Karnataka High Court

The Commissioner Of Income-Tax vs M/S Bangalore Metro Rail ... on 30 June, 2022

Bench: P.S.Dinesh Kumar, Anant Ramanath Hegde

                                       I.T.A. No.60/2014
                                   C/W I.T.A. No.59/2014


                          1
     IN THE HIGH COURT OF KARNATAKA AT BENGALURU

        DATED THIS THE 30TH DAY OF JUNE, 2022

                      PRESENT

      THE HON'BLE MR. JUSTICE P.S. DINESH KUMAR

                        AND
 THE HON'BLE MR. JUSTICE ANANT RAMANATH HEGDE

                I.T.A No.60 OF 2014
                         C/W
                I.T.A. No.59 OF 2014


IN I.T.A No.60 OF 2014


BETWEEN :

1.     THE COMMISSIONER OF INCOME-TAX
       TDS, NO.59, HMT BHAVAN
       4TH FLOOR, BELLARY ROAD
       GANGANAGARA
       BANGALORE-560 032

2.     THE ASST. COMMISSIONER OF
       INCOME TAX, CIRCLE-16(1)
       NO.59, HMT BHAVAN
       4TH FLOOR, BELLARY ROAD
       GANGANAGARA
       BANGALORE-560 032                ... APPELLANTS

(BY SHRI. K.V. ARAVIND, ADVOCATE)

AND :

M/S. BANGALORE METRO RAIL
CORPORATION LTD.,
BMTC COMPLEX, 3RD FLOOR
                                      I.T.A. No.60/2014
                                 C/W I.T.A. No.59/2014


                          2
K.H.ROAD, SHANTHINAGARA
BANGALORE-560 027                      ... RESPONDENT

(BY SHRI. K.K. CHYTHANYA, SENIOR ADVOCATE FOR
    SHRI. S. SHARATH, ADVOCATE)

      THIS INCOME TAX APPEAL IS FILED UNDER SEC.260-A
OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED
17.09.2013 PASSED IN ITA NO.1433/BANG/2012, FOR THE
ASSESSMENT YEAR 2011-2012. PRAYING TO 1. FORMULATE
THE SUBSTANTIAL QUESTIONS OF LAW AND ETC.

IN I.T.A No.59 OF 2014

BETWEEN :

1.   THE COMMISSIONER OF INCOME-TAX
     TDS, NO.59, HMT BHAVAN
     4TH FLOOR, BELLARY ROAD
     GANGANAGARA
     BANGALORE-560 032

2.   THE ASST. COMMISSIONER OF
     INCOME TAX, CIRCLE-16(1)
     NO.59, HMT BHAVAN
     4TH FLOOR, BELARY ROAD
     GANGANAGARA
     BANGALORE-560 032                ... APPELLANTS

(BY SHRI. K.V. ARAVIND, ADVOCATE)

AND :

M/S. BANGALORE METRO RAIL
CORPORATION LTD.,
BMTC COMPLEX, 3RD FLOOR
K.H.ROAD, SHANTHINAGARA
BANGALORE-560 027                      ... RESPONDENT

(BY SHRI. K.K. CHYTHANYA, SENIOR ADVOCATE FOR
    SHRI. S. SHARATH, ADVOCATE)
                                                 I.T.A. No.60/2014
                                            C/W I.T.A. No.59/2014


                                    3
      THIS INCOME TAX APPEAL IS FILED UNDER SEC.260-A
OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED
17.09.2013 PASSED IN ITA NO.1319/BANG/2012, FOR THE
ASSESSMENT YEAR 2011-2012. PRAYING TO 1. FORMULATE
THE SUBSTANTIAL QUESTIONS OF LAW AND ETC.


     THESE ITAs, HAVING BEEN HEARD AND RESERVED
FOR JUDGMENT ON 25.05.2022, COMING ON FOR
PRONOUNCEMENT OF JUDGMENT THIS DAY, P.S.DINESH
KUMAR. J, PRONOUNCED THE FOLLOWING:-

                            JUDGMENT

These two appeals by the Revenue, arise out

of the common order dated September 17, 2013 in

ITA No.1319 & 1433/Bang/2012 passed by ITAT1,

Bengaluru Bench 'C'. These appeals have been

admitted to consider the following questions of law:

1. Whether the Tribunal was correct in holding that the contract as supply contract while the services rendered such as design and testing, are covered by explanation 2 to Sec.9(1)(vii) of the Income-Tax Act?

