Ita/263/2013 Of The Commissioner Of Income Tax v. M/S Kalyani Steels Ltd

IN THR HIGH COURT OF KARNATAKA|DHARWAD BENCH DATBD THIS THR 12 DAY OF FEBRUARY, 2018| PRESENT THE HON’BLE MRS. JUSTICE S. SUJATHA ANT) THR HON’BLE MR. JUSTICK JOHN MICHABL CUNHA ITA No.260/2013 C/W ITA Nos.289/2014, 263/2013, 2659/2013, 2038/2014 AND 262/20 IN ITA NO.260/2013 1.|THE COMMISSIONER OF INCOME-TAX,TDS, AAYAKAR BHAVAN,TDS, AAYAKAR BHAVAN, SEDAM ROAD, GULBARGA. D _THE DEPUTY COMMISSIONER OF INCOME-TAX, TDS CIRCLE, AAYAKAR BHAVAN, STAFF ROAD, FORT, BELLARY-583 102. ... APPBLLANTS (BY SRI.Y.V.RAVIRAJ, ADV.) AND: M/S KALYANI STEELS, LTD.,HOSPET ROAD, GINIGRA,KOPPAL DIST. . RESPONDENT (BY SRI.CHYTHANYA K.K, ADV.) THIS APPBAL IS FILED UNDER SECTION Q6O0A OF LT.|ACT, 1961, ARISING OUT OF ORDER DATED 18.12.2012PASSED)IN|ITA|NO.861/BANG/2011, PARYINGTHAT,I)|FORMULATE THE SUBSTANTIAL QUESTION OF LAW STATED|THEREIN, I) ALLOW THE APPEAL AND SET ASIDE THE ORDER,OF THE ITAT, BANGALORE IN ITA NO.861/BANG/2011 DATED)18.19.2012 CONFIRMING THERE ORDER OF THR APPELLAI 7 OD 3 COMMISSIONBR AND CONFIRM THR ORDER PASSBD BY THE!DEPUTY COMMISSIONER OF INCOME TAX, TDS CIRCLE,|BHLLARY. IN ITA NO.289/2014 1]THE COMMISSIONER OF INCOME-TAX,TDS, AAYAKAR BHAVAN,TDS, AAYAKAR BHAVAN, SEDAM ROAD, GULBARGA. |THE ASST. COMMISSIONER OF INCOME-TAX,|TDS CIRCLE, AAYAKAR BHAVAN,SlLAFF ROAD, FORT, BELLARY.... APPBLLANTS (BY SRI.Y.V.RAVIRAJ, ADV.) AN Ds: M/S KALYANI STEELS, LTD.,HOSPET ROAD, GINIGRA,KOPPAL. .. RESPONDENT (BY SRI.CHYTHANYA K.K, ADV.) THIS APPBAL IS FILED UNDER SECTION Q6O0A OF LT.|ACT, 1961, ARISING OUT OF ORDER DATED 21.02.2014PASSED IN ITA NO.1041/BANG/2013 FOR THE ASSESSMENTYRAR2010-201 1PARYINGTHAT,I)|RFORMULATETHRESUBSTANTIAL QUESTION OF LAW STATED THEREIN, II) ALLOW,THE APPEAL AND SET ASIDE THE ORDER OF THE I[IAT,BANGALORE IN ITA NO.1041/BANG/2013 DATED 21.02.2014.CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER|ANT)CONHIRM|THEORDERPASSED)BY|THEASST..COMMISSIONER OF INCOME TAX, TDS CIRCLE, BELLARY. | ITA NO.263/2013 1.|THE COMMISSIONER OF INCOME-TAX,TDS, AAYAKAR BHAVAN,SEDAM ROAD, GULBARGA. ° 3: |THE DEPUTY COMMISSIONER OF INCOME-TAX,|TDS CIRCLE, AAYAKAR BHAVAN,STAFF ROAD, FORT, BELLARY-583 102. ... APPBLLANTS (BY SRI.Y.V.RAVIRAJ, ADV.) AND:M/S KALYANI STEELS, LTD.,HOSPET ROAD, GINIGRA,KOPPAL DIST. . RESPONDENT (BY SRI.CHYTHANYA K.K, ADV.) THIS APPEAL IS FILED UNDER SECTION 2J60A OF LT.|ACT, 1961, ARISING OUT OF ORDER DATED 18.12.2012PASSED IN ITA NO.862/BANG/2011 FOR THE ASSESSMENTYRAR2009-2010,PARYINGTHAT,I),RFORMULATETHRESUBSTANTIAL QUESTION OF LAW STATED THEREIN, II) ALLOW,THE APPEAL AND SET ASIDE THE ORDER OF THE ITAT,|BANGALORE IN ITA NO.862/BANG/2011 DATED 18.12.2012.CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER|AND CONFIRM THR ORDBR PASSBKHD BY THR DEBPUCOMMISSIONER OF INCOME TAX, TDS CIRCLE, BELLARY. | ITA NO.265/2013 1.|THE COMMISSIONER OF INCOME-TAX,TDS, AAYAKAR BHAVAN,SEDAM ROAD, GULBARGA. D _THE DEPUTY COMMISSIONER OF INCOME-TAX,TDS CIRCLE, AAYAKAR BHAVAN,STAFF ROAD, FORT, BELLARY-583 102.... APPBLLANTS (BY SRI.Y.V.RAVIRAJ, ADV.)AND:M/S MUKUND, LTD., HOSPET ROAD, GINIGRA,KOPPAL DIST. . RESPONDENT (BY SRI.CHYTHANYA K.K, ADV.) THIS APPBAL IS FILED UNDER SECTION Q6O0A OF LT.|ACT, 1961, ARISING OUT OF ORDER DATED 18.12.2012PASSED)IN|ITA|NO.899/BANG/2011, PARYINGTHAT,I)|FORMULATE THE SUBSTANTIAL QUESTION OF LAW STATED|THEREIN, II) ALLOW THE APPEAL AND SET ASIDE THE ORDER,OF THE ITAT, BANGALORE IN ITA NO.859/BANG/2011 DATED)18.19.9012 CONFIRMING THR ORDER OF THR APPBLLATKCOMMISSIONBR AND CONFIRM THR ORDER PASSBD BY THE!DEPUTY COMMISSIONER OF INCOME TAX, TDS CIRCLE,|BELLARY. ITA NO.208/2014 1.