Sec 194C: Is Payment by Transporters Society to its Members Liable to TDS?

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The assessees are registered societies/AOP constituted by the truck operators. These societies enter into contracts with the companies such as cement manufacturers for transport of the goods of the companies. In Sirmour Truck Operators Unions’ case the assessee had entered into a contract with the H.P. State Civil Supplies Corporation for carriage of goods. The company which has entered into contract with the assessee deducts 2 per cent of the amount paid on account of TDS in terms of section 194C(1) of the Income-tax Act, 1961. Thereafter, the assessee-society pays the amount received by it to the members of the society who have actually carried the goods. However, out of the amount paid a nominal amount of Rs. 10 or Rs. 20 is deducted for administrative expenses of running the society and is known as “Parchi charges”. The assessee does not retain any other amount except for the “Parchi charges” and the entire amount received by it from the company is paid to the members. The Assessing Officer however held the payment to the members/truck operators liable to TDS u/s 194C at the rate of 1 per cent.

The issue before Himachal Pradesh High Court in Ambuja Darla Kashlog Mangu Transport Co-op. Society vs CIT 188 taxman 134 was

Whether the freight payments made by the assessee society to the truck owners who were also the members of the society, were subject to deduction at source in view of section 194C(2), being payments made to the truck owners in their capacity as sub-contractors.”

Hon’ble Himachal Pradesh High Court held vide its order 10/20/2009 as under :

The main contention of the revenue was that since the assessee had a separate juristic identity and each of the truck operators, who were members of the assessee, had separate juristic identity, they were covered within the meaning of section 194C(2). It was urged by the revenue that since the assessee was a person paying a sum to the member-truck operator who was a resident within the meaning of the Act, TDS was required to be deducted. That argument did not take into consideration the heading and entire language of section 194C(2) which clearly indicates that the payment should be made to the resident who is a sub-contractor. The concept of a sub-contract is intrinsically linked with section 194C(2) and if there is no sub-contract, then the person is not liable to deduct tax at source, even if payment is being made to a resident.

In the instant case, the assessee-society was created by the transporters themselves who formed the societies or unions with a view to enter into a contract with the companies. The companies entered into contracts for transportation of goods and materials with the society. However, the society was nothing more than a conglomeration of the truck operators themselves and had been created only with a view to make it easy to enter into a contract with the companies as also to ensure that the work to the individual truck operators was given strictly in turn so that every truck operator had an equal opportunity to carry the goods and earn income. The society itself did not do the work of transportation. The members of the society were virtually the owners of the society. It might be true that they both had separate juristic entities but the fact remained that the reason for creation of the society was only to ensure that work was provided to all the truck operators on an equitable basis. A finding of fact had been rendered by the authorities that the society was formed with a view to obtain the work of carriage from the companies since the companies were not ready to enter into a contract with the individual truck operators but had asked them to form a society.

Admittedly, the society did not retain any profits. It only retained a nominal amount as ‘parchi charges’ which was used for meeting the administrative expenses of the society. There was no dispute with the submission that the society had an independent legal status and was also a contractor within the meaning of section 194C. It was also not disputed that the members had a separate status but there was no sub-contract between the society and the members. In fact, if the entire working of the society was seen, it was apparent that the society had entered into a contract on behalf of the members. The society was nothing, but a collective name for all the members and the contract entered into by the society was for the benefit of the constituent members and there was no contract between the society and the members.

For the foregoing reasons, section 194C(2) was not attracted and the assessee-society was not liable to deduct tax at source on account of payments made to the truck owners who were also members of the society.