No disallowance can be made u/s 40(a)(ia) for non-deduction of tax at source u/s 194C unless there exists relationship in the capacity of Contractor and Sub-contractor:

Assessee, an Individual, was awarded a sub-contract by “M/s. ANS Construction Ltd.” (“ANS” for short) w.r.t. construction of peripheral and approach roads.To carry out such work, assessee had to purchase construction materials and for transportation of the same at the given site, he had availed the services of other transporters to whom certain payments were made under the head “Transport charges”. AO disallowed the said transport charges u/s 40(a)(ia) on account of non-deduction of tax at source u/s 194C. The Hon’ble High Court observed that w.r.t. 194C(2), “Nature” of contract between assessee and transporters was such that the same cannot be considered as a relationship between a Contractor and Sub-contractor. None of the responsibilities of the Contractor vis-à-vis the execution of work were fastened on the transporters, assessee had indemnified ANS against any contractual legal or financial liability if so arises in future assessee was solely responsible for execution of work andno part of such liability was fastened on the transporters.Assessee had only availed of the services of such transporters for carrying out the materials to the site. Hence, it was held that ITAT was right in concluding that it was not a case of relationship between the assessee contractor and transporters in the capacity of sub-contractors.

[PRASHANT S. SHAH - TAX APPEAL NO.1591 of 2011 - GHC]