Capital Grant Subsidy Provided For Gap Funding Not Payment For Work Of Contractor; Won’t Attract TDS Deduction: Delhi HC

The Delhi High Court held that the Capital Grant Subsidy which is provided for gap funding cannot be considered as the payment for the work done by Contractor and hence, will not attract TDS (Tax Deducted at Source) Deduction.

The Court held thus in Appeals filed by the Commissioner of Income Tax (CIT) against the National Highways Authority of India (NHAI), challenging the Judgment of the Income Tax Appellate Tribunal (ITAT).

A Division Bench comprising Justice Yashwant Varma and Justice Ravinder Dudeja observed, “Regard must also be had to the provisions contained in Section 194C(2) and which prescribes that any sum credited to any account of the contractor, irrespective of its nomenclature, and entered in its book of accounts would be deemed to a credit of such income to the account of the payee. However, and as was noticed hereinbefore, the capital grant subsidy was not an amount which was to be deposited in its account or be accounted for in its books of account as that expression is understood in common parlance. 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.”

The Bench enunciated that the infusion of equity capital as a measure of financial support, while surely a contractual obligation, cannot be understood to mean the payment for a work undertaken.

Advocate Sanjay Kumar appeared for the Appellant (CIT) while Standing Counsel Santosh Kumar appeared for the Respondent (NHAI).

Facts of the Case -

The ITAT had held that the capital grant subsidy given by the Respondent-assessee i.e., NHAI to its Concessionaires would not be subject to a withholding tax as contemplated under Section 194C of the Income Tax Act, 1961 (ITA). The NHAI is charged with the responsibility of development, maintenance and operation of National Highways and associated facilities. It functions through various Project Implementation Units (PIUs) which are spread out across the length and breadth of the country and obligated to oversee and administer projects being undertaken by the NHAI. The PIUs are entrusted with funds made available by the concerned Ministry in the Union Government and which are routed through the Head Office of the NHAI to those units.

The capital grant subsidy was disbursed by the NHAI to a Concessionaire who was awarded the project work on Build-Own-Operate-Transfer basis. In terms of an Order framed by the Assessing Officer (AO), in 2012, it was held that NHAI had failed to comply with the obligation to deduct taxes in terms of Section 194C of ITA on the capital grant subsidy released by it to its Concessionaries. Being aggrieved, NHAI preferred an Appeal before the CIT (Appeals) and it affirmed the view of AO. Hence, it approached the Tribunal and its Appeal was allowed. Being aggrieved, the CIT was before the High Court.

The High Court in view of the above facts, noted, “It is thus manifest that ‘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 offinancial assistance and equity contribution provided to the Concessionaire by the NHAI bearing in mind the imperatives of economic viability.”

The Court added that the Concession Agreement had in clear and unambiguous terms provided that the grant would be in the nature of cash support to be made outrightly and equivalent to the sum set forth in the bid and that the said grant was to be extended and disbursed by way of equity support.

“The said equity support was to be read in conjunction with the loans and credit facilities which were to be disbursed by the lenders of the Concessionaire under the financing agreements. These grants and payments were to be placed directly in the Escrow Account and were in that sense neither payments made for work undertaken nor where they funds placed at the discretion and disposal of the Concessionaire. This becomes apparent when one views the priorities which were to be borne in mind for the purposes of withdrawal from the Escrow Account during the currency of the Concession. Those provisions, in explicit terms, provided for the manner in which all sums standing to the credit of the Escrow Account were liable to be utilised”, it further said.

The Court remarked that, while equity support was a concomitant of the Concession Agreement, it would be wholly incorrect to view it as payment made for a ‘work’ entrusted to the Concessionaire. It also noted that 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.

“Viewed in that light it becomes apparent that 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”, it observed.

Moreover, the Court elucidated that 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.

“In our considered opinion, the Tribunal has correctly come to conclude that the subsidy or financial support which was extended by NHAI to the Concessionaire and was only envisaged to work as viability gap funding could not possibly have been construed as payment made for a work undertaken by the contractor”, it added.

The Court, therefore, concluded that, while it is true that Section 194C does not stand confined to a works contracts alone, unless the Appellant had established that the sum in question and represented by the viability gap funding were recompense for a physical activity undertaken or labour expended, those disbursements could not have formed subject matter of a withholding tax under Section 194C.

Accordingly, the High Court dismissed the Appeals.

Cause Title- Commissioner of Income Tax (TDS) - 2 v. National Highways Authority of India (Neutral Citation: 2024:DHC:8716-DB)

Appearance:

Appellant: Advocates Sanjay Kumar and Easha.

Respondent: Standing Counsel Santosh Kumar, Advocates Adithya Ramani, and Devansh Malhotra.

Click here to read/download the Judgment