|THE COMMISSIONER OF INCOME-TAX,AAYAKAR BHAVAN,AAYAKAR BHAVAN, SEDAM ROAD, GULBARGA-980) 100d |THE ASST. COMMISSIONER OF INCOME-TAX, TDS CIRCLE, AAYAKAR BHAVAN,TDS CIRCLE, AAYAKAR BHAVAN, SlLAFF ROAD, FORT, BELLARY. ... APPELLANTS (BY SRI.Y.V.RAVIRAJ, ADV.) AND: M/S MUKUND, LTD., HOSPET ROAD, GINIGRA. . RESPONDENT (BY SRI.CHYTHANYA K.K, ADV.) ITA NO.208/2014 1.|THE COMMISSIONER OF INCOME-TAX,AAYAKAR BHAVAN,AAYAKAR BHAVAN, SEDAM ROAD, GULBARGA-980) 100d |THE ASST. COMMISSIONER OF INCOME-TAX, TDS CIRCLE, AAYAKAR BHAVAN,TDS CIRCLE, AAYAKAR BHAVAN, SlLAFF ROAD, FORT, BELLARY. ... APPELLANTS (BY SRI.Y.V.RAVIRAJ, ADV.) AND: M/S MUKUND, LTD., HOSPET ROAD, GINIGRA. . RESPONDENT (BY SRI.CHYTHANYA K.K, ADV.) THIS APPEAL IS FILED UNDER SECTION 2J60A OF LT.|ACT, 1961, ARISING OUT OF ORDER DATED) 17.12.2013PASSED IN ITA NO.1040/BANG/2013 FOR THE ASSESSMENTYRAR2010-2011PARYINGTHAT,I)RFORMULATETHRESUBSTANTIAL QUESTION OF LAW STATED THEREIN, II) ALLOW,THE APPEAL AND SET ASIDE THE ORDER OF THE ITAT,|BANGALORE IN ITA NO.1040/BANG/2013 DATED 17.12.2013)CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER|ANT)CONFIRMTHEORDERPASSED|BY|THEASST..COMMISSIONER OF INCOME TAX, TDS CIRCLE, BELLARY. | ITA NO.262/2013 BETWEEN 1.|THE COMMISSIONER OF INCOME-TAX, TDS, AAYAKAR BHAVAN, SEDAM ROAD, GULBARGA. D _THE DEPUTY COMMISSIONER OF INCOME-TAX, TDS CIRCLE, AAYAKAR BHAVAN, STAFF ROAD, FORT, BELLARY-583 102. ... APPBLLANTS (BY SRI.Y.V.RAVIRAJ, ADV.) AND: M/S MUKUND LTD.,HOSPET ROAD, GINIGRA,KOPPAL DIST. . RESPONDENT (BY SRI.CHYTHANYA K.K, ADV.) THIS APPEAL IS FILED UNDER SECTION 2J60A OF LT.|ACT, 1961, ARISING OUT OF ORDER DATED 18.12.2012PASSED IN ITA NO.860/BANG/2011 FOR THE ASSESSMENT)YRAR2009-2010,PARYINGTHAT,I)|RFORMULATETHRESUBSTANTIAL QUESTION OF LAW STATED THEREIN, II) ALLOW,THE APPEAL AND SET ASIDE THE ORDER OF THE I[IAT,BANGALORE IN ITA NO.860/BANG/2011 DATED 18.12.2012.CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER|AND CONFIRM THRE ORDER PASSED BY JHE DEPUTYCOMMIssIONER OF INCOME TAX, TDS CIRCLE, BELLARY. THRSEK APPKALS COMING ON FOR FINAL HBARING THISDAY, S.SUJATHA J., DELIVERED THE FOLLOWING: °“6:| JUDGMENT These appeals are filed by the revenue undersection 260A of the Income Tax Act, 1961 (‘the Act’ forshort) challenging the order of the Income Tax AppellateTribunal, Bangalore Bench ‘A’ (‘the Tribunal’ for short)in.ITA.Nos.861/Bang/2011-dated|18.12.2012,1041/Bang/2013 dated 21.02.2014, 862/Bang/2011>dated 18.12.2012, 859/Bang/2011 dated 18.12.2012,1040/Bang/2013dated17.12.2013|and860/Bang/2011 dated 18.12.2012 respectively. 2.since the substantial questions of law raised in)these appeals are identical, the same are heard togetherand disposed of by this common judgment. 