Bombay Goods Transport Association vs Central Board of Direct Taxes

Saraf, J.—This writ petition filed by the Bombay Goods Transport Association and its honorary general secretary raises an important question as to whether a contract for mere carriage of goods which does not include any other services like loading or unloading and is not in anyway connected with any ''work'' to be performed by the carrier can be said to be a contract for carrying out any work within the meaning of section 194C of the income tax Act, 1961 (''the Act''). Though section 194C is in the statute book right from 1-4-1972, there was no controversy about the fact that payments made to transport contractors do not fall within the purview of the said section. The controversy has arisen recently with the issuance of circular by the CBDT being Circular No. 681, dated 8-3-1994 - [1994] 73 Taxman 277 (St.). The uncontroverted position is that prior- to the issuance of the above circular there were circulars and clarifications from the CBDT to the effect that section 194C was not applicable to payments made for carriage of goods to the transport operators. For a proper appreciation of the controversy, it may be expedient to set out some of the provisions of the Act, the relevant circulars and guidelines issued by the CBDT from time to time after coming into force of section 194C and during the last two decades of its operation. Section 194C provides for deduction of tax at source from payments to contractors and sub-contractors.

Soon after the enactment of the above section 194C, a circular was issued by the Deputy Secretary to the Government of India being Circular No. 86, dated 29-5-1972 (see Taxmann''s Direct Taxes Circulars, 1991 edn., p. 2073) to explain the broad effect of the provision. In this circular it was clearly stated that deduction of income tax should be made from sums paid for carrying out any work or for supplying labour for carrying out any work. It was made clear that provisions of section 194C would apply only in relation to ''work contracts'' and ''labour contracts'' and will not cover contracts for sale of goods.

Thereafter, another circular was issued by the Deputy Secretary to the Government of India being Circular No. 93, dated 26-9-1972 (p. 2076). The said circular was issued in response to enquiries from various trade associations and members of the public seeking clarifications on several points arising out of the scheme of tax deduction at source from payments made to contractors and sub-contractors in certain cases. Points on which enquiries were made and clarifications given in the matter are set out in the said circular. One of the points on which clarification was sought pertained to transport contracts. Following was the clarification:

A transport contract cannot ordinarily be regarded as ''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 ''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.

The petitioner-association by its letter dated 8-9-1972 also sought specific clarification from the Commissioner, Bombay in regard to the applicability of section 194C to transport contractors. In reply, the Commissioner by his letter dated 13-10-1972 informed the petitioners as follows:

With reference to your letter No. BGTA/2/72/1361 dated 8th September, 1972, I have been directed to state that provisions of section 194C arc not applicable in respect of transport contractors.

It was again clarified in the year 1982 by the Under Secretary to the Government of India, Ministry of Finance, by letter dated 3-2-1982 in reply to a query from some transporter that if the contracts are purely transport contracts involving only transportation of goods entrusted for carriage to the transport operators, the provisions of section 194C would not be applicable to such payments. However, if the contract involves execution of work including supply of labour, it may turn out to be a works contract and provisions of section 194C will be applicable to it.

It is evident from the above discussion that there was no controversy at any point of time about the fact that the provisions of section 194C were not applicable to payments made to transport operators for carriage of goods from one destination to another. It was for the first time on 8-10-1993 that the CBDT by its circular sought to clarify in the light of the decision of the Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 1 that ''any work'' in section 194C has to be understood in its ''natural meaning'', i.e., any work means any work and not only a works contract which has a special connotation in the tax law. On the basis of the above observations of the Supreme Court, it was mentioned that the provisions of section 194C were applicable to all types of contracts for carrying out any work such as transport contracts, service contracts, labour contracts, material contracts, as well as works contracts, etc. On receipt of the above circular the petitioner-association made a representation to the CBDT stating that the carriage and delivery of the goods by the transport contractors do not come within the meaning of ''works contract''. In reply, the CBDT forwarded to the petitioners a copy of its Circular No. 681, dated 8-3-1994 for information and guidance. The said circular contains instructions in the matter of deduction of tax at source on payments to contractors and sub-contractors u/s 194C in the light of Supreme Court''s decision in Associated Cement Co. Ltd.''s case (supra). By the above circular, the CBDT withdrew its earlier Circular Nos. 86 and 93 and para 11 of Circular No. 108, dated 20-3-1973 (p. 2808). It was, however, clarified that the said circular explaining the provisions of section 194C would apply with effect from 1-4-1994?.

