DECEMBER 14, 2018

By Subhashree. R

MONEY evolved as the medium of exchange to overcome the shortcomings of barter system - difficulty in valuation, finding something which would satisfy 'quid pro quo' and so on. Interestingly, part of agricultural produce was collected as tax at some point of time but now we are familiar with everything being measured in monetary terms and 'paid' in legal tender.

Money is a measure of value and also store of value. However, it appears that old habits die hard and payments in kind are very much in vogue even today. The concepts of value, payment and property are visited and revisited periodically by taxpayers and authorities while trying to ensure that the correct amount is subject to tax.

In the recent case of M/s Punjab State Warehousing Corporation [ITA 1309 & 1310/CHD/2016 and Ors., Order dated 30.10.2018], ITAT, Chandigarh held that, consideration paid in kind may attract TDS provisions. However, since the payer did not remain owner of the goods and there was difficulty in valuation, tax was not required to be deducted.

The assessee was acting as a procurement agency and entered into contract with millers of paddy who had to return at least 67% by weight of milled paddy out of the paddy allotted to them. The assessee paid milling charges of Rs.15/- quintal and duly deducted tax under Section 194C (works contract) of the Income Tax Act, 1961 (the Act). However, the department contended that the (so called) by-products of husk, broken grain etc., retained by the millers formed part of consideration for the contract and provisions for Tax Deduction at Source (TDS) were applicable on the value of such byproducts retained by the miller.

ITAT, Chandigarh ruled that it would defeat the intent and purpose of the provisions, if TDS is not held to be applicable on consideration fixed in monetary terms but actually discharged in kind. However, it ruled that since property did not pass to the miller and determination of value was difficult, TDS provisions would not apply.

Section 194 C of the Act requires a person responsible for paying any sum to any resident contractor for carrying out any work (including supply of labour for carrying out any work) to deduct taxes 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.

Thus, the contention of the department was two-fold:

a. The words 'by any other mode' refers to payment other than by cash /cheque/draft

b. The byproducts were consideration for the contract of work (milling)

The words 'by any other mode' refers to payment other than by cash/cheque/draft

A number of decisions including Red Chillies Entertainment Pvt. Ltd. - 2016-TIOL-970-ITAT-MUM and High Court of Karnataka in CIT v. Chief Accounts Officer, Bruhat Bangalore Mahanagar Palike - 2015-TIOL-2471-HC-KAR-IT were cited by the assessee in support of its contention that, TDS provisions would not apply on the byproducts retained by the miller.

In Red Chillies, it was held that though gift given to the actors for acting a film were undoubtedly professional fees, the use of word 'any sum' in Section 194J covers only payment in cash and cannot be extended to payment in kind. Also, in the facts of the case, the recipients had offered the gifts to tax in their return of income and hence payer was given the benefit of proviso to Section 201(1) of the Act.

In the judgment of High Court of Karnataka, wherein the government has issued Certificate of Development Rights (CDRs) to landowners who voluntarily surrendered their land, it was held that where there was no compulsory acquisition nor payment of monetary consideration, there was no requirement of tax deduction at source under Section 194LA which is in respect of payment of compensation on compulsory acquisition of immovable property.

However, ITAT Chandigarh held that, keeping in mind the purpose and intent of the section, payment in kind would attract TDS provisions. It reasoned that if a consideration was settled in monetary terms and the payer transferred the equivalent monetary value of consideration in goods, the payment should attract TDS provisions. Just because cash or banking channels were not used, TDS applicability cannot be ruled out.

'Consideration' and 'transfer of property in goods'

A basic question would be what can form consideration for the contract. As per the Indian Contract Act, 1872, it could be an act or abstinence undertaken at the desire of the promisor. In the contract under consideration, the miller undertakes to deliver the milled paddy and accepts the milling charges fixed by the government. However, as explained in the order, the milling charges are probably not sufficient consideration and the miller is, therefore, allowed to retain the husk and other products which are of value. Thus, the government offers not to stake claim on the byproducts. The ITAT observed that since the miller has no say in the fixation of charges or the retention of by product, the same cannot be said to be a consideration. It may be highlighted here that the said consideration is part of the offer made by the government and accepted by the miller and hence, negotiation by the miller does not seem to be necessary.

The reason for permitting the miller to retain the by-products may be that government does not wish to undertake the transport, storage and disposal of the by-products. The terms of the contract stated that the government shall not claim any right nor accept responsibility for the products.

ITAT Chandigarh has interpreted this clause to mean that the by-products are not property of the government and they stand vested in the miller the moment they come into existence. However, just because the government does not want to retain something does it follow that the by products are not property of the government?

On the contrary, the government is giving up the products to get way from the burden of storage/ sale etc. The ITAT observed that 'the property in the by-product passes immediately to the miller on the very coming of it into existence.' Thus, the byproducts do belong to the government and property passes. The miller gets the right over the products since the government relinquishes its claim.

Taking benefit of the decision

In the decision under discussion, ITAT Chandigarh placed reliance on decision of ITAT, Delhi in Aahar [ITA No. 2910-1939-1654 & 1705/Delhi/2010]. The Aahar decision was in respect of a similar fact pattern wherein the millers had to return about 85% of wheat (by weight) given to them, as flour. However, no milling charges were paid. The parties (group concerns) agreed that the assessee would get the wheat processed by the other party and get dalia. The other party was to retain the residue, waste etc., as a consideration for its services. It was held that the transaction was one of exchange/barter and not of works contract so as to attract TDS provisions. Further the fact that, there was no cash outflow was considered to be significant.

It seems difficult to apply the ratio of Aahar to the present case, since the transaction is one of works contract and the millers retain some item of value in addition to the charges. The ITAT also held that property does not pass from the assessee/government to the miller and hence, there is no 'payment'. There is no doubt that the paddy is owned by the assessee/government and the rights in this regard are given up by the assessee.

While the decision of the Tribunal was ultimately in favour of the assessee, the reasoning seems to be on less sure footing. The ITAT appears to say that payment in kind would attract TDS provisions but only if consideration is calculated in monetary terms and discharged in kind. Barter, even if it constitutes consideration for any of the specified activities under TDS provisions, may not be subject to TDS provisions as per ITAT, Chandigarh. The decision does not provide enough guidance and may not be an authority to state that TDS provisions would not apply to all cases involving payments in kind. The debate as to whether TDS provisions would apply if the goods retained are capable of valuation and are undoubtedly part of consideration is likely to continue.

[The author is an Advocate, Direct Tax, Lakshmikumaran & Sridharan, New Delhi and the views expressed are strictly personal]