3.The assessee is engaged in the business of,manufacture of steel. During the assessment year 2008-09, 2009-10 and 2010-11 the assessee has madepayment to M/s Hospet Steel Limited (‘HSL’ for short)towards managerial and technical services rendered byway of operating and maintaining an integrated steel plant. Survey under Section 133A of the Act wasconducted. Subsequent to survey, proceedings undersection 201(1) and Section 201(1A) of the Act wereinitiated. Orders under Sections 201(1) and 201(1A) ofthe Act were passed holding that, HSL and M/s Kalyanisteel Limited (“KSL’ for short) and M/s Mukund Limited(ML’ for short) are independent entities. HSL is a servicecompany and managed an integrated steel plant for KSLand ML. The required labour and staff for the serviceshas been employed by HSL. HSL has used its assetsand machineries for rendering the agreed services. Theamounts received towards service charges has beenaccounted in the P & L account ot HSL and the same isoffered to tax. Hence, the Assessing Officer held that,assessee 1s in default under Section 2YO1 for notdeducting TDS under Section 194J of the Act andconsequently, interest under Section 2O1(1A) of the Actwas computed. Being aggrieved by the same, appealwas preferred by the assessee/respondent before theAppellate Commissioner. The Appellate Commissioner arrived at a conclusion that the payment made by theassessee to HSL is reimbursement of expenses andthere was no liability to deduct TDS under Section 194J_of the Act and hence, Section 201(1) and 201(1A) of theAct are not justifiable. Being aggrieved by the same,revenue has preterred these appeals raising followingsubstantial questions of law: U)Whether the Appellate Authorities werecorrect in holding that, the payments made|by the assessee to M/s Hospet SteelLimited are reimbursement of expenses oncost to cost basis and does not constitute|income component, hence, provisions ofsection 194J of the Act are not attracted? uy)Whether the Appellate Authorities failed to|take into consideration that, entire payment|made to M/s Hospet Steel Limited was)towards rendering of managerial and|technical services by way of operating and|maintaining an integrated steel plant and|the provisions of Section 194J of the Act are|attracted, consequently, Section 201 of the)Act is attracted? 4Learned counsel Sri.Y.V.Raviraj appearing for therevenue would contend that, both appellate authoritiesfailed to take into consideration that HSL is carrying onbusiness independently and not as an agent of KSL andML. The entire staff and manpower required foroperating and maintaining the integrated steel plant forrendering services were employed by HSL. Both theappellateauthorities|have|failedTO takeIntoconsideration that, while examining the applicability ofthe TDS provisions, the payment should be examinedwith reference to the services for which payment ismade. The nomenclature given by the assessee or HSLdoes not change the applicability of the provisions. Anyamount credited towards fee for professional ortechnical services attracts the provisions of Section194J of the Act. Taxability or otherwise of the saidamount in the hands of the recipient is not therequirement of Section to be looked into while applyingthe said provisions. - 10°) 5.Learned counsel Sri.Chythanya K.K. appearing forthe assessee submitted that HSL acts as an agent ofKSL and ML to manage the affairs of the steel plant.strategic Alliance Agreement (SAA) entered into betweenKSL and ML with HSL indicates that both companiesinstalled their plants in close by and in pursuance ofthe said SAA, the assessee along with ML promoted HSLfor eifective functioning of all the plants as onecomposite manufacturing unit and accordingly, theassessee had installed iron making and steel rollingfacilities and ML had installed steel making facilities”with the following terms namely: (i)the share capital of HSL was held by theassessee and ML in equal