2. Whether the Tribunal was correct in holding that the contract as composite contract and no segregation possible while the assessee has segregated and arrived at the percentage of technical services component, when the Tribunal itself has observed that

Income Tax Appellants Tribunal, Bengaluru I.T.A. No.60/2014 C/W I.T.A. No.59/2014

some portion of the contract can be segregated to attract TDS, whether it was factually and legally tenanble to have allowed the appeal of the assessee in entirety?

3. Whether the work taken up is ancillary to supply of rolling stock or a part of it is a rendering professional and technical service?

2. Hence, they are disposed of by this

common order.

3. Heard Shri. K.V. Aravind, learned

Standing Counsel for the Revenue and Shri.

K.K.Chaitanya, learned Senior Advocate for the

assessee.

4. The BMRCL2 entered into a Contract with

a consortium consisting of M/s BEML Ltd.,

M/s Hyundai Rotem Company, Mitsubhishi

Corporation and M/s Mitsubhishi Electric

Corporation, of which, BEML Ltd., being the

consortium leader, for design manufacture, supply,

Bangalore Metro Rail Corporation Ltd.

I.T.A. No.60/2014 C/W I.T.A. No.59/2014

testing and commissioning of passenger Rolling

Stock, including training of Personnel and Supply of

spares and operation. The total cost of the Contract

was Rs.1672.50 Crores.

5. The Income Tax Department conducted

a survey under Section 133A of the Income Tax Act

and observed that a sum of Rs.182 Crores had been

paid by BMRCL to the consortium. The Department

was of the view that assessee ought to have

deducted tax at source before making the payment.

Accordingly, a show cause notice3 was issued calling

upon the assessee to show cause as to why it

should not be treated 'as an assessee in default'

under Section 201(1) of Income Tax Act4 for not

deducting tax at source and remitting to the

Government. Assessee submitted its reply

contending inter alia that Contract was one for

Dated 27.12.2011

'IT Act' for short I.T.A. No.60/2014 C/W I.T.A. No.59/2014

supply of Coaches and other activities such as

design, testing, commissioning and training are

only incidental to achieve the dominant object and

therefore, it would constitute a sale of goods and

hence, the provisions of Section 194C or 194J

would not apply. It was also contended that

assessee was not aware as to how the consortium

partners had utilized the 10% of the Contract

amount given as 'Mobilization Amount'.

6. The Assessing Officer, not being satisfied

with BMRCL's reply, treated it as 'an assessee in

default' and levied tax and interest thereon under

Section 201(1A) of the IT Act. An appeal filed

before the commissioner of Income Tax (Appeals),

Bengaluru, by the assessee challenging the said

order also stood dismissed. Feeling aggrieved,

assessee filed appeals before the ITAT, Bengaluru.

By the common impugned order, the ITAT has

allowed assessee's appeals. The Revenue has I.T.A. No.60/2014 C/W I.T.A. No.59/2014

presented these appeals raising the questions of

law recorded hereinabove.

7. Shri. Aravind, for the Revenue,

submitted that the ITAT fell in error in holding that

the Contract is a composite Contract and it cannot

be segregated. In support of this contention,

adverting to the order under Section 201(1) and

201(1A) of the IT Act passed by the Assistant

Commissioner and urged that the Contract included

the design, manufacture, supply, testing,

commissioning of passenger rolling stock, training

of Personnel, supply of spares, operation and

maintenance manuals for 150 standard guage

electrical multiple units and supply of equipment,

materials, labour and other facilities for successful

completion of works. Therefore, the Contract

includes fee for Technical services covered under

Section 194(j)(1)(b) of the I.T. Act.

I.T.A. No.60/2014 C/W I.T.A. No.59/2014

8. Shri. Aravind placed reliance on the

following authorities:

(a) IshikWajma-Harima Heavy Industries Ltd.,

Vs. Director of Income Tax5.

(b) Transmission Corporation of A.P. Ltd., Vs.

Commissioner of Income Tax6.

9. In substance, the argument advanced on

behalf of the Revenue is, the Contract between

BMRCL and BEML consisted of two parts namely,

the supply and the Technical service. Therefore,

Section 194(j) of the I.T. Act is applicable so far as

the Technical services are concerned.

10. Shri. Chaitanya, learned Senior

Advocate, opposing the appeal submitted that the

specific case of both assessee and the Revenue

(2007)158 Taxman 259 (SC)

(1999)105 Taxman 742 (SC) I.T.A. No.60/2014 C/W I.T.A. No.59/2014

throughout is that it is a composite Contract. He

contended that the ITAT has recorded in para 7 of

its order that the Assessing Authority had held that

the Contract was in the nature of a composite

package. He contended that the Departmental

Representative has argued before ITAT that it is an

'indivisible' Contract for supply, commissioning,

testing etc.

