MIS. BIRLA CEMENT WORKS v. THE CENTRAL BOARD OF DIRECT TAXES AND ORS.

The Judgment of the Court was delivered by

Y.K. SABHARWAL, J. TI1e legality of circular dated 8tl1 March, 1994 F (hereinafter referred to as the ·impugned circular') issue<l 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. 'Ibe 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 !94C was brought into existence by the Finance Act, 1972 with effect from April I, 1972. Various amendments have been made in that section since then but material part relevant for the present purposes reads as under:

BIRLA CEMENT\VORKS v. CENfRALBOARD OF DIRECT TAXES [Y.K. SABHAR\VAL, J.] 201 "Payments to contractors and sub-contractors. A

194C. (I) Any person responsible for paying any sum to any resident (hereinafter in this section refened to as the contractor) for canying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and_ B (a) to (c) ...

(d) any company; or

(e)toG) ...

shall at the time of credit of such sum to the account of the contractor c 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 t\VO per cent of such sum as income-tax on income comprised therein.'' D Soon after inse1tion of Section 194C, a circular dated 29tl1 May, 1972 was issued, inter alia, stating that tl1e provisions of Section I 94C 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 provisions of Section l 94C will not be applicable to transport contracts. 1'his circular, inter alia, states that a transport contract cannot ordinarily be regarded as a "contract for canying out any work" and, as such, no deduction in respect of income tax is required to be made fron1 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 pro- vided 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 transp011er, 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 pay- G ments. There is no controversy that according to the understanding of Revenue of Section 194C, right from !st 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 staling that the provisions H

p. 202

A of Section I 94C were not applicable to payments made for carriage of goods to the transport operators.

TI1e appellant manufactures cement. The cement manufactnred by the appellant is transported to different destinations through transport operators/ companies. Since the appellant did not deduct the tax at source from the B 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 appellan~ no deduction of tax at source was made from payment made to the transport operators/companies as Section c 194C was not applicable to such transactions. It is, however, not in dispute that the appellant has paid the income tax. TI1e question has cropped up in view of the penalty proceedings initiated by the department against the appellant which led to the filing of tl1e writ petition by the appellant challenging the legality and validity of the impugned circular. The pe1iod in question is from !st April, 1994 to 30th Juue, 1995. D The contention urged before tl1e 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 tl1e CBDT has illegally withdrawn earlier circulars stating tl1at Section l 94C is not applicable to such transactions. It was also contended tliat Explanation III was only prospective and does not cover the pe1iod in question, i.e., 1.4.1994 to 30.6.1996. Rejecting these contentions, the High Court by the impugned judgment has held tliat tl1e payment to the transporters for caniage of goods to different destinations is a payment for work which. comes witl1in the expression "carrying out any work" and is covered by Section 194C and, therefore, on such transactions, tax was deduct- ible at source. It was held that the expression "carrying out any work" would include carrying the goods. Explanation III was held to be merely clarificato1y and inserted in order to remove the doubts and clarify that Section 194C is applicable to such transactions also. G The impugned circular ca1ne to be issued because of tl1e observations made by this Court in Associated Cement Co. lJd. v. Commissioner of Income- Tax & Anr., (1993) 201 !TR 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 H in .4.CC's case. The conclusion drawn by CBDT from this decision, as stated

BIRLA CEMENT \YORKS v. CENTRAL BOARD OF DIRECT TAXES (Y.K. SABHARWAL, J.) 203 in the impugned circular, is that this Court has held that the provisions of A 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 I decided to withdraw earlier circulars and issued fresh guidelines directing that Section 194C shall apply to all types of contracts for canying out any work including transport contracts. The impugned circular was made applicable with B effect from !st April, 1994.

lnACC'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 reimburse- c ment 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 die 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 Sotll'ce made by the company under Section 194C(l) D fell short of the deductions required to be made !hereunder. The claim of the company was that it was not liable to deduct any amount under tht: Section. The notices issued to the company to show cause why action should not be taken under Sections 276B(l), 201 and 221 for short ·deduction were chal- lenged in the writ petition filed by the company in the High Com1. TI1e writ petition was dismissed by the High Court. On appeal, this Court held that Section 194C(l) had a wide impo11 and covered "any work" which could be got ca1rie<l 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 facls of the case and obser- vations made in ACC's case make it clear that in the said decision, this Court was concerned with a work cruTied through a contractor under a contract which further included obtaining supply of labour under a contract with a G contractor for carrying out its work which would have fallen outside the "work" bnt for its specific inclusion in the sub-section. Under these circum- stances, 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 H .

p. 204

A carry out a work should be confined to "works contract" as was argued on behalf of tbe appellant. We see no reason to curtail or to cut down tbe meaning of tbe plain words used in tbe section. "Any work" means any work and not a "works contract", which has a special connotation in tbe tax law. Indeed, in tbe sub-section, tbe "work" refened to therein expressly includes supply of labom to cany out a work. It is a clear B indication of tbe Legislatme tbat tbe "work" in the 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 "auy work" which one or the other of tbe organisations specified iu tbe sub-section can get carried out through a contractor under a contract c and fmtber it includes obtaining by any of such organisations supply of; labour unde~ a contract \vi th a contractor for carrying out its work which would have fallen outside tbe "work", hut for its specific inclusion in the sub-section."

