IT APPEAL NO. 372 (HYD.) OF 2013
[ASSESSMENT YEAR 2009-10]

CHANDRA POOJARI, ACCOUNTANT MEMBER AND SAKTIJIT DEY, JUDICIAL MEMBER

A.V. Raghuram for the Appellant.
D. Sudhakar Rao for the Respondent.

ORDER

Chandra Poojari, Accountant Member :— This appeal filed by the Assessee is directed against the order passed by the CIT(A)-IV, Hyderabad on 27/02/2013, for assessment years 2009-10.

2. The assessee has raised seven grounds of appeal, the sum and substance of which is that assessee is not liable to deduct TDS on the payment made to its two partners so as to attract the provisions of section 40(a)(ia) of the IT Act.

3. Briefly the facts of the case are that two partnership firms, M/s. Hindustan Engineers Syndicate and M/s. Ratna Constructions, entered into a joint venture agreement on 16.8.2004. The salient terms of the JV Agreement were as follows:

"1.0 If selected as successful bidder for the project, the parties desire to enter into a partnership in joint venture with the following objects, roles and purposes:
1.1 Objects:

1.2 The sole objects for which the joint venture will be established are:

1.3 Roles:
HINDUSTAN as the lead partner and RATNA as partner will have the Joint Roles as follows:

2. Participation in the Joint Venture in the ratio of

HINDUSTAN will be the lead partner
The Joint Venture shall cause an Executive Committee to be formed consisting of four members, two nominees representing each party. The Executive committee will be responsible inter alia, for the following:

(6) The parties shall second to the joint venture employees as required by the Project Manager for the satisfactory execution of the Contract works.
(7) The parties shall be jointly and severally liable to the Employer for the performance of the contract.

9. This agreement will become null and void upon occurrence of anyone of the following events.

4. Subsequently, M/s. Hindustan Engineers Syndicate was converted into a company, M/s. HES Infra Pvt Ltd. (hereinafter referred to as HES) and M/s. Ratna Constructions was converted into M/s. Ratna Infrastructure Projects Ltd. (hereinafter referred to as RIPL). Consequent to this change of status of the two members, the two new entities executed a deed of partnership dtd. 31.8.200.7 where it was specifically stated as follows:

"As the earlier Partnership Firms have become Private Limited Companies and necessitated to amend this Joint Venture Deed of Partnership accordingly".
5. The salient features of the partnership deed dtd. 31.8.2007 were as follows:

"Whereas both M/s. HES Infra Pvt Ltd. and M/s. Ratna Infrastructure Projects Pvt Ltd have decided to form a joint venture firm to act and submit prequalification application to submit bid if prequalified and execute the contracts.

(5) That this joint venture agreement shall regulate the relations between the parties and shall include without being limited to them the following conditions:

6. The appellant was awarded certain infrastructure contracts. The aggregate contract receipts were Rs. 115,79,10,993/- of which receipts of Rs. 111,09,23,018/- were transferred to HES and RIPL in the proportion of 600/0 and 400/0 respectively. The balance receipts of Rs. 4,69,87,975/- was credited to the P&L account extracts of which are reproduced below:
Profit & loss account for the year ending 31.3.2009

7. The Assessing Officer directed the appellant to explain why TDS had not been made on the sub-contract expenses of Rs. 111,09,23,018/-. The assessee submitted that the appellant was a JV formed on 16-08-2004 with the sole purpose to win contracts and not to make profits, that the entire work allotted to JV was entrusted to JV members for execution, that the relationship between JV and its members was not that of a contractor and sub contractor and hence, the provisions of sec. 40(a)(ia) were not applicable to the appellant. The AR relied upon the following decisions:

8. The Assessing Officer did not accept the appellant's plea for the following reasons.

8.1 The Assessing Officer observed that the facts in the' case laws cited by the AR were different and these decisions were therefore, not applicable to the appellant's case. The Assessing Officer therefore disallowed the sum of Rs. 111,09,23,018/- u/s. 40(a)(ia).

9. On appeal, the CIT(A) observed that the assessee credited part of the contract receipts in its books of account and debited the corresponding sub-contract expenses, liable to deduct TDS. The assessee has not offered any explanation for this artificial distinction between the two partners of the contract receipts, merely on the basis of the sub-contractor being a partner or otherwise. Accordingly, she observed that assessee is liable for deduction and failed to deduct TDS, therefore, it was liable for disallowance u/s 40(a)(ia) of the Act and confirmed the action of the Assessing Officer.