By the above circular the provisions of section 194C are sought to be applied to transport contracts which would include not merely contracts for works like loading, unloading, etc., but contracts for carriage of goods also. This interpretation of section 194C is the subject-matter of challenge in this writ petition.

The petitioners contend that the above circular of the CBDT is beyond the scope and ambit of section 194C. It is further submitted that the CBDT misinterpreted and misconstrued the ratio of the decision of the Supreme Court in Associated Cement Co. Ltd.''s case (supra) and the observations made therein in regard to the meaning of the expression ''any work'' and has issued the circular on the basis of such erroneous construction of the said judgment. The learned counsel for the petitioners Mr. C.U. Singh submitted before us that the language of section 194C is clear and unambiguous. It has been correctly interpreted by the CBDT all through out in the past and the interpretation has been acted upon both by the income tax Department as well as the assessees. There is no reason to depart from the interpretation consistently placed on section 194C for the past two decades. The decision of the Supreme Court in Associated Cement Co. Ltd.''s case (supra), according to the learned counsel, in no way justifies such a departure. The learned counsel further submitted that the meaning of section 194C is further clear from the legislative intent which can be gathered also from the amendment sought to be made by the Parliament in the year 1987 by insertion of section 194E of the Act by the Finance Bill, 1987 and the introduction of section 194H in the Act by the Finance (No. 2) Act, 1991 with effect from 1-10-1991 which was, however, made inoperative with effect from 1-6-1992. By the insertion of section 194E, the Parliament intended to provide for deduction of tax at source on payments by way of fees or professional services or royalty or fees for technical services or loan or commission (not being insurance commission referred to in section 194D). The proposal to insert the said section was later withdrawn on account of the representations made on behalf of various professional bodies. However, provision was, in fact, made in the Act in the year 1991 by insertion of section 194H for deduction of tax on payments made by way of commission, brokerage, etc. ''Commission'' or ''brokerage'' has been defined in the said section to mean any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing. ''Professional services'' are also defined to mean services rendered by a person in the course of carrying on a legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy of interior decoration or such other profession as is notified by the Board for the purposes of section 44AA of the Act. Section 194H, however, ceased to be operative with effect from 1-6-1992. The above two sections, i.e., proposed section 194E and section 194H as inserted with effect from 1-10-1991 clearly go to show that what was sought to be introduced by section 194E and what was brought in by section 194H in the net of deduction at source was not covered by the existing section 194C. Had it not been so, there was no necessity of introducing new sections.

The learned counsel submits that the transport services rendered by the members of the petitioner-association do not fall within the scope and ambit of the expression ''any work'' in section 194C and, as such, the circular of the CBDT seeking to extend the said section to payments made on account of transportation charges is wholly illegal and without jurisdiction. Reliance is placed on the definition of ''transport'' in the Motor Vehicles Act, 1939 to show that the activities of the transporters are known as ''transport services''. It is also stated on behalf of the petitioners that the decision of the Supreme Court should be read as a whole in the context of the controversy before the Supreme Court and so read it does not give any different meaning to the words ''any work'' than what had been given by the CBDT itself in the past all throughout.

In reply Mr. G.S. Jetly, the learned counsel for the respondents, submitted that the fact that the revenue had interpreted section 194C in a particular manner in the past cannot take away its power to interpret the section differently with prospective effect if it is found that its earlier interpretation was not correct. According to him, grievance on this account can be made only if such departure is made retrospectively which is not the case here. Mr. Jetly further submitted that section 194C should be construed by this Court de hors the circulars or the judgment of the Supreme Court and so construed the words ''any work'' will have to be interpreted to include all services including the transport services. The counsel submitted that the circulars of the CBDT cannot detract from the Act and in case of any conflict, the provisions of the Act ought to be given effect to ignoring the circulars. Reliance was placed in this connection on the decision of the Supreme Court in Kerala Financial Corporation Vs. Commissioner of Income Tax, . Mr. Jetly referred to the meaning of the word ''contract'' as also the word ''work'' as given in various dictionaries such as Black''s Law Dictionary, Chambers Dictionary, Oxford Dictionary in support of his contention that the word ''contract'' is wide enough to include a contract for carriage of goods and the word ''work'' includes services also.

