Judgment:
1. This is an appeal filed by the assessee directed against the order dated 10-1-2005 of the Commissioner of Income-tax (Appeals) for the assessment year 2003-04 on the following effective grounds: (1) The learned CIT(A) erred in treating supply of material as works contract and relied on the case laws which are not applicable to the facts of this case.
(2) The learned CIT(A) did not apply the Board circular No. 681, dated 8-3-1994, which is very specific and clear on the issue of applicability of Section 194C in such cases.
(3) The learned CIT(A) erred in not accepting the independent supply order, as supply of material which does not attract TDS.2. Brief facts of the case are given below. The assessee is a Central Government undertaking engaged in the activity of transmission and power distribution of electricity to various constituents across the country. During the year under consideration, the assessee was involved in three projects for which contracts were awarded to different contractors. The assessee awarded contracts to various parties to construct/execute the transmission line/sub-station. The categories of contracts entered into by the appellant with various contractors for the above purpose are as follows: (C) Supply-cum-Erection Contracts (but with 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: 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implicit or explicit, contained in your proposal referred to above and your subsequent communications, if any, stand withdrawn without any financial implication to Powergrid, insofar as they are repugnant to what has been stated in this Letter of Award and/or Bidding Documents and its amendments.
(ii) The title of Goods in respect of equipment/materials to be supplied by you shall be transferred to Powergrid on Ex-works despatch. This transfer of title shall not relieve you from the responsibility of all risks, loss or damage to the equipment materials as specified in the Bidding Documents.
(iii) The entire quantity under the subject package shall be supplied from your Pondicherry works (a Sales Tax free Zone).
(iv) The value of advance BG's shall be reduced during the execution of Contract as per the provisions of Clause 34.7.1 of GCC, Conditions of Contract, Volume-I of the Bidding documents.
(v) The Guaranteed Technical Particulars of ACSR "Moose" Conductor are given at Annexure-IV of this Letter of Award.
The total contract price for the entire scope of work under the contract shall be Rs. 37,70,10,000 (Rupees Thirty Seven Crores Seventy Lakhs Ten Thousand only) as per the following price break-up:-------------------------------------------------------------- Sl. No.Price Components Price (In Indian Rupees)-------------------------------------------------------------- (i) Ex-works price 37,43,25,000 (iii) F.O.R. Destination 37,66,50,000 (iv) Type Test Charges 3,60,000 The detailed price break-up of Ex-works Price component, freight and insurance charges and type test charges. For the purpose of an account payment, is enclosed at Annexure-II and Annexure-III respectively to this Letter of Award.
Notwithstanding the break-up of the Contract Price, the Contract shall, at all times, be construed as a single source responsibility and any breach in any part of this Contract shall be treated as a breach of the entire Contract: All taxes and duties such as custom duties, excise duty, sales tax and other levies payable by you in respect of transactions, between you and your sub-suppliers, 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.
2.1 We are pleased to award you a detailed Letter of Award for Shifting of 1CT from Vijayawada S/S to Khammam S/S, its erection, testing and commissioning at Khammam S/S dismantling of faulty ICT at Khammam S/S and transportation of the same to CGIL Works, Mumbai which included dismantling of faulty 315MVA ICT main tank with bushings (excluding cooler banks) at Khammam S/S and dragging it on rail up to temporary sleeper platform. Dragging of ICT main tank weighing 180 MT at Vijayawada S/S on rail road, loading on to trailer and transporting to Khammam S/S, unloading and dragging on the rail road up to plinth, erection of bushing, evacuation, drying out and oil processing as required, conduct commissioning checks and reconnect cable. FF pipes making the transformer ready for energisation in all respect. The scope also covers transportation of the removed transformer tank at Khammam S/S weighing 180 MT from the sleeper platform to CGL Works, Mumbai after dragging and loading on to the trailer.
2.2 The scope of works under the contract shall also include all such items which are not specifically mentioned in the BOQ, bidding documents and/or your proposal but are necessary for the successful shifting, erection testing and commissioning of ICT at Khammam Sub-station.
3.1 We agree to pay you Rs. 48,99,150 (Rupees forty eight lakhs ninety nine thousand one hundred and fifty only) for the entire scope of work under this Award Letter on 'Firm Price' basic.
3.2 The detailed break-up of the above contract price for the purpose of on account payment is given at Annexure-I enclosed to this Award Letter.
3.3 Notwithstanding the break-up of the contract price the contract shall, at all times, be construed as a single source responsibility contract and any breach in any part of the contract shall be treated as a breach of the entire contract.
