Income Tax Appellate Tribunal - Ahmedabad
Shyam Industries Ltd.,, Ahmedabad vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL 'C' BENCH : AHMEDABAD
(Before Hon'ble Shri T.K.Sharma, J.M. & Hon'ble Shri A.N.Pahuja, A.M.)
I.T.A.No. 3323/Ahd./2010 : Assessment Year 2005-06
M/s. Shyam Industries Ltd., Ahmedabad -Vs- DCIT, Circle-3, Ahmedabad
(PAN : AAFFS 5433E)
(Appellant) (Respondent)
Appellant by : Shri Tushar P. Hemani
Respondent by : Shri G.S.Souryawanshi, Sr.D.R.
ORDER
Per Shri T.K.Sharma, Judicial Member :
This appeal is filed by the Assessee against the order of ld. CIT(A)-XVI, Ahmedabad dated 22.10.2010 for the assessment year 2005-2006.
2. The only ground raised in this appeal is relating to confirmation of disallowance of Rs.38,43,900/- under section 40(a)(ia) of the I.T.Act, 1961.
3. At the time of hearing before us, on behalf of the Assessee, Shri Tushar P. Hemani appeared and pointed out that the only controversy involved in this appeal is covered in favour of the assessee by the decision dated 05/09/2008 of the ITAT, 'D' Bench, Ahmedabad in the case of M/s. Krishak Bharati Cooperative Ltd. -vs- ITO (TDS) in ITA Nos.1702,1703, 2473,2474, 4573 and 4574/Ahd/2007. Further arguing, the Counsel of the assessee pointed out that the assessee pays fixed transmission charges along with gas charges to Gas Authority of India Ltd. (GAIL). The supplier has charged local tax on the entire amount, which include the fixed transmission charges and the sales-tax has been charged, the amount paid is for sales and not for any works or services. Therefore, provisions of section 194C of the I.T. Act, should 2 ITA No.3323/Ahd./2010 not be made applicable and resultantly, the disallowance made by the AO of Rs.38,43,900/- under section 40(a)(ia) is required to be deleted.
4. On the other hand, Shri G.S.Souryawanshi, appearing on behalf of the Revenue, could not controvert the aforesaid submissions of the ld. Counsel for the Assessee.
5. After hearing both the sides, we have carefully gone through the orders of the authorities below. The assessee, namely, M/s. Shyam Industries Ltd. has entered into contract called "Gas Sales Agreement" with GAIL (India) Ltd. for supply of gas which is used as consumables for processing sesame seeds. As per contractual agreement, M/s. Shyam Industries has to pay fixed transmission charges periodically for the supply of gas through pipeline allocated to it. In the previous year, relevant to the assessment year under appeal, it has paid Rs.38,43,900/- as gas transmission/ transportation charges. Since no tax was deducted at source under section 194C, the AO disallowed the entire transport charges amounting to Rs.38,43,900/-. The issue before us is whether the assessee is required to deduct TDS on transportation charges amounting to Rs.38,43,900/- paid in the previous year, relevant to the assessment year under appeal. This question has been answered by the ITAT, 'D' Bench, Ahmedabad in the case of M/s. Krishak Bharati Cooperative Ltd. (supra), wherein it was held that this type of contract is a contract for sale of goods and not a work contract. Hence, the assessee is not required to deduct TDS under section 194C of the I.T. Act, 1961. The relevant portion of the judgment of the ITAT, 'D' Bench, Ahmedabad in the case of M/s. Krishak Bharati Cooperative Ltd. (supra) reads as under:
"6. We have heard the rival contentions and gone through the facts and circumstances of this case. We have also perused the case records including the TDS assessment orders as well as the order of CIT(A). We have also gone through the Paper Book (PB) filed by the assessee. We have also gone through the case laws referred by both the sides. It is observed from the facts that the Assessing Officer in order to levy the TDS and interest stated in the assessment order, that it is clear from the sale bills of suppliers of gas, i.e., GAIL, GSPCL & GGCL that the purchaser-assessee, i.e., KRIBHCO was required to pay the transportation charges in addition to the cost of purchase of gas in lieu of supply of gas from the premises of the suppliers to the premises of the assessee.
3ITA No.3323/Ahd./2010 The Assessing Officer has noticed this fact from the Article 4.02 of the Agreement Deed entered into by the assessee with GAIL. First of all, we have gone through the terms and conditions of supply of gas by the supplier, i.e, GAIL to the assessee. The relevant clause of the agreement reads as under:-
4.01 GAS shall be delivered by the SELLER to the BUYER at the outlet of Gas Metering Station located at BUYER's premises at Hazira. GAS will be transported from the cown stream flange of the pipeline at the outlet of the Gas Metering Sation hereinafter referred to as point of delivery by means of pipeline to be provided and maintained by the BUYER.
4.02 Gas Metering Station and building needed for the same shall be set up/constructed and maintained by the SELLER. The land needed for the purpose of such Gas Metering Station / Building shall be provided by the BUYER free of cost. The SELLER may use the said location in consultation with the BUYER for effecting deliveries to an other parties in the area without affecting the supply of GAS by the SELLER to the BUYER as per the CONTRACT.
