2006 (7) TMI 262 - AT - Income Tax

TDS - Applicability of section 194C - payments made to contractors who were given separate contracts for supply as well as for erection - activity of transmission and power distribution of electricity - whether the contracts in question are contracts of sale or they are work contracts - HELD THAT - The contracts were not only to supply equipment, but also by way of separate contract to erect the transmission towers and also the sub-stations. The contract, though contained in the same document in some cases are in two parts. Simply because the supply and erection parts of the contract were entered into with the same party in some cases and in some other cases, were in two separate parts in the same agreement the nature of each part of the contract will not alter. In this connection we may refer to the decision in the case of Walchandnagar Industries 1984 (11) TMI 304 - BOMBAY HIGH COURT in which the Hon'ble High Court referred to the judgment of the Hon'ble Supreme Court in the case of Gannon Dunkerley Co. 1958 (4) TMI 42 - SUPREME COURT wherein it was held that the parties may enter into two contracts, one for the sale of goods and one for services. Even when such contracts are in one document they can be separate, for more so when they are in two separate documents. 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. The title in the goods in respect of equipment/material to be supplied as per the terms of contract is to be transferred ex-work on dispatch as movable property. The critical test to be applied is as to when the title in the goods is transferred. Thus as the title in the goods were passed on to the assessee, before the commencement of the works or erection contract and as admitted by the assessee had treated these goods as its property and entered the same as such in its stock register before issuing the same for erection, it is a contract of sale and section 194C has no application. On erection portion as admitted TDS is made. A plain reading of the section 194C along with CBDT Circular and applying the same to the facts of this case, where we find that the supplier does not work or process the material supplied by the purchaser and that the 'seller' supplied goods the title in which passed on to the purchaser/assessee, as a chattel, on delivery ex-work dispatch and as the assessee has already deducted tax at source from the erection portion of the contract treating it as a separate contract, we have to hold that section 194C is not applicable to the supply contract in question. In the result, the appeal of the assessee is allowed.

Issues Involved:
1. Whether the supply of materials constituted a works contract or a sale contract.
2. Applicability of Board Circular No. 681, dated 8-3-1994.
3. Whether the independent supply order should attract TDS under section 194C of the Income-tax Act, 1961.

Issue 1: Whether the supply of materials constituted a works contract or a sale contract.
The assessee, a Central Government undertaking involved in power transmission and distribution, had awarded contracts for supply and erection of transmission lines and substations. The contracts included Pure Supply Contracts, Pure Erection Contracts, and Supply-cum-Erection Contracts. The Assessing Officer classified these as works contracts, arguing that the supply involved design and manufacture, making it a works contract rather than a sale. The Commissioner of Income-tax (Appeals) upheld this view, stating that the transactions were not direct purchases from the market but were for future execution of specified contracts, thus constituting works contracts.

Issue 2: Applicability of Board Circular No. 681, dated 8-3-1994.
The assessee contended that the Board Circular No. 681, which clarifies that section 194C does not cover contracts for the sale of goods, was not applied correctly. The Commissioner (Appeals) relied on Circular No. 715, which deals with contracts involving work, such as advertising, broadcasting, and catering, and argued that the contracts in question were composite and indivisible, thus falling under section 194C.

Issue 3: Whether the independent supply order should attract TDS under section 194C of the Income-tax Act, 1961.
The assessee argued that the supply contracts were distinct and did not attract TDS under section 194C, as they were contracts for the sale of goods. The Tribunal examined the nature of the contracts, the intention of the parties, and the transfer of property in goods. It was found that the contracts involved the supply of goods as chattels, with the title passing on delivery ex-works, thus constituting sale contracts. The Tribunal concluded that section 194C was not applicable to these supply contracts, and the assessee's appeal was allowed.

Detailed Analysis:

1. Nature of Contracts:
The Tribunal analyzed the nature of the contracts, distinguishing between supply and erection contracts. It noted that the supply contracts involved the delivery of goods as chattels, with the title passing on ex-works dispatch, indicating a sale contract. The erection contracts, where the assessee had deducted TDS, were treated separately and did not affect the classification of supply contracts.

2. Application of Circulars:
The Tribunal considered the applicability of Board Circulars No. 681 and No. 715. It emphasized that Circular No. 681 clarified that contracts for the sale of goods are outside the purview of section 194C. The Tribunal found that the contracts in question were for the supply of goods, with the property passing as chattels, and thus Circular No. 681 was applicable.

3. Judicial Precedents:
The Tribunal referred to various judicial precedents, including the Supreme Court's decisions in Hindustan Shipyard and Kane Elevators, which provided guidelines for distinguishing between contracts for sale and works contracts. It concluded that the contracts in question were sale contracts, as the property in goods passed as chattels, and the work involved was incidental to the supply.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the supply contracts were contracts for the sale of goods and did not attract TDS under section 194C. The Tribunal emphasized the importance of the intention of the parties, the transfer of property in goods, and the nature of the contracts in determining the applicability of section 194C.

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