10. Aggrieved, the assessee is in appeal before us.
11. Before us, the learned counsel for the assessee referred to the Joint Venture Agreement, dated 16/08/2004, which is placed at pages 1 to 4 of the paper book to submit that the JV formed on 16/08/2004 with the following constituents, namely,

The object of the JV was to procure contracts from various Governments, as under:

This agreement will become null & void upon occurrence of any one of the following events:

12. The learned counsel submitted that later on the said JV was converted into a partnership firm vide Deed of Partnership dated 31st day of August, 2007, which shall come into force from 8th day of November, 2004 and the partners are i) M/s HES Infra Pvt. Ltd.(formerly Hindustan Engineers Syndicate) and ii) M/s Ratna Infrastructure Projects Pvt. Ltd. (formerly Ratna Constructions). Both the parties, as per the Deed, are engaged in the business of execution of Works Contract by forming a joint venture firm to act and submit prequalification application to submit bid if prequalified and execute the contracts. The participation of the two companies in the JV shall be as follows:

12.1 There is a special clause in the partnership deed, namely Clause (f), which states that the provisions of Indian Partnership Act, 1937 shall be applicable for all the clauses otherwise than specified in this deed.

12.2 Clause (g) states that M/s HES Infra Pvt. Ltd. and M/s Ratna Infrastructure Projects Pvt. Ltd. shall be jointly and severally liable towards the owners for the execution of the contract commitments in accordance with the contract conditions.

12.3 Clause (h) states that this JV agreement shall not be dissolved till the completion of defect liability period as stipulated in the tender document conditions and till all the liabilities thereof are liquidated.

12.4 The learned counsel relied on the following judgments to submit that assessee is a joint venture, therefore, the question of deducting TDS on the payment of the member of the JV, does not arise.

12.5 The learned counsel submitted that as per the partnership deed, which was essentially a JV agreement, the JV constituents were jointly and severally liable towards the owner for the execution of the contract commitments. In terms of the JV agreement, the contract works obtained by the JV was executed by its constituents in the given ratio of 60 : 40. In respect of one contract the work was given on sub contract basis to a third party, for a sum of Rs. 4,04,84,647/- and tax deducted on it. The other contract receipts of Rs. 111,09,23,018/- were transferred to the JV constituents in the agreed ratio and the works relating to such contract receipt were carried on by the constituents in their own capacity. These receipts and expenses on the execution of this contract were disclosed in the returns of income of the constituents and tax paid by them on the profits thereon. The JV had neither retained any commission nor gained any profit on these contract receipts.

12.6 Further, the learned counsel submitted that the JV was formed for the purpose of winning contract which was intended to be executed by an d for the benefit of the JVs constituents. The JV was only a de jure contractor and constituents were the de facto contractors. The constituent members were jointly and severally responsible to the owners for the timely execution of the contract and therefore they could not be treated as sub-contractors to the JV. Since the relationship between the JV and the constituent members was not that of a contractor and sub-contractor, the JV was not required to deduct tax for the amounts transferred by the JV to its constituents.

12.7 It was submitted that the JV did not execute any contract work. It transferred not only the gross revenue but also the corresponding TDS to its members in the ratio of the work done by the individual members. This had been accepted by the Assessing Officer of the constituents.

12.8 Further to the decisions relied on by the appellant during the assessment proceedings, the learned counsel relied on the decision in the following cases:

12.9 The learned counsel following the decision in the case of Hindustan Coco cola Beverage(P.) Ltd. v. CIT [2007] 293 ITR 226/163 Taxman 355 (SC), no disallowance u/s. 40(a)(ia) could be made in view of the fact that tax had been paid by the constituent.

12.10 It was submitted that the second proviso to sec. 40(a)(ia) provides that once the recipient has paid the tax, no disallowance can be made u/s. 40(a)(ia) in the case of the payer. Though the proviso was inserted w.e.f. A.Y. 2013-14, it was clarificatory in nature and therefore should be applied retrospectively. Reliance was placed on the decision of Hon'ble Calcutta High Court in the case of CIT v. Virgin Creations [GA No. 3200 of 2011, dated 23-11-2011].

12.11 Further, it was submitted that Interest has been levied on the appellant u/s. 201(1) and 201(lA) for the A.Y. 2008-09 to 2010-11 and the CIT(A)-II Hyderabad in her order dtd. 10.01.2013 held that there was no sub-contract between the appellant and its constituents, as a result of which there was no liability to deduct tax on the appellant.
12.12 Finally, the learned counsel submitted that since the entire amount transferred to the constituents had already been paid to them and no amount remained payable as on 31.3.2009, sec. 40(a)(ia) did not apply in view of the decision in the case of Merilyn Shipping& Transport v. Addl. CIT [2012] 136 ITD 23/20 taxmann.com 244 (Visakhapatnam).