4.03 The BUYER, in addition to price of GAS mentioned in Article 11, shall pay to the SELLER monthly transportation charges of Rs.49,58,250/- (Rupees forty nine lakhs fifty eight thousand two hundred and fifty only) plus taxes with effect from 01.04.1996 (Fist April One thousand Nine hundred & Ninety Six) thereon for the facilities provided by the SELLER for supply of GAS to the point of delivery located at the BUYER's premises. The above monthly transportation charges shall be increased by 3% (Three per cent) on yearly rest basis with effect from 01.04.1997 (First April One Thousand Nine Hundred and Ninety Seven). The BUYER shall pay the above monthly transportation charges to the SELLER in addition to payment of invoice for supply of GAS to be raised as per Article 11 & 12 hereinafter. Provided further, in case monthly transportation charges are not paid by the BUYER within 3(three) working days of presentation of invoice, the SELLER will present the invoice for the same to a Bank against Letter of Credit and draw the amount.
4.04 The BUYER shall make all proper and adequate arrangement for receiving GAS at the outlet of Gas Metering Station at its own risk and cost.
Should any defect in the BUYER's intake arrangement arise, the same shall be rectified by the BUYER themselves.
4.05 For effecting deliveries of GAS as aforesaid the SELLER shall install and maintain at its own risk and cost, the piping control, regulation and metering equipment in the aforesaid Gas Metering Station and all other accessories. The said equipment so installed by the SELLER shall remain the property of the SELLER and the SELLER shall have he right to remove such equipment at any time within twelve (12) months after the expiry of the CONTRACT. The SELLER shall have the right to use the BUYER's utilities 4 ITA No.3323/Ahd./2010 essentially required for installation, operation and maintenance of Gas Metering Station and allied equipments required for the supply of GAS on payment of such charges for utilities only as may be mutually agreed. All Statutory approvals shall be obtained by the SELLER.
4.6 The title of Gas shall pass from the SELLER to the BUYER at the point of delivery of GAS. The delivery point shall be at the down stream flange of the pipeline at the outlet of the Gas Metering Station.
7. From the above terms and conditions, It is noticed that the Assessing Officer has gone through the Article 4.02 of the Agreement Deed entered into by the assessee with GAIL. It is observed by the lower authorities that the assessee was required to pay transportation charges of the gas supplied. The Assessing Officer treated the transportation charges paid at charges for 'work contract'. The lower authorities in their respective orders stated that in the case of the assessee, it is covered by provision of clause-c of the Explanation- III of Section 194C, which says that the expression work shall also include carriage of goods and passengers by any mode of transport other than by railways. The lower authorities have relied on the Board's Circular No.681 dated 08-03-1994, wherein it was claimed to be stated that this Section apply to all type of contracts for carrying out any work including transport contracts. The lower authorities heavily relied on the case law of the Hon'ble Apex Court in the case of Associates Cement Co. Ltd. (supra) and the relevant provision of Explanation-III to sub-section (2) of Section 194 reads as under:-
Payments to contactors and sub-contractors.
194C
1.....
2.....
Explanation III- For the purposes of this section, the expression "work" shall also include -
(a) advertising ;
(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 ;
(d) catering.
8. The Ld. Counsel for the assessee has drawn our attention to the invoice No.2020000037, whereby the fixed transportation charges paid are at Rs.62,80,964/-, which is included in the sub-total price of supply of gas. For example, the copy of invoice is reproduced as under:-
5ITA No.3323/Ahd./2010 GAIL (India) Ltd.
PO - ONGCL, Hazira, Surat
PROVISIONAL INVOICE WITHOUT PREJUDICE
Customer Code 10577 Invoice No. 2020000037
To: KRIBHCO- Date 16.03.2005
HP,SURAT HAZIRA
ROAD, DIST. Kind Attention Mr. P.W.Shah GM
SURAT-394515, (tech)
Location
Gujarat, INDIA DIST - SURAT
Matering station H002
D.C.O. 3,000,000,000
Telephone 620034-7 M.G.O. 2,700,000.000
Fax 2038 Wt.Avg. Cal Val 9,072,27
for fortnight
E-mail
Telex Product Natural Gas
Supply of Natural Gas Quantity (1000 Rate/1000 Amount (in
SCM) SCM Rs.)
From To
01.03.2005 29,586.123 3,064.30 90,660,766.71
15.03.20005
Con. Price
2,850.00
Less Discount
ONGC Prm/Reb price 284.28 8,410,870.38
Taxes
Royalty 214.30 Pm/Reb TPT 0.00 0.00
Sales Tax 0.00 Metr/Dis./Service 0.00
charges
6
ITA No.3323/Ahd./2010
Transmission 0.00 Fxd.Trans chrgs 0.00 6,280,964.00
Local Dist 0.00 Sub Total 88,530,850.33
Total LST 12,00 10,623,702.04
3,064.30
CST 0.00 0.00
Turnover tax 0.00 0.00
Surcharge 0.00 0.00
Total 99,154,552.00
(Amount in words) RUPEES NINE CRORE NINETY-ONE LAC FIFTY-FOUR THOUSAND FIVE HUNDRED FIFTY-TWO ONLY In case the Invoice is not paid within 3 days of receipt of invoice, the supply of gas shall be disconnected without any further notice and without prejudice to other rights under the contract.
