The soft drink industry has, for some time, been going through a hard phase. The latest to add to their financial hardship is the Income Tax Appellate Tribunal order dismissing an appeal of Hindustan Coca-Cola Beverages Pvt Ltd against confirmation of penalty levied by the income tax authorities under Section 271-C.
The ITAT has held that the payment of rent for warehouses or warehousing charges cannot be treated as a payment to contractors under Section 194-C and the same cannot qualify for lower rate of tax deduction at source.
The tribunal observed that section 194-C deals with the payments made to contractors or sub-contractors for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract executed between the contractor and different types of assesses envisaged in sub-section (i) of section 194-C of the Act whereas section 194-I deals with the payment of rent by a person not being an 'Individual' or a 'Hindu Undivided Family', who is responsible for paying to any person any income by way of the rent.
In Explanation (1) to section 194-I the word 'rent' has been defined and according to the explanation the rent means any payment by whatever name called under any lease, sub-lease, tenancy or any other agreement or arrangement of he use of any land or any building (including the factory building), together with furniture, fitting and the land appurtenant thereto whether or not such building is owned by the payee, meaning thereby any payment in respect of use of any property to a person to whom the property belongs in any manner the payment is called to be a rent and while making the payment of this rent the payer is required to deduct @ 15 per cent if payee is individual or HUF and @ 20 per cent in other cases.
The tribunal found that section 194-C deals only with the payment with a contractor and sub-contractor for the work carried out by the contractor or sub-contractor and it has no relevance with regard to the payment for the use of the land or property.
ITAT observed that an agreement was executed between the assessee and M/s Pradeep Oil Corporation, who has a warehouse at Shakur Basti, Delhi. It was stated in this agreement that M/s Pradeep Oil Corporation is a licensee in respect of railway land, on which warehouse has been constructed.
Accordingly to clause 5, all charges, taxes, levies, duties payable, on the products warehoused in the warehouse to the government and/or any other authorities shall be paid promptly by the company directly to the concerned authorities and the warehouser shall not be responsible and/or liable for the same for any reason whatsoever.
ITAT held that 'from a plain reading of various clauses of this agreement only one inference would be drawn that the warehouse was taken on almost a fixed rent and the warehouser has not right to warehouse the goods or any other person without the permission of the assessee company.'
'More so, according this agreement, this warehouse was let out/given to the assessee company for a period of three years after taking a huge advance. Once it is evident from the documents and the conduct of the parties that the assessee has taken this warehouse on rent, we are unable to understand how the assessee has claimed that it has made the payment to a contractor or a sub-contractor and claimed deduction of TDS under section 194-C of the Act, as section 194-C only deals with the payment to contractors for the work carrying out by them.'
'The facts of the case make abundantly clear that the payments ware made by the assessee company to the warehouse as rent of the warehouse taken to warehouse its goods or at the most as a warehousing charges. Through circular No. 715, dated August 8, 1995 it has been made clear by the board that if the composite arrangement is in essence of the agreement for taking premises on rent, the tax will be deducted under section 194-I for payments thereof. Through circular No. 718 dated 22.8.1995, while replying to a query whether the tax is to be deducted at source from warehousing charges, the board has clarified that the term 'rent' as defined in Explanation (i) below section 194-I means any payment by whatever name called under any lease, sub-lease, tenancy or any other arrangement or arrangement for the use of any building or land.
'Therefore, warehousing charges will be subject to deduction of tax under section 194-I.'
The tribunal found that since the doubt, if any, with regard to the nature of payment of ware-housing charges has been clarified by the board in 1995, there is no plausible reasons as to why and how the assessee had been claiming the payment of rent of ware-house or at the most ware-housing charges as a payment to contractors under section 194-C of the Act and deducted the TDS @ 2 per cent only.
The tribunal did not find any force in the contentions of the assessee that under misconception of legal provisions, he has deducted the tax at 2 per cent, the rates applicable to contractors as per section 194-C of the Act. It was held that the Revenue authorities were justified in levying the penalty under section 271-C of the Act for the assessee's default of short deduction of tax inasmuch as the assessee is required to deduct the TDS @ 20 per cent, rate applicable on payment of rent as per section 194-I of the Act, but the assessee has intentionally only deducted the lesser TDS @ 2 per cent under the garb that its case falls under section 194-C of the Act.
Show-cause notice was issued to the assessee as to why the payments to Pradeep Oil Corporation may not be treated as a warehousing charges and TDS deducted as per section 194-I i.e. @ 20 per cent. In response thereto the assessee has submitted that it was an arrangement for services to the party under the contract and by no stretch of imagination, can this be construed to be payment of rentals.
The assessing officer examined the facts of the case in the light of the circular No. 715 dated 8/8/1995 and 718 dated 22/7/1995 and also in the light of the agreement executed between the parties and held that this composite agreement is in essence the arrangement for taking the premises on rent, hence the payment is covered under section 194-I of the Act and tax needs to be deducted for payment thereof as per section 194-I of the Act.
He accordingly charged interest under section 201(1A) of the Act and initiated the penalty proceedings under section 271-C of the Act for short deduction of tax. Again in the penalty proceedings the assessee raised the same plea, which was turned down by the assessing officer and slapped consolidated penalty of Rs 48,86,450 for the financial year 1998-99 and 1999-2000 against which an appeal was filed before the Commissioner of Income-tax (Appeals) assailing the penalty order on various grounds. The CIT (Appeals) again re-examined all the grounds raised before him and directed the assessing officer to apply the rate of 15 per cent instead of 20 per cent, following his order in quantum.
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