No Technical Services, No TDS: Court Rules Section 194J (of Income Tax Act, 1961) Inapplicable

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Case Name:

Commissioner of Income Tax vs. Hubli Electric Supply Co. Ltd. (High Court of Karnataka)

ITA No. 473 of 2012 C/w ITA No. 439, 442, 444, 445, 446, 449, 450, 451, 452, 453, 455, 456, 458, 460 & 465 of 2012

Date: 15th December 2015

Key Takeaways:

- No Technical Services: The court determined that the services provided by KPTCL were purely for power transmission and did not involve any technical services.

- Section 194J (of Income Tax Act, 1961) Inapplicability: Since no technical services were involved, Section 194J (of Income Tax Act, 1961), which requires TDS for technical services, was not applicable.

- Revenue's Misconception: The Revenue's argument that technical services were involved was not supported by evidence.

- No Revenue Loss: The court noted that KPTCL had already paid taxes on the income, so there was no loss to the Revenue.

Issue

Was Section 194J (of Income Tax Act, 1961) applicable to the payments made by HESCOM to KPTCL for power transmission services?

Facts

- Parties Involved: Hubli Electricity Supply Company Limited (HESCOM) and Karnataka Power Transport Corporation Limited (KPTCL).

- Dispute: HESCOM paid KPTCL for power transmission without deducting TDS under Section 194J (of Income Tax Act, 1961), which the Revenue claimed was required for technical services.

- Timeline: The case involved assessments for the years 2006-07 to 2009-10.

Arguments

- Revenue's Argument: The Revenue argued that the services provided by KPTCL were technical in nature, thus requiring TDS under Section 194J (of Income Tax Act, 1961).

- HESCOM's Argument: HESCOM contended that the services were purely for power transmission and did not involve any technical services, making Section 194J (of Income Tax Act, 1961) inapplicable.

Key Legal Precedents

- Hindustan Coca Cola Beverages (P) Ltd. vs. CIT: The court referenced this case to support the argument that no demand could be made under Section 201(1) (of Income Tax Act, 1961) if the payee had already paid the taxes.

Judgement

The court ruled in favor of HESCOM, stating that the services provided by KPTCL were not technical services. Therefore, Section 194J (of Income Tax Act, 1961) was not applicable, and HESCOM was not required to deduct TDS. The court also noted that since KPTCL had already paid taxes on the income, there was no loss to the Revenue.

FAQs

Q1: What is Section 194J (of Income Tax Act, 1961)?

A1: Section 194J (of Income Tax Act, 1961) mandates the deduction of tax at source for payments made for technical services, professional services, and certain other specified services.

Q2: Why did the court rule that Section 194J (of Income Tax Act, 1961) was not applicable?

A2: The court found that the services provided by KPTCL were purely for power transmission and did not involve any technical services.

Q3: What was the significance of the Hindustan Coca Cola case in this judgment?

A3: It established that no demand could be made under Section 201(1) (of Income Tax Act, 1961) if the payee had already paid the taxes, which was relevant because KPTCL had paid taxes on the income.

Q4: What does this judgment mean for HESCOM?

A4: HESCOM is not required to deduct TDS on payments made to KPTCL for power transmission services, as these do not qualify as technical services under Section 194J (of Income Tax Act, 1961).

Revenue has presented following appeals raising certain questions of law.

Sl. Nos. ITA No. ITA No. Before Tribunal Assessment years

1. 437/2012 910/Bang/2012 2009-10

2. 439/2012 909/Bang/2012 2008-09

3. 440/2012 908/Bang/2012 2007-08

4. 442/2012 906/Bang/2011 2009-10

5. 444/2012 905/Bang/2011 2008-09

6. 445/2012 904/Bang/2011 2007-08

7. 446/2012 903/Bang/2011 2010-11

8. 449/2012 902/Bang/2011 2009-10

9. 450/2012 901/Bang/2011 2008-09

10. 451/2012 900/Bang/2011 2007-08

11. 452/2012 899/Bang/2011 2010-11

12. 453/2012 898/Bang/2011 2009-10

13. 455/2012 897/Bang/2011 2008-09

14. 456/2012 896/Bang/2011 2007-08

15. 458/2012 913/Bang/2012 2009-10

16. 460/2012 912/Bang/2012 2008-09

17. 465/2012 911/Bang/2012 2007-08

2. All the above appeals were admitted to consider the

following common substantial question of law:

“Whether the Tribunal is justified in holding that

Section 194J (of Income Tax Act, 1961) is not applicable to the facts and

circumstances of this case?”

