Income Tax Appellate Tribunal - Hyderabad
Andhra Pradesh State Road Transport ... vs Deputy Commissioner Of Income Tax on 20 November, 2000
ORDER
Rakesh Kumar Gupta, A.M.
1. This bunch of four appeals has been preferred by the assessee against the order of the CIT(A) IV, Hyderabad, dt. 23rd Oct., 1998. In fact, these appeals emanate from the order passed under Section 201, dt. 6th Feb., 1998, by the Asstt. CIT, 5(1) (TDS), Hyderabad.
2. The short point raised in these appeals is as to whether assessee was required to deduct tax at source under Section 194C out of the payments made to the fabricators for body building contracts and whether by not deducting TDS as prescribed under Section 194C, assessee has rendered itself liable to be treated as 'assessee in default' under Section 201 along with all its resultant consequences.
3. At the outset, it was pointed out to the learned counsel for the assessee that appeals are delayed by 108 days. But in reply, learned counsel for the assessee put the facts straight and argued that there was no such delay and this confusion has arisen because of some typographical error crept in the particulars mentioned in Form No. 36. It is seen that the order of the learned CIT(A) was dt. 23rd Oct., 1998, whereas the present appeal as per the nothing made on Form No. 36 was filed on 24th Dec., 1998. Therefore, there was no delay in filing the appeals, as was made out on the basis of nothing of the Registry.
4. Before the issue is dealt by us, it is necessary for us to record the facts of the present case as are borne out from the assessment order, order of the learned CIT(A) and the facts as stated before us. Assessee-Andhra Pradesh State. Road Transport Corporation, is a corporation established under the state enactment. The assessee is in the business of providing transport services to the public in the state and for that purpose, it owns fleet of buses. It purchases chassis and after the purchase of chassis hands over the same to the fabricators for constructing the body building upon the chassis.
5. During the course of inspection, it came to the notice of the IT Department, that assessee is getting bus body building work done through private fabricators and payments were being made to such fabricators without deduction of tax at source under Section 194C. This question was posed to the assessee by the learned Asstt. CIT in response to which the assessee stated that the bus body building comes under the Sale of Goods Act and 'TDS provisions under Section 194C are not applicable to the payment made to the fabricators. The AO, being not convinced with the reply of the assessee,' held that the bus body building contract comes within the meaning of "works contract" and is not governed by the Sale of Goods Act. Accordingly, the AO treated the assesses as 'assessee-in-default' under Section 201 and raised the demand of tax and interest under Section 201(1 A) as under:
Asst-
yr.
Contract amount paid Tax(TDS) Delay in months Interest under s. 201(1A) Total (Rs) (Rs) (Rs) (Rs) 1995-96 32.76.62,660 73,39.643 34 31.19.348 1.04.58.991 1996-97 42,58,89,967 95,39,935 22 26,23,482 1.21,63,417 1997-98 69.26.90,968 1,38,53.819 10 17.31,727 1,56,85,546 1998-99 39.56,20.348 79,12.406 79.12,406 (Upto Dec.. 1998) Total 3,86.46.803 74,74.557 4,61,15.360
6. Assessee filed appeal against the whopping demand raised by the learned Asstt. CIT and reiterated before him that the whole process of getting bus body building culminates in the sale of the bus body by the fabricator to the appellant and since appellant pays sales-tax on the consideration paid to the fabricators, meaning thereby that it was nothing but the sale. It was vehemently argued by learned counsel for the assessee before the learned CIT(A) that Section 194C was not applicable to the facts of its case and the order passed under Section 201 was liable to be quashed. But learned CIT(A) was not convinced with the arguments of learned counsel for the assessee and on the basis of the 'extracts' of the bus body building contract, which was placed before him by the appellant, he held the assessee as 'assessee-in-default' and confirmed the order passed by the AO under Section 201
7. Before us, learned counsel for the assessee submitted that Section 194C does not cover those transactions, which involve sale of goods and in the case before us, what was done by the assessee by entering into contracts with bus body builder was to purchase bus bodies constructed and fitted on the chassis supplied- He further argued that the dominant objective and intention of the parties have to be seen, which are embedded in an agreement. According to him, the dominant objective and intention of the appellant was to purchase bus bodies and, therefore, the transactions entered into were the transactions of purchase and sale simplicitor. He drew our attention to p 4 of the learned CIT(A)'s order where the caption has been mentioned. He argued that merely because certain specifications were given to the seller as to the number of seats, quality of seats and other material, the transaction does not lose its basic character, which was purchase and sale in the instant case. Learned counsel for the assessee argued that learned CIT(A) was not justified in distinguishing the case of PS & Co. 56 STC 282 cited before him, as it covers the case of the assessee and moreover, this case was approved by the Hon'ble Supreme Court, in the case reported in 119 STC 533. He further submitted that the case Sentinel Rolling Shutters, relied upon by learned CIT(A) was not applicable to his case, as analogy drawn by learned CIT(A) was not correct. He vehemently argued that by holding the assessee as 'assessee-in-default' for no fault of the assessee under Section 194C, the order passed under Section 201 by AO and confirmed by learned CIT(A) is contrary to law, which may be reversed.
