Our erection and commissioning contractor uses its own engineers. Should we deduct under 194J, not 194C?
No. Payments for construction, erection and commissioning of a plant do not become fees for technical services merely because the contractor deploys technical personnel to perform its contract; deduction under s.194C is correct.
Decided by the High Court (Punjab & Haryana High Court — S.J. Vazifdar C.J. and Deepak Sibal J.) on 2016-12-09, reported as [2017] 77 taxmann.com 269 (Punjab & Haryana) / (2017) 390 ITR 322 (Punjab & Haryana) / (2017) 291 CTR 161 (Punjab & Haryana); IT Appeal No. 242 of 2016 (O&M). It bears on section 194C, section 194J, section 9(1)(vii), section 201, section 201(1A), section 133A of the Income Tax Act 1961, in TDS Defaults matters.
This is the answer to the common survey point that any contract with engineers in it is a s.194J contract. The Court asked whom the technical personnel were working for: they were deployed by the contractor to satisfy itself, and to demonstrate to the customer, that what it supplied met the contractual specification — not to render a service to the payer. It also rejected the wider premise that anything falling outside s.194C must land in s.194J, holding that s.194J is not a residuary clause, which is worth quoting whenever the officer reasons by elimination.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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A TDS inspection under s.133A was carried out on BHEL on 7 February 2012. For assessment year 2012-13 BHEL had made payments to five contractors under contracts for the erection, testing, commissioning and trial operation of power cycle piping, boiler and LP piping packages for units in Haryana, and had deducted tax at 2 per cent under s.194C. Both sides argued from one specimen contract, with M/s. PCP International Limited, Chandigarh, dated 4 December 2009, the others being identical. The Assessing Officer held that because testing, trial operation and commissioning could only be done by qualified engineers, supervisors and technicians, the contractors were rendering technical services attracting s.194J at 10 per cent, and treated BHEL as an assessee in default under s.201(1A). The Commissioner (Appeals) held the contract was for work and labour and decided for the assessee, also accepting the alternative contention that the recipients had already paid tax; the Tribunal confirmed. The revenue appealed under s.260A, and the appeal was admitted only on questions (ii) and (iv).
The revenue's appeal was dismissed. Questions (ii) and (iv) were decided in favour of the assessee (para 26): the contracts did not involve the supply of professional or technical services within the meaning of s.194J, and the consideration paid was not for professional or technical services rendered to BHEL, so s.194J did not apply (para 22). Two limits should be read with that. The Court expressly refrained from deciding whether the contract falls within s.194C, because the assessee had accepted that it does and had complied; had that been contested the question would have had to be answered (para 23). And having decided questions (ii) and (iv), the Court held it unnecessary to decide questions (i) and (iii), which concerned the proviso to s.201(1) inserted by the Finance Act 2012 and the application of Hindustan Coca Cola Beverages (P.) Ltd. v. CIT (2007) 293 ITR 226 (SC) (para 27).
The Court construed the specimen contract clause by clause. Clause 1 defines the work as erection, testing, commissioning and trial operation; the rate schedule is for material, not for the supply of technical services; and the manpower schedule is one of deployment of personnel at site to execute that work, so their services were not engaged for the customer's benefit but engaged by the contractor for its own benefit in performing the contract (paras 10 to 12). Clause 4's deployment obligation is 'for timely completion of work'; that the equipment requires input from technical personnel is another matter, and that input is to enable the contractor to supply the equipment, not to enable BHEL to run the machinery itself (para 14). Clause 19.17's supply of labour, tools and tackles is for executing the contract, not supplied under it (para 15). The requirement that only licensed electricians be employed (clause 27.4) is a quality stipulation, not the provision of technical assistance (para 17), and the supervisory staff clauses (39.1, 39.2, 39.5, 39.11) require deployment to ensure due and proper execution by the contractor, not the supply of personnel (para 19). On the testing and commissioning clauses (46.4, 46.13, 46.16, 46.18) the Court held these are usual clauses whose purpose is to satisfy the customer that the contractor has performed; the technical personnel are deployed for and on behalf of the contractor, not the customer (para 21). Separately, the Court held that s.194J is not a residuary clause: ss.194C and 194J are independent provisions, and it does not follow from a contract falling outside s.194C that it falls within s.194J (paras 9 and 23). It distinguished CIT v. Bharti Cellular Ltd. [2010] 193 Taxman 97 (SC), on which the revenue relied to seek a remand for expert evidence: the department had never applied to examine an expert, did not say there was material beyond the contracts, and here the extent of human intervention appeared from the contract itself, whereas in Bharti Cellular the question was how human intervention occurred in the routing of calls, on which there was no evidence (paras 24 and 25).