proportion and|the investment in the said steel makingfacilitieshavebeen|madeby|SAAconstituents in the ratio of 41.38% (theassesse): 58.62% (by ML). assessee and ML in equal proportion and|the investment in the said steel makingfacilitieshavebeen|madeby|SAAconstituents in the ratio of 41.38% (theassesse): 58.62% (by ML). (it)the assessee and ML have agreed toreimburse HSL the expenditure incurred onbehalf of the assessee and ML in course ofadministering the plant operations on costreimburse HSL the expenditure incurred onbehalf of the assessee and ML in course ofadministering the plant operations on cost Cn in a to cost basis, te., all the expenses for hotmetal making and steel rolling activitieswere allocated to the assessee and the.EXPENSES.incurred|forSteelmaking|activities to ML; (iit) all other common expenses and corporateexpenses except the provision for gratuityand leave encashment to staff etc., wererecovered from SAA constituents in theratio of 41.38% and 58.62% as agreedupon, It has been subscribed under the caption —C.Payments to JVC in the SAA as under:| “The parties agree and undertake topay the JVC in advance a sum of Rs.20.00|million in the products sharing ratio orsuch other sum as may be agreed from|time to time to facilitate the operation of theplants. All costs and expenses incurred by JVC shall be reimbursed by the parties in|the products sharing ratio.” Cn in a to cost basis, te., all the expenses for hotmetal making and steel rolling activitieswere allocated to the assessee and the.EXPENSES.incurred|forSteelmaking|activities to ML; (iit) all other common expenses and corporateexpenses except the provision for gratuityand leave encashment to staff etc., wererecovered from SAA constituents in theratio of 41.38% and 58.62% as agreedupon, It has been subscribed under the caption —C.Payments to JVC in the SAA as under:| “The parties agree and undertake topay the JVC in advance a sum of Rs.20.00|million in the products sharing ratio orsuch other sum as may be agreed from|time to time to facilitate the operation of theplants. All costs and expenses incurred by JVC shall be reimbursed by the parties in|the products sharing ratio.” The parties also agree to pay to JVCservice charges as may be agreed upon|between the parties and the JVC.” In.the|supplementaryagreement(dated10.08.1999) to SAA dated 16.05.1998, sub-para 2. 2(c) of Chapter 2 on Page 24 of the PrincipalAgreementWdasSubstitutedby|the|followingparagrapnh. “It is agreed by and between theparties to this Agreement that JVC is an|outcome of the Strategic Alliance betweenthe parties and will only be acting asconduit pipe for and on behalf of theStrategic Alliance constituents and noremuneration will be paid to JVC.” 6.In terms of the aforesaid, share capital of HSL washeld by the assessee and ML in equal proportion andthe investment in the said steel making facilities hasbeen made by SAA constituents in the ratio of 41.38and 958.62 by the assessee and ML respectively. As perthe terms of SAA, the assessee and ML have reimbursedthe expenses incurred by HSL in performance of itsObligations. The said payment did not comprise of anyincome component in the hands of HSL. It is only thereimbursement of such expenses incurred by HSL, the same cannot be categorized as fees towards professionaland technical services. Thus, it was argued that, therebeing no income in the hands of HSL, Section 194J ofthe Act is not applicable. This factual aspect as well as.legal aspects were rightly considered by the appellateauthorities while arriving at a decision. Hence, thesubstantial questions of law raised by the revenuedeserves to be answered in favour ot the assessee|rejecting the appeals. T Heard the learned counsel appearing for theparties and perused the material on record. 