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TMI Blog2006 (7) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith separate agreements in respect of supply portion) The contracts entered into with the respective contractors are identical and the scope of various contracts consisted of supply of conductor, insulators, towers and sub-stations and the erection part is incidental. The main features of various contracts are as under: 1. SUPPLY CONTRACT AWARD AND SCOPE: The contract inter alia includes design, manufacture, testing at works and supply of-kms. of-Conductor on F.O.R. destination delivery at site basis for 400 kv D/C Nellore Sriperumbudur Transmission Line..... . The letter of award is subject to the terms and conditions detailed hereunder: (i) The work under this letter of Award shall be performed strictly in accordance with the relevant terms and conditions of the Bidding Documents referred to in Clause 1 above and specific confirmation and deviations agreed in Minutes of post bid discussions referred to at para 1.0 except as specifically amended/modified in this Letter of Award. All other deviations and/or additional conditions, implicit or explicit, contained in your proposal referred to above and your subsequent communications, if any, stand with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , either while procuring any equipment, components, sub-assemblies, raw materials and any other items used for your consumption or dispatched directly to Powergrid from your sub-supplier's works or godown to the site are included in the Contract price and no claim on this behalf shall be entertained by the Powergrid. For transactions between you and Powergrid, Powergrid shall pay Excise Duty applicable on the scheduled date of dispatch or actual date of dispatch, whichever is lower, further no sale tax or other levies shall be payable by Powergrid for the supplies to be made under the subject packages. For payment/reimbursement of excise duty, in respect of dispatches made directly from your works, per-numbered invoices duly signed by authorized signatory will be considered as evidence for payment of excise duty. Powergrid shall be entitled to deduct income-tax and other taxes at source in accordance with the provisions of Income-tax Act/other taxation laws as applicable from time to time. Necessary TDS Certificate shall be issued by Powergrid. 2. ERECTION CONTRACT 2.0 Award of Contract and its Scope: 2.1 We are pleased to award you a detailed Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary TDS Certificate shall be issued by Powergrid. 3. CONTRACT FOR ERECTION EXECUTED BY A SUPPLY-CUM-ERECTION CONTRACTOR 2.1.......The scope of work covered under the Contract, inter alia, includes the following as detailed in the Bidding Documents: (i) Preliminary survey, details survey, profiling, tower spotting/optimisation of tower locations, soil resistivity measurements, geo-technical investigation and check-survey. (ii) Selecting type of foundation for different types of towers and casting of foundation for tower footings as per Powergrid's foundation design. (iii) Protection of tower footings; (iv) Performance of all activities at site including inland transportation to final destination and insurance, taking delivery of equipment/material (to be supplied by you under 'Supply contract' as well as Owner supplied material), unloading, transportation to site, handling, storage; (v) Erection of towers, tack welding of bolts and nuts including supply and application of zinc rich primer enamel paint, span market, painting towers for aviation requirements, tower earthing, fixing of insulator strings, stringing of conductor and ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mages under that Contract shall give us a right to terminate this Contract and/or recover damages under this Contract as well. However, such breach or occurrence in the 'Supply Contract' shall not automatically relieve you of any of your obligations under this Contract. It is expressly understood and agreed by you that the equipment/material supplied by you under 'Supply Contract', when transported to site and erected commissioned under this Contract shall give satisfactory performance in accordance with the Bidding Documents. (iii) The Erection Insurance shall be taken by you as per the relevant provisions of Clause 38, section - GCC and Clause 28, section - ECC, Conditions of Contract, Vol.-I of the Bidding Documents. (iv) For the equipment/material to be supplied by you under the 'Supply Contract', it will be your responsibility to take delivery, unload and store the same at site and execute an indemnity Bond as per proforma specified of Annexure-VII, Section - Annex., Conditions of Contract, Vol.-I of the Bidding Documents in favour of Powergrid against loss, damage and any risk involved for the full value of the equipment/material. This Inde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above but required as per BPS. The list of materials to be supplied by you is given at Annexure-II enclosed. 2.2 The scope of work under this Letter of Award (LOA) shall also include all such items which are not specifically mentioned in the bidding documents and/or your bid but are necessary for the successful erection, testing and commissioning of line covered under Letter of Award No......dated.....for Erection Portion unless otherwise specifically excluded in the bidding documents or this Letter of Award. 2.3 This Letter of Award is subject to the terms and conditions detailed hereunder: (i) The work under this Letter of Award shall be performed by you strictly in line with Bidding Documents and all its subsequent amendments/errata referred to in Clause 1.0 above except as specifically amended/modified in this Letter of Award and in Annexure-I to his Letter of Award. All other deviations and/or additional conditions, implicit or explicit, contained in your bid referred to above and your subsequent communications, if any, shall stand withdrawn without any cost implication to Powergrid, insofar as they are repugnant to what has been stated in this Letter of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laws as applicable from time to time. Necessary TDS certificate shall be issued by Powergrid. 