We have carefully considered the rival submissions. The controversy, in our opinion, is in a very narrow compass. Section 194C has been in the statute book almost in the same form ever since its inception in the year 1972. It provides for deduction of tax at source on payments made for carrying out any work including supply of labour for carrying out any work in pursuance of a contract between the contractor and the persons specified therein. The crux of the section is ''payment made for carrying out any work'' which, by virtue of specific inclusion, also includes supply of labour for carrying out any work. The requirement that such work should be carried out in pursuance of a contract between a contractor and the person/s concerned is an additional requirement. To attract section 194C, it is, therefore, necessary that the payment should be made ''for carrying out any work''. If this condition is fulfilled, then and then only the next condition becomes relevant, i.e., such work should be carried out in pursuance of a contract between the contractor and the person concerned. The word ''contract'' is a word of wide import and includes agreements, oral or written. There is no dispute in this case that there is a contract of agreement between the transporter and the owner of the goods for carriage of goods. The case of the petitioner is that ''carriage of goods'' does not amount to ''carrying out any work'' and payments made on that account, therefore, cannot be said to be payments made for carrying out any work. We find force in the above submission. The words ''any work'' have been interpreted by CBDT itself which is the highest authority under the Act for implementation of the provisions of the Act from time to time. It has been made clear in the very first circular on the subject being Circular No. 86, dated 29-5-1972 that section 194C applies only to work contracts and labour contracts and it does not apply to contracts for sale of goods. In reply to enquiries from various trade associations and members of the public including the petitioner-association, by Circular No. 93, dated 26-9-1972, it was reiterated that a transport contract cannot ordinarily be regarded as ''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. It was further made clear that in the case of a composite contract involving transport as well as loading and unloading, the entire contract will be regarded as ''work 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. In answer to another question it was even clarified that pipeline/pumping charges for use of pipelines owned and operated by port trusts for movement of petroleum products by pipeline from refinery to port installations would not fall within the purview of section 194C. Again, on 13-10-1972, in a letter written to the petitioner-association itself, it was specifically stated that provisions of section 194C were not applicable in respect of transport contractors. The same view was reiterated in yet another letter of 3-2-1982. There is no change in the situation during the last 20 years to justify a departure from the above interpretation of section 194C given by the CBDT and accepted by the taxpayers. The CBDT has reviewed the above instructions and changed the interpretation given by it and acted upon it for more than two decades only on the basis of certain observations of the Supreme Court in the case of Associated Cement Co. Ltd.''s case (supra). According to the CBDT, some of the issues raised in the circulars issued by it earlier from 1972 onwards needed review in the light of the above judgment. Accordingly, by Circular No. 681, dated 8-3-1994, it opined that the provisions of section 194C shall apply to all types of contracts for carrying out any work including transport contracts, service contracts, advertisement contracts, (covering broadcasting contracts, telecasting contracts), labour contracts, material contracts and works contracts. The term ''transport contracts'' has been defined to include, in addition to contracts for transport and loading/unloading of goods, also contracts for plying buses. The term ''service contracts'' has also been defined to include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. In Writ Petition No. 1052 of 1994, the very same circular was challenged insofar as it purports to include payments made to professionals on account of services rendered by them by including them in service contracts. By our judgment dated 14-7-1994 we have held that section 194C is not applicable to payments made to professionals for services rendered by them. We have also discussed the ratio of the decision of the Supreme Court in Associated Cement Co. Ltd.''s case (supra).

We have carefully gone through the decision of the Supreme Court in the aforesaid case in the light of the controversy before it. In the case before the Supreme Court, under the terms and conditions of an agreement between the appellant and a contractor, the contractor was to be paid at a flat rate for loading packed cement bags into wagons or 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 appellant to the contractor in case of certain increase in the dearness allowance, etc., payable by the contractor to the workmen employed by him. The appellant 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 appellant u/s 194C(1) fell short of the deductions required to be made thereunder. On a show-cause notice being issued the appellant contended that it was not liable to deduct any amount under the said section, as the payments were not in respect of ''works contracts''. It is in this context that the Supreme Court observed:

... 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 subsection, therefore, 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. (p. 440)