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
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Handle my notice → Ask a CA on WhatsAppNo. Payments for construction, erection and commissioning of a plant do not become fees for technical services merely because the contractor deploys technical personnel to perform its contract; deduction under s.194C is correct. This was decided by the High Court (Punjab & Haryana High Court — S.J. Vazifdar C.J. and Deepak Sibal J.) and bears on section 194C, section 194J, section 9(1)(vii), section 201, section 201(1A), section 133A of the Income Tax Act 1961. It is reported as [2017] 77 taxmann.com 269 (Punjab & Haryana) / (2017) 390 ITR 322 (Punjab & Haryana) / (2017) 291 CTR 161 (Punjab & Haryana); IT Appeal No. 242 of 2016 (O&M). This is the answer to the common survey point that any contract with engineers in it is a s.194J contract. The Court asked whom the technical personnel were working for: they were deployed by the contractor to satisfy itself, and to demonstrate to the customer, that what it supplied met the contractual specification — not to render a service to the payer. It also rejected the wider premise that anything falling outside s.194C must land in s.194J, holding that s.194J is not a residuary clause, which is worth quoting whenever the officer reasons by elimination. If it applies to you, the first step is this: Produce the contract and point to the scope of work — supply, erection, commissioning and demonstration of conformity — rather than any separate engagement for advice or expertise.
A TDS inspection under s.133A was carried out on BHEL on 7 February 2012. For assessment year 2012-13 BHEL had made payments to five contractors under contracts for the erection, testing, commissioning and trial operation of power cycle piping, boiler and LP piping packages for units in Haryana, and had deducted tax at 2 per cent under s.194C. Both sides argued from one specimen contract, with M/s. PCP International Limited, Chandigarh, dated 4 December 2009, the others being identical. The Assessing Officer held that because testing, trial operation and commissioning could only be done by qualified engineers, supervisors and technicians, the contractors were rendering technical services attracting s.194J at 10 per cent, and treated BHEL as an assessee in default under s.201(1A). The Commissioner (Appeals) held the contract was for work and labour and decided for the assessee, also accepting the alternative contention that the recipients had already paid tax; the Tribunal confirmed. The revenue appealed under s.260A, and the appeal was admitted only on questions (ii) and (iv). The matter was decided on 2016-12-09 by the High Court (Punjab & Haryana High Court — S.J. Vazifdar C.J. and Deepak Sibal J.). On those facts the High Court held as follows. The revenue's appeal was dismissed. Questions (ii) and (iv) were decided in favour of the assessee (para 26): the contracts did not involve the supply of professional or technical services within the meaning of s.194J, and the consideration paid was not for professional or technical services rendered to BHEL, so s.194J did not apply (para 22). Two limits should be read with that. The Court expressly refrained from deciding whether the contract falls within s.194C, because the assessee had accepted that it does and had complied; had that been contested the question would have had to be answered (para 23). And having decided questions (ii) and (iv), the Court held it unnecessary to decide questions (i) and (iii), which concerned the proviso to s.201(1) inserted by the Finance Act 2012 and the application of Hindustan Coca Cola Beverages (P.) Ltd. v. CIT (2007) 293 ITR 226 (SC) (para 27).
The Court construed the specimen contract clause by clause. Clause 1 defines the work as erection, testing, commissioning and trial operation; the rate schedule is for material, not for the supply of technical services; and the manpower schedule is one of deployment of personnel at site to execute that work, so their services were not engaged for the customer's benefit but engaged by the contractor for its own benefit in performing the contract (paras 10 to 12). Clause 4's deployment obligation is 'for timely completion of work'; that the equipment requires input from technical personnel is another matter, and that input is to enable the contractor to supply the equipment, not to enable BHEL to run the machinery itself (para 14). Clause 19.17's supply of labour, tools and tackles is for executing the contract, not supplied under it (para 15). The requirement that only licensed electricians be employed (clause 27.4) is a quality stipulation, not the provision of technical assistance (para 17), and the supervisory staff clauses (39.1, 39.2, 39.5, 39.11) require deployment to ensure due and proper execution by the contractor, not the supply of personnel (para 19). On the testing and commissioning clauses (46.4, 46.13, 46.16, 46.18) the Court held these are usual clauses whose purpose is to satisfy the customer that the contractor has performed; the technical personnel are deployed for and on behalf of the contractor, not the customer (para 21). Separately, the Court held that s.194J is not a residuary clause: ss.194C and 194J are independent provisions, and it does not follow from a contract falling outside s.194C that it falls within s.194J (paras 9 and 23). It distinguished CIT v. Bharti Cellular Ltd. [2010] 193 Taxman 97 (SC), on which the revenue relied to seek a remand for expert evidence: the department had never applied to examine an expert, did not say there was material beyond the contracts, and here the extent of human intervention appeared from the contract itself, whereas in Bharti Cellular the question was how human intervention occurred in the routing of calls, on which there was no evidence (paras 24 and 25). In the words reproduced by the source cited on this page: "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"
