No accumulation can be done under sec. 40(a)(ia) if assessee is not liable to deduct tax at source

With Contract agreements becoming more prominent and rampant in the country through not only the domestic contractors but also through their international counterparts, the applicability of sec. 194C demands lot more understanding and indulgent care wherever contract payments are remitted or received. At times the understandings of different sections are misinterpreted without taking into consideration different angles contained into other sections which are correlated to it. Now whether expenses of a contractor can be disallowed only on the basis of non-submission of Form No. 15J within prescribed time-limit is an issue before the contractors. This core problem was resolved in the case Valibhai Khanbhai Mankad VS. Deputy Commissioner of Income-tax (OSD), Circle-9, Ahmedabad.

The point to be noted here is that if during a financial year a contractor receives Form No. 15I from its sub-contractor, then mere non-submission of Form No. 15J under rule 29D to assessing officer within prescribed time-limit cannot pave way for disallowance of expenses under 40(a)(ia).

Case:  Valibhai Khanbhai Mankad VS. Deputy Commissioner of Income-tax (OSD), Circle-9, Ahmedabad.

Citation:  [2011] 12 taxmann.com 160 (AHD.) / [2011] 46 SOT 469 (AHD.)

One should know: Every contractor, other than an individual or a HUF, who is responsible for paying any sum to any sub-contractor (who is resident in India), in pursuance of a contract with such sub-contractor for carrying out or for the supply of labour for carrying out, wholly or in part, of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor had undertaken to supply, will be required to deduct income-tax at the rate of 1% of such sum.

Applicable section and rules in above case: Section 194(C)(3),  40(a)(ia)  and Rule 29D.

Facts:  The payment of Rs. 7, 93, 34,193 was made to sub-contractors by contractor on account of sub-contract for hiring and the Form 15-I were obtained from sub-contractors thereof and hence TDS was not deductible. The assessing officer disallowed the entire expenses to the tune of Rs. 7, 93, 34, 193 on the ground that the assessee instead of filing the Form no. 15J on or before 30^th June, 2006, filed the same on 26.02.2009 after the assessment was completed.

The Assessing officer was of contention that since Forms 15-I were duly obtained from the transporters, the same were not furnished to the CIT in Form 15J as per Rule 29D of the IT Rules, 1962.

Requirement of rule no. 29D:

Ø  The declaration by a sub-contractor shall be made in Form no. 15-I to contractor for non-deduction of tax at source before such sum is credited or paid to sub-contractor.

Ø  The particulars referred under the third proviso to section 194C(3) shall be furnished in Form No. 15J to the commissioner of income –tax on or before 30^th June following the financial year.

Therefore the assessing officer contended that held that once the assessee failed to furnish Form 15J enclosing therewith Form 15-I to the CIT before 30th June, 2006, he failed to fulfill the conditions laid down u/s. 194C(3)(ii). He accordingly added back the sum paid without TDS u/s 40(a)(ia).

Conclusion:

The requirement to file Form No. 15J by 30^th June 2006 was though required as per income tax rules but was not mandatory. If the contractor has obtained Form No. 15-I before the payment is made in the year to sub-contractor and he has taken reasonable assurance that there are no undisputed contents in the particulars of form and its genuineness cannot be doubted in any manner, then there is no requirement to deduct tax at source. So assessee is not liable to deduct tax at source u/s 194C and additions u/s 40(a)(ia) cannot be approved only on ground that Form No. 15J has not been submitted in prescribed time. The submission of Form no. 15J is immaterial as far as additions u/s 40(a)(ia) is concerned as this is an event which is suppose to occur after the end of financial year. If any sub-contractors have furnished Form No. 15-I during the financial year then contractor cannot be made liable for deducting tax at source only because the said contractor do not furnishes Form No. 15J within 3 months from the end of financial year.