In the light of the above, the contention of the appellant that section 194C was not applicable to payments made on account of loading packed cement bags into wagons or trucks was turned down by the Supreme Court. We find that similar was the interpretation of the revenue itself even in the very first circular issued by it on 29-5-1972 soon after the coming into force of section 194C. It was clearly stated therein that the provisions of section 194C would apply to ''works contracts'' and ''labour contracts''. Labour contracts were covered by the expression ''any work'' in section 194C all throughout. In the second circular, the CBDT was required to specifically say whether transport contract would fall within the purview of section 194C or not. The CBDT was always of the clear opinion that though section 194C was applicable to ''labour contracts'', it was not applicable to transport contracts as according to it ''transport contracts cannot be said to be contracts for carrying out any work''. We do not find anything in the decision of the Supreme Court to justify the reversal of the above view by the CBDT by the impugned circular. The Supreme Court has not interpreted the provisions of section 194C in the manner it is sought to be interpreted by CBDT to apply to all types of contracts including transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labour contracts, material contracts, works contracts, etc. In our opinion, the CBDT has committed a manifest error of law in interpreting the judgment of the Supreme Court. It is well-settled that judgment of the Supreme Court has to be read subject to the facts directly presented for consideration before it and not affecting those matters which may lurk in the record. In Commissioner of Income Tax Vs. M/s. Sun Engineering Works (P.) Ltd., , the Supreme Court itself observed:

... It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete ''law'' declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasonings.... (p. 320)

In Associated Cement Co. Ltd.''s case (supra) controversy before the Supreme Court was limited to applicability of section 194C to labour contracts. The various circulars of the CBDT were not before the Supreme Court. The Supreme Court interpreted section 194C de hors those circulars, it did not approve the narrow construction to the expression ''any work'' to include only ''works contracts''. There is nothing beyond that in the above judgment of the Supreme Court.

Mr. Jetly, the learned counsel for the respondents, stated that we should interpret section 194C without reference to the circulars of the CBDT and the decision of the Supreme Court because the particular aspect of the matter which is subject-matter of controversy in the present case was not a question involved in the Associated Cement Co. Ltd.''s case (supra). We have carefully considered the above submission and read and re-read the provisions of section 194C. We, however, do not find anything in it to justify the interpretation which is sought to be put on it by the CBDT. In our opinion, the expression ''any work'' used in section 194C means ''works contracts'' and ''contracts for work'', i.e., ''labour contracts'' but not ''service contracts'' or ''transport contracts''.

We may, however, like to make it clear that apart from their binding character, the circulars of the CBDT clarifying the scope and ambit of a statutory provision are entitled to considerable weight in interpreting the provisions of the relevant statute unless they go counter to the plain and unambiguous language of the statute itself. They provide useful aid to construction of a statute to ascertain the true intention of the Legislature as well as the intention of those in charge of its administration.

The proposed insertion of section 194E in the year 1987 and insertion of section 194H in the year 1991 further goes to show that according to the Legislature, section 194C was not applicable to ''service contracts'' or ''contracts'' brought within the purview of deduction of tax at source by section 194H. The observations of the Supreme Court in Associated Cement Co. Ltd.''s case (supra) to the effect that the ''work'' envisaged in the sub-section 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 cannot be construed in a manner not intended by the Supreme Court. The Supreme Court merely affirmed the interpretation that had been put by the CBDT on section 194C to include not only ''works contracts'' but also ''labour contracts''. The Supreme Court made it clear that ''labour contracts'' would have fallen outside the ''work'' envisaged by section 194C but for its specific inclusion in sub-section (1).

In the light of the above discussion, we are of the clear opinion that the provisions of section 194C are not applicable to contracts for mere carriage of goods which do not include any other services like loading or unloading. The CBDT Circular No. 681, dated 8-3-1994, in our opinion, is based on an erroneous reading of the decision of the Supreme Court in Associated Cement Co. Ltd.''s case (supra) and certain observations made therein. We, therefore, hold that the said circular is illegal and without jurisdiction insofar as it requires deduction of tax at source u/s 194C from payments made under contracts for mere carriage of goods which do not include any other services like loading and unloading and are not in anyway connected with any work to be performed by the carrier. In the result this writ petition is allowed and rule is made absolute in the above terms. On the facts and circumstances of the case, there shall be no order as to costs.

Mr. Jetly, the learned counsel for the respondents, applies for stay of the operation of this order for a period of four weeks from today. We do not find any reason to do so particularly in view of the fact that the operation of the impugned circular of the CBDT had been stayed by this Court at the time of filing of this petition.