The sale is subject to the terms & conditions stipulated in the agreement.
For & on behalf of GAIL
LST 2224000787 DT.01/07/2002
CST GUJ.17B-8199 DT.22/06/1987
Authorised signatory
In view of the above gas supply contract between the GAIL and the assessee, it is clear that gas will be delivered by the seller, i.e., GAIL etc., to the assessee, i.e., buyer at the outlet of gas metering station located at the buyer's premises at Hazira. The gas will be transported from the downstream flange of the pipeline at the outlet of the gas metering station at the point of delivery by means of pipeline to be provided and maintained by the buyer. The gas metering station and building needed for the same will be constructed and maintained by the seller and the land needed for the purpose of such gas metering station will be provided by the buyer free-of-cost whether the provision of Section 194C particularly Explanation III to sub-section (2) of this Section will apply to the present assessee or not. For this, now we have to go through the Memo explaining the provision in Finance Bill, 1995 and the relevant Memo explain the provision as reported in (1995) 212 ITR 345 (St), is being reproduced below:-7
ITA No.3323/Ahd./2010 "Enlarging scope of provision regarding deduction of tax at source from payments to contractors and sub-contractors Sub-section (1) of Section 194C provides for deduction of income-tax at source from any sum payable for carrying out any work in pursuance of a contract between the contractor and the Government, local authorities, statutory corporations, companies, co-operative societies, statutory authorities engaged in provision of housing accommodation, etc., registered societies, trusts and universities. There is no requirement for deduction of income-tax at source where the contract is between the contractor and a firm. The payments under such contracts also need to be subjected to the requirement of deduction of income-tax at source. The Bill, therefore seeks to amend Section 19C, in order to apply its provisions to the payments made in pursuance of a contract between the contactor and any firm.
In order to subject payments in respect of advertising contracts, broadcasting contracts, telecasting contracts, transport contracts and catering contracts to the requirement of deduction of income-tax at source, the Bill seeks to amend Section 194C by providing that the expression "work", used therein, shall also include (a) advertising (b) broadcasting and telecasting including production of programs for such broadcasting or telecasting, (c) carriage of goods and passengers by any mode of transport other than by railways, and (d) catering.
Under the existing provisions of Section 194C no deduction of income- tax at source is required to be made if the consideration for the contract or the sub-contract does not exceed ten thousand rupees. As a measure of rationalization the Bill seeks to raise the aforesaid limit to twenty thousand rupees.
The aforesaid amendments will take effect from 1st July, 1995."
9. Even a similar legal discussion was carried out in the Ministry of Law & Justice, Department of Legal Affairs, Govt. of India where exactly a similar agreement for supply of goods has been discussed and finally formed an opinion, which reads as under:-
"Discussed the matter under reference with Shri R.P.Verma, Manager (P&A) and Shri S.R.Cora, Consultant (Taxation) of the National Thermal Power Corporation (NTPC) and Shri B.K.oyal, Dy. General Manager (Finance) and Shri L..Gupta, Manager (P&A) of Gas Authority of India Ltd. (GAIL).
From the discussion held with the aforesaid officials and on perusal of the documents placed of the file, the following questions inter alia emerge :8
ITA No.3323/Ahd./2010
(a) Whether gas is movable property? And whether gas is 'goods' covered under the definition given under Section 7(2) of the Sale of Goods Act, 1930?
(b) As to whether supply of gas by GAIL to NTPC is a contract for sale or contract for work?
At the outset, we would like to address the first question, i.e., (a) Both the issues raised in question (a) have been dealt with under the General Clauses Act, 1897. Section 3(36) defines the various kinds of movable property which cold squarely be covered under this Section such s debt, animals, inanimate property, copyright, share, water, electricity and gas etc., (emphasis added). The aforesaid Section defines movable property to man property of every description accept immovable property. To make it more understandable, attention is invited to a quarry whether electricity is a movable property? This issue has been examined by the various courts in catena of cases. According to the holdings the property which posses the characteristic of transmission, transference, delivery storage and possession will amount to be movable property. Thus, electric energy is a movable property. On the same anology, we may conclude that gas is also movable property.
So far as second pat of the question is concerned, the court in Kric County Natural Gas and Fuel Co. v. Samul S. Carrol 1911 AC 10 at P 117- 119 held that gas is goods. Since gas is movable property, therefore, gas is in a 'deliverable sage' as defined under Section 2(3) of the Sale of Goods Act, 1930.
As regards question (b), this question was examined by the Hon'ble Supreme Court in the case of Hindustan Aeronautics Ltd. v. Sate of Karnataka (1984) 1 SCC 706. While laying down the test to determine as to what amount to contact for sale and what amount to contract for work, the Hon'ble Supreme Court observed as under:-
".....A contract of sale is a contract whose main object is the transfer of property in, and the delivery of the possession of, non chatterl chattel to the buyer. Where, however, the main object of work undertaken by the payee of the..........
