2013 (9) TMI 644 - AT - Income Tax

TDS u/s 194C - Works contract or contract for sale - Assessee has entered into two separate contracts for procurement and installation of plant and equipments required for commissioning 1000MW SSTPP Stage-II - First contract is entered up to the stage of making the plant and equipment ready at the site of the manufacturer and the second contract is entered in connection with the transportation from manufacturer's place, installation and commissioning, conducting performance and guarantee tests and handing over of all the equipments - Second contract was treated as Contract of Work and accordingly deducted at source u/s 194C of the Act - First contract was treated by the assessee as a Contract for sale and hence it did not deduct tax at source u/s 194C of the Act Held that - Reliance has been placed upon the ratio laid down by Hon'ble Supreme Court in the case of State of Andhra Pradesh v. Kone Elevators (India) Ltd. 2005 (2) TMI 519 - SUPREME COURT OF INDIA , wherein it has been held that the issue is as to the time and situs of passing of the property and as to whether the property passes brick by brick on the theory of accretion or as a chattel qua chattel- If the erection portion cannot be taken as the main object of these contracts, title in goods was transferred as movables prior to erection. The erection portion being subsequent to passing of title by execution of the supply portion, it cannot be said that the erection portion controls the supply portion, though the fulfillment of the conditions of the erection contract has a bearing on the fulfillment of the condition of supply portion of the contract, and though in some cases both the contracts are in the same document. The scope and object of each part of the contract is different - Though the supply portion and erection portion dovetail into each other, the erection portion does not control the supply portion and the supply contract does not become a works contract, just because there is an obligation cast on the supplier to erect the equipment which by that time has become the property of the purchaser. In view of the foregoing discussions, Supply Contract entered into by the assessee is in the nature of Contract of sale and hence the provisions of sec. 194C shall not apply to it, in the present case Appeal allowed Decided in favor of Assessee.

Summary

Issues Involved:
1. Whether the machinery purchased by the assessee falls under the category of "Contract for works and labour" or "Contract for sale".
2. Whether the assessee is liable to deduct tax at source under section 194C of the Income Tax Act on payments made for the machinery.
3. Whether the assessee can be treated as "an assessee in default" under section 201 of the Income Tax Act for failing to deduct tax at source.

Detailed Analysis:

Issue 1: Classification of the Contract
The primary issue is whether the machinery purchased by the assessee falls under "Contract for works and labour" or "Contract for sale". The Assessing Officer and CIT(A) held that the contracts for supply and installation of machinery are composite and inseparable, thus falling under "Contract for works and labour". The CIT(A) referred to various clauses in the "Instruction to Bidders" to support this conclusion, emphasizing that the contract was awarded for a complete package of work, including design, engineering, manufacturing, and installation. The CIT(A) also noted that the machinery supplied was custom-made and could not be sold in the open market, thus constituting a works contract.

However, the Tribunal disagreed, noting that the machinery was designed, manufactured, and tested at the supplier's site before being dispatched to the assessee. The Tribunal emphasized that the ownership of the machinery passed to the assessee upon shipment, indicating that the supply contract was a "Contract for sale". The Tribunal cited the decision in the case of Power Grid Corpn. of India Ltd. v. ACIT, where it was held that the supply portion of a contract, even if it involves custom specifications, remains a contract for sale if the property in the goods passes to the purchaser upon delivery.

Issue 2: Tax Deduction at Source under Section 194C
The next issue is whether the assessee was required to deduct tax at source under section 194C on payments made for the supply of machinery. The CIT(A) held that since the contract was a composite contract for works, tax should have been deducted under section 194C. The Tribunal, however, concluded that the supply contract was a "Contract for sale", and therefore, the provisions of section 194C did not apply. The Tribunal noted that the machinery was supplied as a complete unit, tested and ready for installation, and the property in the machinery passed to the assessee upon shipment.

Issue 3: Assessee in Default under Section 201
The final issue is whether the assessee can be treated as "an assessee in default" under section 201 for failing to deduct tax at source. The Assessing Officer treated the assessee as in default and raised demands under sections 201(1) and 201(1A). The Tribunal, however, set aside these orders, concluding that since the supply contract was a "Contract for sale", the assessee was not liable to deduct tax under section 194C. Consequently, the assessee could not be treated as in default under section 201.

Conclusion
The Tribunal concluded that the supply contract was a "Contract for sale" and not a "Contract for works and labour". Therefore, the assessee was not liable to deduct tax at source under section 194C on payments made for the supply of machinery. Consequently, the assessee could not be treated as in default under section 201. The Tribunal set aside the orders of the CIT(A) and the Assessing Officer, directing the deletion of the demands raised under sections 201(1) and 201(1A). All appeals filed by the assessee were allowed.