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2013 (4) TMI 635 - HC - Income TaxTDS u/s 194C - assessee in default u/s 201(1) - separate contracts or composite contract - three separate contracts viz., one for Supply of Indian sourced equipments and materials; second for labour-cum-erection; and third for construction of refinery. As it was emphasized by the Department that this amounts to only one contract which was signed on 7th November 1994, deduction of amount equal to 2% of such sum as Income-tax on income comprising therein was a must whenever the person responsible for paying any sum to any contractor for carrying out any work in pursuance to a contract.Department issued a SCN as why the assessee-company should not be treated as a defaulter for recovery of dues towards TDS amount. Held that - appellant had originally entered into a single agreement dated 7.11.1994 for construction of refinery plant. The assessee had thereafter, made amendments to the original agreement and created three separate contracts for supply of (i) Indian sourced equipment and material, (ii) labour-cum-erection and (iii) construction. These amendments were made later on i.e. on 25.3.1997. In the subsequent agreements, the original agreement was mentioned at various places. - the covenants of the agreement led both the authorities to conclude that essentially it was only the main contract for construction of refinery and not three separate contracts. There is no reason to hold otherwise than what has been concluded by these authorities consecutively. - Decided against the assessee.
Issues Involved:
1. Liability of the appellant under Section 201(1) read with Section 194C of the Income Tax Act, 1961. 2. Nature of the contracts - whether they were composite or separate. 3. Applicability of TDS (Tax Deducted at Source) provisions under Section 194C. 4. Validity and retrospective effect of the certificate issued under Section 197(1). Detailed Analysis: 1. Liability of the appellant under Section 201(1) read with Section 194C of the Income Tax Act, 1961: The appellant challenged the order of the Income Tax Appellate Tribunal, which held the appellant liable as a defaulter for not deducting TDS on payments made to Essar Projects Limited. The court examined whether the appellant was liable to pay Rs. 77,78,973 as a defaulter under Section 201(1) read with Section 194C. The Tribunal had concurred with the findings of the CIT(A), concluding that the contracts were composite and thus required TDS deduction. 2. Nature of the contracts - whether they were composite or separate: The appellant entered into three agreements with Essar Projects Limited for setting up an oil refinery, categorized as: - Supply of Indian sourced equipment and materials. - Labour-cum-erection. - Construction of the refinery. The Tribunal and CIT(A) held that these were not separate contracts but rather a single composite contract for the construction of the refinery. The court relied on the judgment of the Apex Court in State of Himachal Pradesh v. Associated Hotels of India Ltd., which emphasized that the primary objective of the contract should be considered to determine if it is divisible or indivisible. The court concluded that the primary objective was the construction of the refinery, making it a composite contract. 3. Applicability of TDS provisions under Section 194C: Section 194C mandates that any person responsible for paying any sum to a contractor for carrying out any work must deduct TDS. The court noted that the term "any work" includes the supply of labour and materials necessary for the contract. The Tribunal held that even if there were three separate contracts, TDS was still applicable as the contracts were for work and labour, not just the sale of materials. The court supported this view, stating that the provisions of Section 194C applied to the entire payment made for the construction of the refinery. 4. Validity and retrospective effect of the certificate issued under Section 197(1): The appellant argued that a certificate issued under Section 197(1) on 9th September 1997 should apply retrospectively from 1st April 1997. The Tribunal and CIT(A) rejected this argument, stating that the certificate could not have retrospective effect. The court upheld this view, referencing Circular No. 777, which clarified that such certificates do not apply retrospectively. The court also noted that the appellant's belief based on earlier years' experience did not exempt them from the statutory requirement of TDS deduction. Conclusion: The court concluded that the contracts were composite, making TDS applicable under Section 194C. The certificate issued under Section 197(1) could not be applied retrospectively. The appellant was held liable as a defaulter for not deducting TDS, and the appeal was dismissed in favor of the revenue. The court emphasized that the primary objective of the contracts was the construction of the refinery, thus necessitating TDS deduction on the entire payment made to the contractor.
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