12.13 The main arguments advanced by the learned counsel for the assessee that the assessee as well as its partners are assessed to tax on a regular basis and they have also filed their income-tax returns and assessments have been completed in their cases as well and they have paid taxes on their income which included the income arose to them out of contracts awarded by assessee. Therefore, the case of the learned counsel is that even though technically taxes have not been deducted by the assessee, taxes have already been paid by its partners and, therefore, no liability subsists in the hands of the assessee to make good for the non-deduction of tax at source and as a consequence, invoking of provisions of law contained in section 40(a)(ia) is not justified.

13. The learned DR, on the other hand, submitted that the assessee is liable for TDS as the payments are in the nature of sub-contract payments. He submitted that it is necessary at this stage to take note of the fact that the appellant is a partnership firm and not an AOP and this conclusion is born out of the document dtd. 31.8.2007 which is expressly described as a partnership deed. Clause 5(f) of the partnership deed in fact also invokes the provisions of the Indian Partnership Act, 1937. In its return of income the appellant admitted its status as firm. The Assessing Officer however in his order has held that the appellant was a joint venture and its income had been offered to tax in the status of AOP and not in the status of firm. The learned DR pointed out that this observation of the Assessing Officer is factually incorrect in view of the facts narrated above. The decision of the Assessing Officer to assess the appellant in the status of an AOP is, therefore, not in accordance with the facts and is held to be incorrect.

13.1 Further, the learned DR submitted that the partnership deed dtd. 31.8.2007 provides that HES and RIPL had decided to form a firm 'to act and submit pre-qualification application, to submit bid if pre-qualified and execute the contract'. The terms of the partnership deed thus expressly provide that the firm was to execute the contract. In other words, the firm had not been constituted with the sole purpose of obtaining the contract. It had been constituted for the purpose of actually executing the contract as well.

13.2 Further, it is submitted that clause 5(g) of the partnership deed provided that the partners, M/s. HES and RIPL, were to be jointly and severally liable towards the owners for the execution of the contract commitments in accordance with the contract conditions. Two aspects are noteworthy from this clause. Firstly, the clause expressly establishes the joint and several liability of the two partners to the owners. While the concept of joint and several liability is an essential and defining feature of any partnership, the clause serves to emphasize the fact that the two constituents were jointly liable for the entire contract and not for their respective portions of the work.

13.3 Secondly, the clause establishes that the joint and several liability was towards 'the execution of the contract'. In other words, the responsibility of the partnership firm as such for the execution of the contract and not merely for the obtaining of the contract was expressly provided for.

13.4 The learned DR submitted that the terms of the partnership deed therefore go to establish the fact that the firm had been created not for the sole purpose of obtaining the contract but also for executing it. The learned DR referred the order CIT(A)-II. Hvderabad in her order dtd. 10.1.2003 in the appellant's own case for the A.Y. 2009- 10 has held that the JV had been formed only to procure contract works from the Government to submit that the conclusion given is not agreeable.

13.5 The learned DR submitted that in assessee's case the work has admittedly not been carried out by the appellant directly but was awarded to the partners. It is also an admitted fact that the partners have credited these receipts to their P &L account. Such crediting of the sub-contract receipts by the sub-contractors in their P&L etc is the normal practice and does not prejudice the stand of the Assessing Officer.

13.6 Further, it is submitted that the mere fact that the contract receipts have been credited by the partners in their books is not a relevant factor in taking a decision in the case. In a hypothetical case of an assessee actually getting the contracted works executed through sub-contracts, the assessee would credit the entire contract receipts in its books while debiting the sub-contract expenses. The sub-contractor in turn would credit the entire sub-contract receipts in its books while debiting its own expenses. Thus, even in this hypothetical situation, the contract receipts do get credited in the books of the sub-contractor.

13.7 The learned DR submitted that that the appellant had credited asum of Rs. 4,69,87,975/- to its P&L account (which had been subcontracted to a third party for Rs. 4,04,84,647/-). This reinforces the view that the assessee had been created with the object of executing the contract as well. Had it been the sole purpose of the appellant to merely obtain the contract works, the appellant should not have executed the contract in its own right even for the sum of Rs. 4,69,87,975/- and even this part of the contract should have been apportioned and transferred to the two partners, who in turn could have claimed the sub-contract expenses in their own P&L account.

13.8. In view of the said submissions, the learned DR finally submitted that there existed a relationship of a contractor and sub-contractor between the appellant and its partners, that the appellant was, therefore, liable to deduct tax on the works contract receipts transferred to them and in view of its failure to do so, it was liable for disallowance u/s 40(a)(ia. Hence, the disallowance made by the lower authorities may by upheld.