4.0 Taxes Duties: 4.1 Taxes and duties under this Contract shall be governed by the provision of clause 15, section - INB of Bidding Document (Vol-I) and as per the following: 4.2 As all supplies under this contract are brought-out items, the contract price is inclusive of all taxes and duties and Powergrid shall not entertain any claim on account of the same. However, wherever sale-in-transit is effected, Powergrid shall issue requisite sales tax declaration forms to you. In respect of erection contracts, the assessee had deducted taxes at source duly applying the provisions of section 194C of the Income-tax Act, 1961. Insofar as the supply contracts are concerned, the assessee did not make any deduction, on the ground that provisions of section 194C are not attracted to the said payments. Excise duty and sales tax were paid on the invoices raised by the contractors in respect of supply contracts. There was a survey in the premises of the assessee on 28-1-2004. In the course of survey, the Assessing Officer observed that the appellant entered into contracts with vari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was issued. This clearly showed that the transaction was not a direct purchase from the market but only in respect of future execution of a specified contract. The letter of award contained conditions of contract, technical specification, bid form, prices and other schedules and technical data requirement. The learned Commissioner (Appeals) has further stated at para 2.4 that the relevant clauses of the agreement stated as under: 2.1 First contract or supply contract which, inter alia, includes design, engineering, manufacture, type testing, training of Powergrid's personnel and supply of goods. 2.2 Scope of supplies under the contract also includes all such items, equipments and materials which are not specifically mentioned in the bidding documents. 4.2.1 Notwithstanding the break-up of the contract price, the contract shall at all times be construed as single source responsibility contract and any breach in any part of this contract shall be treated as breach of the entire contract. The learned Commissioner (Appeals) has held at para 6.10 of the order that: In view of the above, it cannot be denied that the appellant was liable to deduct tax at s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee in addition to his oral submissions, has filed detailed written submissions submitting that: the order of the Commissioner (Appeals) is unsustainable on facts and in law and is liable to be set aside. The Commissioner (Appeals) while holding that the contracts entered into by the appellant are works contract, lost sight of the relevant provisions of the Income-tax Act, 1961, valid tests and guidelines laid down by various Benches of Income-tax, Appellate Tribunal, the jurisdictional High Court/other High Courts as well as the Hon'ble Supreme Court. The Hon'ble jurisdictional High Court in the case of P.S. Co. v. State of Andhra Pradesh [1984] 56 STC 283 (AP) laid down the guidelines at paragraph 21 of the judgment for distinguishing a Contract of Sale from a Works Contract, which is reproduced: (i) The essence of the contract or the reality of the transaction as a whole has to be taken into consideration, in judging whether the contract is for a sale or for work and labour. (ii) If the thing to be delivered has any individual existence before the delivery, as the sole property of the party who is to deliver it, then it is a sale. (iii) If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Annexure is minimal. It cannot therefore control the interpretation of the contract. Further the Hon'ble Supreme Court while considering the issue of installation of lift which is comparable to the facts of the present case, on facts came to the conclusion that it is one in the nature of sale. The Hon'ble Court observed that since the obligation of the assessee therein was only to supply and install the lift manufactured and brought to site in knocked-down state to be assembled by assessee and the customer's obligation was to undertake work connected in keeping site ready for installation as per drawings, held that the contract was a 'sale contract' and not a 'works contract'. The Hon'ble Court also noticed that the major component of the end product is material consumed in producing the lift delivered. The skill and labour employed for converting main components into the end product were only incidental. The learned Commissioner (Appeals) failed to consider any of the above tests while coming to the erroneous conclusion that the contracts entered into by the appellant were works contract. If the facts of the present case are tested by applying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e drew the attention of the Bench to the decision of the Hon'ble Bombay High Court wherein the said Court while dealing a similar issue in the case of CST v. Walchandnagar Industries [1985] 58 STC 89, at page 94 referred to a judgment of Hon'ble Supreme Court in the case of State of Madras v. Gannon Dunkerley Co. [1958] 9 STC 353 wherein it was held that the parties may enter into two contracts, one for sale and one for service. Even when such contracts are in one document they can be separate, far more so when they are in two separate documents. 