4.1 The Contract price is exclusive of service tax payable extra on transportation and erection testing and commissioning services @ 10.2% as an applicable as the contract price. All other taxes, duties and levies are included in the Contract price and Power-grid shall not entertain any claim on account of the same.
4.2 Statutory deductions such as WCT, income-tax etc. shall be affected at source in accordance with the provisions of various tax laws as applicable from time to time. Necessary TDS Certificate shall be issued by Powergrid.
3. "CONTRACT FOR ERECTION" EXECUTED BY A "SUPPLY- CUM-ERECTI0N 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 Power-grid's foundation design.
(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 earthwire along with all necessary line accessories; and (vi) Testing and commissioning of the erected Transmission line viz., 400 KV D/C Sitanagaram - Gazuwaka Transmission Line (198 Kms.) and handing over the Transmission line complete in all respect.
2.2 Your scope of work under this Contract shall also include all such items which are not specifically mentioned in the Bidding Documents, and/or you Bid but are necessary for the successful erection, testing and commissioning of transmission line for 400KV D/C Sitanagaram - Gazuwaka Transmission Line, as detailed in the Bidding Documents unless otherwise specifically excluded in the Bidding Documents or in this LOA. 2.3 This letter of Award is subject to the terms and conditions detailed hereunder: (i) The work under this LOA shall be performed by you strictly in line with the Bidding Documents and all its amendments referred to in para 1.2 above, except as specifically amended/ modified in this LOA and/or in the record notes of post bid discussions referred to at para 1.4 above. All other deviations and/or additional conditions, implicit or explicit, contained in your Bid referred to at para 1.3 above and your subsequent communications, if any, shall stand withdraw-without any cost implication to Powergrid, insofar as they are repugnant to what has been stated in this LOA and/or Bidding Documents and its subsequent amendments.
(ii) Another Contract has been awarded on you vide our Letter of Award Ref. No. C.54705L195A-3/OA-1/990, dated 28th October, 2002 (hereinafter called the 'First Contract' or 'Supply Contract') for fabrication and supply on ex-works basis of all transmission line towers including bolts, nuts & washers, hangers, D-shackles and all types of tower accessories and line materials namely Earthwire, Hardware fittings and Accessories for Conductor & Earthwire which are to be insured and transported to final destination site and erected/installed, tested and commissioned under this 'Erection Contract'. You shall be fully responsible for the work to be executed under the 'Supply Contract', and it is expressly understood that any breach under the 'Supply Contract', shall automatically be deemed as a breach of this Contract and any such breach or occurrence giving us a right to terminate the 'Supply Contract' and/or recover damages 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 Indemnity Bond shall be furnished by you before commencement of the supplies as per Clause 17.0 Special Conditions of Contract, Vol.-IA of the Bidding Documents and shall be valid till the issuance of Taking Over Certificate by Powergrid pursuant to Clause 31.0, section-GCC, Conditions of Contract, Vol.-I of the Bidding Documents.
3.1 We agree to pay you a total sum of Rs 17,84,21,086 (Rupees Seventeen Crore Eighty Four Lakhs Twenty One Thousand and Eighty Six only) as the Contract price for the entire scope of work under this LOA. The break-up of the above Contract price is as follows:-------------------------------------------------------------- S. No. Price Component Amount in Rupees-------------------------------------------------------------- 1.
Inland Transportation & 1,50,02,529 Insurance Charges 2.
Erection and Civil Works Component 16,34,18,557-------------------------------------------------------------- Total Contract Price [(1) + (2)] 17,84,21,086 Further detailed break-up of the contract price for the purpose of on account payment is given at Annexure-II. 3.2 Notwithstanding the break-up of the Contract price, the contract shall, be all times, be construed as a single source responsibility Contract and any breach in any part of this Contract shall be treated as a breach of the entire Contract.
4.1 The Contract Price is inclusive of all Taxes & Duties and other levies and Powergrid shall not entertain any claim on account of the same.
4.2 Powergrid shall be entitled to statutory deductions including income tax at source in accordance with the provisions of various tax laws as applicable from time to time. Necessary TDS certificate shall be issued by Powergrid.
4. "CONTRACT FOR SUPPLIES" MADE BY AN ERECTION-CUM- SUPPLY CONTRACTOR: ...The scope of work under the contract, inter alia, includes the following: (i) fabrication, galvanizing and supply on Ex-works basis of all types of 400 KV Double circuit transmission line towers based on Powergrid's drawings including bolts, nuts and washers, hangers, D-shackles and all types of tower accessories like phase plate, circuit plate, number plate, danger plate, anti-climbing device etc.