14. We have heard the arguments of both the parties, perused the record and have gone through the orders of the authorities below. As seen from the record, the Partnership Deed dated 31/08/2007 placed at pages 175 to 177 of paper book, the firm was formed with two partners, viz., HES Infra Pvt. Ltd. and Ratna Infrastructure Projects Pvt. Ltd. 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 has been received by the partnership firm M/s Hindustan Ratna JV. Appreciation of facts shows that M/s HES Infra Pvt. Ltd. and Ratna Infrastructure Projects Pvt. Ltd. are not sub-contracts, per-se, but, they are partners of M/s Hindustan Ratna JV. These partners might have entered into agreements with the partnership firm wherein they are partners so as to execute the works. The partners might have maintained their books of account as if they are paying and receiving monies from the partnership firm where they are partners. As always admitted, the format of an agreement or the style of accounts by themselves do not decide the true character of relationship of parties in a business and the nature of transactions relating to the business. What is to be applied is the rule of Pith (Form) and substance. One has to see the real nature of the relationship and character of transactions, necessarily looking beyond the formalities of agreements and accounts. For that matter for calculation, it is not the format of agreements and the manner of accounting alone that decide the issue. The deciding factor is the real intention of the parties, the actual conduct of the parties and the nature of activities and the overall relationship of the concerned parties.

15. In the present case, the modus of obtaining the Government contracts, the sequence and frequency of execution of the contracts clearly show that the assessee as a partnership firm 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 as per clause (g) of the partnership deed. They have demarcated the nature of the contracts into principal contracts and sub-contracts for the purpose of identifying the work handled by the partners and for the purpose of accounting contract receipts and payments.

16. In order to establish a relationship of contractor and sub-contractor, in addition to a formal agreement, it is necessary to show that the parties have 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.

17. Defacto speaking, when there is no basis for coming to a conclusion that there existed a relationship of contractor vis-a-vis sub-contractor, it is useful to look into the principle embodies in section 20 of the Indian Contract Act of 1872. This section 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. In the present case, the question is mainly focussed on the contractual relationship of the assessee and its partners. This principle embodies in the section 20 of the Indian Contract Act has great relevance. It turns out that the formats of the agreement entered into with the partners and the styling of accounts prepared by them are products of mistakes of fact, and therefore, the agreement is not to be relied on to hold that the assessee is acting in the status of contractors vis-a-vis sub-contractors. Therefore, it is to be seen that the question of TDS in the present case cannot be considered only on the basis of the agreements entered into between the assessee and its partners.

18. 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 sub- contractor and there may not be an occasion to invoke Section 194C(2). When the said provision relating to deduction of tax at source is not applicable for the assessee for the reasons stated above, violation uls.40(a) (ia) does not arise. If that is the case, payments made under the nomenclature of "sub- contractors" are not liable to be disallowed.

19. It is also useful to refer to Section 70 of the Contract Act which deals with the obligation of the person enjoying the benefit of non- gratuitous act. In other words, it is the case of 'Unjust Enrichment'. For the mistakes and follies committed by the assessees, it may not be justified on the part of the Revenue to insist that the assessees were making payments to sub-contractors and they were bound by Section 194C(2) and consequently by Section 40(a)(ia).

20. Therefore, if the payments are 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.

21. Being so, if any partner use the property of the assessee firm, benefit derived from that property shall go to the common pool of the assessee firm, which is for the common advantage to all the partners. If any partner carries on any business by using name and goodwill of the firm, profit derived from that business shall be the income of assessee's firm. Further, no partner is entitled to carry on any business which is in the nature of competing with the business of the assessee firm. The partners are jointly and severally responsible for any acts done by them though individually and jointly. If the partners carry on any business contrary to the provisions of partnership deed or partnership Act, they are not entitled to that profit or loss derived from such transactions it does not belong to individual partners and on the other hand it belongs to the firm as a whole.

22. In view of the above discussion and considering the facts and circumstances of the case, we are of the view that the relationship created by the Partnership Deed dated 31st August, 2007 and partners cannot be considered as sub-contractors of the firm and they are jointly and severally liable towards the owners for the execution of the contract commitments in accordance with the contract conditions. Being so, the provisions of section 194C cannot be attracted so as to treat them as sub-contractors of the firm thereby invoking the provisions of section 40(a)(ia). In other words, we can safely conclude that there is no sub-contract between JV and the constituents and since the JV has been formed only to procure contract works from the Government and the contract is being executed by the constituent partners in their sharing ratio 60:40 as per the terms of JV, it cannot be said that the JV is a contractor and its constituents are sub-contractors. Accordingly, we set aside the orders of the revenue authorities and delete the disallowance of Rs. 111,09,23,018/- made by the Assessing Officer by invoking the provisions of section 40(a)(ia) of the Act.

23. In the result, appeal of the assessee is allowed.