3.2 He then has drawn the attention of this Bench to the decision of this Tribunal in the case of APGENCO v. ACIT which, while dealing with the issue of turnkey contract, where erection part was incidental to the supply contract, Hyderabad B Bench by following the decision of the Jurisdictional High Court in the case of CIT v. Sundwiger EMFG Co. [2003] 262 ITR 110 (AP), held that the contracts were contracts for sale. The Hon'ble Supreme Court in the case of Mahabir Commercial Co. Ltd. v. CIT [1972] 86 ITR 417 has held that mere fact that in the case of contract of sale, the seller does certain acts even after th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered into by the appellant involve manufacturing activity and are not works/service-oriented contracts. The contention of the Revenue that the finished product supplied to the assessee is not a commercial commodity in the sense that it cannot be sold in the market to any other person and therefore the transaction is works contract is totally wrong and misplaced statement. As per assessee such a statement is a general statement, which is not borne out from the record. It is submitted that the specification mentioned by the assessee are common to Power Transmission sector on the following reasons: a. Standard specified are IS/ANSI/IEE/IEC etc., which are used by all power transmission sector all over the world. b. International Competitive Bids are invited for which even foreign parties are also quoting. c. The equipments are basically required to meet the power load requirements, wind zone, soil testing, climatic, geographical and terrain requirements but not for specific requirement of appellant or any particular user. d. The equipments used by Powergrid are also used by State Transmission Companies, Private Transmission Companies, Railways, Power Generating C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edominantly skill oriented and the value is only incidental. Therefore, the law laid down in the said case cannot be applied to the facts of the present case. 3.7 Other judgments relied upon by the Assessing Officer and the Commissioner (Appeals) are also not relevant for the issue under consideration as they were rendered in a different context. The contention of the revenue that all the equipments supplied by the contractors are as per specification of the appellant and therefore it is a works contract is devoid of merits and unsubstantiated. As already submitted, the averment that the items supplied by the contractors are not marketable and hence the contract is a work contract is totally misplaced statement. 3.8 Coming to application of section 194C, it was submitted that the section would be applicable if any person is making payment to any resident for carrying out any work also is defined under Explanation III to section 194C of the Act . The assessee is procuring the plant and machinery/equipments and getting them erected and the question is whether the said supply of plant and machineries is covered within the ambit of definition of contract for carrying out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and storage of towers/tower extensions including bolts, nuts and spring washers, hangers, D-Shackles and all types of tower accessories like phase plates, number plates, anti-climbing devices, danger plate etc. And line material namely earth wire, hardware fittings and accessories for conductor and earth wire, unloading, storage at site of Powergrid's supplied materials, i.e., conductor and insulator; detailed survey, including profiling, tower spotting/optimization of tower locations, soil resistivity measurements and geo-technical investigations, check survey, casting of foundation for tower footing as per Powergrid's design, erection of towers, tack welding of bolts and nuts and application of zinc rich enamel paint, tower earthing, fixing of insulator strings, stringing of conductor and earth wire along with all necessary line accessories and testing and commissioning of 400 KVS/C Khammam-Nagarjunasagar Transmission Line as set forth in the Bidding Documents, has been placed on you vide our letter of award ref. C-55204-L195A-7/LOA-II/884, dated 7-1-2002. You shall be fully responsible for the work to be executed under the 'Second Contract' and it is express ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d into with contractors reads as under: In view of the criticality of project implementation, Powergrid requested B C to complete the commissioning of the line by 28 months from the date of LOA. B C agreed for the same. However, they requested Powergrid that liquidated damages for delay should be made leviable based on the commissioning period of 36 months from the date of LOA, which is the specified commissioning period. for this line. Powergrid agreed for the same. B C, however, agreed that PV shall (be) applicable as per the agreed commissioning period of 28 months, from the date of LOA. According to the learned D.R., the above clauses in the agreements clearly demonstrate that although the agreements were split into two parts, i.e., one for supply of equipment and the other for erection/installation, they are in essence and substance one composite contract for supply and erection inasmuch as breach of one leads to the breach of the other contract. The two parts of the agreement if read together and construed as a whole clearly establish that they were for carrying out the work within the meaning of section 194C as per the specifications of the assessee. Even otherwise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommercial value. Further it is provided in the contract that the assessee has sufficient control over the equipments manufactured at every stage of the manufacturing process till they are finally delivered. If it is sale of goods per se, there is no question of buyer having control over the manufacture of goods at every stage of the manufacturing process of the seller. If the contract is for supply of off the shelf goods or bought out goods, the finished product along with its operational manual is only given. That is not the case here as the scope of the contract includes design, engineering, manufacture, type testing, and training of Powergrid 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 Power Grid. Merely because Sales Tax, Excise Duty, etc., were charged on supply of the material in the invoice, it does not lead to the conclusion that it was purely purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th section 201(1A) and the order of the first appellate authority, sought sustenance of the order of the lower authorities. 