1.Back Ground

Facts:

XYZ  of India Limited (hereinafter referred as “Querist”) is a company registered under the provisions of Companies Act 2013 vide registration no 56365365xxxxx(CIN No. **************************) with its registered office at Gurgaon, Haryana, 1220xx. It was incorporated on       28/12/2020 and has started functioning w.e.f. 01.04.2021

Being designated as Central Transmission Utility, the Querist’s function, as required in CERC Sharing Regulation, 2020, includes raising invoices and collecting payment on behalf of Inter-State Transmission System Licensees (“ISTS”).

We have been contacted by the Querist to provide an opinion on applicability of TDS on payment of amount collected on behalf of ISTS to ISTS.

2. Question Raised

The Querist wants to know: –

1. Whether any TDS is applicable on payment of transmission charges collected by the Querist on behalf of ISTS?
2. If the answer of first question is “Yes”, then under which section TDS will be deducted and what will be the rate of TDS under the provisions of Income Tax Act 1961 and rules made thereunder?

3. Analysis

The Querist, 100% subsidiary of Power Grid Corporation of India Limited, is notified as the XYZ under Section 38 of the Electricity Act 2003. Its functions as per Electricity Act, 2003 are as below:

• to undertake transmission of electricity through inter-State transmission system;
• to discharge all functions of planning and co-ordination relating to inter-state transmission system with –

1. State Transmission Utilities;
2. Central Government;
3. State Governments;
4. generating companies;
5. Regional Power Committees;
6. Authority;
7. licensees;
8. any other person notified by the Central Government in this behalf;

•  

• to ensure development of an efficient, co-ordinated and economical system of inter-State transmission lines for smooth flow of electricity from generating stations to the load centres;
• to provide non-discriminatory open access to its transmission system for use by-

1. any licensee or generating company on payment of the transmission charges; or
2. any consumer as and when such open access is provided by the State Commission under sub-section (2) of section 42, on payment of the transmission charges and a surcharge thereon, as may be specified by the Central Commission.

In exercise of the powers conferred under Section 178 read with Part V of the Electricity Act, 2003 (36 of 2003), the Central Electricity Regulatory Commission through notification number No.L-1/250/2019/CERC Dated: 4th May 2020 has notified Central Electricity Regulatory Commission (Sharing of Inter-State Transmission Charges and Losses) Regulations, 2020 which contains provisions :-

Chapter 4 of such regulation provides: –   14. Accounting (1) The Implementing Agency shall publish transmission charges payable by drawee DICs and injecting DICs with untied LTA for the billing month in Rupee terms.   (2) Regional Transmission Accounts and Regional Transmission Deviation Accounts for the billing month for the DICs shall be prepared by the Secretariat of the respective Regional Power Committee on the basis of: (a) DIC-wise transmission charges for the billing month, as furnished by the Implementing Agency; and (b) Meter readings of all Special Energy Meters for computation of Transmission Deviations for every time block of the corresponding billing period, as furnished by respective RLDCs.   (3) Regional Transmission Accounts and Regional Transmission Deviation Accounts shall be issued by the Secretariat of respective Regional Power Committee to DICs, the XYZ and inter-State transmission licensees and also be displayed on the website of respective Regional Power Committees.   15. Billing. (1)The XYZ shall, raise the bills for transmission charges, as per the timelines specified in sub-clause (d) of Clause (5) of Regulation 14 of these regulations.   (2) The bills for transmission charges for the DICs shall be raised by the Xyz  Utility under the following three categories:   (a) The first bill of each billing month shall contain the transmission charges for thebilling period in accordance with Regulations 5 to 8 of these Regulations.   (b) The second bill shall be raised in the months of April, July, October and Januaryevery year for the quarter ending on 31st March, 30th June, 30th September and 31stDecember respectively to adjust variations on account of any revision intransmission charges allowed by the Commission, including incentives asapplicable   (c) The third bill shall be raised in each billing month for TransmissionDeviationcharges, along with the first bill.   (3) The XYZ shall raise separate bills, as per the timelines for thefirst bill, for transmission systems covered under Clauses (3), (6), (8), (9) and (12) ofRegulation 13 and not covered under Regulations 5 to 8 of these regulations.   (4) All bills raised by the XYZ shall also be posted on its website.   20. Collection and Disbursement (1) The XYZ shall collect transmission charges on account of thefirst bill for transmission system covered under Regulations 5 to 8 of these regulationsand disburse the amount so collected to inter-State transmission licensees and intraState transmission licensees in proportion to their Yearly Transmission Charges   (2) Transmission charges collected by the XYZ for transmissionsystems covered under Clauses (3), (6), (8), (9) and (12) of Regulation 13 and notcovered under Regulations 5 to 8 of these regulations shall be disbursed directly to theconcerned inter-State transmission licensee or the generating company, as the casemay be.   (3) The XYZ shall collect transmission chargesunder the secondbill and disburse the same to the respective inter-State transmission licensees.   (4) The XYZ shall collect Transmission Deviation charges underthe third bill and reimburse the same to the DICs, in proportion to their first bill in thefollowing billing month.   (5) All payments and disbursements under provisions of this regulationshall be executedthrough National Electronic Funds Transfer (NEFT) or Real Time Gross Settlement(RTGS) or any other means of electronic transfer approved by the Reserve Bank ofIndia.

As per para 7 & 8 of Ind AS-18

“Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants.”

