negotiations with the unions representing the operator's work force.
(xiii) provide all personnel, services, vendor contracts, tools, equipment and materials, under approval of the owner, to make such repairs or replacements as may be necessary to operate and maintain all portions of the facility.
(xiv) perform periodic routine and annual overhaul of equipment related to the facility.
(xv) perform routine inspections and maintenance of the facility.
(xvi) perform periodic operational checks, and testing of equipment relating to the facility.
(xvii) maintain records of maintenance inspections, operational checks and financial transactions relating to the facility.
(xviii) perform calibration of all instruments and loop checking on a regular basis.
(xix) prepare paper work for any insurance claim on behalf of the owner."
The provisions of Section 194J provide that any person, not being an individual or a HUF, who is responsible for paying to a resident any sum by way of :
(a) fees for professional services, or
(b) fees for technical services, shall, at the time of credit of such sum to the account of the payee or at the time of payment, whichever is earlier, deduct an amount equal to five per cent of such sum as income-tax on income comprised therein. The expression "professional services" and "fees for technical services" have been defined in Explanation to Section 194J which is being reproduced in earlier part of this order. It is not the case of the AO that the payment made to GEB represents payment of fees for professional services. The AO has invoked the provisions of Section 194J by treating the payment made to GEB as payment made by way of "fees for technical services". It will, therefore, be relevant here to reproduce the definition of "fees for technical services" given in Expln. 2 to Section 9(1)(vii) of the Act :
"Explanation 2 : For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries"."
12. The scope and effect of Section 9(1)(vii)i as originally enacted had been elaborated in Departmental Circular No. 202, dt. 5th July, 1976. Para 16.3 of the said Circular is published at pp. 624 and 625 of Income-tax Law By Chaturvedi & Pithisaria, Vol-I, is reproduced below :
"16.3 The expression "fees for technical services" has been defined to mean any consideration (including any lump sum consideration) for the rendering of managerial, technical or consultancy services, including the provision of services of technical or other personnel. It, however, does not include fees of the following types, namely :
(i) Any consideration received for any construction, assembly, mining or like project undertaken by the recipient. Such consideration has been excluded from the definition on the ground that such activities virtually amount to carrying on business in India for which considerable expenditure will have to be incurred by a non-resident and accordingly it will not be fair to tax such consideration in the hands of a foreign company on gross basis or to restrict the expenditure incurred for earning the same to 20 per cent of the gross amount as provided in new Section 44AD of the IT Act. Consideration for any construction, assembly, mining or like project will, therefore, be chargeable to tax on net basis, i.e., after allowing deduction in respect of costs and expenditure incurred for earning the same and charged to tax at the rates applicable to the ordinary income of the non-resident as specified in the relevant Finance Act.
(ii) Consideration which will be chargeable to tax in the hands of the recipient under the head "Salaries"."
13. It is clear from the aforesaid circular that the expression 'fees for technical services' does not include consideration for any construction, assembly, mining or like project undertaken by the recipient. Such consideration has been excluded from the definition on the ground that such activities virtually amount to carrying on business for which considerable expenditure Will have to be incurred by the recipient. A perusal of the operation and maintenance agreement executed between GSECL (appellant-company) and GEB clearly shows that the agreement was not only for providing of skilled and technical services relating to operation and maintenance of power plants but the entire business activities of operation and maintenance of power plants were entrusted to GEB, who had long-standing experience in the field of operation and maintenance of power plants of similar capacity. The aforesaid contract requires GEB to carry out all or any of the activities required for operation and maintenance of power plants. Such agreement has been executed with a view to entrust the entire responsibilities of carrying out important part of business activities of power project, viz. to carry on the business activities of operation and maintenance of plants. A separate agreement has also been executed between the appellant-company and GEB on 22nd Jan., 1997, in relation to sale/distribution of electricity produced by the appellant-company as per the terms of power project agreement. On a careful reading of the entire agreement dt. 14th Oct., 1998, we are of the view that the payment made by the appellant-company to GEB was a payment made for carrying out the mega project of entire operation and maintenance of power plants undertaken by the GEB. Such payment would came within the limb of exclusionary part, viz. "consideration for like project" excluded in the definition of "fees for technical services" given in Expln. 2 to Section 9(1)(vii) of the Act. Such payment cannot also be treated as payment of fees for professional services as contemplated in Section 194J.
14. It may now be relevant to reproduce main part of Section 194C of the Act;
"194C. (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out of a contract between the contractor and :
(a) the Central Government or any State Government; or
(b) any local authority; or
(c) any corporation established by or under a Central', State or Provincial Act; or
(d) any company; or..........
shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to :
(i) one per cent in case of advertising,
(ii) in any other case two per cent, of such sum as income tax on income comprised therein."
The Hon'ble apex Court has explained the meaning and scope of Section 194C in the case of Associated Cement Co. Ltd. v. CIT (supra) as under, at p. 440 :
"We see no reason to curtail or to cut down the meaning of the plain words used in the section. "Any work" means any work and not a "works contract", which has a special connotation in the tax law. Indeed, in the sub-section, the "work" referred to therein expressly includes supply of labour to carry out a work. It is a clear indication of the legislature that the "work" in the sub-section is not intended to be confined to or restricted to "works contract". "Work" envisaged in the sub-section, therefore, has a wide import and covers "any work" which one or the other of the organisations specified in the sub-section can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which have fallen outside the "work", but for its specific inclusion in the sub-section."
The agreement executed between appellant-company and GEB is not an agreement simpliciter for acquiring technical services or professional services from them but it is an agreement requiring GEB to execute the work contract of operating and maintaining the mega power project. Such a contract will come within the ambit and scope of Section 194C of the Act in view of the aforesaid judgment of Hon'ble apex Court. The assessee had, therefore, rightly deducted tax at source as per Section 194C of the Act.
15. The impugned orders passed by the CIT(A) and the AO creating demand for alleged short-deduction of tax at source by invoking the provisions of Section 194J also deserve to be quashed in view of the fact that GEB had suffered heavy losses and they are not liable to pay any tax for the year under consideration. In fact, the appellant could obviate all this wasteful litigation by making an application to the learned AO requesting him to grant a certificate for non-deduction of tax at source out of payments required to be made to GEB under the aforesaid agreement, as GEB had substantial loss of several crores and no tax was payable by them.
The Hon'ble Gujarat High Court in the case of CIT v. Rishikesh Apartments Coop. Housing Society Ltd. (supra) has held as under :
"Held, that for the asst. yrs. 1974-75 and 1975-76, it was not in dispute that RB, on whose behalf the tax was to be deducted and paid under Section 194C of the Act, had paid more amount of tax by way of advance tax than what was payable and had also paid tax on self-assessment. There was no question of levying any interest on the assessee as the amount which was payable to the Revenue had been duly paid. For the other two years, tax was paid by RB a little late. So far as the late payment was concerned, the AAC held that the assessee had to pay interest under Section 201(1A) for the said years and the assessee had accepted the said finding."
16. The fact that GEB has no tax liability, has not been disputed by the learned Departmental authorities nor by the learned Departmental Representative before us. A copy of return submitted by GEB for asst. yr. 2001-02 shows that they have declared loss of Rs. 21,61,70,25,880 and was entitled to refund of tax deducted at source amounting to Rs. 2,99,19,725. The Department will be liable to pay interest to them in view of heavy loss. The orders of the CIT(A) and the AO creating demand of Rs. 50,90,757 under Section 201(1) deserve to be quashed in view of the aforesaid judgment of the Hon'ble Gujarat High Court.
17. In view of the aforesaid facts and discussion, the assessee's appeal is allowed.