2022 (7) TMI 336 - HC - Income Tax

TDS u/s 194C OR 194J - assessee entered into a Contract with a consortium - Whether contract can be segregated to attract TDS? - Whether the Tribunal was correct in holding that the contract as supply contract while the services rendered such as design and testing, are covered by explanation 2 to Sec.9(1)(vii) of the Income-Tax Act? - Tribunal held that the contract as composite contract and no segregation possible - HELD THAT - A careful perusal of the explanation shows that fee for Technical services does not include construction, assembly and mining operation etc. In the instant case, the Contract is one for designing, manufacturing, supply, testing, commissioning of passenger rolling stock and training Personnel. The total Contract is for Rs.1,672.50 Crores whereas, the training component is about Rs.19 Crores. Though the consortium consists of different Companies, BEML Ltd., is the consortium leader. To a query made by the Court with regard to payment made, Shri. Chaitanya, on instructions from the BMRCL Officer present in the Court, submitted that all cheques have been issued in favour of BEML Ltd. As the specific case of the Revenue before the ITAT is that the Contract is a composite one. Shri.Chaitanya is right in his submission that the dominant purpose of the Contract is supply of the passenger rolling stock. Thus, having taken a specific stand before the ITAT that the Contracts is a composite one, the Revenue cannot be permitted to take a contradictory stand before this Court The total project cost is Rs.1672.50 Crores out of which, the service part in the form of training accounts for about Rs.19 Crores. Thus, the dominant purpose is supply of Rolling Stock. Thus the questions raised by the Revenue are not substantial questions for consideration for more than one reason. Firstly because, the Revenue has taken a specific stand before the ITAT that the Contract is a composite Contract. Secondly because, the dominant purpose of the Contract is for supply of Rolling Stocks and the cost towards service component is almost negligible. Thirdly because, the word assembly must include the manufacture/assembly of the Rolling Stocks by BEML Ltd., being the Consortium leader. Fourthly because, the entire payment has been made in favour of BEML Ltd. Fifthly because, Revenue has not raised any objection with regard to payment of 90% of the Project costs, so far as deduction under Section 194J is concerned. Thus questions No.1 and 2 are answered in the affirmative in favour of the assessee. Question No.3 is whether the work taken up is ancilliary to supply of Rolling Stock or a part of it is rendering professional and technical services. For the reasons recorded herein above, we are of the view that the work taken up is ancilliary to supply of Rolling Stock and does not amount to professional or technical service.

Summary

Issues Involved:
1. Classification of the contract as a supply contract or a composite contract involving technical services.
2. Segregation of the contract components for the purpose of Tax Deducted at Source (TDS).
3. Determination of whether the work performed is ancillary to the supply of rolling stock or constitutes professional and technical services.

Issue-wise Detailed Analysis:

1. Classification of the Contract:
The primary issue was whether the contract between Bangalore Metro Rail Corporation Ltd. (BMRCL) and the consortium led by BEML Ltd. was a supply contract or a composite contract involving technical services. The Revenue argued that the contract included design, manufacture, supply, testing, commissioning of passenger rolling stock, and training of personnel, thereby constituting technical services under Section 194J(1)(b) of the Income-Tax Act. Conversely, the assessee contended that the contract was predominantly for the supply of coaches, with other activities being incidental, thus constituting a sale of goods.

2. Segregation of Contract Components:
The Revenue contended that the contract should be segregated into supply and technical services components, with TDS applicable to the technical services portion. The ITAT, however, held that the contract was a composite one and could not be segregated. The court noted that both the assessee and the Revenue had consistently treated the contract as a composite one, and the Revenue could not change its stance at this stage. The ITAT observed that the dominant purpose of the contract was the supply of rolling stock, with the service component being minimal.

3. Ancillary Work vs. Professional and Technical Services:
The court examined whether the work performed was ancillary to the supply of rolling stock or constituted professional and technical services. The Revenue argued that the contract included technical services, while the assessee maintained that the services were incidental to the supply of rolling stock. The court noted that the total contract value was Rs.1672.50 crores, with the training component being only Rs.19 crores. The court concluded that the dominant purpose of the contract was the supply of rolling stock, and the services provided were ancillary and did not amount to professional or technical services.

Conclusion:
The court dismissed the Revenue's appeal, holding that:
1. The contract was a composite one, primarily for the supply of rolling stock, with incidental services.
2. The Revenue's attempt to segregate the contract for TDS purposes was not tenable.
3. The work performed was ancillary to the supply of rolling stock and did not constitute professional or technical services.

The questions raised by the Revenue were answered in favor of the assessee, affirming that the contract was a composite supply contract with ancillary services.