3. Heard Shri Y.V.Raviraj, learned counsel for the

appellants/Income Tax Department and Shri Parthasarathi,

learned counsel for the respondent/assessee.

4. Learned counsel for the Revenue made following

submissions with regard to factual matrices of appeals.

(i) Assessee, Hubli Electricity Supply Company Limited

(HESCOM) is a State owned Company registered

under the Companies Act and engaged in the

business of buying and selling electricity. Assessee

purchases electricity from State owned generators

like Karnataka Power Corporation Limited (KPCL),

National Thermal Corporation (NTC) and the like

ones as also from private generators like Jindal

Energy Limited. Power is transmitted from the

generation point to the consumers through the

transmission network of the Karnataka Power

Transport Corporation Limited (KPTCL) in terms

of an agreement dated 08.05.2012 which has a term

of 25 years there from.

(ii) During the survey conducted by the Revenue in the

premises of assessee under Section 133A (of Income Tax Act, 1961) of the

Income Tax Act, 1961 (‘Act’ for short), it was

noticed that the assessee had made payments

towards transmission charges to KPTCL; Power

Grid Corporation of India Limited (PGCIL) and

‘SLDC charges’ to State Load Dispatching Centre

(SLDC) without deducting tax deductible at source

under Section 194J (of Income Tax Act, 1961). After issuing

summons and following all procedure, the assessing

authority vide separate orders dated 31.03.2011 for

the assessment year 2006-07 to 2009-10 held that the

assessee was in default under Section 201(1) (of Income Tax Act, 1961) of the

Act and levied interest of Rs.65,18,10,369/- under

Section 201(1A) (of Income Tax Act, 1961) both in respect of payments made

towards transmission charges and ‘SLDC charges’.

Orders passed by the Assessing Authority were

challenged before the Commissioner of the Income

Tax (Appeals).

(iii) During the hearing, the assessee had brought to the

notice of the Commissioner of Income Tax

(Appeals) that the payee namely the KPTCL had

paid the taxes due on its income. Accordingly, the

assessee urged that no demand be raised against the

assessee, as the taxes were already paid by the payee

KPTCL. Following the decision of the Hon’ble

Supreme Court in the case of Hindustan Coca

Cola Beverages (P) Ltd., vs. CIT

the Commissioner held that no demand could be

visualized under Section 201(1) (of Income Tax Act, 1961) in cases

where assessee had successfully demonstrated that

the taxes were already paid by the payee.

Accordingly, the appeals were allowed in part and

the ITO (PDS) was directed to afford an

opportunity to the assessee to furnish proof of

payment of taxes by the payees and thereafter work

out interest under Section 201(1A) (of Income Tax Act, 1961) from

the date of remittance of TDS till the date of filing

of the return by the payee in each case.

(iv) The orders passed by the Commissioner (Appeals)

were challenged by both the assessee as well as

Revenue before the Income Tax Appellate Tribunal

(ITAT), Bengaluru. The said appeals were dismissed

by common order dated 31.07.2012 impugned

herein. Assessee was aggrieved by the order of the

Commissioner to the extent that it has been

rendered liable to pay interest. Revenue was

aggrieved by the order passed by the Commissioner

against a finding that no demand could be visualized

under Section 201 (of Income Tax Act, 1961) when the assessee would satisfy

the Revenue that the taxes were paid by the payee.

With the dismissal of the appeals by ITAT, Revenue

has preferred these appeals raising questions of law

mentioned supra.

5. Learned counsel for the Revenue urged the

following grounds in support of these appeals.

(i) Admittedly, KPTCL is a transmission company and

power generated at the generating stations is

transmitted through its transmission network;

(ii) KPTCL collects transmission charges and SLDC

charges for transmission of power.

(iii) In terms of Section 39 of the Electricity Act, 2003 it

undertakes transmission of electricity through intra-

state transmission system and ensures development

of efficient, coordinated and economical system for

smooth flow of electricity from generating station to

the load centres.

(iv) State Load Dispatching Centre is also an another

arm of KPTCL and collects fixed rate from

generating companies called as ‘SLDC charges’.