The aforesaid holding was further confirmed by the Hon'ble Supreme Court in another case i.e., Everest Copiers v. State of Tamil Nadu (1996) 5 SSC p 390. It is pertinent to mention here that sale of gas and transport of gas are two different things. The contract in question is a contact for supply of gas only which includes freight / transportation charges also. There is no separate agreement / contract for transportation of gas from GAIL to NTPC at the point o delivery of gas which is located in the NTPC's plant.9
ITA No.3323/Ahd./2010 Thus, from the foregoing legal discussion it can squarely be concluded that gas is a movable property and is also goods as defined under Section 7(2) of the Sale of Goods Act, 1930. Therefore, the question (b) the principle laid down by the Hon'ble Supreme Court in the aforesaid Hindustan Aeronautics case can also be applied in this case. Hence, the contact in question is a contract for sale and not for work and does not inter alia fall under Section 194(c) of the Income-tax Act, 1961. The action of the Income Tax Department is not legally sustainable.
Addl. L.A., Shri Krishna Kumar ma kindly see.
As per the above discussion and opinion of Law Ministry dated 16-05- 1997, forwarded by GAIL to the assessee wherein relying on Hon'ble Apex Court in the case of Hindustan Aeronautics Ltd. (supra), it was opined by the Law Ministry that the contract is for sale of gas which included freight, transportation charges and which would constitute contract for 'sale' and not for 'works'. The contract in question is a contract for supply of gas which include freight / transportation charges also. There is no separate contract for transportation of gas from GAIL to NTPC at the point of delivery of gas which is located in the NTPC's plant. As regards, second question, the principle laid down by the Hon'ble Apex Court in the case of Hindustan Aeronautics Ltd. (supra), the contract in question is a contact for sale and not for works.
10. Now we will discuss the case laws referred by both the sides. The Ld. Counsel for the assessee has first of all referred to the case of law of Hon'ble Apex Court in the case of Hindustan Aeronautics Ltd. (supra), wherein the Honble Apex Court has dealt with the issue of contract for sale of goods and distinguished the same from the contract for work and labour as under:-
"16. As has been clearly stated in the Halsbury's Laws of England, Third Edition, Volume 34, a contract of sale of goods must be distinguished from a contract for work and labour. The distinction is often affine one. A contract of sale is a contract 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 however the main object of work undertaken by the payee of the price was of the transfer of chattel qua chattel, the contract is one of work and labour. The test is, whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials, nor the value of the skill and 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 was in substance one for work and labour or one for the sale of a chattel.
17. In the case of Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. v. CSTA, this Court reiterated that tests indicated in several decisions of this Court to distinguish between a contract for sales and a contract for work and labour were not exhaustive and did not lay down any rigid or 10 ITA No.3323/Ahd./2010 inflexible rule applicable alike to all transactions. These did not give any magic formula by the application of which one could say, in every case whether a contract was a contract for sale or a contract for work and labour. These merely focused on one or the other aspect of the transaction and afforded some guidance in determining the question, but basically and primarily, whether a particular contract was one for sale of goods or for work and labour depended upon the main object of the parties gathered from the terms of the contract, the circumstances of the transactions and the custom of the trade. In that case, the assessee who was carrying on business as engineers, contractors, manufacturers and fabricators had entered into a contract with a company for fabrication, supply, erection and installation of two rolling shutters in two sheds belonging to that company for a price which was inclusive of charges for "erection at site". The contract provided, among others, that the delivery of the goods was to be ex-works and once the delivery was effected, rejection claims would not be entertained. All masonry works required before or after erection were to be carried out by the company at its own cost. Payments were to be made on overall measurements which should be checked by the company before installation. The actual transportation charges were to be in addition to the price stipulated in the contract and the terms of payment provided "25 per cent advance, 65 per cent against delivery and remaining after completion of erection and handing over of the shutters to the satisfaction" of the company. The assessee had submitted the bill to the company after completion of the fabrication of the rolling shutters, but before they were erected and installed at the premises of the company. On the question whether the contract was a contract for sale or a contract for work and labour, the High Court had held, agreeing with the Sales Tax Tribunal, that the contract was a divisible contract, which essentially consisted of two contracts, one for the supply of rolling shutters for money and the other for service and labour and that the amount payable at the stage of delivery represented the sale price of rolling shutters and it was liable to sales tax. On appeal, by special leave, this Court held that the contract was one single and indivisible contract and the erection and installation of the rolling shutters was as much a fundamental part of the contract as the fabrication and supply. The contract was clearly and indisputably a contract for work and labour and not a contract for sale.