5. We have carefully considered the rival submissions. The crux of the issues involved in this appeal is whether section 194C is applicable to payments made to contractors who were given separate contracts for supply as well as for erection. To resolve the issue we have to decide first whether the contracts in question are contracts of sale or they are work contracts. While the argument of the assessee is that the contracts concerned are supply contract the revenue took the view that they are works contract taking support from the Circular No. 715 dated 8-8-1995 issued by the Board. As far as the erection contracts are concerned the assessee had already deducted tax as per provisions of section 194C of the Act. The revenue took the view that supply of transmission towers/cables involved design and manufacture of goods and therefore was a contract of works and not a contract of sale. 5.1 We find substantial force in the arguments of the learned counsel for the assessee which are supported by the case laws cited and we are inclined to agree with these cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corporation to suit the bus bodies according to appellant's requirements, does not alter the basis crux and character of the contract, which in the instant case is nothing but the contract of sale and purchase. The materials involved in the construction of the bus bodies were to be procured by the fabricators and thereafter bus bodies were to be constructed and to be fitted on the chasis supplied by the appellant-corporation. At no point of time, appellant had any property or ownership in the material used in bus body building or in the bus body itself unless these were delivered to the appellant and approved by the appellant for final use. Property in the bus bodies was to pass on acceptance of bus bodies by the appellant. Purchase of any item which is constructed as per agreed specifications would involve labour and skill but these two elements by themselves alone are not enough to turn the transaction of sale into transaction of work . Object and end-result of the entire process through which that transaction passes shall be looked into. In the case before us, we are of the considered view in the backdrop of the object and end-result of the contract, that it was a contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be delivery of bus bodies as units or as bus bodies though fitted to the chasis, that will be a case where the property passed only at the time of delivery. Such a transaction will be a sale of goods. That precisely is the position in this case. We agree with the Tribunal that the turnover in respect of these transactions was rightly charged to sales-tax.' Similar issue was dealt with by the Hon'ble Supreme Court in the case of Patnaik Co. v. State of Orissa [1965] 2 SCR 782/16 STC 364 in which Hon'ble Supreme Court held that the bus body constructed by the fabricator was sale and was not works contract . Circumstances considered and relied upon in above cases for holding that the transaction amounted to a sale and not to works contract , we find, do exist in the case before us also as is clear from the salient features of the contract mentioned earlier and from the discussion and findings in the preceding paragraphs. Therefore, the contract entered into by the appellant-corporation with its fabricators in the instant case, was the contract of sale upon which the provisions of section 194C were not applicable. 5.4 The Hon'ble Supreme Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... failed to consider any of the above tests while coming to the erroneous conclusion that the contracts entered into by the appellant were works contract. If the facts of the present case are tested by applying the principles laid down by the jurisdictional High Court and the Hon'ble Supreme Court, the obvious answer that would emerge is that this is a supply contract and not works contract . The nature of a contract as to whether it is 'contract for sale' or works contract will depend on the terms of the contract and its execution. In the present case, the contractors have to fabricate towers as per tested quality of conformity with International Standard (IS) 2062. Further the contractor has been given the option to use other equivalent grade of structural steel angle sections and plates conforming to latest International Standards. The contractor fabricates and manufactures the tower with steel sections as per International Standards. The material is that of the supplier and not of the purchaser . The supplier does not work on the material supplied by the purchaser . There is no accretion of material to the purchaser, part by part, unit by unit. The rest of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. The order in the case of Essar Oil Ltd. does not apply to the facts of this case as the original contract was a single contract and later on this was split into 3 contracts. The order in the case of BDA Ltd. relates to a printing press and similar issue was considered by the Hyderabad Bench in the case of Andhra Pradesh State Road Transport Corpn. Thus these cases are not applicable to the facts of this case. The Hon'ble Supreme Court in the case of Associated Hotels of India Ltd. has laid down that It may in some cases be that even while entering into a contract of work or even service, parties might enter into separate agreements, one of work and service and the other of sale and purchase of material to be used in the course of erect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by the contractor. (b) Where, however, the contract undertakes to supply any article or thing fabricated according to the specifications given by the Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a con tract for sale and as such outside the purview of this section. (Emphasis supplied) (c) The State of Himachal Pradesh v. Associated Hotels of India Ltd. [1972] 29 STC 474 (SC), the Supreme Court observed that where the principal objective of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, contract is of work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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