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CASE NO.: Appeal (civil) 5004  of  1997

PETITIONER: M/S.  BIRLA CEMENT WORKS

       Vs.

RESPONDENT: THE CENTRAL BOARD OF DIRECT TAXES & ORS.

DATE OF JUDGMENT:       28/02/2001

BENCH: N.S.Hegde, Y.K.Sabharwall

JUDGMENT:

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     Y.K.  SABHARWAL, J.

     The  legality  of  circular   dated  8th  March,  1994 (hereinafter  referred to as the ‘impugned circular’) issued by  the  Central  Board of Direct Taxes  (CBDT)  prescribing fresh guidelines regarding the applicability of Section 194C of  the  Income Tax Act, 1961 (for short, the ‘Act’) to  the extent  it  relates to transport contracts, i.e.,  contracts for carriage of goods, is in issue in this appeal.  The said circular,  inter alia, states that the provisions of Section 194C  shall apply to all types of contracts for carrying out any  work  including  transport   contracts.   Section  194C provides  for  deduction of tax at source from  payments  to contractors  and sub-contractors.  Section 194C was  brought into  existence  by the Finance Act, 1972 with  effect  from April  1,  1972.  Various amendments have been made in  that section  since  then  but  material part  relevant  for  the present  purposes reads as under :  "Payments to contractors and  sub-contractors.  194C.  (1) Any person responsible for paying  any sum to any resident (hereinafter in this section referred  to  as the contractor) for carrying out  any  work (including  supply  of labour for carrying out any work)  in pursuance  of a contract between the contractor and-- (a) to (c)...   (d)  any company;  or (e) to (j)...  shall  at  the time  of credit of such sum to the account of the contractor or  at the time of payment thereof in cash or by issue of  a cheque  or draft or by any other mode, whichever is earlier, deduct  an  amount  equal  to two per cent of  such  sum  as income-tax on income comprised therein."

     Soon after insertion of Section 194C, a circular dated 29th  May,  1972  was issued, inter alia, stating  that  the provisions  of Section 194C would apply only in relation  to "work  contracts" and "labour contracts" and will not  cover contract  for  sale of goods.  Another circular No.93  dated 26th   September,  1972  was   issued  clarifying  that  the

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provisions  of  Section  194C  will  not  be  applicable  to transport contracts.  This circular, inter alia, states that a  transport  contract  cannot ordinarily be regarded  as  a "contract  for  carrying  out  any work" and,  as  such,  no deduction  in  respect of income tax is required to be  made from  payments made under such a contract.  In the case of a composite  contract  involving transport as well as  loading and  unloading,  the entire contract will be regarded  as  a "works  contract"  and income tax will have to  be  deducted from  payments made thereunder.  Where, however, the element of  labour provided for loading and unloading is negligible, no  income  tax  will be deductible.  By  letter  dated  3rd February,  1982,  in  reply to a query from  a  transporter, Government  of India stated that if the contracts are purely transport  contracts involving only transportation of  goods entrusted   for  carriage  to   the   transport   operators, provisions  of Section 194C would not be applicable to  such payments.   There  is no controversy that according  to  the understanding  of  Revenue of Section 194C, right  from  1st April,  1972  till  issue  of the  impugned  circular,  this provision was not applicable to the payments made in respect of  transport  contracts.  It is not disputed that prior  to issue  of  the  impugned  circular,  various  circulars  and clarifications  were  issued  by the CBDT stating  that  the provisions  of Section 194C were not applicable to  payments made  for carriage of goods to the transport operators.  The appellant  manufactures cement.  The cement manufactured  by the  appellant  is  transported  to  different  destinations through  transport operators/companies.  Since the appellant did  not deduct the tax at source from the payments made  by it  to the transporters under Section 194C of the Income Tax Act, by letter dated 18th March, 1995 the Income Tax Officer required the appellant to deduct the tax at source from such payments   in  accordance  with   the   impugned   circular. According  to  the appellant, no deduction of tax at  source was    made   from   payment     made   to   the   transport operators/companies  as  Section 194C was not applicable  to such  transactions.  It is, however, not in dispute that the appellant has paid the income tax.  The question has cropped up  in  view  of the penalty proceedings  initiated  by  the department  against the appellant which led to the filing of the  writ petition by the appellant challenging the legality and  validity  of  the  impugned circular.   The  period  in question  is  from 1st April, 1994 to 30th June, 1995.   The contention urged before the High Court was that Section 194C does  not  apply to payments made for transport charges  for carrying  of goods as transportation of goods is not covered by  the  words  "any work" used in the section  and  by  the impugned  circular the CBDT has illegally withdrawn  earlier circulars  stating  that Section 194C is not  applicable  to such  transactions.  It was also contended that  Explanation III  was  only prospective and does not cover the period  in question,  i.e.,  1.4.1994  to 30.6.1996.   Rejecting  these contentions,  the  High Court by the impugned  judgment  has held  that  the payment to the transporters for carriage  of goods  to different destinations is a payment for work which comes  within the expression "carrying out any work" and  is covered   by   Section   194C   and,  therefore,   on   such transactions,  tax  was deductible at source.  It  was  held that  the  expression "carrying out any work" would  include carrying  the goods.  Explanation III was held to be  merely clarificatory and inserted in order to remove the doubts and clarify that Section 194C is applicable to such transactions also.   The  impugned circular came to be issued because  of the observations made by this Court in Associated Cement Co.

