The Delhi High Court, ‘capital grant subsidy’ which may be extended by the National Highways Authority of India to its contractors is not accountable to TDS deduction u/s 194C of the Income Tax Act, since such grant cannot be construed as payment for a “work”.
Deduction of tax at source (TDS) is needed under section 194C on any sum that might get filed before the contractor performs any work.
Capital grant subsidy is financial aid that NHAI performs to its Concessionaires in connection to projects where the revenue that the Concessionaire generates is less than the expected projection, rendering it unable to recover the total cost of the project.
A division bench of Justices Yashwant Varma and Ravinder Dudeja noted,
“As we read Section 194C, it becomes evident that the same is principally concerned with the undertaking of a physical or tangible activity as opposed to the mere grant of subsidy or financial assistance…The infusion of equity capital as a measure of financial support, while surely a contractual obligation, cannot consequently be understood to mean the payment for a work undertaken.”
In the matter, the Concessionaire had entered into a BOOT agreement with the National Highways Authority of India (NHAI), in which it was bound to make and manage the project till its cost was recovered and subsequently, transfer the project to NHAI.
As the concessionaire was not able to recover its cost through the project, the NHAI proposed a capital grant subsidy.
The matter of the income tax department is that the legal body is not able to deduct the taxes on this grant as per section 194C. An ITAT order was countered by the department in NHAIs favour.
It was asserted by the NHAI that the capital grant assistance cannot be viewed as a sum filed before the concessionaire to perform work and therefore section 194C was not applicable.
It was argued by the department that the word work in section 194C has the objective of being granted an expansive term and is not limited to a works contract solitary. It claimed that all payments incurred before a concessionaire via NHAI shall be within TDS.
In Associated Cement Company Ltd. v. Commissioner of Income Tax (1993), the Delhi High Court regarded the ruling of the Apex court in which it was carried that section 194C is not limited to the works contracts.
Apex court cited that “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 legislature that the “work” in sub-section is not intended to be confined to or restricted to “works contract”. “Work” envisaged in the sub-section, therefore, has a wide import and covers “any work” which get carried out through a contractor under a contract…”
It indeed marks that Birla Cement Works v. Central Board of Direct Taxes and Others (2001) where the Supreme Court explained the true import of the decision in Associated Cement.
The Supreme Court had ruled, “The key words in Section 194-C are “carrying, out any work”…the word ‘work’ is to be understood in the limited sense as a product or result. The carrying out of work indicates doing something to conduct the work to completion or an operation which produces such result.”
For the same case, the HC carried that
“work” is essentially understood to mean the expending of labour and the output or result of labour that has been bestowed. The capital grant subsidy was really not concerned with the physical elements of the contract. As has been correctly noted by the Tribunal, it was more in the nature of a grant in aid, the provision of financial assistance and equity contribution provided to the Concessionaire by the NHAI bearing in mind the imperatives of economic viability.”
The HC further makes its stance stronger by directing distinct precedents specifying the work. It indeed directed to the explanation of section 194C which specifies the word “work” to comprise activities like advertising, broadcasting, and telecasting of programs, carriage of goods or passengers, catering, manufacturing or supplying a product as some of the activities which could come within the term of that expression.
It specifies that East India Hotels Ltd. and Another v. Central Board of Direct Taxes and Another where the Bombay High Court had carried that “work” in section 194C is restricted to perform something to achieve the task carry out an operation which produces some outcome.
According to HC, “While equity support was undoubtedly a concomitant of the Concession Agreement, it would be wholly incorrect to view it as payment made for a „work‟ entrusted to the Concessionaire…the capital grant subsidy was not a payment made for work per se but representative of the obligation of NHAI to extend financial support in connection with the creation of an asset of public utility and importance.”
The court directed to section 194C(2) which specifies that any sum credited to any account of the contractor, whatever its nomenclature is, and entered in its books of accounts shall be regarded as a credit of this income to the account of the payee.
The court observed that the capital grant subsidy was not an amount required to get deposited in the account of the concessionaire or be accounted for in its books of account.
Those sums were credited to the Escrow Account. The same shall not be a matter where sub-section (2) of section 194C shall be drawn.
As per that the HC kept the ITAT order and concluded.
The capital grant subsidy was provided as required and assisted that the NHAI extended to the concessionaire as contradictory to the payment that it shall have ordinarily made to a contractor and shall be rendered linked with or comprise recompense for physical work that was performed.
Since the precedents witnessed that hereinabove bid us regard, the word work as per section 194C is obligated to be understood as pertinent to the labor that is expended, the task undertaking that produces an outcome. The input of equity capital as a measure of financial assistance, while surely a contractual obligation, could not subsequently be learned to mean the payment for a work performed.
| Case Title | National Highway Authority vs. Commissioner of Income Tax (TDS) |
| Citation | ITA 1145/2017 |
| Date | 12.11.2024 |
| Appellant by | Mr. Sanjay Kumar and Ms. Easha |
| Respondent by | Mr. Santosh Kumar, Mr. Adithya Ramani and Mr. Devansh Malhotra |
| Delhi High Court | Read Order |