18. It cannot be said as a general proposition that in every case of works contract, there is necessarily implied the sale of the component parts which go to make up the repair. That question would naturally depend upon the facts and circumstances of each case. Mere passing of property in an article or commodity during the course of performance of the transaction in question does not render the transaction to be transaction of sale. Even in a contact purely of works or service, it is possible that articles may have to be used by the person executing the work, and property in such articles or materials may pass to the other party. That would not necessarily convert the contract into one of sale of those materials. In every case, the court would have to find out what was the primary object of the transaction and the intention of the parties 11 ITA No.3323/Ahd./2010 while entering into it. It may in some cases be that even while entering into the 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 materials to be used in the course of executing the work or performing the service. But, then in such cases the transaction would not be one and indivisible, but would fall into two separate agreements, one of work or service and the other of sale. These principles can be deducted from the decision of this Court in State of H.P. v. Associated Hotels of India Ltd. In the decision in the case of The State o Madras v. Gannon Dunkerley & Co. (Madras) Ltd., this court had stated that according to the law, both of England and of India, in order to constitute a sale, it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which of course pre-supposed capacity to contract, that it must be supported by money consideration that as a result of transaction, the property must actually pass in the goods. Unless all these elements were present, there would be no sale.
19. In the instant case it is indisputable as we have referred to the "1951 contract" and the substance of the invoices and, it is not disputed that the other works orders were on the basis of the principles agreed by the 1951 agreement set out hereinbefore, that the transactions were as a result of composite contracts involving the execution of works viz. overhauling, repairing, servicing and in one year assembling, air force planes, entrusted to the appellant. The question is, whether this composite contract was divisible into one exclusively for work and labour and another for sale of materials. The fat that there is supply of materials for the purpose of execution of the work contracts undertaken by the appellant cannot be disputed. But, the question then arises whether that can be taken as pursuant to a distinct contract with a view to execute the work undertaken. In this connection, we have already mentioned the principles enunciated by the statement of Halshurv's Laws of England, Third Edition, Volume 34, pages 6 and 7, para-3.
20. It would be appropriate, in our opinion, because it clearly enunciates the principles, to refer to the statement of law in Benjamin's Treatise on the Law of Sale of Personal Property with reference to the French Code and Civil Law, Eighth Edition(1950) at pages 167-168 where the learned editor has deduced the principles that would be applicable in deciding the controversy before us. These principles are:-
1. A contract whereby a chattel is to be made and affixed by the workman to land or to another chattel before the property therein is to pass, is not a contract of sale, but a contract for work, labour and materials, for the contract does not contemplate the delivery of a chattel as such.
2. When a chattel is to be made and ultimately delivered by a workman to his employer, the question whether the contract is one of sale or of a bailment for work to be done depends upon whether previously to the completion of the 12 ITA No.3323/Ahd./2010 chattel the property in its materials was vested in the workman or in his employer. If the intention and result of the contract is to transfer for a price property in which the transferee had no previous property then the contract is a contract of sale.
Where, however, the passing of property is merely ancillary to the contract for the performance of work such a contract does not thereby become a contract of sale.
3. Accordingly
(i) Where the employer delivers to a workman either all or the principal materials of a chattel on which the workman agrees to do work, there is a bailment by the employer, and a contract for work labour, or for work, labour and materials (as the case may be, by the workman.
Materials added by the workman, on being affixed to or blended with the employer's materials, thereupon vest in the employer by accession, and not under any contact of sale.
(ii) Where the workman suppliers either all or the principal materials, the contract is a contract for sale of the completed chattel, and any materials supplied by the employer when added to the workman's materials vest in the workman by accession."
11. Similarly, the Ld. Counsel for the assessee relied on the decision of Hon'ble Delhi High Court in the case of CIT v. Dabur India Ltd. (2006) 283 ITR 197 (Del), wherein Hon'ble High Court has held as under:-
"We have carefully gone through the decision relied upon by counsel but find it difficult to accept the submission made by her. In the case of Annandam Viswanathan (1989) 73 STC 1 (SC)the work entrusted to the assessee was printing of question papers for universities. The question was whether such printing work could be treated to be a simple case of contract for sale of goods. Answering the question in the negative, the court held that printing of question papers at the behest of a university or education institution is a delicate and confidential type of work and the price paid for supplying such printed question papers or printed matter entails primarily the confidence and secondly the skill and to a very small extent the material. Hence, such work undertaken by the concerned agency could not be categorized as entailing sale of goods. It was instead a contract for works done. There is no similarity between the facts with which the Supreme Court was dealing in Viswanathan's case [1989] 73 STC 1 (SC) and those in the present case. It is nobody's case before us that the printing of the labels on the corrugated boxes required any special skill or involve any confidence or secrecy. In the circumstances, the Tribunal was justified in holding that the predominant object underlying the contract was one for sale of goods which took the contract out of the purview of Section 194C of the Act.13
ITA No.3323/Ahd./2010
12. The Ld. Counsel for the assessee also relied on the Hon'ble Bombay High Court - Aurangabad Bench in the case of BDA Ltd. v. ITO (TDS) (2006) 281 ITR 99 (Bom), wherein the Hon'ble Bombay High Court relying on Hon'ble Apex court in the case of State of Himachal Pradesh, AIR 1972 (SC) 1131 and State of Tamil Nadu v. Anandam Viswanathan (1989) 73 STC 1 (SC) and also in the case of Associated Cement Co.Ltd.(supra), has held as under:-
"The case of State of Himachal Pradesh, AIR 1972 SC 1131; [1972] 29 STC 474 (SC)came to be decided by a Constitution Bench. In para.9 (page 1134), the court observed thus (page 479):-