8. On the other hand, learned Senior Departmental Representative, Shri T. Jayashankar was forceful in his arguments to prove that Section 194C clearly covers the case of the assessee, as the words used in that section are "any work, which are of wide import and quite comprehensive. According to him, the words "any work" would cover the fabrication work of bus bodies entrusted by the appellant to the body builders and these words should not be given restrictive meaning to include only those cases which involve labour alone. He cited the decision of the Hon'ble Supreme Court in the case of Associated Cement Co. Ltd. v. CIT (1993) 201 ITR 435 (SC) to drive home his viewpoint canvassed above. He took us to the extracts of the agreement quoted by learned CIT(A) in his order and emphasised at several places, where the words "work" appear and he sought to emphasise that even the agreement entered into with the bus body fabricators also speak of the work, which was nothing but was includible within the meaning of the words "any work". He further argued that payment of sales-tax cannot be the determinant of the nature of the transaction and cannot prove that the transaction involved was the transaction of sale because now sales-tax is attracted on the works contracts also. He distinguished the case of PS & Company (supra) on the ground that in that decision, what was got made from the fabricators was an identifiable object i.e., ferry whereas in the instant case, no identifiable object having separate existence and entity was purchased. What has been got made in the instant case, was the bus body fabricated on the chassis already supplied. Learned Senior Departmental Representative further argued that the fabricators did not have the property rights in the chassis fitted with bodies which also shows that it was not the sale but was fabrication work got done. He relied upon the decision of the Hon'ble Supreme Court in the case of State of Gujarat v. Kailash Engg. Co. 19 STC 13, State of Gujarat v. Variety Body Builders 38 STC 176 and Sentinel Rolling Shutters & Engg. Co. (P) Ltd. v. CST 42 STC 409. He further relied upon the decision of the Honourable Madras High Court in the case of Kumdum Publications (P) Ltd. v. CIT (1991) 188 ITR 84 (Mad). Therefore, he vehemently pleaded that there was no infirmity in the orders passed by the authorities below and, therefore, their orders were prayed to be upheld.
9. In reply, learned counsel for the assessee submitted that the decisions relied upon by learned Senior Departmental Representative in the case of Kailash Engineering Company (supra) and other cases were considered by Hon'ble Supreme Court and distinguished by the apex Court in the subsequent decision rendered by it in the case of Hindustan Shipyard Ltd. v. State of Andhra Pradesh 119 STC 33. Therefore, the decisions relied upon by learned Senior Departmental Representative were not relevant to the case at hand. In respect of the point of time when the property in the bus bodies passed, it was submitted by him that during the construction period of the bus bodies on the chassis, the property remained vested with the fabricators only and has not transferred before the time of sale. He further made prayer for the reversal of the orders of the authorities below.
10. We have heard the rival submissions and have gone through the orders passed by the authorities below and have deliberated upon the decisions cited before us. The short point for our consideration as stated earlier also, is as to whether the appellant was liable to deduct tax at source under Section 194C out of the payments made to the fabricators on account of the construction of bus bodies and installing such bodies on the chassis supplied by the appellant-corporation.
11. Section 194C enjoins an obligation to deduct tax at source out of the payments made to a contractor for carrying out "any work" if other conditions stipulated in that section stand satisfied. In the instant case, we have to examine as to whether the meaning of the word "work" would cover the activity of bus body building. The word "work" has not been defined under the IT Act except the fact that an inclusive meaning has been assigned to the expression "work" by inserting Expln. 3 to Section 194C by the Finance Act, 1995, w.e.f. 1st July, 1995. In the past, attempts have been made by the interested parties to give a restrictive meaning to the expression "work" to be confined to the expression "works contracts". Such dispute as to whether the meaning of "work" has to be confined to the "works contracts" alone travelled upon the stage of the Hon'ble Supreme Court and Hon'ble Supreme Court in the case of Associated Cement Company v. CIT (supra) held that the expression "work" envisaged in Sub-section (1) to Section 194C is of a wide import and covers "any work" which one or the other of the organisations specified in Clauses (a) to (j) of that sub-section can get carried out through a contractor under a contract. In that decision, the Hon'ble Supreme Court made it clear in very many words that the meaning of the word "work" cannot be construed to be confined to the expression "works contracts" alone. Therefore, the meaning assigned to the expression "work" will have to be seen beyond the meaning of the expression "works contracts." This position as enunciated by the apex Court was also duly taken note of and clarified by the CBDT in its Circular 666, dt. 8th Oct., 1993 in para 5.3. But one thing which is certain and on which there could be no dispute from either of the parties is that, if a transaction can be termed as a contract for sale, that transaction can at least not be treated as "work". This position was admitted by the CBDT also, in the context of Section 194C itself in its Circular No. 86, dt. 29th May, 1972, reported at 84 ITR 99 (St).
