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TMI Blog2012 (6) TMI 204X X X X Extracts X X X X X X X X Extracts X X X X ..... reement for supply of material and because the said agreement is a part of a composite transaction. Section 194C cannot be pressed into service to deduct tax at source. The whole object of introducing the Section is that it should deduct tax in respect of payments made for a works contract. No deduction is permissible in respect of contract for supply of material for carrying out work. The transaction in question is not a case of composite contract. It is a case of the distinct contracts and the contract for supply of materials is a separate distinct contract in respect of which no deduction is permissible under Section 194C of the Act. - Decided in favor of assessee. - IT Appeal No. 337 of 2011 - - - Dated:- 15-3-2012 - N. Kumar and Ravi Malimath, JJ. JUDGMENT 1. This appeal is preferred by the Revenue challenging the order passed by the Income Tax Tribunal allowing the appeals filed by the assessee and holding that the assessee was not under the obligation to deduct tax under Section 194C of the Income Tax Act, 1961 (hereinafter referred to as "the Act" for short) towards the payment made on supply portion and consequently, the assessee cannot be treated as the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y portion, According to the revenue as the assessee has awarded work on turnkey basis, which is a composite contract, tax should have been deducted on supply portion also. As the assessee has failed to deduct tax on supply portion, a show-cause notice under Sections 201(1) and 201(1A) of the Act was issued on (11.3.2009) asking the assessee to show-cause as to why an order under the aforesaid provision should not be passed in its case treating it as assessee in default. 3. In response to the said show-cause notice, the assessee submitted its reply. The assessee contended that Section 194C of the Act deals with deduction of tax at source on composite contracts for erection and installation of plant and machinery. Circular No. 681 dated 8.3.1994 issued by the Central Board of Direct Taxes clearly excludes contract for sale of goods. As in their case there are separate contracts for supply of goods and erection/installation charges and the goods supplied by the contractor consists of goods manufactured by the contractor and brought through third parties and therefore, Section 194C of the Act is not attracted. Therefore, they denied their liability to pay tax and requested the auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al to the Income Tax Appellate Tribunal. 4. The Tribunal on careful consideration of all the relevant materials and the case law on the point held that the entire arrangement between the assessee and its contractors was at best be called as divisible contract and that it should be characterised as a supply contract. The material on record clearly established that as soon as the work was awarded by the assessee to the contractor, the contractor supplies the equipment to the assessee and the property in goods gets transferred at that point of time only. It was only later on that the assessee hands over the equipment to the contractor for using them, in the erection and civil work portions. Therefore, the contract relating to supply of equipment was a separate and distinct contract for sale and it falls within paragraph (7)(vi)(b) of the Board's Circular. The term "work" has been defined in Explanation IV to Section 194C. The sub-clause (e) deals with contract manufacturing as work. However, the latter part of the aforesaid clause clearly excludes manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and non-performance of any contract or portion of contract shall be deemed to be breach of the entire contract and therefore, the finding recorded by the Tribunal is contrary to the express term of "work". Therefore, he submits that the impugned order is liable to be set aside and the order of assessment has to be restored. 6. Per contra the learned counsel appearing for the assessee submitted that in the agreement which came into existence between the assessee and the contractor, both the words composite contract and divisible contract are used. Because of this the clause (7) of General Terms and conditions of contract makes it clear how the parties understood the contract and how it has to be interpreted, It is categorically stated that notwithstanding anything stated elsewhere in the bid document, the contract to be entered into will be treated as a divisible contract resulting in three separate contract, one for supply of goods (2) for erection and (3) for civil engineering works governing the entire scope of partial/totalturnkey contract In the light of the aforesaid express terms, it is not open to the assessing authority to hold that the contract in question is a composi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find out whether Section 194C is attracted to the facts of this case. 9. The tender notification clearly sets out the scope of the bid enquiry- It states, it is for combined package of Establishment of 1 6.3 MVA, 66/11 KV sub-station at V.G. Doddi and construction of 66KV SC line for a distance of 7.929 Kms. tapped from the existing 66KV SC Magadi-T.G. Halli Line to the proposed 66/11KV sub-station at V.G. Doddi in Magadi Taluk, Bangalore Rural District on partial Turnkey Basis including supply of all matching Materials/Equipments (excluding Power Transformer) and erection (including Civil Works) of all Materials/Equipments, Testing and Commissioning. 10. In the case of Total Turnkey Basis even the power transformer has to be supplied by the contractor. Therefore, it is clear the scope of work involves supply of material, erection, including the civil works, testing and commissioning. Twelve months is the period prescribed for commissioning from the date of indent including the monsoon period. Four Clauses in these bid documents requires to be noticed. The first one is Clause 35.2 of instructions to bidders, which reads as under: 35.2 In case of Award of Contract, a Divis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able is in respect of these three separate contracts. However, Clause 3.5 of the proforma of contract agreement makes it clear notwithstanding the fact that three separate contracts have entered into, all the three are integral parts of the composite contract on single sole responsible basis. The contractor is bound to perform the total contracts in its entirety. No performance of any part or portion of the contract would be treated as breach of entire contract. It is because of its inconsistent clause where at one place it is mentioned as three separate agreements and where all the three are referred to as the composite agreement in order to clarify what exactly the parties meant it become necessary to introduce Clause 7.0 provide how the contract is to be construed. Clause 7.1 expressly state that notwithstanding anything stated elsewhere in the bid documents, the contract to be entered into will be treated as divisible contract resulting in three separate contracts, one for supply of goods, the second for erection and the third for the civil engineering works covering the entire scope of the Partial/Total Turnkey Package, Therefore, the intention is clear. There is no ambiguity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espatch documents, the Equipments/Materials supplied under the Agreement of Supply from the Contractor to KPTCL the title in the goods passes. It is therefore KPTCL/Owner in order to enable the Contractor to carry out its obligation under the other contracts head over the goods so supplied to them. The moment the materials are supplied under the Agreement of Supply and title passes to the KPTCL, the Agreement for Supply comes to an end. In order to see that the ultimate object of entering into contract is achieved, it is made clear in the Agreement for Supply, the obligation under the contract would not come to an end. The moment the machinery and the material as supplied under the agreement of supply, the obligation of the contract continues till the work entrusted to them is complete. That by itself would not make it a composite contract. It is clearly expressed in the contract, how these contracts have to be construed, the three agreements are separate and therefore the transaction in question cannot be construed as a case of composite contract and the Assessing Authority as well as the Appellate Court Commissioner were not justified in holding that it is a composite contract an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... litigation. The Parliament though it fit to clarify by way of amendment so that the litigation could be avoided. In view of the aforesaid clarification and the statutory provision, it is clear that "work" did not include manufacturing or supplying a product according to the requirement upon specification of a customer by using raw-materials purchased from a person other than such customer, as such a contract is a contract for sale. Further, it is also clarified TDS shall be deducted on the invoice value excluding the value of material purchase from such customer, if such value is mentioned separately in the invoice. It is only in cases where the material component has not been separately mentioned in the invoice, TDS shall be deducted on the whole of the invoice value. Therefore, whatever ambiguity which prevailed earlier is clarified. When in a composite contract, if an invoice is raised, separately mentioning the value of the material supplied, no deduction is permissible under Section 194C. In a case where three separate agreements entered into and one such agreement is agreement for supply of material and because the said agreement is a part of a composite transaction. Section ..... X X X X Extracts X X X X X X X X Extracts X X X X
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