"The difficulty which the courts have often to meet with in construing a contact of work and labour, on the one hand, and a contract for sale, on the other, arises because the distinction between the two is very often a fine one. This is particularly so when the contract is a composite one involving both a contract of work and labour and a contract of sale. Nevertheless, the distinction between the two rests on a clear principle. A contract of sale is one whose main object is the transfer of property in, and the delivery of the possession of, a chattel as a chattel to the buyer. Where the principal 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 end in anything that can properly become the subject of sale ; neither the ownership of materials, nor the value of the skill and 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 for work and labour or one for the sale of a chattel (Halsbury's Laws of England, 3rd edition, vol. 34, 6-7)"
The apex court was considering the applicability of sales tax under the Punjab General Sales Tax Act. In fact, deduction of TDS under section 194C is converse to the payment of sales tax under the Sales Tax Act framed by the States inasmuch as if the contract is not covered for payment of sales tax, it is covered for deduction of TDS under section 194C of the Act and vice versa. While distinguishing the transaction of sale contract from the works contract, the court observed (page 481):
"From the decisions earlier cited it clearly, emerges that such determination depends in each case upon its facts and circumstances. Mere passing of property in an article or commodity during the course of the performance of the transaction in question does not render it a transaction of sale. For, even in a contract purely of work or service, it is possible that articles may have to be used by the person executing the work and property in such articles or materials may pass to the other party. That would not necessarily convert the contract into one of sale of those materials. In every case the court would have to find out what was the primary object of the transaction and the intention of the parties while entering into it. It may in 14 ITA No.3323/Ahd./2010 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 materials to be used in the course of executing the work or performing the service. But, then in such cases the transaction would not be one and indivisible, but would fall into two separate agreements, one of work or service and the other of sale."
In the case of State of Tamil Nadu v. Anandam Viswanathan [1989] 73 STC 1 (SC), the assessee had supplied printed question papers to university and other educational institutions in the country. The question was whether it was a "work contract", or "contract for sale" for the purposes of payment of sales tax under the Tamil Nadu General Sales Tax Act. In para-27, the court stated (page 14 of [1989] 73 STC 1 and page 972 of AIR 1989 (SC) :
"In our opinion, in each case the nature of the contract and the transaction must be found out. And this is possible only when the intention of the parties is found out. The fact that in the execution of a contract for work some materials are used and the property in the goods so used, passes to the other party, the contractor undertaking to do the work will not necessarily be deemed, on that account, to sell the materials. Whether or not and which part of the job-work relates to that depends, as mentioned hereinbefore, on the nature of the transaction. A contract for work in the execution of which goods are used may take any one of the three forms as mentioned by this court in Government of Andhra Pradesh v. Guntur Tobaccos Ltd., AIR 1965 SC 1396."
In the case of Associated Cement Co. Ltd. [1993] 201 ITR 435 (SC),it was held that, the payment made to the labourers engaged by the contractor for loading the cement bags for transportation fall within the ambit of the terms "any work", and therefore TDS was deductible under section 194C. In para. 5, the court noted (page 440) :
"We see no reason to curtail or to cut down the meaning of the plain words used in the section. 'Any work' means any work and not a 'works contract', which has a special connotation in the tax law. Indeed, in the sub-section, the 'work' in the sub-section is not intended to be confined to or restricted to 'works contract'. 'Work' envisaged in the sub-section, therefore, has a wide import and covers 'any work' which one or the other of the organizations specified in the sub-section can get carry out through a contractor under a contract and further it includes obtaining by any of such organizations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the 'work' but for its specific inclusion in the sub- section."
It is not disputed that, M/s. Mudranika is an independent establishment engaged in the business of supplying printed packaging material to various establishments, and it I not a captive unit of the assessee. The assessee had issued a purchase order in favour of M/s. Mudranika for supply of printed 15 ITA No.3323/Ahd./2010 labels as per the specifications provided by it, and the raw materials required for the same were not supplied by the assessee. M/s. Mudranika has been supplying such printed labels to other establishments as per their respective specifications. The printing work was not being carried out in the premises of the assessee. This supply of printed labels cannot be compared and equated with the supply of printed question papers to universities and educational institutions. M/s. Mudrnika would into print such labels with the specifications of the assessee beyond the quantity specified in the purchase order, and therefore, it was wrong on the part of the Tribunal to hold that, the labels printed by M/s. Mudranika to supply to the assessee could not be sold to any other establishments in the market. This finding regarding no marketability is based on a fallacious premise that, M/s. Mudranika was printing an unlimited number of labels. When the printing work was being carried in the premises of M/s. Mudranika, though as per the specifications of the assessee, the supply was limited to the quantity specified in the purchase order and it would not do such printing beyond the numbers specified in the same. There is nothing on record to show that, all other ancillary costs like the labels, ink, papers, screen-printing, screens, etc., were being supplied by the assessee to M/s. Mudranika. In the facts of this case, the supply of printed labels by M/s. Mudranika to the assessee was a "contract of sale" and it could not be termed as a "works contract". The Tribunal has rightly held in the case of Wadilal Dairy International Limited [2002] 81 ITD 238 (Pune) that, the supply of printed packing labels amounted to a "sale contract" and not a "works contract", and the same ratio is applicable in the instant case, as well. The single Bench of the Tribunal thus fell in gross error in holding that, the subject transaction was a "works contract", and therefore TDS was required to be deducted by the assessee under section 194C of the Act."