SLDC is a statutory body and functions as per

Section 32 of the Electricity Act. It is responsible for

optimum scheduling and dispatch of electricity. It is

required to monitor grid operations, keep accounts

of quantity of electricity transmitted through the

State Grid, exercise supervision and control over

intra-state transmission system and carry out real

time operations for grid control and dispatch of

electricity within the State through secured operation

as per grid standards and State Grid Code;

(v) The aforementioned functions of KPTCL and

SLDC clearly establish that KPTCL extends

“technical services” to the assessee while

transmitting power under the aforementioned power

transmission agreement. Therefore, Commissioner

(Appeals) fell in an error while coming to a

conclusion that no demand could be visualized

under Section 201(1) (of Income Tax Act, 1961), if the assessee

satisfied the Revenue that the payee had paid the

taxes and further directing the ITO (TDS) to

workout the interest from the due date of remittance

of TDS till the date of filing of returns. Similarly, the

ITAT also fell in an error in dismissing the appeals

filed by the Revenue. Accordingly, he prayed for

answering the substantial question of law in favour

of the Revenue by allowing these appeals.

6. On the other hand, Shri Parthasarthi, learned

counsel for the assessee supporting the judgment of the Tribunal,

contended that there is no error in the impugned orders passed by

the ITAT, giving rise to any question of law much less a

substantial question of law arising out of the said orders.

Reiterating the grounds of appeals urged on behalf of the assessee

before the Commissioner (Appeals), he submitted that the service

which the KPTCL offers is transmission of power from the

generating point to the consumer’s point. So far as the assessee is

concerned, it has not sought for any technical service from

KPTCL. The functions carried out by the KPTCL under Section

39 of the Electricity Act, 2003 and the functions carried out by

the SLDC under Section 32 (of Income Tax Act, 1961), assessee has no other

option but to utilize the services of KPTCL as it functions under

a statute and has a monopoly in the power transmission service.

Thus, assessee is compelled to seek the services of KPTCL and at

any rate, assessee does not avail any “technical service” from the

KPTCL. In the premise, Section 194J (of Income Tax Act, 1961) is not applicable to the facts

of the case. As a supplemental argument, he contended that in any

event the income earned has been offered to tax by the payee

namely, the KPTCL and therefore, the Commissioner (Appeals)

has rightly held that the case on hand is fully covered by the ratio

of the judgment of the Hon’ble Supreme Court in the case of

Hindustan Coca Cola Beverages (P) Ltd., (supra). He further

contended that ITAT, rightly following the case of Bangalore

Electricity Supply Company vs. ITO (TDS)

2. has dismissed the

appeals by the impugned order. Thus, he submitted that the

instant appeals do not merit any consideration and accordingly

prayed for their dismissal.

7. We have given our careful considerations to the

submission made by the learned counsel for the Revenue and the

assessee.

Revenue is aggrieved by the decision of the ITAT holding

that compliance of Sec 194J (of Income Tax Act, 1961) mandating deduction of tax at source

are not attracted to the facts of these cases and the assessee was

not liable to deduct tax at source on payment of transmission

charges to KPTCL.

Sec. 194J (of Income Tax Act, 1961) reads as follows:

194J. (1) Any person, not being an individual or a

Hindu undivided family, who is responsible for paying to a

resident any sum by way of—

(a) fees for professional services, or

(b) fees for technical services26

28[(ba) any remuneration or fees or commission by whatever

name called, other than those on which tax is deductible under section

192, to a director of a company, or] 27[(c) royalty, or

(d) any sum referred to in clause (va) of section 28 (of Income Tax Act, 1961),]

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 29[ten] per cent of such sum as income-tax on

income comprised therein :

Provided that no deduction shall be made under this

section—

(A) from any sums as aforesaid credited or paid29a before

the 1st day of July, 1995; or

(B) where the amount of such sum or, as the case may be, the

aggregate of the amounts of such sums credited or paid or likely

to be credited or paid during the financial year by the aforesaid

person to the account of, or to, the payee, does not exceed—

(i) 30[thirty thousand rupees], in the case of fees for professional

services referred to in clause (a), or

(ii) 30[thirty thousand rupees], in the case of fees for technical

services referred to in 31[clause (b), or]

32[(iii) 30[thirty thousand rupees], in the case of royalty referred

to in clause (c), or

(iv) 30[thirty thousand rupees], in the case of sum referred to in

clause (d) :]

33[Provided further that an individual or a Hindu

undivided family, whose total sales, gross receipts or turnover

from the business or profession carried on by him exceed the

monetary limits specified under clause (a) or clause (b) of section

44AB during the financial year immediately preceding the

financial year in which such sum by way of fees for professional

services or technical services is credited or paid, shall be liable to

deduct income-tax under this section :]

34[Provided also that no individual or a Hindu undivided

family referred to in the second proviso shall be liable to deduct income-tax on the sum by way of fees for professional services in case

such sum is credited or paid exclusively for personal purposes of

such individual or any member of Hindu undivided family.]

