2019 (12) TMI 1184 - AT - Income Tax

TDS u/s 194C - composite / turnkey contract including supply of labour and services with supply of material - Non-deduction of TDS on supply of materials treating the assessee as assessee-in-default as per Section 201(1)/201(1A) - HELD THAT - Award of separate contracts shall not in any way dilute the responsibility for successful competition of the facilities achieving the guaranteed performance of the erection/installation proper O M of the erection/installation after final acceptance by the corporation etc as per the tender specification and a breach in one contract shall automatically be construed as a breach of the other contracts which will confer a right on the corporation to terminate other contracts also at the risk and the cost of the supplier. Regarding the closure of projects the contract mentioned the following clause. Closure proposal will be prepared by the contractor after completion of the project or as per decision of NBPDCL for closure of the project. The details of supplied materials and works executed as per the contract will be prepared by the contractors and reconciled with the engineer to his satisfaction. Therefore the CIT(A) observed that the two contracts are of the nature of a composite package and that they are inseparable. Both contracts serve the purpose of rendering one single service. The scope of the contract includes design engineering manufacture type testing and training of power grid personnel and supply of goods. Further as per the conditions of the supply of contract the contract price is inclusive of all customs duties levies excise duty sales-tax and other duties payable on equipments components sub-assemblies and raw materials or any other items used and it is clearly mentioned that no separate claim on these duties will be entertained by the contractee. These are essential elements of a composite contract and therefore the CIT(A) held that the two contracts of supply and erection shall be taken as composite contract. As relying on M/S SAHARA INDIA COMMERCIAL CORPN. LTD. ALIGANJ LUCKNOW 2017 (1) TMI 1681 - ALLAHABAD HIGH COURT we remit the issue to the file of AO for verification and adjudication of the issue after affording an opportunity of being heard to the assessee as per the observations made by the Hon ble High Court supra. If it is found that in the return of income filed for these years by the deductee it has included the impugned amount in its receipts and there is loss as per return no demand can be raised u/s 201(1A) of the Act on the present assessees. In case of found otherwise the charge of interest u/s.201(1A) is liable to be paid by the appellant/assessees.

Summary

Issues Involved:
1. Validity of the CIT(A) and AO's orders.
2. Composite nature of contracts and TDS applicability.
3. Opportunity for defense and principles of natural justice.
4. Deduction of TDS on supply of materials.
5. Interest liability under Section 201(1A) of the I.T. Act.

Issue-wise Detailed Analysis:

1. Validity of the CIT(A) and AO's Orders:
The assessee argued that the orders of the AO and CIT(A) were "bad both in law and on facts," based on "presumption, surmises and conjectures," and violated principles of natural justice due to lack of adequate opportunity for defense. The Tribunal noted that the CIT(A) considered all submissions and facts before holding that the contracts were composite in nature, thus requiring TDS deduction.

2. Composite Nature of Contracts and TDS Applicability:
The core issue was whether the contracts for supply of materials and erection services were separate or composite. The AO and CIT(A) held that the contracts were composite, requiring TDS under Section 194C. The Tribunal agreed, noting the interlinking nature of the contracts, where the supply of materials was closely associated with erection work, making them inseparable. The CIT(A) emphasized that the contracts served the purpose of rendering one single service, and the supply of materials was specific and customized for the assessee, having no use elsewhere.

3. Opportunity for Defense and Principles of Natural Justice:
The assessee contended that no adequate opportunity was provided to furnish its defense during assessment proceedings. However, the Tribunal found that the CIT(A) had carefully considered all submissions and facts, indicating that due process was followed.

4. Deduction of TDS on Supply of Materials:
The assessee argued that separate contracts for supply and erection did not require TDS on the supply portion, citing Section 194C and relevant CBDT Circulars. The AO and CIT(A) disagreed, stating that the contracts were composite, and TDS was applicable on the entire payment. The Tribunal upheld this view, noting that the supply of materials was integral to the composite contract.

5. Interest Liability under Section 201(1A) of the I.T. Act:
The CIT(A) held that the assessee was liable to pay interest under Section 201(1A) for non-deduction of TDS. The assessee argued that if the deductee had incurred losses and filed returns, no TDS was required. The Tribunal referred to the Hon'ble Allahabad High Court's decision in M/s Sahara India Commercial Corporation Ltd., which stated that if the deductee filed returns declaring losses, no interest could be charged under Section 201(1A). The Tribunal remitted the issue to the AO for verification, holding that if the deductee included the impugned amount in its receipts and filed returns declaring losses, no demand could be raised under Section 201(1A).

Conclusion:
The Tribunal upheld the composite nature of the contracts, requiring TDS deduction on the entire payment. It remitted the issue of interest liability to the AO for verification, based on the deductee's tax filings. The appeals were allowed for statistical purposes, with directions for further verification by the AO.