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Ltd.  v.  Commissioner of Income-Tax & Anr.  [(1993) 201 ITR 435].  The circular states that some of the issues raised in circular No.86 dated 29th May, 1972 and circular No.93 dated 26th September, 1972 need to be reviewed in the light of the judgment  of this Court in ACC’s case.  The conclusion drawn by  CBDT  from  this  decision, as stated  in  the  impugned circular, is that this Court has held that the provisions of Section  194C would apply to all types of contract including transport  contracts,  labour contracts,  service  contracts etc.   In  the light of this judgment, the CBDT  decided  to withdraw  earlier  circulars  and  issued  fresh  guidelines directing  that  Section  194C shall apply to all  types  of contracts  for  carrying  out any work  including  transport contracts.   The impugned circular was made applicable  with effect  from  1st  April, 1994.  In ACC’s case  (supra)  the facts  were  that  under  the terms  and  conditions  of  an agreement  between  the Associated Cement Co.  Ltd.   and  a contractor, the contractor was to be paid at a flat rate for loading  packed  cement bags into wagons and  trucks.   This rate  was fixed on the basis of daily basic wages,  dearness allowance  etc.   and clause 13 of the agreement  stipulated reimbursement  by  the Associated Cement Co.  Ltd.   to  the contractor  in  case  of certain increase  in  the  dearness allowance  payable by the contractor to the workmen employed by  him.   The  company  paid   the  contractor  the  amount stipulated  at  a  flat rate as well as amounts  by  way  of reimbursement  under clause 13.  But the deduction of tax at source  made by the company under Section 194C(1) fell short of the deductions required to be made thereunder.  The claim of  the  company  was that it was not liable to  deduct  any amount under the Section.  The notices issued to the company to  show cause why action should not be taken under Sections 276B(1),  201 and 221 for short deduction were challenged in the  writ  petition filed by the company in the High  Court. The  writ  petition  was dismissed by the  High  Court.   On appeal,  this  Court  held that Section 194C(1) had  a  wide import and covered "any work" which could be got carried out through   a  contractor  under  a  contract  including   the obtaining  of  supply  of  labour under a  contract  with  a contractor  for carrying out any work.  The section was  not confined   or  restricted  in   its  application  to   "work contracts".   There  was  nothing  in the  language  of  the section  which permitted exclusion of the amount  reimbursed by  the  company to the contractor under clause 13 from  the sum   envisaged  therein.   The  facts   of  the  case   and observations  made  in ACC’s case make it clear that in  the said  decision, this Court was concerned with a work carried through a contractor under a contract which further included obtaining  supply  of  labour  under   a  contract  with   a contractor for carrying out its work which would have fallen outside  the  "work" but for its specific inclusion  in  the sub-section.   Under  these  circumstances, it  was  said  : "...there  is nothing in the sub-section which could make us hold  that the contract to carry out a work or the  contract to  supply labour to carry out a work should be confined  to "works  contract" as was argued on behalf of the  appellant. We  see  no reason to curtail or to cut down the meaning  of the  plain words used in the section.  "Any work" means  any work  and  not  a  "works contract",  which  has  a  special connotation in the tax law.  Indeed, in the sub-section, the "work"  referred  to  therein expressly includes  supply  of labour to carry out a work.  It is a clear indication of the Legislature  that  the  "work"  in the  sub-section  is  not intended  to  be  confined  to   or  restricted  to   "works contract".   "Work" envisaged in the sub-section, therefore,

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has  a  wide import and covers "any work" which one  or  the other  of the organisations specified in the sub-section can get  carried  out through a contractor under a contract  and further  it includes obtaining by any of such  organisations supply  of  labour  under a contract with a  contractor  for carrying  out  its work which would have fallen outside  the "work", but for its specific inclusion in the sub-section."