11. Thus, in substance, Shri. Chaitanya

argued that both the assessee and the Revenue

have understood the Contract as an 'Indivisible

Contract'. Therefore, the Revenue cannot be

permitted to improve its case at this stage. He has

placed reliance on the following authorities:

(a) Oil and Natural Gas Corporation Ltd., Vs.

Commissioner of Income Tax, Dehradun7;

(b) Director of Income Tax Vs. AP Moller

Maersk8 A.S;

(2010)322 ITR 180 (SC) (para 8) I.T.A. No.60/2014 C/W I.T.A. No.59/2014

(c) Japan Airlines Company Ltd., Vs.

Commissioner of Income Tax, New Delhi.9

12. We have carefully considered rival

contentions and perused the records.

13. All three questions of law are inter-

linked. Hence, they are considered together.

14. Explanation (2) to Section 9(1)(vii) of

the Act reads as follows:

"Explanation[2]-For the purpose of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining, or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries' "

(2017)392 ITR 186 (SC) (para 15)

(2015)60 Taxmann.com 71 (SC) I.T.A. No.60/2014 C/W I.T.A. No.59/2014

15. It was argued by Shri. Aravind that the

word 'construction' contained in the explanation

refers to building construction.

16. Shri. Chaitanya, pointed out that the

explanation is unambiguous and refers to any

construction, assembly, mining or like projects. He

has also placed reliance on instruction No.1862

dated 22.10.1990 by the Ministry in which the

opinion of the Attorney General for India has been

recorded and it reads as follows:

"2. The question whether prospecting for, or extraction or production of, mineral oil can be termed as 'mining' operations, was referred to the Attorney General of India for his opinion. The Attorney General has opined that such operations are mining operations and the expressions 'mining project' or 'like project' occurring in Explanation 2 to section 9(1)(vii) of the Income-tax Act would cover rendering of services like imparting of training and carrying out drilling operations for exploration or exploitation off- oil and natural gas."

I.T.A. No.60/2014 C/W I.T.A. No.59/2014

17. A careful perusal of the explanation

shows that fee for Technical services does not

include construction, assembly and mining

operation etc. In the instant case, the Contract is

one for designing, manufacturing, supply, testing,

commissioning of passenger rolling stock and

training Personnel.

18. The total Contract is for Rs.1,672.50

Crores whereas, the training component is about

Rs.19 Crores.

19. Though the consortium consists of

different Companies, BEML Ltd., is the consortium

leader. To a query made by the Court with regard

to payment made, Shri. Chaitanya, on instructions

from the BMRCL Officer present in the Court,

submitted that all cheques have been issued in

favour of BEML Ltd.

I.T.A. No.60/2014 C/W I.T.A. No.59/2014

20. Shri. Chaitanya further submitted that

the question of deduction of tax under Section 194J

is held against the assessee by the Revenue only in

respect of 10% of the entire project value which

was given as 'Mobilization Advance'. The project is

complete. Assessment for all years in respect of the

remaining 90% payment is complete. In respect of

90% payment, the Revenue has not raised any

objection with regard to non-compliance of Section

194J.

21. In para 14 of its order, the ITAT has

recorded Revenue's contention and it reads as

follows:

"14. The learned DR also placed reliance upon the following decisions in support of his contention that the project being a composite contract, it has to be considered as one indivisible contract and the tax is to be deducted at source on such contracts having regard to the dominant nature of the contract."

(Emphasis Supplied) I.T.A. No.60/2014 C/W I.T.A. No.59/2014

22. Thus, the specific case of the Revenue

before the ITAT is that the Contract is a composite

one. Shri.Chaitanya is right in his submission that

the dominant purpose of the Contract is supply of

the passenger rolling stock. Thus, having taken a

specific stand before the ITAT that the Contracts is

a composite one, the Revenue cannot be permitted

to take a contradictory stand before this Court. In

ONGC Ltd.10, cited by Shri. Chaitanya, it is held as

follows:

"8. At the outset, we may nothe that although in view of the orders passed by the Committee on disputes, advising the revenue not to file appeals against Tribunal's orders, we find some substance in the objection of learned counsel for the assessee about the maintainability of revenue's appeals before the High Court but as we have heard learned counsel for the parties on merits of the appeals, at this stage, we do not propose to go into this question. We also reject at the threshold the submission of learned counsel for the revenue that the claim of the assessee qua capital account deserved to be disallowed because no agreement between the assessee and the foreign

(2010)322 ITR 180 (SC) I.T.A. No.60/2014 C/W I.T.A. No.59/2014

creditors, as observed by the High Court was placed on record, because no such objection was raised by the revenue at any stage of the assessment proceedings nor had the Assessing Officer rejected the claim of the assessee on that ground."