13. The Ld. Counsel for the assessee also relied on the Hon'ble Apex Court in the case of Bharat Sanchar Nigam Ltd. and Anaother v. Union of India and Others (2006) 282 ITR 273 (SC), wherein the Hon'ble Apex Court has held as under:-
"Coming now to the merits of the case, the petitioners contended that the service providers are licences under section 4 of the Telegraph Act, 1885, and provide "telecommunication services" as provided under section 2(k) under the Telecom Regulatory Authority of India Act, 1997, Service tax is imposed on them under the Finance Act, 1994, on the basis of the tariff realized from the subscribers. They further contended that in providing such service thee is in fact no "sales" effected by the service providers and that the States do not have the legislative competence to impose sales tax on the rendition of telecommunication services. Article 366(29A) which extended the definition of "sale" in the Constitution did not apply to the transaction in question. Clause
(d) of article 366 (29A) relied upon by the respondents contemplates a transfer of a legal right to use goods. According to the petitioners there is no transfer of any legal right by the service providers nor any delivery of any goods which 16 ITA No.3323/Ahd./2010 may be covered under the Telegraph Act, 1885, as the same is barred and prohibited in terms of the licence granted to service providers under section 4 of that Act. It is submitted without a delivery of goods, there could be no transfer of any right to use those goods as contemplated under Article 366(29A)(d). It is the petitioners' case that the decision in State of U.P. v.
Union of India [2003] 3SCC 239 ; [2003] 130 STC 1 (SC) was erroneous not only because it held that the telephone connection and all other accessories which gives access to the telephone exchange with or without instruments are goods but also because there was in fact no transfer of any of these equipment to a subscriber. The predominant element and intention in the transaction was one of service and not of sale. It is submitted that taxing telecommunication services as a deemed sale under entry 54 of List II would be violative of Article 286 of the Constitution as the same involves connecting subscribers throughout the territories of India without any regard to state boundaries.
On the interpretation of Article 366 (29A) it was submitted that the fiction in one clause could not be read into the other. It is said that the disintegration of composite transactions has to be specifically enabled by the Constitution and that it was not within the competence of the State Legislation to divide a composite transaction otherwise. It is also submitted that the language of clause (d) was distinct from the language used in clause (b) of clause (29A) of Article 366. Our attention was drawn to the absence of the use of the word "involved" in the former sub-clause. It is emphasized that there must be goods of which the right to transfer is covered by sub-clause (d) of clause (29A) of Article 366. It is contended that there was no transfer of any right to use any goods and the parties never intended for such transfer. It is submitted that the court should apply the standard of the ordinary man for deciding whether the transaction in question was a contract for service or for transfer of a right to use deemed goods. The obligation of the service provider is merely to transmit voice and the subscriber was not interested in stipulating as to how the voice / data is to be conveyed to the other end. It is for the service provider to choose the medium as it thinks fit. The SIM card was not goods it merely enables activation.
According to the petitioners prior to the 46th Amendment composite contracts were not exigible to State sales tax under entry 54, List II. The legal fiction created in Article 366 (29A) provided for specific composite contracts to be subjected to sales tax. Therefore, even after the 46th Amendment other transactions had been held not to be sales. Reliance has been placed on the Everest Copiers v. State of Tamil Nadu [1996] 5 SCC 390 ; [1996] 103 STC 360 (SC), Rainbow Colour Lab v. State of Madhya Pradesh [2000] 2 SCC 385 ; [2000] 118 STC 9 (SC) and Hindustan Aeronautics Ltd. v. State of Karnataka [1984] 1 SCC 706 ; [1984] 55 STC 314 (SC). It was contended in addition that the restrictions regarding the States' inability to tax inter-state sales would continue to apply. Furthermore, the activity of providing the connection involved the use of instruments embedded to earth or attached to what is 17 ITA No.3323/Ahd./2010 embedded in the earth and therefore was immovable property and outside the scope of sales tax. Thus, there were no goods nor any transfer of any goods involved in the activity.
It is pointed out that none of the States could contend that telecommunication was not a service. It was submitted that the service did not allow for transfer of right to use goods. There was no transfer of control or equipments at any stage. It is submitted that what the service providers provide was a means of communication and what was transferred was the sounds of the message or signals which were generated by the subscribers themselves. It is further submitted that the SIM card was merely an identification device for granting access and was a means to access services.
