INCOME TAX ACT, 1961

--Tax deduction at source--Under section 194-IPayment of transmission and wheeling charges--The AO found that the assessee (GRIDCO) was a company engaged in the business of trading of power. Power was purchased from the generators (power generating companies) and sold to the DISCOMs and others utilizing the transmission network of OPTCL, PGCIL and other. The transmission charges were not paid by the distribution companies to OPTCL directly. The Distribution companies paid electricity charges to GRIDCO through the Escrow agreement and GRIDCO after collection from the Escrow agreement, paid to OPTCL. The transmission/wheeling charges were then paid by GRIDCO to the OPTCL. Further, the assessee-company, GRIDCO has also paid transmission/wheeling charges to Power Grid Corporation of India Ltd. (PGCIL) and other Transmission companies depending on the party, whose transmission network was used while bringing the electricity purchased from other generators (in other States) or selling the extra energy generated in Orissa, which were sold to the other states. Wheeling charges are levied by the transmission utilities for use of their network. The AO was of the view that TDS was applicable on these charges under section 194-I. The assessee-company has not deducted tax on these expenditures. The assessee-company had not showed the transmission charges paid to OPTCL in its books of accounts. The assessee-company had neither credited the amounts received from the Distribution companies in its profit and loss account nor it had debited the amounts paid to OPTCL. Accordingly, the AO issued show cause in response to which, the assessee submitted that the transaction was not routed through the-profit and loss account of GRIDCO. As the company had not claimed transmission charges as a deductible expenditure, the provisions section 40(a)(ia) did apply. The AO observed that the DISCOMs had not used any equipments of OPTCL; GRIDCO had used the equipments to deliver the electricity purchased from the generators to the DISCOMs. The DISCOMs had paid charges only to GRIDCO, as per their agreement with GRIDCO. GRIDCO had paid to OPTCL as per the rate. Bills were raised by OPTCL in the name of the DISCOMs just to create a first charge on the receivables of GRIDCO from the DISCOMs. In view of the above, the AO concluded that the transmission charges/wheeling charges were paid by GRIDCO to OPTCL towards use of equipments for transfer of power from the generators to the DISTCOMs, which attracted liability under section 194-I. Since the assessee failed to deduct and deposit TDS, the AO disallowed Rs. 512,44,43,724 under section 40(a)(ia), being the total payments of transmission/wheeling charges indirectly paid by the DISCOMs to OPTCL and PGCIL, and added the same to the total income of the assessee. Held: It cannot be said that the assessee-company had used the equipments and machineries. The assessee had made the payment for the services provided by them. This view was fortified by the judgment of Tribunal, Mumbai Bench rendered in the case of Vodafone Essar Ltd. v. Dy. CIT (2011) 9 ITR 182 (Mum-Trib) : 2011 TaxPub(DT) 750 (Mum-Trib). In that view of the matter, the provisions of section 194-I were not applicable to payments of transmission and wheeling charges and the AO was not justified in invoking the provisions of section 40(a)(ia) for disallowance of the transmission and wheeling charges.