It was decided by the High Court on 2016-12-09 and is reported as [2017] 77 taxmann.com 269 (Punjab & Haryana) / (2017) 390 ITR 322 (Punjab & Haryana) / (2017) 291 CTR 161 (Punjab & Haryana); IT Appeal No. 242 of 2016 (O&M). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 194C, section 194J, section 9(1)(vii), section 201, section 201(1A), section 133A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The revenue's appeal was dismissed. Questions (ii) and (iv) were decided in favour of the assessee (para 26): the contracts did not involve the supply of professional or technical services within the meaning of s.194J, and the consideration paid was not for professional or technical services rendered to BHEL, so s.194J did not apply (para 22). Two limits should be read with that. The Court expressly refrained from deciding whether the contract falls within s.194C, because the assessee had accepted that it does and had complied; had that been contested the question would have had to be answered (para 23). And having decided questions (ii) and (iv), the Court held it unnecessary to decide questions (i) and (iii), which concerned the proviso to s.201(1) inserted by the Finance Act 2012 and the application of Hindustan Coca Cola Beverages (P.) Ltd. v. CIT (2007) 293 ITR 226 (SC) (para 27). It arises in TDS Defaults matters, on section 194C, section 194J, section 9(1)(vii), section 201, section 201(1A), section 133A of the Income Tax Act 1961, and was decided by Punjab & Haryana High Court — S.J. Vazifdar C.J. and Deepak Sibal J.. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show that the personnel were the contractor's own, working to discharge the contractor's obligation, and were not made available to you. If the officer argues that the payment is not squarely within s.194C and must therefore fall in s.194J, answer that s.194J is not a residuary provision and he must positively establish professional or technical services. Where the Revenue asks for expert examination of the extent of human involvement, point out that here the contracts themselves showed it and no external evidence was needed.
Still good law. Followed by the Allahabad High Court in CIT (TDS) v. Lalitpur Power Generation Co. Ltd. [2023] 156 taxmann.com 698 / (2024) 296 Taxman 372 (Allahabad), IT Appeal Nos. 104 to 106 and 111 of 2018, decided 16 November 2023 (assessment years 2012-13 to 2014-15). That Court held the essence of the two cases similar, adopted the reasoning that the dominant object of the contract governs its other clauses, and held that in the absence of any internal tool in the contract or any enabling provision the Assessing Officer cannot dissect an indivisible contract to discover a component of fees for technical services; TDS was therefore due under s.194C and not s.194J. Its case review records this judgment as followed. The Karnataka High Court decision in CIT v. Bangalore Metro Rail Corpn. Ltd. [2022] 140 taxmann.com 229 / 449 ITR 431 (Kar.) is agreed with in the same judgment on the same principles. No SLP, stay, reversal or decision doubting this judgment appears on the report. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Cite this as IT Appeal No. 242 of 2016 (O&M), decided 9 December 2016, reported at [2017] 77 taxmann.com 269 / (2017) 390 ITR 322 / (2017) 291 CTR 161 (P&H), with the respondent named as Senior Manager (Finance), Bharat Heavy Electricals Ltd. - that is how later High Courts cite it. Read the decision for what it decides and not for what it assumes. The Court held only that these contracts fall outside s.194J; it expressly refrained from deciding whether they fall within s.194C, because the assessee accepted that they do (para 23). It also left undecided the questions on the proviso to s.201(1) and on Hindustan Coca Cola Beverages (para 27), so the entry is not authority on whether a deductor escapes interest where the payee has paid tax. The point of general use is the one at paras 9 and 23 - that ss.194C and 194J are independent and s.194J is not a residuary provision - and the factual test at para 21, that technical personnel deployed by a contractor to demonstrate its own performance are not rendering technical services to the customer. The judgment does not state the amount of the short deduction demanded or the identity of the other four contractors; the contract construed is the specimen agreement with M/s. PCP International Limited dated 4 December 2009. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The revenue's appeal was dismissed. Questions (ii) and (iv) were decided in favour of the assessee (para 26): the contracts did not involve the supply of professional or technical services within the meaning of s.194J, and the consideration paid was not for professional or technical services rendered to BHEL, so s.194J did not apply (para 22). Two limits should be read with that. The Court expressly refrained from deciding whether the contract falls within s.194C, because the assessee had accepted that it does and had complied; had that been contested the question would have had to be answered (para 23). And having decided questions (ii) and (iv), the Court held it unnecessary to decide questions (i) and (iii), which concerned the proviso to s.201(1) inserted by the Finance Act 2012 and the application of Hindustan Coca Cola Beverages (P.) Ltd. v. CIT (2007) 293 ITR 226 (SC) (para 27).
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
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