2011 (3) TMI 598 - AT - Income Tax

Assessee in default - TDS u/s 194C - Composite contract (indivisible contract) or separate contract - Held that - when parties enter into two separate contracts, one for material and one for labour, the transaction would not be one and indivisible, but would fall into two separate agreements, one of work or service and the other of sale. In such case, as rightly highlighted by the assessee, the provisions of section 194C could apply only to the labour contract and not to the materials contract - when the assessee was not required to deduct tax towards the payment on supply portion, there was no question whatsoever in charging interest under section 201(1A) of the Act - Decided in favor of the assessee

Issues Involved:
1. Justification of treating the assessee as 'assessee in default' under section 201(1) of the Act.
2. Obligation of the assessee to deduct TDS under section 194C of the Act.
3. Applicability of section 201(1A) of the Act for levying interest on tax.
4. Nature of the contract between the assessee and the contractor - 'contract for supply' or 'contract of work'.
5. Whether the contract should be treated as a composite contract or separate contracts.
6. Alleged collusion between the assessee and contractors for tax evasion.
7. Obligation of the assessee when the recipient has paid tax on the income.
8. Treatment of reimbursement and payments towards survey work and testing charges.

Detailed Analysis:

1. Justification of treating the assessee as 'assessee in default' under section 201(1) of the Act:
The Tribunal found that the assessee, a State Government Public Sector Company, was not justified in being treated as 'assessee in default' under section 201(1) of the Act. The assessee had entered into separate agreements for supply of materials, erection work, and civil work. It was noted that while the assessee deducted TDS for civil and erection works, it did not do so for the supply of materials. The Tribunal concluded that the contract for the supply of materials was distinct and not subject to TDS under section 194C.

2. Obligation of the assessee to deduct TDS under section 194C of the Act:
The Tribunal examined the applicability of section 194C and concluded that the term 'work' as defined in the section does not include the supply of goods or materials. The Tribunal referred to various judicial pronouncements, including the Supreme Court's ruling in Birla Cements Works v. CBDT, which defined 'work' as activities involving human intervention. The Tribunal concluded that the supply of materials did not involve human intervention and thus did not fall under the purview of section 194C.

3. Applicability of section 201(1A) of the Act for levying interest on tax:
Since the Tribunal concluded that the assessee was not obligated to deduct tax on the supply portion, it held that there was no question of charging interest under section 201(1A) of the Act. The Tribunal emphasized that when there is no obligation to deduct tax, the provisions of section 201(1A) do not apply.

4. Nature of the contract between the assessee and the contractor - 'contract for supply' or 'contract of work':
The Tribunal analyzed the nature of the contract and concluded that the contract was primarily for the supply of materials and not for work. It referred to the Supreme Court's ruling in State of Himachal Pradesh v. Associated Hotels of India Ltd., which distinguished between contracts for sale and contracts for work and labor. The Tribunal found that the primary object of the contract was the transfer of property in goods, making it a contract for supply.

5. Whether the contract should be treated as a composite contract or separate contracts:
The Tribunal found that the contracts for supply, erection, and civil work were separate and distinct. It referred to the 'Instruction to Bidders' issued by the assessee, which clearly stated that the contract would be divided into three separate contracts. The Tribunal concluded that the contracts should not be treated as a composite contract merely because they were awarded through a single bidding process.

6. Alleged collusion between the assessee and contractors for tax evasion:
The Tribunal dismissed the Revenue's allegation of collusion between the assessee and contractors for tax evasion. It found no documentary evidence to support the claim and noted that the assessee, being a State Government Public Sector Company, had no motive to evade taxes. The Tribunal referred to the Bombay High Court's ruling in CIT v. West Coast Paper Mills Ltd., which held that when the other party is a statutory body, the question of evasion of tax does not arise.

7. Obligation of the assessee when the recipient has paid tax on the income:
The Tribunal referred to section 191 of the Act, which states that if the recipient has paid tax on the income, the deductor cannot be treated as an 'assessee in default'. The Tribunal cited the Supreme Court's ruling in Hindustan Coca Cola Beverages (P.) Ltd. v. CIT, which held that no demand should be enforced if the deductee has paid the taxes. The Tribunal concluded that since the contractors had paid taxes on the amounts received, the assessee was not obligated to deduct tax.

8. Treatment of reimbursement and payments towards survey work and testing charges:
The Tribunal found that reimbursements to contractors for compensation for cutting trees or loss of crops did not fall within the purview of section 194C. It also held that payments made towards survey work and testing charges did not fall under section 194C or 194J, as these were not considered fees for professional or technical services.

Conclusion:
The Tribunal allowed the assessee's appeals for the assessment years 2007-08, 2008-09, and 2009-2010, concluding that the assessee was not obligated to deduct tax on the supply portion of the contracts and thus could not be treated as an 'assessee in default' under section 201(1) of the Act. Consequently, the interest charged under section 201(1A) was also not applicable.

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