(Emphasis Supplied)

23. In A.P. Moller Maersk, it is held as

follows:

"15. After the arguments were concluded, additional submissions were filed by Mr.Radhakrishnan on behalf of the Revenue wherein altogether new point is raised viz. the payments made by the agents to the assessee for use of the Maersk Net System can be treated as royalty. However, this desperate attempt on the part of the Revenue cannot be allowed as no such case was sought to be projected before the High Court or even in the appeals in this Court. We have already mentioned in the beginning the issue raised by the Revenue itself which shows that the only contention raised is as to whether the payment in question can be treated as fee for technical services.

Having held that issue against the Revenue, no further consideration is required of any other aspects in these appeals. These appeals are, therefore, bereft of any merit and are accordingly dismissed."

(Emphasis Supplied) I.T.A. No.60/2014 C/W I.T.A. No.59/2014

24. Shri. Aravind has relied upon

Transmission Corporation of A.P. Ltd. The question

involved in that case was deduction of income tax

under Section 195 of the Act on the payments

made to the non-resident Company. In the instant

case, the entire payment has been made to BEML

Ltd., which is a resident Company. Therefore, on

facts, the said authority does not lend any support

to the Revenue.

25. He has also relied upon Ishikawajma-

Hairma Heavy Industries Ltd. The said authority

also does not lend any support because, in that

case, payments were made 'separately' to the

Members of the Consortium.

26. In Japan Airlines Company Ltd., the

Revenue took a stand that deduction was required

to be made under Section 194-I of the Act while

making payment towards 'Landing and Parking the I.T.A. No.60/2014 C/W I.T.A. No.59/2014

Aircrafts' in Indira Gandhi International Airport.

Under Section 194-I of the Act, any person

responsible for paying to any other person, any

income by way of "rent", shall deduct Income tax at

the rate of 15% in the case of individuals or HUF

and 20% in other cases. The word 'rent' has been

described to mean any payment by whatever name

called under any lease, sub-lease, tenancy or any

other agreement or arrangement for the use of any

land or building (including factory building) together

with furniture, fittings and the land appurtenant

thereto, whether or not such building is owned by

the payee. In that case, the Apex Court has held as

follows:

"This reasoning is clearly fallacious. A bare reading of the definition of 'rent' contained in explanation to Section 194-I would make it clear that in the first place, the payment, by whatever name called, under any lease, sub-lease, tenancy which is to be treated as 'rent'. That is rent in traditional sense. However, second part is independent of the first part which gives much wider scope to the term I.T.A. No.60/2014 C/W I.T.A. No.59/2014

'rent'. As per this whenever payment is made for use of any land or any building by any other agreement or arrangement, that is also to be treated as 'rent'. Once such a payment is made for use of land or building under any other agreement or arrangement, such agreement or arrangement, gives the definition of rent of very wide connotation. To that extent, High Court of Delhi appears to be correct that the scope of definition of rent under this definition is very wide and not limited to what is understood as rent in common parlance. It is a different matter that the High Court of Delhi did not apply this definition correctly to the present case as it Med to notice that in substance the charges paid by these airlines are not for 'use of land' but for other facilities and services 'wherein use of the land was only minor and insignificant aspect. Thus it did not correctly appreciate the nature of charges that are paid by the airlines for landing and parking charges which is not, in substance, for use of land but for various other facilities extended by the AAI to the airlines. Use of land, in the process, become incidental. Once it is held that these charges are not covered by Section 194-I of the Act, it is not necessary to go into the scope of Section 194-C of the Act."

27. As recorded hereinabove, the total

project cost is Rs.1672.50 Crores out of which, the

service part in the form of training accounts for I.T.A. No.60/2014 C/W I.T.A. No.59/2014

about Rs.19 Crores. Thus, the dominant purpose is

supply of Rolling Stock.

28. In view of the above, the questions

raised by the Revenue are not substantial questions

for consideration for more than one reason.

29. Firstly because, the Revenue has taken a

specific stand before the ITAT that the Contract is a

composite Contract. Secondly because, the

dominant purpose of the Contract is for supply of