8.In order to answer the substantial questions of lawraised by the revenue, it is apt to refer to Section 194J_of the Act, the relevant provision reads thus: 194 J-FeesforprofessionalOrtechnicalSeCYrvUICe (1) Any person, not being an individual or|(OHinduundividedfamily,who1S|responsible for paying to a resident any|sum by way of -(a)|XXXXX|(b)fees for technical services, - 14°) (ba) Xxxxx| (c)XXXXX| (cd)XXXXX| shall, at the time of credit of such sum tothe account of the payee or at the time ofpayment thereof in cash or by issue of @'cheque or draft or by any other mode,whichever ts earlier, deduct an amount equal to (ten) per cent of such sum as income-tax on|income comprised therein: QOA reading of this provision discloses that, an amount equal to ten percent of such sum as income-taxhas to be deducted on income comprised therein, by aperson not being an individual or a HUF, who isresponsible for paying a resident any sum towards feesfor technical services as per Clause (b) of Section194J(1) of the Act, the relevant factor is “incomecomprised”. To attract this provision, there must be anincome comprised therein. Section 2(24) of the Actdefines the income. The reimbursement of expensesincurred by HSL cannot be categorized as income undersection 2(24) of the Act. 10,section 190 of the Act provides for deduction atsource and advance payment. The said provision readsthus: QOA reading of this provision discloses that, an amount equal to ten percent of such sum as income-taxhas to be deducted on income comprised therein, by aperson not being an individual or a HUF, who isresponsible for paying a resident any sum towards feesfor technical services as per Clause (b) of Section194J(1) of the Act, the relevant factor is “incomecomprised”. To attract this provision, there must be anincome comprised therein. Section 2(24) of the Actdefines the income. The reimbursement of expensesincurred by HSL cannot be categorized as income undersection 2(24) of the Act. 10,section 190 of the Act provides for deduction atsource and advance payment. The said provision readsthus: “190. (1) Notwithstanding that theregular assessment in respect of any income|is to be made in a later assessment year, the|tax on such income shall be payable by|deduction (or collection) at source or by|advance payment (or by payment under sub-section (1A) of Section 192), as the case may.be, in accordance with the provisions of this|Chapter. | (2)Nothingin|thissectionShallprejudice the charge of tax on such income.under the provisions of sub-section (1) of|section 4.” 11.This provision makes it clear that deduction at.source shall be on such income not otherwise. The'primary factor to attract Section 194J is the ingredientof “income comprised therein”. If no income is reflectedin the balance sheet and P & L account ot HSL towardsthe reimbursement charges paid on cost to cost basis by KSL and ML, it ceases to have the character of income. As such, the assessee cannot be treated as the assessee|in default in not deducting tax at source under Section194J of the Act. The arguments of the revenue that thefees paid by the assessee is towards technical services isimaginary one not established with substantial material. 