The Income Tax Appellate Tribunal (ITAT) at Cochin has ruled in favour of Kerala-based Brilliant Study Centre Pvt. Ltd., setting aside a Rs 9.48 lakh tax demand. It ruled that contractual teachers cannot be classified as employees solely because they follow attendance rules, fixed working hours and leave procedures.
The tribunal stated that such administrative requirements do not automatically create an employer-employee relationship.
What led to the dispute?
The matter stemmed from a TDS survey conducted in December 2023 under Section 133A of the Income Tax Act to verify compliance with tax deduction at source provisions. During the inspection, the Income Tax Department took the view that the institute should have deducted tax under Section 192, which applies to salaries, instead of Section 194J, meant for payments to professionals.
According to the department, the teachers' fixed work schedule, attendance records, leave approval process, annual increments and restrictions on teaching at competing institutes reflected an employment relationship. Based on this assessment, the institute was declared an assessee in default under Sections 201(1) and 201(1A), leading to a tax demand of nearly Rs 9.48 lakh. The Commissioner (Appeals) later upheld this finding.
Why did ITAT disagree?
In its June 16 order, the tribunal said the key test is not whether an organisation exercises administrative supervision, but whether it controls the manner in which professionals perform their work.
It pointed out that the faculty members had the freedom to decide how they conducted their classes, as long as they followed the prescribed syllabus. The tribunal also noted the absence of appointment letters, employment contracts and statutory benefits such as provident fund, gratuity, ESI and leave encashment, indicating that the teachers were engaged as independent professionals rather than employees.
Tribunal cites inconsistent tax treatment
The way the Income Tax Department handled the teachers' salaries was another factor that favoured the institute. The tribunal observed that the department had accepted their income tax returns, where the receipts were declared as professional income under Section 44ADA. It said the same payments could not be treated as professional income for the recipients while simultaneously being classified as salary for the payer.
The tribunal concluded that administrative rules by themselves do not turn professionals into employees, citing prior court decisions. The Rs 9.48 lakh demand made under Sections 201(1) and 201(1A) was dismissed when it was determined that the coaching institute had legally deducted TDS under Section 194J.
"The regulations, restrictions, guidelines and control exercised in regard to logistical and administrative functions of the workforce are not unique to a reduction organisation, and it is difficult to identify any establishment that does not exercise some degree of control over the administrative and logistical functioning of the workforce, be they salaried or otherwise called as a consultant,” the tribunal said, as per Live Law.
What is the difference between TDS under Sections 194J and 192?
Under Section 194J of the Income Tax Act, tax is deducted on payments made to resident professionals and consultants for services such as professional or technical work and certain other specified payments. TDS is generally deducted at 10% on professional fees, subject to the prescribed annual threshold of Rs 50,000.
In contrast, Section 192 applies to salary payments made by an employer to an employee. Unlike Section 194J, it does not prescribe a fixed TDS rate. Instead, tax is deducted based on the employee's estimated annual taxable income and the applicable income tax slab rates.
Since the ITAT concluded that the teachers were engaged as independent professionals, it held that the coaching institute had correctly deducted TDS under Section 194J.
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