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 Award and/or bidding documents and its subsequent amendments.
The materials, equipment and services to be supplied by you under the contract shall comply with the following provisions: (iii) The "Erection Contract" for the subject line which includes performance of all other activities such as detailed survey, inland transportation, insurance, performance of all activities of sites viz. unloading, handling, storage at sites, erection, testing and commissioning of all the equipment/materials to be supplied by you under this contract including taking delivery of Owner supplied material, i.e. conductor, insulators, earthwire, hardware fittings and accessories for conductor and earthwire from the nearest railway station and/or road transporter at your stores, unloading, transportation to site, handling, storage and erection, testing and commissioning of the Transmission Line with Owner supplied materials and associated civil works of all the items as specified in the Bidding documents, has been placed on you vide our LOA No. SR-STR/C-54902-L165-3/PKG-A2/AL-11-84, dated 6-2-2001 (hereinafter called as the 'second contract').
(iv) The transfer of title and ownership in respect of equipment and materials supplied by you to Powergrid on ex-works basis shall pass on to Powergrid on dispatch of goods from your works i.e. on Ex-works basis. This transfer of title shall not relieve you from the responsibility of all risks, loss or damage to the equipment and materials as specified in the Bidding Documents. Further, this transfer of title shall not be construed as "Taking Over" of equipment and materials. The Contractor shall continue to be responsible for the quality and performance of such equipment and materials and for their compliance with the specification until 'Taking Over' and the fulfilment of guarantee provisions under the contract.
3.2 Notwithstanding the break-up of the contract price, the contract shall, at all times, be construed as a single source responsibility contract and any breach in any part of this contract shall be treated as a breach of the entire contract.
3.3 Powergrid shall be entitled to deduct income-tax and other taxes 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.
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 various organizations for supply and erection of equipment but has not deducted taxes. The Assessing Officer issued a show-cause notice dated 6-2-2005, which was replied to by the appellant. The case of the Assessing Officer was that the supply of transmission towers/cables involved design and manufacture of the goods, and hence it was a contract of works and not a contract of sale. The Assessing Officer not convinced with the reply filed by the appellant passed an order under Section 201(1), read with Section 201(1A) of the Act holding the assessee as "assessee in default" for not having deducted taxes in respect of the various contracts entered into by it, which according to him, were contracts in the nature of works contracts. While passing the said order; the Assessing Officer held that the appellant with a view to avoid payment of taxes had split the contracts namely supply and erection. According to the Assessing Officer since the supply included design, engineering, manufacture, type testing, training of appellant's personnel and supplying, and also since the contract price was inclusive of all customs duties, levies, excise duties, sales tax and other duty payable on equipments, components, sub-assembles and raw-materials, the contract was not a supply contract but a works contract. Assessing Officer also held that since the finished products is not a commercial commodity and was made to the specific need of the assessee, the contract in whole is a works contract. The Assessing Officer accordingly raised a demand under Section 201(1) of the Act.
2.1 Aggrieved, the assessee filed appeal before the Commissioner of Income-tax (Appeals), Hyderabad. The assessee had raised similar contentions that were raised before the Assessing Officer and had also relied upon decisions rendered by this Hon'ble Tribunal and various courts including the Hon'ble Supreme Court. The learned Commissioner (Appeals) has stated at para 2.3 that he does not agree with the contention of the appellant. According to him, the transmission equipment/towers were manufactured by the supplier in one sample case i.e. in the case of M/s. Tata Projects, as per the requirements and specification given. The appellant was not purchasing transmission equipment/towers in open market but bids/offers were invited from the contractors and after examination of the same, a letter of award 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 source from the payments made to the contractors who supplied the materials as per specification and who also executed the erection with or without additional material being supplied by the appellant under Section 194C of the Act.
The learned Commissioner (Appeals) further held at para 6.13 of the order as follows: However, the Hon'ble Rajasthan High Court in the case of Rathi Gum Industries, while examining the issue, inter alia, held as under: The provisions of Section 201 provides not only for collection of tax which has not been deducted but for levy and charge of interest also. If the tax has already been paid by the recipient on such income it may not be justified to recover the said amount of tax, but so far as the liability of interest is concerned, that cannot be considered to be non-existent on account of deposit of tax by the recipient at a subsequent or later stage.
