'Capital Grant Subsidy' Paid To Contractor To Meet Economic Shortfall In Revenue Is Not Liable For TDS Deduction: Delhi HC

The Delhi High Court has held that 'capital grant subsidy' which may be extended by the National Highways Authority of India to its contractors is not liable to TDS deduction under Section 194C of the Income Tax Act, since such grant cannot be construed as payment for a “work”.

Section 194C requires deduction of tax at source on any sum which may be paid to a contractor for carrying out any work.

Capital grant subsidy is financial support which is rendered by NHAI to its Concessionaires in relation to projects where the revenue that the Concessionaire generates is less than the expected projection, rendering it unable to recover the total project cost.

A division bench of Justices Yashwant Varma and Ravinder Dudeja observed,

“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 present case, the Concessionaire had entered into a BOOT agreement with NHAI, where it was obligated to build and operate the project till its cost is recovered and thereafter, transfer the project to NHAI.

Since the Concessionaire was unable to recover its cost from operation of the project, the NHAI offered a capital grant subsidy.

It was the Income Tax Department's case that the statutory body failed to deduct taxes on this grant in terms of Section 194C. The Department was opposing an ITAT order in favor of NHAI.

NHAI argued that capital grant support could not be viewed as a sum paid to the Concessionaire for carrying out a “work” and thus, Section 194C was inapplicable.

The Department however contended that the word “work” in Section 194C is intended to be conferred an expansive meaning, and not restricted to a works contract alone. It was argued that all payments made to a Concessionaire by NHAI would be subject to TDS.

At the outset, the High Court took note of the Supreme Court's judgment in Associated Cement Company Ltd. v. Commissioner of Income Tax (1993) where it was held that Section 194C is not confined to works contracts.

““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…” the Top Court had said.

However, it also took note of Birla Cement Works v. Central Board of Direct Taxes and Others (2001) where the Supreme Court clarified the true import of the decision in Associated Cement.

The Top Court had held, “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.”

In this backdrop, the High Court held,

”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.”

To further strengthen its stance, the High Court referred to various precedents defining “work”. It also referred to the Explanation to Section 194C which defines the word “work” to include activities such as advertising, broadcasting and telecasting of programmes, carriage of goods or passengers, catering, manufacturing or supplying a product as some of the activities which could fall within the meaning of that expression.

It also cited East India Hotels Ltd. and Another v. Central Board of Direct Taxes and Another where the Bombay High Court had held that "work" in section 194C is limited to doing something with a view to achieving the task undertaken or carry out an operation which produces some result.

“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,” High Court held.

Court also referred to Section 194C(2) which prescribes that any sum credited to any account of the contractor, irrespective of its nomenclature, and entered in its books of accounts would be deemed to a credit of such income to the account of the payee.

However, the Court noted that the capital grant subsidy was not an amount which was to be deposited in the account of the Concessionaire or be accounted for in its books of account.

“Those sums were credited directly to the Escrow Account. This would, therefore, also not be a case where sub-section (2) of Section 194C would be attracted.”

Accordingly, the High Court upheld the ITAT order and concluded,

“the capital grant subsidy was essentially aid and support that the NHAI extended to the Concessionaire as opposed to payment that it would have ordinarily made to a contractor and would be directly connected with or constitute recompense for physical work that was performed. As the precedents noticed hereinabove bid us to acknowledge, the word “work” in the context of Section 194C is liable to be understood as relating to labour that is expended, the undertaking of a task or operation which produces a result. 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.”

Appearance: Advocates Sanjay Kumar & Easha for Department; Standing Counsel Santosh Kumar with Advocates Adithya Ramani and Devansh Malhotra

Case title: Commissioner Of Income Tax (TDS) - 2 v. National Highway Authority Of India

Case no.: ITA 1145/2017

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