It is evident tliat ACC's case (supra) was not in respect of transport contracts. The controversy therein was deduction of tax at source from pay- ments made for loading and unloading of goods. The question whether tbe expression "carrying o~t any work" would include therein carrying of tl1e goods or not, was not in issue in ACC's case. 'fhat is precisely the question in the present case. The decision in ACC's case has not been con·ectly understood by the CBDT. It would not be conect to come to the conclusion, x as CBDT did, that question involved is covered by the decision in the case of ACC.

Section l 94C was amended by tbe Finance Act, 1995 with ellcct from !st July, 1995. Explanation III was inserted. So for relevant for present pmpose, the said explanation reads as under:

"Explanation lll.- For tl1e purposes of tl1is section, the expression "work shall also include : 1 '

(a) ... G (b) ...

(c) caniagc of goods and passengers by any mode of transport other than by railways;

H (d) ... "

B!RLA CEMENT WORKS''· CENTRAL BOARD OF DIRECT TAXES [Y.K. SABHARWAL, !.] 205 In view of above, ii is not in dispute that from !st July, 1995 Section A J94C is applicable to transport contracts as well. The question, h0wever, is + ( whether the aforesaid explanation is only clarificatory or it makes applicable the provisions of Section I 94C to the types of contracts in ql'estion for the first time from the date of insertion of the explanation, i.e., !st July, 1995. B The Rajasthan High Court in the judgment under challenge has fol- lowed the interpretation placed on Section I 94C by Kerala High Court in Cmtral Boaid of Di1~ct Taxes v. Cochin Goods Transpo11 Association, (1999) 236 !TR 993 and the Punjab & flaryana High Court in Ekonkar Dashmesh Transpo1t Co. & Ors. v. Central Boa1d of Direct Taxes & Am:, (1996) 219 c !TR 511. TI1e contrary views expressed by the High Courts of Bombay, Calcutta, Karnataka, Gujarat, Madras, Orissa and Delhi quashing the im- pugned circular has been dissented in the .Judgment under challenge .

...,. The key words in Section 194C are "canying out any work". Learned counsel for the appellant conlended tliat a word or collection of words should fit into the structure of the sentence in which the word is used or t:ollection 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 canying the goods, no \Vork to the goods is undertaken and the context in \:Vhich the expression "t:a1Tying out any v.-·ork" has been used, makes il evident that it does not include in it the transportation of goods by a ca1Tier. In Bombay Goods Transpo11 Association & Am: v. Central Boan! of Diffcl Taxes, (1994) 210 !TR 136, the Bombay High Comt quashing the impugned circular has held that the expression "cai1ying out any work" would not include can·ying 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 Parliamenl had sought to bring professional services and other works within the net of tax deduction at source. If such '\vorks" were already covered by Section G 194C, it \vas \\'holly unnecessary for the parliament to introduce separate statnt01y 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 carTying out .....#-- of work indicates doing soinething to conduct the work to completion or an operation which produces such result. In VM. Salgaocar & Bros. Ltd. & Or.,. v. Income Tax Officer & Ors., (1999) 237 !TR 630, the Karnataka High Court H

p. 206

A has concurred with tl1e 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 otl1er hand, as already noticed, R~jasthan High Court in the judgment under appeal h~s expressed the contrary view relying upon the decision in ACC's case (supra).

B Two inteipretations are reasonably possible on the question whether the contract for carrying of goods would come or not within the ambit of the expression "canying out any work". One of the two possible inteipretations 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 compelJing reasons. There can be no doubt that if the only view of Section 194C had been the one retlected in the impugned circular, then the issue of earlier circulars and acceptance and acting thereupon by the Revenue reflect~ ing the contrary vie\11 would have been of no consequence. That, however, is not the position. Further, there are uo compelling reasons to hold that Explanation III inserted in Section 194C with effect from Isl July, 1995 is clarificatory or retrospective in operation. We hold Section l 94C before insertion of Explanation lII is not applicable to transpmt contracts, i.e., contracts for caniage of goods.

For the afores~id reasons the appeal is allowed, the impugned circular to the extent it relates 10 transport contraqs is quashed. The parties are left to hear their own costs.

A.K.T. Appeal allowed.