The learned Commissioner (Appeals) upheld the finding in the order of Assessing Officer that the contracts entered into by the assessee were "works contract". The appeal was partly allowed to the extent of TDS under Section 201 of the Act on supply portion in case the appellant establishes to the satisfaction of Assessing Officer that the respective contractors engaged for supply of material as per specification have paid appropriate tax on the income arising out of the payment received by them from the appellant during the relevant previous year. The Commissioner (Appeals) reasoned that since the contractors were responsible for design, material selection, inspection, testing at manufactures works, packing for shipment, delivery at site, construction, installation, field testing and commissioning, the contracts are "turnkey contracts". According to the Commissioner (Appeals), the contracts were composite contracts, payments were made in stages, ultimately ending with installation and commissioning and completion of the whole work including the expiry of the defects liability period. The Commissioner (Appeals) relied upon certain orders/judgments rendered by Tribunals and High Courts and circulars, which were as per his opinion not apposite to the facts of the present case, and held that the contracts entered into by the appellant were "works contract". Aggrieved the assessee has filed the present appeal before this Tribunal.
3. The learned Counsel 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 the main object of the contract is the transfer from A to B, for a price, of the property in a thing in which B had no previous property, then the contract is a contract of sale.
(iv) where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for work and labour.
(v) If the bulk of the material used in the construction belongs to the manufacture who sells the end-product for a price that will be a strong pointer to a conclusion that the contract is in substance one for the sale of goods and not one for work and labour.
(vi) A contract where not only work is to be done but the execution of such work requires goods to be used may take one of three forms: (a) the contract may be for work to be done for remuneration and for supply of materials used in the execution of the work for a price; (b) it may be a contract for work in which the use of materials is accessory or incidental to the execution of work; or (c) it may be a contract for supply of goods where some work is required to be done as incidental to the sale.State of A.P. v. Kone Elevators (India) Ltd. installation of lifts held that the contract is a "contract for sale".
The Hon'ble Apex Court while enumerating the tests to be considered while deciding the nature of contract emphasized the fact that the intention of the parties in the contract would to a large extent determine the issue. The Hon'ble Court laid down the following as the probable tests that should be conducted before determining the nature of contract: (i) Whether it was one for transfer of property or for work and labour; (ii) How and when property of dealer passed to the customer, i.e., whether by transfer or accession.
The Hon'ble Apex Court while saying so has followed the principles laid down by it in the case of Hindustan Shipyard[l999] 115 STC 96 and clarified that it is not the bulk of the material used in the construction alone but the relative importance of the material qua the work, skill and labour of the payee which also has to be seen, but it is a relevant parameter. In the present case, where the contract of Supply and Erection is given to the same party, the value of the Erection Contract as can be seen from the 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 the principles laid down by the jurisdictional High Court and the Hon'ble Supreme Court the obvious answer that would emerge is that the contract 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 given option to use other equivalent grade of structural steel angle sections and plates conforming to latest International Standards. The contractor fabricates the tower with steel sections as per International Standards. The rest of the equipment such as Insulators, Conductors, Transformers, Circuit Breakers, etc., are standard equipment. The relevant technical specification is enclosed herewith. From this it can be seen that the same is common to the industry and no specific design is involved as stated by the Assessing Officer. Apart from the appellant there are other customers for these products as well. The property in the goods was intended to be passed on, on ex-works basis and the element of work employed by way of services is negligible. Just because it was tailor-made equipment, it does not become a "work contract".
3.1 Reliance was placed on the decision of the Hyderabad Bench of the Tribunal in the case of Andhra Pradesh State Road Transport Corporation v. Dy. CIT [2001] 119 Taxman 73 (Hyd.) (Mag.) wherein this Bench of the Hon'ble Tribunal while dealing with the case of fabricators for construction of bus bodies, which ideally would be an apt one for determining the present controversy held, following the judgment of Hon'ble Supreme Court in the case of State of Gujarat v. Variety Body Builders [1976] 38 STC 176 that it is necessary to discern the dominant object and intention of the parties for determining the nature of contract. Merely because certain specifications were given to the seller, the nature of the contract would not be altered. He submitted that the issue in the present case is squarely covered by the aforesaid Tribunal's order. The learned Counsel further submitted that just because the "Supply Contract" and "Erection Contract" were entered into with the same party in some cases, the nature of contract will not alter. He 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 (pg. 58 in judgments paper book) 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 (at pages 21,22 and at 30 of the order in ITA Nos.
1057-1060/H/2002), Hyderabad "B" Bench by following the decision of the Jurisdictional High Court in the case of CIT v. Sundwiger EMFG & Co.
(AP), held that the contracts were contracts for sale. The Hon'ble Supreme Court in the case of Mahabir Commercial Co.