12)The Assessing Officer proceeded to pass the ordersunder Sections 201 and 201(1A) of the Act on thefooting that the assessee was required to deduct taxfrom the payments made to the HSL irrespective of thefact that the said payments include element of incomeor not. This approach of the Assessing Officer iscontrary to Section 194J of the Act, which inunequivocal terms describes deduction of income tax onincome comprised therein. 13.It is trite that, if there is no income embedded inapayment, then TDS provisions would not apply as TDSis only an alternative method of collection of taxes. It is"beneficial to refer to the judgment of this Court in the case oftHyderabad Industries Ltd., Vs Income Tax|Officer and Another 188 ITR 749 (kar), wherein it isheld that, “an amount which will not be included in thetotal income of a person cannot be considered as“income” for the purpose of deduction of tax at source atall. The purpose of deduction of tax at source is not tocollect a sum which is not a tax levied under the Act, it)is to facilitate the collection of tax lawfully leviableunder the Act.” In view of the factual finding of theappellate authorities that the payment made by KSLand ML to HSL tor various expenses incurred would bea reimbursement and not a fee for technical services,|Section 194J of the Act is not attracted. | 14,The CBDT in the circular number 715 dated03.08.1995 has clarified that the reimbursement cannotbe deducted out of the bill amount for the purpose ofTDS. The Assessing Officer’s view is against the intent ofthe said circular. | - 18°) 14,The CBDT in the circular number 715 dated03.08.1995 has clarified that the reimbursement cannotbe deducted out of the bill amount for the purpose ofTDS. The Assessing Officer’s view is against the intent ofthe said circular. | - 18°) 15]This Court 1nKarnataka Power Transmission|Corporation Ltd., Vs. Deputy Commissioner ofIncome-tax (TDS) Circle 16/2), Bangalore-reported in|(2016) 383 ITR 59 (Kar)| while considering theapplicability of Section 194A of the Act has observedthat, Section 194A of the Act mandates the tax deductor.to deduct ‘income tax’ on any income by way of interestother than income by way of interest on securities. Thehrase ‘any income’ and ‘income tax thereon’ if read Vharmoniously, it would indicate that the interest whichfinally partakes the character of income, alone is liablefor deduction of the income tax on that income by wayof interest. If the said interest is not finally consideredto be an income of the deductee, as per reversal entriesof the provision, Section 194A(1) of the Act would not bemade applicable. In other words, if no income isattributable to the payee, there is no liability to deducttax at source in the hands of the tax deductor. | 16.Under the circumstances, the assessee falls|outside the scope of Section 194J r/w Section 200 of ° 19°) theActduringtherelevant.assessmentyycar©rsConsequently, the provisions of Sections 201 and201(1A) of the Act are not attracted. We do not find anymaterial irregularity or infirmity in the orders passed bythe appellate authorities. For the aforesaid reasons, weanswer substantial questions of law against the revenueand in tavour of the assessee. Accordingly, the appeals stand dismissed. [Sd/-]JUDGE| MBS /- Isd/-|.JUDGE