“Revenue includes only the gross inflows of economic benefits received and receivable by the entity on its own account. Amounts collected on behalf of third parties such as sales taxes, goods and services taxes and value added taxes are not economic benefits which flow to the entity and do not result in increases in equity. Therefore, they are excluded from revenue. Similarly, in an agency relationship, the gross inflows of economic benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity. The amounts collected on behalf of the principal are not revenue. Instead,revenue is the amount of commission.”

For deduction of TDS, element of income is required. If there is no income, the same can not be under obligation of withholding tax provisions. In the matter of

 

COMMISSIONER OF INCOME TAX

V.

KALYANI STEELS LTD.,

([2018] 91 taxmann.com 359 (Karnataka))

hon’ble High Courtheld:-

“Section 194J, read with section 201, of the Income-tax Act, 1961 – Deduction of tax at source – Fees for professional or technical services (Reimbursement) – Assessment years 2008-09 to 2010-11 – Whether if there is no income embedded in a payment, then TDS provisions would not apply as TDS is only an alternative method of collection of taxes; reimbursement cannot be deducted out of bill amount for purpose of TDS – Held, yes – Assessee was engaged in business of manufacturing of steel – It had made payment to a company named ‘HSL’ towards managerial and technical services rendered by way of operating and maintaining an integrated steel plant for assessee – AO noticed that required labour and staff for services had been employed by HSL and HSL had used its assets and machineries for rendering agreed services – Further, amounts received towards services charges had been accounted in Profit & Loss account of HSL and same was offered to tax – Hence, Assessing Officer held that assessee was in default for not deducting TDS under section 194J – Whether since no income was reflected in balance sheet and Profit & Loss account of HSL towards payment made by assessee and it was reimbursement of expenses incurred on cost to cost basis by assessee, it could not be treated as in default under section 194J – Held, yes”

In the matter of,

Additional Commissioner of Income-tax 8(2), Mumbai

v.

Mumbai International Airport (P.) Ltd.

[2017] 88 taxmann.com 663 (Mumbai – Trib.)

Hon’ble Tribunal held that:-

“Section 2(24) of the Income-tax Act, 1961 – Income – Definition of – Assessment year 2008-09 – Passenger service fee (Security component) (PSF – SC) being amount collected by assessee, airport operator, on behalf of Ministry of Civil Aviation to be disbursed for security purposes to CISF deployed by Ministry of Home Affairs could not be characterized as ‘income’ under section 2(24).

The assessee, being a licensee of an airport was responsible for collecting a fee from embarking passengers referred to as Passenger Service Fee (PSF). Portion of PSF being 35 per cent was on account of providing passenger facilities and was to be retained by the airport operator for providing passenger related services and the balance 65 per cent of PSF represented security component to be utilized for payment of security agency, i.e., CISF, designated by the Ministry of Home Affairs for providing security services. The assessee had included the aforesaid 35 per cent in its income but did not include PSF-security component in its income while filing of return of income. The Assessing Officer concluded that the aforesaid amount was part of taxable income of the assessee.

Held that the said amount was collected by the assessee on behalf of the Ministry of Civil Aviation to be disbursed for security purposes to CISF deployed by the Ministry of Home Affairs. The amount was collected and retained purely in a fiduciary capacity. The assessee had no discretion or freedom at all to utilize the aforesaid amount for any other purposes other than the designated purpose of meeting security expenses. So much so, even the surplus left, if any, was not at the disposal of the assessee-company but was to be mandatorily transferred to the account of the Airports Authority of India as per the prescribed procedure. Under these circumstances, it was clear that the assessee merely acted as a conduit or a trustee for collection and disposal of the impugned amount of PSF-SC. Under these circumstances, the aforesaid amount could not be characterized as ‘income’ under section 2(24), section 5 or any other provisions of the Act.”

Raising invoices, collecting amounts on behalf of ISTS and further distributing it to the ISTS, are statutory functions, expected to be done under the provisions of law.

Applying the principles of Ind AS 18, it can be said that the Querist does not provide any service nor supply any goods for these statutory functions. These functions are neither revenue nor expenditure for the Querist.

From Income tax perspective, we find only one section which may apply for deduction of TDS. i.e. section 194C.

As per section 194C of the Income Tax Act 1961

“ (1) Any person responsible for paying any sum

• to any resident (hereafter in this section referred to as the contractor)
  • for carrying out any work (including supply of labour for carrying out any work)
  • in pursuance of a contract between the contractor and a specified person

shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to—

(i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;

(ii) two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, of such sum as income-tax on income comprised therein.

Explanation.—For the purposes of this section,—

(iv) “work” shall include—

1. advertising;
2. broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
3. carriage of goods or passengers by any mode of transport other than by railways;
4. catering
5. manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer or its associate, being a person placed similarly in relation to such customer as is the person placed in relation to the assessee under the provisions contained in clause (b) of sub-section (2) of section 40A,but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer or associate of such customer.

As per Rule 37BA of the Income Tax Rules 1962:-

“(1) Credit for tax deducted at source and paid to the Central Government in accordance with the provisions of Chapter XVII, shall be given to the person to whom payment has been made or credit has been given (hereinafter referred to as deductee) on the basis of information relating to deduction of tax furnished by the deductor to the income-tax authority or the person authorised by such authority.

3. Conclusion

After analysing above, we have reached to the conclusion that:-

• Disbursal of amount collected by Querist to ISTS is not within the scope of TDS. Accordingly, TDS is not required to be deducted.
• Since the first question is negative, the second question is not applicable.