Ltd. v. CIT has held that mere fact that in the case of contract of sale, the seller does certain acts even after the sale or retains certain amount of control over the assets sold even after sale, does not mean that the sale has not taken place earlier. It is respectfully submitted that the Board Circular No. 681, dated 8-3-1994 while dealing with contracts which are attracted by Section 194C of the Act pursuant to the judgment of the Apex Court in the case of Associated Cement Co. Ltd. v. CIT has clarified that the provisions of the said section will not cover contracts for sale of goods like in the present case. The circulars issued by the Board are binding on the department. As to the question when and at what time the title to the goods pass, it was submitted that the contract between the parties is sacrosanct. Also Hon'ble Supreme Court in the case of CIT v.Motors & General Stores (P.) Ltd. held that unless it is established that a contract is a sham, or is contrary to law, the contract should be respected.
3.3 He sought to distinguish the decisions relied upon by the Commissioner (Appeals) while holding that the contracts entered into by the appellant is 'work contract' to submit that they are not applicable to the facts of the present case. The revenue cannot take the support of the Board Circular No. 715, dated 8-8-1995 for the facts of the present case because the said circular was issued clarifying the legal position with respect to contracts like advertisement, print media, contract for carriage (sic) of goods of passengers, travel agency, courier services, transport, catering, recruitment agency etc. The said circular is totally relevant so far as the facts of the present case is concerned.
3.4 He then referred to the decision of the Pune Bench of the Tribunal and the Hon'ble Apex Court in the cases of BDA Ltd. v. ITO [2005] 84 ITD 442 (Pune)(SMC) and Anandam Viswanatham [1989] 73 STC 1 which are relied upon by the Assessing Officer and the Commissioner (Appeals) and submitted that they cannot be applied to the present case because the Pune Bench of the Tribunal and the Hon'ble Apex Court in the said cases were dealing with the issue pertaining to printing and supply of multicoloured receipt books and the printing and supply of question papers to the university. The said products are not comparable to the supply of equipment like towers and conductors. It was submitted that the supply contracts 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 Companies for switch yard equipments.
e. Even appellant supply the same to other utilities while executing various consultancy job on their behalf.
f. Indian manufacturers of Power Transmission equipments are quoting for supplying to various foreign transmission companies.
g. There are more manufacturers for the same equipments, which clearly shows that it is standard equipment e.g. Transformers, Current Transformers, Isolators, Circuit Breakers etc., such as BHEL, ABB, Crompton Greaves, etc.
He then distinguished the case law relied on by the lower authorities and submitted that while some of them are not relevant, others have no application to the facts of the present case. He went on to submit that Section 194C would be applicable if any person is making payment to any resident for carrying out any work. The assessee is procuring the plant and machinery/ equipments and getting them erected, the charges for which is subjected to TDS and the point relevant here is whether the said supply of plant and machineries is covered within the ambit of definition of "contract for carrying out any work".
3.5 The decision of Pune Bench in the case of ITO v. Narmada Cement Co.
Ltd. [2003] 81 TTJ 955 is also not apt as the Hon'ble Pune Bench was dealing with the case of printed PP Woven Sacks. Similarly the judgment of Hon'ble Supreme Court in the case of State of Gujarat v. Variety Body Builders 38 STC 178 is not applicable to the facts of the present case because the Hon'ble Supreme Court was dealing with the case of a railway coach. It is pertinent to mention here that this Hon'ble Tribunal in the case of Andhra Pradesh State Road Transport Corpn.
(supra) has considered the judgment of the Hon'ble Supreme Court in the case of Variety Body Builders (supra) and distinguished the same. It is respectfully submitted that the facts in the case of Variety Body Builders (supra) turned on its own facts. On the facts of the said case, the intention of the parties at the time of entering into the contract was not to transfer any completed railway coach, and Hon'ble Supreme Court having regard to the said facts held that the contract performed was a works contract.
3.6 The judgment of Hon'ble Kerala High Court in the case of Waves Electronics (P.) Ltd. v. State of Kerala 82 STC 143 is also not applicable as in the said case the nature of contract was predominantly 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 any work" and submitted that the supply and erection of plant and machineries/equipments is not covered by Explanation III to Section 194C. Therefore, the provisions of Section 194C are not applicable for the said supply and erection contract placed by the assessee.
3.9 The learned Counsel concluded his arguments by submitting that the price quoted and paid by assessee is for supply or sale of equipments and not for any design of work. The predominant object underlying the contract is for sale of goods and sought setting aside of the orders of the lower authorities and allowing the appeal filed by it.
