TDS on testing and commissioning services deductible u/s 194C as contractual payments

TDS on testing and commissioning services deductible u/s 194C as contractual payments as not as fees for technical services u/s 194J-ITAT follows High Court decision 

ABCAUS Case Law Citation:
ABCAUS 2228 (2018) (03) ITAT

Important Case Laws Cited/relied upon by the parties
Pr. CIT Vs. Bharat Heavy Electricals Ltd 390 ITR 322

The Challenge/Grievance:
The appellant assessee was aggrieved by the order of CITA) in confirming that the TDS at the rate of 10% under section 194J of the income tax act 1961 (the Act) is required to be deducted on the services of testing and commissioning services.

Brief Facts of the Case:
The appellant assessee was a company engaged in the business of generation of power. The company was a special purpose vehicle by the State Government. for implementation of the power project.

A survey under section 133A of the Act was conducted wherein the statement of the VP of the assessee company was recorded. It was found that the assessee had contracted some of the work to a Government company. One of the contract involved the service of transportation, insurance, erection, installation, testing and commissioning. On the above payments the assessee had deducted tax at source under section 194C  whereas the Assistant Commissioner of Income Tax (TDS) was of the view that services provided to the assessee were in the nature of “fees for technical services” on which tax should be deducted under section 194J and not under section 194C of the Act as deducted by the assessee.

Therefore, show cause notice was issued to the assessee towards the service of civil construction, erection, installation and testing and commissioning etc.

The assessee replied that the above services were falling under the provisions of section 194C and tax was not required to be deducted under provisions of section 194J of the Act. With respect to the erection and installation services it was stated that it had been specifically excluded from the definition of fees for technical services under section 9 of the income tax act as it is involving construction, assembly, mining, like project undertaken.

However, the Assessing Officer held that services of testing and commissioning is specialised technical work performed by the technically competent manpower and therefore they are “fees for technical services” u/s 194J of the Income Tax Act on which tax at the rate of 10% should have been deducted at source.

As the assessee could not provide the valid justification with respect to the quantum of work involved of aforesaid services, he bifurcated the expenses on the basis of the quantum of work involved and held that 40% of overall expenses are incurred towards erection, installation, insurance, testing and commission and balance 60% are for other works, services. Based on this he worked out the short deduction of tax and also calculated the interest under section 201(1A) and worked out the total demand under section 201(1) and 201(1A).

Observations made by the Tribunal:
The ITAT observed that the the Hon’ble Punjab and Haryana High Court has decided an identical issue. The Hon’ble High Court after considering the clauses of the contract observed that the testing, pre-commissioning, commissioning and post-commissioning are required to be carried out by a contractor to satisfy the customer that the work has been executed in a proper manner ; that the equipment has been installed as required and that its performance meets the parameters specified in the contract. The personnel that are required to test and commission the plant and equipment perform their functions not under a contract for the supply of technical services to the customer, but to satisfy the customer on behalf of the contractor that the plant and equipment has been duly supplied as per the contractual specifications. Indeed, this entire exercise would require the deployment of technical personnel

The Hon’ble High Court emphasised that what is important is that in such services, the technical personnel are deployed not for and on behalf of the customer, but for and on behalf of the contractor itself with a view to ensuring that the contractor has supplied the equipment as per the contractual specifications. Everything done in this regard is to this end and not to supply technical services to the customer.

Decision/ Conclusion/Held:
The ITAT, following the decision of the Hon’ble High Court reversed the finding of the lower authorities and cancelled the order passed by the Assessing officer under section 201 (1) and section 201 (1A).