Commissioner Of Inco... v. M/S. Ambuja Darla Ka...

Deepak Gupta, J.

These appeals are being disposed of by a single judgment as the questions of law involved in all the appeals are virtually the same and reads as follows:

“1. Whether the freight payments made by the assessee Society to the truck owners who were also the members of the society, were subject to deduction at source in view of section 194C(2), being payments made to the truck owners in their capacity as Sub-Contractors.”

In ITA Nos. 25, 45, 46 & 50 of 2006 the following question of law is involved:

“Whether under Section 194C(2) of the Income Tax Act the assessee is liable to deduct TDS.”

Briefly stated the facts of the case are that except for the Sirmour Truck Operators Union, the assesses in these appeals are registered Cooperative Societies. The Sirmour Transport Truck Operators Union is an un-registered Association of persons. However, this difference will have no impact on the hearing of the case.

The assessees are registered Societies/Association of persons constituted by the Truck Operators. These Societies enter into contracts with the Companies such as Cement Manufacturers for transport of the goods of the Companies. In Sirmour Truck Operators Unions' case the assessee had entered into a contract with the H.P State Civil Supplies Corporation for carriage of goods. The Company which has entered into contract with the assessee deducts 2% of the amount paid on account of TDS in terms of Section 194C(1) of the Income Tax Act, 1961. Thereafter, the assessee society pays the amount received by it to the members of the Society who have actually carried the goods. However, out of the amount paid a nominal amount of Rs. 10/- or Rs. 20/- is deducted for administrative expenses of running the Society and is known as “parchi charges” The assessee does not retain any other amount except for the “purchi charges” and the entire amount received by it from the Company is paid to the members.

According to the Revenue the assessee is liable to deduct TDS @ 1% from the amount paid to the members/truck operators in terms of Section 194C(2), relevant portion of which reads as follows:

“194C. (1) xxxxxxxxxxx

(2) Any person (being a contractor and not being an individual or a Hindu undivided family) responsible for paying any sum to any resident (hereafter in this section referred to as the sub-contractor) in pursuance of a contract with the sub-contractor for carrying out, or for the supply of labour for carrying out, the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor has undertaken to supply shall, at the time of credit of such sum to the account of the sub-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 one per cent of such sum as income-tax on income comprised therein.”

The Assessing Officer decided the case in favour of the Revenue. However, the Commissioner Income Tax as well as the Tribunal have decided the matter in favour of the assessee. According to the Commissioner as well as the Income Tax Appellate Tribunal the assessee Society has not given any sub-contract to any member of the society and in fact the society was created for the sole purpose of obtaining contract from the Company. According to both the authorities since there is no sub contract between the Society and its members the provision of Section 194C(2) is not attracted at all.

Sh. Kuthiala submits that in terms of Section 2(7) assessee means any person who is liable to pay tax under the Act; under Section 2(19) a cooperative society means any cooperative society registered under the Cooperative Societies Act of any State; under Section 2(31) an association of persons is included in the definition of person and under Section 2(42) resident means a person who is a resident within the ambit of Section 6. Section 6 of the Act lays down the requirements of being a resident in India. He submits that all the assessees are persons within the meaning of the Income Tax Act and the Truck Operators are residents of India and therefore in terms of Section 194C(2) since the assessee is making payment to a resident it is liable to deduct the tax at source.

In support of his contention Sh. Kuthiala has relied upon Associated Cement Co. Ltd. v. Commissioner of Income Tax, (1993) 201 ITR 435, Central Board Of Direct Taxes v. Cochin Goods Transport Association., (1999) 236 ITR 993 and Birla Cement Works v. Central Board of Direct Taxes, (2001) 248 ITR 216. In our considered view these judgments have no relevance to the present case because in these cases the only question involved was the interpretation of the word ‘work’ in Section 194C. In the present case the question which arises before us is whether the owners of the trucks who were members of the society would fall within the purview and ambit of Section 194C(2) or not.