12. Therefore, we will have to examine as to whether the contract entered into by the appellant-corporation with the fabricators, a copy of which was supplied to learned CIT(A) and quoted by him in his impugned order is essentially a contract for a sale or is a contract for work. If it is former, it can safely be concluded that the provisions of Section 194C would not be attracted to the appellant-corporation and in case it falls within the latter category, appellant-corporation would well be within the clutches of the provisions of Section 194C.
13. Admittedly, it is not an easy task to distinguish between the contracts of sale and the contracts of work because the distinction between the two types of contracts is very thin and the Courts have faced tremendous difficulty at times in construing the true nature of a contract. This problem gets magnified further when the contract is a composite one involving both a contract of work and labour and a contract of sale. Certain guidelines have been laid down by the apex Court in the case of P.S. Company v. State of Andhra Pradesh 56 STC 283 to determine the true construction of a contract so as to determine in turn as to whether transaction covered by that contract is one of sale or of work and labour. Though these guidelines cannot be termed as infallible tests yet they provide valuable help and insights to arrive at correct decision. These guidelines are as under:
(1) 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.
(2) 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.
(3) 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.
(4) 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.
(5) If the bulk of the material used in the construction belongs to the manufacturer 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.
(6) 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;
Where a contract is of the first type, it is a composite contract consisting essentially of two contracts, one for the sale of goods and the other for work and labour.
The second type of work is clearly a contract for work and labour not involving sale of goods.
While the third type is contract for sale where the goods are sold as chattels and some work is undoubtedly done, but it is done merely as incidental to the sale."
Similarly, observations of the Hon'ble Supreme Court in the case of Hindustan Shipyard Ltd. v. State of Andhra Pradesh 110 STC 533 are also guideposts in this regard, relevant portion of which is extracted below :
"Transfer of property in goods for a price is the linchpin of the definition of "sale". Whether a particular contract is one for sale of goods or for work and labour depends upon the main object of the parties found out from an overview of the terms of the contract, the circumstances of the transaction and custom of the trade. It is the substance of the contract document(s), and not merely the form, which has to be looked into. The Court may form an opinion that the contract is one whose main object is transfer of property in a chattel as a chattel to the buyer, though some work may be required to be done under the contract as ancillary or incidental to the sale. If the primary object of the contract is the carrying out of work by bestowal of labour and services and materials are incidentally used in execution of such work then the contract is one for work and labour, [see para 14(2)].
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, [see para 14(3)].
If the bulk of material used in construction belongs to the manufacturer who sells the end-product for a price, then it is a strong pointer to the conclusion that the contract is in substance one for the sale of goods and not one for labour. However, the test is not decisive. It is not the bulk of the material alone but the relative importance of the material qua the work, skill and labour of the payee which have to be weighed. If the major component of the end product is the material consumed in producing the chattel to be delivered and skill and labour are employed for converting the main components into the end products, the skill and labour are only incidentally used, the delivery of the end product by the seller to the buyer would constitute a sale. On the other hand, if the main object of the contract is to avail the skill and labour of the seller though some material or components may be incidentally used during the process of the end product being brought into existence by the investment of skill and labour of the supplier, the transaction would be a contract for work and labour."
14. The tests indicated in several decisions of the Supreme Court to distinguish between a contract for sale and a contract for work and labour are not exhaustive and do not lay down a rigid or inflexible rule applicable alike to all transactions. They do not give any major formula by the application of which one can say that in every case whether a contract is a contract for sale or a contract for work and labour. They merely focus one or the other aspect of the transaction and afford some guidance in determining the question. Basically and primarily whether a particular contract is a contract for sale of goods or for work and labour, depends upon the main object of the parties, gathered from the terms of the contract, the circumstances of the transactions and the customs of the trade. There can be no gainsaying that there is no standard formula by which a contract of sale can be distinguished from a contract for work and labour. There may be many common characteristics in both the contract, some neutral in a particular contract and yet certain clinching terms in a given case may fortify the conclusion one way or the other. All that will depend upon the facts and circumstances of each case. This question to be answered, is not ah easy and has perplexed the jurists all over. Nevertheless, the distinction between the two rests on a clear principle. A contract of sale is one whose main object is the transfer of the property in and the delivery of the possession of a chattel as a chattel to the buyer. Where the dominant object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one of work and labour. The test is whether or not the work and labour bestowed and in anything that can properly become the subject of sale; neither the ownership of materials is conclusive although such factors may be relevant and be taken into consideration in ascertaining and determining whether the contract in question is in pith and substance a contract for work and labour or one for the sale of chattel. These principles have enunciated and culled out from Halsbury Laws of England, 3rd Edn., Vol. 34, 6-7.
