2006 (4) TMI 194 - AT - Income Tax

Composite Contract Or Separate Contracts - Assessee-in-default - demand for short deduction of tax at source u/s 201(1) - charging interest on tax - HELD THAT - We find that the primary object of the appellant was to purchase the plant in question and the civil work, erection and commissioning was only incidental to purchase the material by the appellant. We are, therefore, of the view that the Revenue authorities were not justified in considering the gross payments made by the appellant to BHEL for the purpose of determining the TDS by the appellant. In the present case, the supply of the power generator was an independent transaction and its erection was only ancillary or incidental to the purchase of the power generator. We are also of the view that in each case the terms of the contract need to be analyzed before coming to the conclusion whether it was a composite contract or not. As already stated, the contract, insofar as it relates to supply of the material, freight insurance and supply of spare parts, is clearly separable from the other part of the contract relating to carrying out civil work, commissioning and erection of the power generators. Thus, we direct the AO to work out the short deduction of tax at source, if any, by excluding the payments towards supply of machinery, spare parts as well as freight and insurance. We are of the view that the documents on record do not establish the case pleaded by the appellant. We, however, deem it fit and proper to direct the AO to verify this aspect and in case it is found that the contractor has offered the sums received from the appellant to tax then in that event the appellant should not be proceeded against as an appellant in default u/s 201 of the Act, as laid down in the case of Rishikesh Apartments Co-operative Housing Society Ltd. 2001 (6) TMI 17 - GUJARAT HIGH COURT . We are of the view that the other grounds of appeal raised by the appellant do not require any consideration in view of our decision on the main contentions of the appellant. In the result, the appeal is allowed for statistical purposes.

Issues Involved:
1. Creation of demand for short deduction of tax at source under Section 201(1) of the IT Act.
2. Charging of interest on tax short deducted under Section 201(1A) of the IT Act.
3. Determination of whether the contract between the appellant and BHEL was composite or divisible.
4. Verification of tax payment by the contractor (BHEL) and its impact on the appellant being treated as an assessee-in-default.

Issue-wise Detailed Analysis:

1. Creation of demand for short deduction of tax at source under Section 201(1) of the IT Act:
The appellant challenged the action of the Revenue authorities in creating a demand for short deduction of tax at source under Section 201(1) of the IT Act. The AO considered the contract between the appellant and BHEL as a composite contract and held that TDS should have been deducted on the entire sum, including payments for supply of materials. The appellant contended that the contract was divisible, and TDS was only required for the civil work, erection, designing, and commissioning, not for the supply of materials.

2. Charging of interest on tax short deducted under Section 201(1A) of the IT Act:
The AO also charged interest on the tax short deducted in terms of Section 201(1A) of the IT Act. The appellant disputed this, arguing that the contract was divisible and not composite, thus affecting the calculation of TDS and the subsequent interest charged.

3. Determination of whether the contract between the appellant and BHEL was composite or divisible:
The Tribunal analyzed the terms of the contract, noting that the primary intention was to purchase materials (two ESPs) and that civil work and commissioning were incidental. The Tribunal referenced the Supreme Court's decision in State of Himachal Pradesh & Ors. vs. Associated Hotels of India Ltd., emphasizing the need to determine the primary object of the contract. The Tribunal concluded that the contract was divisible, with separable parts for supply of materials and for civil work, commissioning, and erection.

4. Verification of tax payment by the contractor (BHEL) and its impact on the appellant being treated as an assessee-in-default:
The appellant claimed that BHEL had already paid tax on the amounts received, thus they should not be treated as an assessee-in-default under Section 201 of the Act. The Tribunal directed the AO to verify if BHEL had offered the sums to tax. If verified, the appellant should not be treated as an assessee-in-default, as per the Gujarat High Court's decision in CIT vs. Rishikesh Apartments Co-operative Housing Society Ltd.

Conclusion:
The Tribunal directed the AO to exclude payments towards supply of machinery, spare parts, and freight and insurance while calculating the short deduction of tax at source. The AO was also instructed to verify if BHEL had paid tax on the amounts received from the appellant. If confirmed, the appellant should not be treated as an assessee-in-default. The appeal was allowed for statistical purposes.

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