4. The learned D.R. on the other hand has also filed detailed written submissions in addition to his oral submissions and submitted that: the only issue in the instant case is whether the provisions of Section 194C are attracted to payments made to contractors involved in supply contracts and supply-cum-erection contracts. According to him the crux of the argument of the assessee is that supply contracts and supply portion in supply-cum-erection contracts, in pursuance of which the assessee made payments were not for carrying out any 'work' within the meaning of Section 194C but for sale of goods simpliciter and therefore, the payments made under these contracts are not covered by the provisions of Section 194C and these arguments of the assessee arc not valid for the following reasons.
To understand the true nature and perspective of the contract, he referred to some of the clauses in the letter of award issued by the assessee to the contractors. A perusal of one such letter of award for supply-cum-erection contracts showed that the contract for 'supply portion' (first contract) also contains references to 'erection portion' (second contract) which is as under: 2.2 The scope of work under this Letter of Award 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. SR-STR/C-54902-L165-3/PKG-A2/ AL-H/784, dated 6-2-2001 for "Erection Portion" unless otherwise specifically excluded in the bidding documents or this Letter of Award.
2.3(ii) The "Erection Contract" for performance of all; other activities viz., inland transportation, insurance, taking delivery 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 expressly understood by you that any breach under the 'Second Contract' shall automatically be deemed as a breach of this contract and any such breach or occurrence giving us a right to terminate the 'Second Contract' and /or recover damages 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 'Second 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/materials supplied by you under this contract when erected, strung and the transmission line is commissioned under the 'Second Contract' shall give satisfactory performance in accordance with the Bidding Documents.
The supply contract" which includes fabrication and supply on ex-works basis of various types of 400 KV single circuit transmission line towers based on Powergrid's structural/shop drawings, including bolts, nuts and washers, hangers, D-Shackle, all types of tower accessories like phase plate, number plate, danger plate, anti-climbing devices etc., various line materials, namely, earth wire, hardware fittings and conductor and earth wire accessories; as detailed in the bidding documents referred to in Clause 1.0 hereinabove has been placed on you vide our LOA No. C-5504-L 195A-7/LOA-I/883, dated 7-1-2002.
You shall be fully responsible for the work to be executed under the abovementioned "First Contract" and it is expressly understood by you that any breach under the "First Contract" shall automatically be deemed as a breach of this contract and any such breach or occurrence giving us a right to terminate the "First Contract" and/or recover damages 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 "First 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/materials erected and commissioned by you under this contract which are supplied by you under the "First Contract" shall give satisfactory performance in accordance with the bidding documents.
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, he submitted that in the so-called supply portion of the contract, it may be noticed that the equipments which are engineering goods are required to be manufactured strictly as per the specifications of the assessee and utilized for a specific requirement of the assessee. The principal object of the assessee is to get the equipment as per the prescribed specifications and not to purchase the material as available in the market. 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 goodsperse, there is no question of the manufacturing proccs of the seller. Simply because sales-tax, excise duty etc. were charged only supply of the material in the invoice, it does not lead to the conclusion that it was purely purchase of goods because the said levy under the Sales-tax Act, etc. has its own identity and nothing to do with income-tax. Even otherwise, he submitted, the contracts involving work are brought within the purview of Sales-tax Act and hence the inclusion of sales tax and other levies in the invoice does not necessarily lead to the conclusion that the transaction in question are that of sale. Therefore he submitted that supply of the equipment as per the specifications of the assessee is not a sale but a contract involving work. It is an executory contract rather than a case of mere supply or sale of goods. In short, according to him, although a part of the contract is termed as supply portion of the contract, if the terms of the contract are considered as a whole, the entire contract is to be considered as one indivisible contract and treated as a composite contract and once it is a composite and indivisible contract in substance, tax has to be deducted at source from the gross payments under the supply as well as erection portion of the contracts.
4.1 The learned D.R. submitted that the clauses in the letter of award clearly indicate that even in a contract for supply of equipment, it may be noticed that the equipments which are engineering goods are required to be manufactured strictly as per the specifications of the assessee and utilized for a specific requirement of the assessee. The equipments supplied were not standard goods and were not capable of any use to anyone else and thus had no commercial 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 purchase of goods because the said levy under the Sales-tax Act, etc., has its own identity and nothing to do with income-tax. Even otherwise, he submitted the contracts involving work are brought within the purview of Sales-tax Enactments and hence the inclusion of sales tax and other levies in the invoices does not necessarily lead to the conclusion that the transaction in question are that of sale. It is rather a composite package, which does consist of some material also. But the entire package is inseparable and is accordingly to be considered as 'Rendering of one single service'. He thus argued that in the present case the agreements were not for sale of goods per se. It is an executory contract rather than a case of mere supply or sale of goods.