15. In the case before us, after careful consideration of the covenants, material features of the contract entered into by the appellant, as referred to in the order impugned, are found as under :
(1) Bus bodies shall be manufactured by the fabricators.
(2) Chassis shall be supplied by the appellant.
(3) Sales-tax shall be levied on the value of each bus body.
(4) The constructed bus bodies shall be delivered at APSRTC office at Mushirabad.
(5) Fabricator shall arrange for transit insurance for chassis as well as body.
(6) Bus bodies manufactured shall give satisfactory performance.
(7) Fabricator shall make over the appellant the bus bodies ex-factory completed and finished and ready for use on the road.
(8) Fabricator shall deliver all the bodies within the stipulated period.
(9) Payments of the cost for the completed bodies will be made to the fabricators within a stipulated time after taking over the completed bus bodies.
(10) In case of partly fabricated bus body, payment shall be made as: per assessment of the appellant.
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 simplicitor. 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 deliver them 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 basic 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 chassis 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 chassis the moment the materials were affixed to the chassis. 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 chassis. 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 customer 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 chassis. 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 chassis, 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."
16. Similar, issue was dealt with by 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.
17. Our attention was drawn by learned Senior Departmental Representative to the words "work" appearing in the impugned contract. But mere use of the words "work" alone cannot determine the true character of a transaction covered by that contract. On the basis of covenants of the said contract and by reading the contract as a whole if conclusion emerges that it was contract of sale, use of words "works" here and there do not matter. Substance of the contract has to be seen and not the form or certain words or phrases scattered and used in that contract. It is not the meaning of an individual recital or the inference flowing from any term or word or condition of the contract read in isolation but an overview of the contract wherefrom the nature of the transaction covered thereby has to be determined.
18. Insofar as the contention of the Revenue that fabricators did not have the property rights in the chassis fitted with bodies is concerned, it is clear from the contract before us that property in the bus bodies remained with the fabricators and it got vested with the appellant-corporation only upon the completion of the sale. The case laws relied upon by the learned Senior Departmental Representative do not come to the help of the case of the Revenue as the facts involved in these cases were different than those obtaining in the case of the appellant.
19. In the case of Kailash Engineering Company (supra), facts were materially different than the ones involved in the case before us. In that case, fabricator-contractor was not the owner of the ready coaches constructed by him at any stage of their production. Whereas in the instant case, fabricator was the absolute owner and liable to all risks insofar as bus bodies were concerned till the time these were made over the assessee. It is important to mention that Hon'ble Supreme Court in that case distinguished the case of Patnaik & Co. v. State of Orissa (supra), before arriving at the conclusion that contract in the case before them (Kailash Engg. Company) was one for carrying out of the works. It may be recalled that in our opinion, case of the appellant is governed by the case of Patnaik & Company (supra) as stated earlier also. In the case of Slate of Gujarat v. Variety Body Builders (supra) Hon'ble Supreme Court has distinguished the facts of the case before them with the facts of a contract of bus body building implying thereby that in view of Hon'ble Supreme Court, a contract of bus body fitted into the chassis with all the materials supplied by the contractor and all the skill and labour contributed by the contractor constitutes a contract of sale. Because Hon'ble Supreme Court in the case of Variety Body Builder's case (supra) held that contract for construction of coaches on the underframe supplied by Railways was a contract of works and labour. Facts of the case of Sentinel Rolling Shutters & Engineering Co. (P) Ltd. v. CST (supra) are also materially different and therefore, ratio of that decision cannot be applied to the case before us. Similar is the position in regard to the cases of Hindustan Aeronautics Ltd. v. State of Karnataka 55 STC 314 (SC) and Kumudam Publications (P) Ltd. (supra).
20. Therefore, we quash the orders passed by the authorities below and hold that appellant-corporation was not liable to deduct tax at source under Section 194C. Therefore, there was no question of the appellant-corporation being treated as "assesses in default" and fastening the liability of tax and interest levied by learned AO and therefore, we delete the demand and reverse the orders passed by the authorities below.
21. In the result, appeals are allowed.