Deduction at source — Provisions of s 194C do not apply towards the transportation charges paid to partners by partnership firm for use of trucks owned by the partners — as held by PHHC in CIT v Grewal Brothers; ITA No. 662 of 2010, 20 April 2011

Decided on: 5 April 2011 — In favour of: The Assessee.

The assessee-partnership firm, engaged in the business of transport, entered into a contract with HP and IOC for the carriage of LPG. From the payment made to it, the companies deducted tax. The assessee-firm passed on the transportation work to its partners and made the payment received from the said companies to its partners after deducting 3% commission as charges for the firm having secured the contract. The AO held that in giving of the contract of transportation by the firm to the partners, there was a subcontract and the firm was liable to deduct TDS under s 194C out of the payment made to the partners as subcontractors, in the absence of which the payment made to the partners was liable to be disallowed. On appeal, the CIT(A) upheld the plea of the assessee that there was only one contract of transportation to be executed by the partners for the companies and the firm only acted as an agent for securing the contract and earned 3% commission and thus, there was no separate subcontract between the firm and the partners. The Tribunal upheld the findings of the CIT(A). Being aggrieved, the revenue has filed the present appeal.

The issue is whether the partnership firm is liable to deduct TDS under s 194C on the payments made to its partners on account of transportation charges for the use of trucks owned by the partners.

No doubt the firm and the partners may be separate entities for income tax and it may be permissible for a firm to give a contract to its partners and deduct tax from the payment made as per s 194C, but it has to be determined in the facts and circumstances of each case whether there was any separate subcontract or the firm merely acted as an agent as pleaded in the present case. The case of the assessee is that it was the partners who were executing the transportation contract by using their trucks and the payment from the companies was routed through the firm as an agent. The CIT(A) and the Tribunal accepted this plea on facts. Once this plea was upheld, it cannot be held that there was a separate contract between the firm and the partners in which case the firm was required to deduct tax from the payment made to its partners under s 194C.