The respondents contend that in view of the law laid down by the Apex Court in Chelmsford Club v. Commissioner Of Income Tax, Delhi, (2000) 243 ITR 89, the income of the society arises out of mutual transactions and the principle of mutuality is applicable and therefore the income of the assessee is not assessable to income tax. This judgment is also not applicable to the facts of the present case. In the Chelmsford Club Case the question before the Apex Court was whether the principle of mutuality applies to property income and the same is not taxable income of the assessee. The Apex Court held that the principles of mutuality applies even to the deemed income from the property of the club. To apply the principles of mutuality the basic premise is that the contributors should derive profit from contributions made by themselves to a fund which could only be expended or returned to themselves. In case there is complete identity between the contributors and the participators the principle is applicable. However, this principle is not applicable to the present case since the income is not being derived from contributions by the transporters but is in fact being derived from income received from the Companies for work of transportation being done.

Having said so, we are still of the considered view that Section 194C(2) is not attracted in the present case. The heading of Section 194C reads thus:

“Payments to Contractors and Sub Contractors”

Section 194C(1) deals with payments made to the Contractor which in this case would mean the payment made by Companies which entered into contract of transportation with the assessees. Admittedly the Companies deducted tax at source in terms of Section 194C(1). The entire amount received by the assessee from the Companies after deductions was paid to the members of the truck operators who had carried the goods after deducting a nominal sum as “parchi charges” The question which arises is whether the members are sub-contractors or not.

The main contention of the Revenue is that since the assessee has a separate juristic identity and each of the truck operators who are members of the assessees have separate juristic identity they are covered with the meaning of Section 194C(2). It is urged on behalf of the Revenue that since the assessee being a person is paying a sum to the member truck operator who is a resident within the meaning of the Act, TDS is required to be deducted. This argument does not take into consideration the heading of the Section noted hereinabove and the entire language of Section 194C(2) which clearly indicates that the payment should be made to the resident who is a sub contractor. The concept of Sub Contract is intrinsically linked with Section 194C(2). If there is no sub contract then the person is not liable to deduct tax at source even if payment is being made to a resident.

To understand the nature of the contract, it would be relevant to mention that in the present cases the assessee Societies were created by the transporters themselves. The transporters formed the societies or Unions with a view to enter into a contract with the Companies. The Companies enter into contract for transportation of goods and material with the Society. However, the society is nothing more than a conglomeration of the truck operators themselves. The assessee societies have been created only with a view to make it easy to enter into a contract with the Companies as also to ensure that the work to the individual truck operators is given strictly in turn so that every truck operator has an equal opportunity to carry the goods and earn income. The society itself does not do the work of transportation. The members of the Society are virtually the owners of the society. It may be true that they both have separate juristic entities but the fact remains that the reason for creation of the Society was only to ensure that work is provided to all the truck operators on an equitable basis. A finding of fact has been rendered by the authorities that the societies were formed with a view to obtain the work of carriage from the Company since the Companies were not ready to enter into a contract with the individual truck operators but had asked them to form a society.

Admittedly, the society does not retain any profits. It only retain as nominal amount as “parchi charges” which is used for meeting the administrative expenses of the society. There is no dispute with the submission that the Society has an independent legal status and is also contractor within the meaning of Section 194C. It is also not disputed that the members have a separate status but there is no sub-contract between the society and the members. In fact if the entire working of the society is seen it is apparent that the societies have entered into a contract on behalf of the members. The society is nothing but a collective name for all the members and the contract entered by the society is for the benefit of the constituent members and there is no contract between the society and the members.

For the foregoing reasons we are of the considered view that Section 194C(2) of the Act is not attracted and the assessee Society(s) is not liable to deduct tax at source on account of payments made to the truck owners who are also members of the society. The questions of law accordingly decided in favour of the assessees and against the Revenue.

All the appeals are accordingly disposed of.