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 notified36 by the Board for the purposes of

section 44AA (of Income Tax Act, 1961) or of this section;

(b) “fees for technical services” shall have the same meaning as

in Explanation 2 to clause (vii) of sub-section (1) of section 9 (of Income Tax Act, 1961);

37[(ba) “royalty” shall have the same meaning as in

Explanation 2 to clause (vi) of sub-section (1) of section 9 (of Income Tax Act, 1961);]

(c) where any sum referred to in sub-section (1) is credited to any

account, whether called “suspense account” or by any other

name, in the books of account of the person liable to pay such

sum, such crediting shall be deemed to be credit of such sum to

the account of the payee and the provisions of this section shall

apply accordingly.

In the instant cases, the above provision would come into

play only when there is payment of fee for availing technical

services. Compliance or otherwise of the above provision by the

assessee entirely hinges upon the factual matrix with regard to

availing of technical services if any from the KPTCL. Thus, in

order to answer the question of law raised by the Revenue, it is

imperative to examine as to whether assessee had availed any

technical services from KPTCL.

8. Irrefutable facts in these cases are KPTCL and

assessee have entered into a power transmission agreement dated

08.05.2012. Under the said agreement, KPTCL has agreed with

the assessee to provide its transmission network for the purpose

of carrying electricity to its users. For the said purpose, KPTCL

has covenanted with assessee to fulfill the obligations contained in

Article 2 of the agreement and to perform other obligations.

Assessee has agreed to pay transmission charges on a monthly

basis in terms of Article 8 of the agreement. Both parties have

agreed to comply with the provisions of the State Grid Code and

Regulations and Rules issued by KERC from time to time.

9. SLDC is required to maintain records of quantity of

energy flowing through the State Grid and issue State Energy

Account under KERC (Terms and Conditions of Tariff)

Regulations 2006.

10. KPTCL is required to maintain the operation and

maintenance of the transmission system.

11. Transmission charges are calculated as per

transmission tariff determined by KERC and KPTCL is required

to raise bills on every first working day of every month and the

assessee has undertaken to pay transmission charges in terms of

the said bills.

12. We have carefully perused the contents of the power

transmission agreement. There is no mention of any offer with

regard to any “technical services” by the KPTCL. Plain and

simple intention of the parties to the agreement as discernable

from the power transmission agreement is that the assessee was

desirous of using the transmission network belonging to the

KPTCL in accordance with the provisions of the Electricity Act

subject to payment of charges applicable and determined by

KERC. KPTCL was willing to provide its transmission network

for the purpose of carrying electricity to its users subject to

payment of transmission and other charges as determined by

KERC. There is neither an offer nor an acceptance of any

“technical service” inter se between the parties. Admittedly,

KPTCL is a State owned Company and the only power

transmitting agency. It has installed and developed its own

infrastructure. Assessee is also a State owned electricity

distribution company. The only service which the assessee has

availed from the KPTCL is “transmission of power” on payment

of charges fixed by KERC. No material is placed by the Revenue

before this Court to substantiate its contention that assessee had

availed of any technical services. In our considered view, assessee

has done nothing more than transmitting certain quantum of

power from one place to the other for a price fixed by KERC.

Assessee was oblivious to the technical expertise which the

KPTCL may possess. There was neither transfer of any

technology nor any service attributable to a technical service

offered by the KPTCL and accepted by the assessee. Therefore,

application of Section 194J (of Income Tax Act, 1961) to the facts of this case by

the Revenue is misconceived.

13. The above finding is sufficient to answer the

common substantial question of law. However, having perused

the order passed by the Commissioner (Appeals) by adverting to

the judgment of the Hon’ble Supreme Court in the case of

Hindustan Coca Cola Beverages (P) Ltd., (supra), we deem it

necessary to touch upon the subject of payment of tax by the

payee. It is not in dispute that the payee KPTCL has offered the

income to tax and paid the same. In the circumstances, there is no

loss of Revenue. Although the question of loss of Revenue is not

subject matter of these appeals, we have adverted to the same as

payment of tax by the payee has the effect of rendering these

appeals purely academic.

14. In the premise, we hold that these appeals are devoid

of merit and answer the question of law against the Revenue.

In the result, these appeals fail and accordingly stand

dismissed. No costs.

Sd/-

JUDGE

Sd/-

JUDGE