According to the learned D.R., the agreements entered into between the assessee and the contractors were basically for carrying out work as per the specifications of the assessee. From various covenants of the contract and by reading the contracts as a whole, it is clear that the contract entered into by the assessee corporation with its contractors is not merely a supply contract but that of a works contract and any payments made under the contract are covered by provisions of Section 194C. (2) Sentinel Rolling Shutters & Engg. Co. (P.) Ltd. v. CST 42 STC 409 (6) Dy. Commissioner v. Indian Refrigeration Industries Ltd. 27 STC 427 4.3 Countering the contention of the assessee that the Board Circular No. 681 should have been followed by the Assessing Officer, the learned D.R. submitted that in fact Board's Circular No. 715, dated 8-8-1995 issued later is binding on the Assessing Officer. Moreover validity of Circular No. 681 was also challenged before the Courts as a result of which Circular No. 715 was issued. Therefore, Circular No. 681 has to be read along with Circular No. 715 and not in isolation. He then went on to distinguish the decisions relied on by the assessee and submitted that in view of the legal position and for the elaborate reasons mentioned in the order under Section 201(1), read with Section 201(1 A) 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 contentions of the assessee, that the contract in question are pure contracts of sale and not works contract for the reasons given below.
5.2 In this case, as already stated, the assessee entered into contracts with various contractors for supply of conductor, insulators, transmission towers and sub-stations. The contracts were not only to supply equipment, but also by way of separate contract to erect the transmission towers and also the substations. 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 of the Bombay High Court in the case of Walchandnagar Industries (supra) in which the Hon'ble High Court referred to the judgment of the Hon'ble Supreme Court in the case of Gannon Dunkerley & Co. (supra) 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." Similar view was taken by the Hon'ble Apex Court in the case of State of Himachal Pradesh v.Associated Hotels of India Ltd. 5.3 In Andhra Pradesh State Road Transport Corporation's case (supra), Hyderabad Bench of the Tribunal held as follows: In the instant case, if we closely go through the various covenants of the contract, the excerpts of which have selectively been quoted by the learned CIT(A) in the order impugned and the salient features of which are extracted by us as referred above, the inescapable conclusion is that the contract entered into by the appellant-corporation with its fabricators was a contract for purchase/sale of bus bodies and cannot be construed as a contract of work and labour simpliciter. The dominant object and intention between the parties was to construct and sell and purchase the bus bodies in terms of the requirements and specifications indicated by the appellant-corporation and deliverthem duly fitted on the chassis supplied. Whole exercise involved resulted into purchase and sale of bus bodies in fact. Merely because specifications are provided by the appellant-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 of sale ultimately and finally. In fact, the issue which is involved in the present case came to be considered by Hon'ble Madras High Court in the case of City Motor Services (P.) Ltd. v. State of Madras, wherein interestingly, the assessee sought to claim that the bus body building activity was a "works contract" on which sales-tax was not leviable. Therefore, Hon'ble High Court of the State of Madras considered the issue whether the work of the building body constituted the contract of sale or not and held that it was contract of sale. It is pertinent to quote the relevant portion of the judgment of the Madras High Court, which is as under: It has to be decided in the light of the terms of the contract in each case. Certain primary tests, however, have to be applied in construing the contract. The principal test is how and when property is intended to pass. There is nothing in the terms of the contracts before us to show that the property in the materials used in the process of bus-body building should pass to the customer who supplied the chasis the moment the materials were affixed to the chasis. On the other hand, the stipulation relating to payment, namely, payment against delivery, clearly shows that the property passed only at the time of delivery of the bus body. It is explicit from this term that if there is no delivery of the bus body as such, there will be no liability for payment. The position would be otherwise if the property in the materials used in the bus body-building passed as and when they were affixed to the chasis.