     It  is  evident  that ACC’s case (supra)  was  not  in respect of transport contracts.  The controversy therein was deduction  of  tax at source from payments made for  loading and unloading of goods.  The question whether the expression "carrying  out  any work" would include therein carrying  of the  goods or not, was not in issue in ACC’s case.  That  is precisely the question in the present case.  The decision in ACC’s  case  has not been correctly understood by the  CBDT. It  would not be correct to come to the conclusion, as  CBDT did,  that  question involved is covered by the decision  in the  case  of ACC.  Section 194C was amended by the  Finance Act,  1995 with effect from 1st July, 1995.  Explanation III was inserted.  So for relevant for present purpose, the said explanation  reads  as  under:  "Explanation III.-  For  the purposes  of this section, the expression "work" shall  also include  :   (a)  ...  (b) ...  (c) carriage  of  goods  and passengers  by any mode of transport other than by railways; (d) ..."

     In  view of above, it is not in dispute that from  1st July, 1995 Section 194C is applicable to transport contracts as  well.   The question, however, is whether the  aforesaid explanation is only clarificatory or it makes applicable the provisions  of  Section  194C to the types of  contracts  in question  for  the first time from the date of insertion  of the  explanation, i.e., 1st July, 1995.  The Rajasthan  High Court  in  the  judgment under challenge  has  followed  the interpretation  placed on Section 194C by Kerala High  Court in  Central Board of Direct Taxes v.  Cochin Goods Transport Association  [(1999)  236 ITR 993] and the Punjab &  Haryana High  Court  in Ekonkar Dashmesh Transport Co.  &  Ors.   v. Central  Board of Direct Taxes & Anr.  [(1996) 219 ITR 511]. The  contrary views expressed by the High Courts of  Bombay, Calcutta,  Karnataka,  Gujarat,  Madras,  Orissa  and  Delhi quashing  the  impugned circular has been dissented  in  the judgment under challenge.  The key words in Section 194C are "carrying  out any work".  Learned counsel for the appellant contended that a word or collection of words should fit into the  structure of the sentence in which the word is used  or collection  of words formed.  The contention is that in  the context  of  Section 194C, carrying out any  work  indicates doing  something  to  conduct  the  work  to  completion  or something   which   produces   such    result.    The   mere transportation  of  goods by a carrier does not  affect  the goods  carried thereby.  The submission is that by  carrying the  goods,  no  work  to the goods is  undertaken  and  the context  in which the expression "carrying out any work" has been  used, makes it evident that it does not include in  it the  transportation of goods by a carrier.  In Bombay  Goods Transport  Association  & Anr.  v.  Central Board of  Direct Taxes  [(1994) 210 ITR 136], the Bombay High Court  quashing the impugned circular has held that the expression "carrying out  any  work"  would not include carrying  of  goods.   In Calcutta  Goods  Transport  Association v.  Union  of  India [(1996) 219 ITR 486], similar view has been expressed by the Calcutta  High Court.  It has also been pointed out in  this decision   that   the  Parliament   had  sought   to   bring

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professional  services and other works within the net of tax deduction  at source.  If such "works" were already  covered by  Section  194C,  it  was   wholly  unnecessary  for   the parliament  to  introduce separate statutory  provisions  in this regard and, thus, it follows that the word "work" is to be  understood  in the limited sense as product  or  result. The  carrying  out  of  work indicates  doing  something  to conduct  the  work  to  completion  or  an  operation  which produces  such result.  In V.M.  Salgaocar & Bros.  Ltd.   & Ors.   v.  Income Tax Officer & Ors.  [(1999) 237 ITR  630], the  Karnataka  High  Court  has concurred  with  the  views expressed  by the Bombay and Calcutta High Courts.  The High Courts  of  Gujarat,  Madras,  Orissa and  Delhi  have  also expressed  similar  views.   On the other hand,  as  already noticed,  Rajasthan High Court in the judgment under  appeal has expressed the contrary view relying upon the decision in ACC’s  case  (supra).   Two interpretations  are  reasonably possible  on the question whether the contract for  carrying of  goods  would  come  or  not  within  the  ambit  of  the expression "carrying out any work".  One of the two possible interpretations  of  a  taxing statute,  which  favours  the assessee  and which has been acted upon and accepted by  the Revenue for a long period should not be disturbed except for compelling  reasons.  There can be no doubt that if the only view  of  Section  194C had been the one  reflected  in  the impugned  circular, then the issue of earlier circulars  and acceptance  and  acting thereupon by the Revenue  reflecting the  contrary view would have been of no consequence.  That, however,  is  not  the  position.   Further,  there  are  no compelling  reasons to hold that Explanation III inserted in Section   194C   with  effect  from   1st  July,   1995   is clarificatory  or  retrospective  in   operation.   We  hold Section  194C  before  insertion of Explanation III  is  not applicable  to  transport  contracts,  i.e.,  contracts  for carriage  of goods.  For the aforesaid reasons the appeal is allowed,  the impugned circular to the extent it relates  to transport  contracts  is quashed.  The parties are  left  to bear their own costs.

     ....................J.  [S.P.  Bharucha]