Case relied upon while arriving on judgement:  ACIT vs. M/s Shree Pramukh Transport Co. Bhutadi, Baroda pronounced on 31.08.2010

“4. The learned CIT(A) considering the material on record noted that the
AO has not disputed that the assessee claimed that he had obtained
declaration in Form No.15-I from the payees. The learned CIT(A) noted
that ultimately Form No.15-I was filed with delay in the office of the
Commissioner, but the assessee in fact had obtained the declaration and
therefore, it cannot be said that the assessee had violated the mandate
given by the payees not to deduct tax. The addition was accordingly
deleted.
5. On consideration of the rival submissions, we are of the view that no
interference is called for in the matter. The learned DR submitted that
Rule 29 D of the IT Rules is procedural in nature. The submission of the
learned DR itself shows that since the compliance of the rule was
procedural only, therefore, when the assessee obtained requisite
declaration and filed the same with delay with the office of the
Commissioner and also filed the same before the AO at the assessment
stage, would prove that the addition is clearly unjustified in the matter.
According to section 194(C)(3) of the IT Act, the assessee complied with
the second proviso by obtaining declaration in the prescribed form.
Therefore, there was no liability for deduction of tax at source. The
genuineness of the certificate is not doubted by the authorities below.
Therefore, the assessee has substantially complied with the provisions of
law. In case of procedural irregularities, the assessee cannot be put to
unnecessary hardship in the matter and that too when certain exemption
has been given to the assessee in section proviso to section 194(c)(3) of
the IT Act. Since, there is sufficient compliance of the provisions of law,
therefore, the learned CIT(A) was justified in deleting the addition. We,
therefore, do not find any justification to interfere with the order of the
learned CIT (A). We confirm his findings and dismiss the appeal of the
revenue.”

Tax effect of Indirect sale distribution channels

CA Maneet Pal Pasricha

(www.capasricha.com)

In fast growing economies like India, china etc.; Global companies are looking forward to pioneer there products to have there share of pie. While introducing products in new markets, one of the major decisions which companies needs to take is to identify the marketing strategy along with the superlative distribution channel for its products. Company has to select the distribution channel from among the various options like distribution through agents (indirect channels), exclusive distribution, intensive distribution etc. The most common and successful channel is indirect channel, Depending on the industry, between 30 percent and 70 percent of all sales worldwide flow through indirect channels, allowing businesses to lower costs, expand more aggressively into new markets and better serve existing customers and reach new ones. In India such distribution model is relied upon by many companies across the sectors like consumer durables, telecommunication, airline companies etc.

But not always indirect distribution channels can be tax effective. According to Income-tax Act, 1961 “the Act” companies need to withhold tax under section 194H on amount of commission paid to its distributors/ agents or anyone else. Generally the companies selling goods through agents sell its product to agents at price less than market price, Now here arise the point of legal action, whether difference between the retail price (at which product is sold to end user) and the price at which product is transferred to agents is “discount” or “commission”. Income-tax authorities consider it to be commission to try cover such transactions under the ambit of section 194H and on the other hand companies consider it to be a discount. In recent times there flowed numerous judgements from various forums dealing on this issue, some against and some in favour of the assessee. Some of the facts on which these cases were decided are principal-agent relationship, Control of company on agents in respect of operations and price of the products, type of agreement etc. It in essence depends on the facts of the cases and technical assessment of these facts. Wrong interpretation can attract huge interest, penalties and disallowance; under section 201(1A), 271C and 40(ia) of the act respectively, of commissions expenses. Such provisions can have severe cash impact on companies, suppose the company has paid commission of INR 100,000 and has not withheld tax on such amount, then such default can lead to cumulative cash outflow of INR 52,000 in terms of interest, penalties and additional loss of tax saving on disallowed expenditure. In addition to this company will also be declared as assessee in default and may further attract the interest and penalty under section 220 and 221 of the act. Thereby giving hit of more than 52% of expense amount in addition to the expense.

In order to avoid lethal effects of Withholding Tax Provisions companies should take experts views for determining the possible effects of tax provisions of major business decisions like putting its distribution channels in place etc.