No TDS liability us 194C for back to back contract in JV as JV and constituent members had no contractor or sub-contractor relationship -ITAT

No TDS liability us 194C for back to back contract in JV. Joint venture and its constituent members had no contractor or sub-contractor relationship -ITAT

ABCAUS Case Law Citation:
1013 (2016) (09) ITAT

Brief Facts of the Case:
The assessee was an AOP which was forme as a joint venture (JV) between two partnership firms, for the purpose of submission of bids and execution of project works.  The Assessing Officer noted that the AOP had not deducted tax tax at source u/s 194C for payments made to joint venture partners. The assessee claimed that the JV and its constituent members did not have a contractor or sub-contractor relationship and consequently there was no liability to deduct tax u/s 194C. However, the AO rejected the claim of the assessee and completed the assessment by making an addition u/s 40(a)(ia).

CIT(A) deleted the addition considering the identical circumstances for the AY 2009-10 where the ITAT held that there was no sub-contract between the JV and the constituents and therefore, the provisions of Section 194C were not attracted in the appellant’s case. The above order was followed by the ITAT for AY 2010-11 also.

ITAT observations in AY: 2009-10

While adjudicating the matter in AY 2009-10, the ITAT observed that  the JV firm was formed with two partners, for the purpose of carrying the business of works contracts to act and submit prequalification application to submit bid if prequalified and execute the contracts. In the way of executing the contract works, Assessee got contract from various Governments and distributed the works among two partners and executed the work and the payment had been received by the JV.  The constituents of the JV were not sub-contracts, perse, but, they were partners of JV.

The ITAT noted that the modus of obtaining the Government contracts, the sequence and frequency of execution of the contracts clearly showed that the assessee as a JV secured contracts and given to its partners with a collective responsibilities and liabilities jointly and severally liable towards the owners for the execution of the contracts in accordance with the contract of the business.

ITAT opined that in order to establish a relationship of contractor and subcontractor, in addition to a formal agreement, it was necessary to show that the parties had acted in such a manner conducive to uphold a contractor-sub contractor relationship when there is a strong case of interlacing of finance and funds, interdependence of responsibilities, interconnection of activities. It is very difficult to come to a conclusion that the assessee were acting in the status of contractors vis-a-vis sub-contractors. A more rational finding would be that the parties were executing the contracts through joint effort, as a group of partners.

The ITAT pointed out that section 20 of the Indian Contract Act of 1872 provides that where both parties to an agreement are under a mistake as to a matter of fact, essentially to the agreement, the agreement is void. Therefore, the agreement is not to be relied on to hold that the assessee was acting in the status of contractors vis-avis sub-contractors. The question of TDS could not be considered only on the basis of the agreements entered into between the assessee and its partners. Therefore, if the payments were recorded by the assessee as sub-contract payments’ as a result of actual misconception, that should not make way for unjust enrichment by the Revenue.

The liability u/s 194C(2) is cast on the assessees only when they are in fact and in substance acting in the relationship of contractors and sub contractors. Dehors the agreements and accounts, when it is found that they are acting jointly, for the purpose of their contract business, there cannot be a relationship of contractor and subcontractor and there may not be an occasion to invoke Section 194C(2). 

Held:
ITAT dismissed the appeal filed by the Revenue and upheld the order of CIT(A) which was based upon the view taken by the ITAT in assessee’s own case.