This position also demonstrates that the risk in respect of the materials used in the bus body-building is with the assessee and that before completion of the bus body and delivery thereof, the customers bears no risk in respect of it. It is not stray words used in the contract that by themselves would govern the intention of the parties. The contract will have to be read as a whole and the terms therein will have to be read as a whole and the terms therein will have to be interpreted in the context of each other and also taken together. Undoubtedly, the idea of construction is involved in the process of bus bodybuilding. But the point is whether the parties bargained only for work and labour or for delivery of the bus body as such fitted to the chasis. In other words, if the parties intended that there should 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 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 of Kone Elevators (India) Ltd. (supra) considering the case of installation of lifts held that the contract is a "contract for sale". The Hon'ble Apex Court while enumerating the tests to be considered while deciding the nature of contract emphasized the fact that the intention of the parties in the contract would to a large extent determine the issue. The Hon'ble Court laid down the following as the probable tests that should be conducted before determining the nature of contract: (i) Whether it was one for transfer of property or for work and labour; (ii) How and when property of dealer passed to the customer i.e., whether by transfer or accession.
The Hon'ble Apex Court while saying so has followed the principles laid down by it in the case of Hindustan Shipyard(supra) and clarified that it is not the bulk of the material used in the construction alone but the relative importance of the material qua the work, skill and labour of the payee which also has to be seen, but it is a relevant parameter.
In the present case, where the contract of Supply & Erection is given to the same party, the value of the Erection Contract as can be seen from the annexure is lesser than the value of the supply contract. It cannot therefore control the interpretation of the contract, specifically when the property in the goods have passed ex-works on delivery and not on the theory of accession. The assessee took possession of the goods and the title passed on to it as a chattel prior to commencement of the erection portion of the contract.
5.5 Further the Hon'ble Supreme Court while considering the issue of "installation of lift" 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 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 the equipment such as insulators, conductors, Transformers, Circuit Breakers, etc., are standard equipments. The relevant technical specification is specified by the 'purchaser'. The title in the goods passes as a chattel on delivery though certain obligations are still necessarily to be performed by the 'supplier'. Though the assessee claims that the design specification are not unique in the sense that the same specifications are used by many other concerns, to our mind, this is not a relevant test. The issue is as to the time and situs of passing of the property and as to whether the property passes "BRICK by BRICK" on the theory of accretion or as a chattel qua chattel. The mere fact that the supplier has to perform many other obligations cast on it by virtue of the contract after delivery of goods does not change the nature of transaction. The 'supply' portion of the contract are the predominant object and intention of the parties. Erection is relatively minor portion as compared to the supply portion. If the erection portion cannot be taken as the main object of these contracts. Title in goods was transferred as movables prior to erection. If equipment are manufactured as per the design engineering, etc., specified by the customer, it would not result in a works contract especially when all the material belongs to the supplier, even though it produced a tailor made product. The erection portion being subsequent to passing of title by execution of the supply portion, it cannot be said that the erection portion controls the supply portion, though the fulfilment of the conditions of the erection contract has a bearing on the fulfilment of the condition of supply portion of the contract, and though in some cases both the contracts are in the same document. 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.
The order in the case of Essar Oil Ltd., (supra) 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. (supra) relates to a printing press and similar issue was considered by the Hyderabad Bench in the case of Andhra Pradesh State Road Transport Corporation (supra). 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. (supra) 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 erecting the work or performing the service. In such cases, the transaction would not be one indivisible but should fall into two separate agreements, one of work or performance and the other of sale". Applying the proposition, we hold that the contract of sale, does not become a contract of work, as there are two separate agreements.
194C. (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of contract between the contractor and....
shall at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to...
"Explanation III.-For the purposes of this section, the expression "work" shall also include- (b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting; (c) carriage of goods and passengers by any mode of transport other than by railways; The test is whether, in substance, the contract is one of work or labour or not. Section 194C will apply, when payment is made to the deductee for carrying on any work or for supplying labour for carrying out any work and will not cover contracts for sale of goods.
The CBDT recognized this position and issued the following guidelines in regard to the applicability of the provisions of Section 194C vide Circular No. 681, dated 8-3-1994 wherein: Para'7'(vi) the provisions of this section will not cover contracts for sale of goods.
(a) since contracts for the construction, repair, renovation or alteration of buildings or dams or laying of roads or airfields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labour, income-tax will have to be deducted from payments made in respect of such contracts.
Similarly, contracts granted for processing of goods supplied by the Government or any other specified persons, where the ownership of such remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect 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 contract for sale and as such outside the purview of this section.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 chattelqua. chattel, contract is of work and labour. The test is whether or not the workand labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skilland labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel.
A building contract or a contract under which a movable is fixed to another chattel or on the land, where the intention plainly is not to sell the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel but for the labour and work done and the material furnished, the contract will be one of work and labour. In the case of doubt, whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the above mentioned case.
A plain reading of the Section 194C along with CBDT Circular referred above 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.