The service providers in the appeal from the decision of the Kerala High Court submitted that the High Court had not appreciated the facts. The service providers had imported the SIM cards and sold them to franchises who then sold them to the subscribers. It is submitted that the authorities had wrongly proceeded on the basis that there was a sale of SIM cards by the service providers to the subscribers. It is pointed out that the sale was factually and legally distinct from the activity of giving the connection or activation of the SIM cards. The decision of the Kerala High Court has also been impugned on the ground that it overlooked, inter alia, questions of competence raised by the petitioners, the explanation to the definition of turnover as well as the ratio of Gannon Dunkerley [1958] 9 STC 353 (SC) ; [1959] SCR 379 ; AIR 1958 SC 560 and misapplied the aspect theory."
13. On the other hand, the Ld. DR relied on the case law of Hon'ble Bombay High Court in the case of Pentagon Engineering Pvt. Ltd. v. CIT (1995) 212 ITR 92 (Bom) wherein, the Hon'ble High Court has held that the use of word 'shall' in Section 201(IA) makes the liability to pay interest in circumstances mentioned mandatory and there is no precondition of consideration of "reasonable cause" for non-payment in time of tax deducted under Section 192. Sec. 201(1A) is mandatory and the Tribunal was right in law in taking the view that the ITO was not required to take into consideration the "reasonable cause" for non-payment of taxes deducted under Section 192 of the Act. The Ld. DR also relied on the case law of Hon'ble Apex Court in the case of CIT & ANR. v. Century Building Industries (P) Ltd. (2007) 293 ITR 194 (SC), wherein the Hon'ble Apex court has held that the material expression in Section 194A(1) is "at the time of credit of such income to the account of the payee". When interest is debited to "interest account" the debit is for a specific amount calculated with reference to the liability of the deductor to a particular creditor in accordance with the terms and conditions of the loan. Therefore, whenever interest is credited to the account of the payee the payer has to deduct the TDS. The crux of the matter is that the debit is for a specific amount calculated with reference to the deductor's liability to a 18 ITA No.3323/Ahd./2010 particular creditor in accordance with the terms and conditions of the loan. In the present case, the lender has advanced the loan to the assessee-company. Debit was made by the assessee-company to the "interest account" for a specific amount calculated with reference to the deductor's liability to a creditor. There is no resolution of the assessee-company placed before the AO whereby the company has agreed to act as a medium for routing the borrowings and repayments. In the circumstances it cannot be said that the assessee-company was in-charge of disbursing the repayments made by the Directors in their individual capacities. Consequently, Department was right in invoking the provisions of Section 201(1) and 201(1A) of the Act.
14. In view of the above case laws, and discussion carried out, the provisions of Clause-C Explanation III to sub-section (2) to Section 194C are parallel to Section 194C(1) and while dealing with deduction of tax from sum paid for carrying out any work or for supplying of labour for carrying out any work, the new provision will apply only in relation to 'work contracts' and 'labour contracts' and will not cover 'contracts for sale of goods'. Since contractors for the construction of buildings or dams or laying of roads and air-fields 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 o be deducted from payments made in respect of such contracts. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of the new section. The same position will obtain in respect of contract for fabrication of sea and river crafts where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor. Where, however, the contractor undertakes to supply any sea or river crafts fabricated according to the specifications given by Government or any other specified person and the property in such sea and river crafts passes to the Government or such person only after such crafts are delivered, the contract will be a contract for sale and, as such, outside the purview of the new provision. In the case of Associated Hotels of India Ltd.,(supra), their Lordships of the Supreme Court observed that where the principal objective of work undertaken by the payee of the price is not the transfer of a chattel, qua chattel, the contract is of work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining, 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 o the land, where the intention plainly is not t sell the article but to improve the land or the other chattel, and the 19 ITA No.3323/Ahd./2010 consideration is not for the transfer of the chattel, but for the labour and work done and the materials furnished, the contract will be one of work and labour.
15. The relevant clauses of CBDT Circular No. 681 dated 8th March, 1994, the Clause VI is being reproduced as under:-
"(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 of 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 person, 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 thin where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.
(b) Where, however, the contractor 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 contact will be a contract for sale and as such outside the purview of this section.
c) In 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 no the transfer of a chattel qua chattel, contract is of work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale;
neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials is conclusive although such matters ma 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 contact 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 labor and wok done and the material furnished, the contract will be one of work and labour. In 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 abovementioned case."
20ITA No.3323/Ahd./2010 In view of the above, the point to be seen is whether in the present case, whether the assessee has engaged any contractor for carrying out any work. The expression 'contractor for carrying out any work' implies that the contractor should have carried out such activities. The term 'carried out' suggests an executory contract rather than a case of a mere supply or sale of goods. If a person engages the services of another and gives him a job of manufacturing goods or articles and for the purpose supplies him raw material, it would be a clear case of a contract of work. In such cases, the provisions of Section 194C would undoubtedly be applicable. But, if, on the other hand, a manufacturer on his own purchases material and manufacturers product which he sells to the assessee and it may be that such product might be customer-specific as per the requirement of the customer, it is still a case of a sale and not for carrying out any work. In such sale which is customer- specific, the fact that the goods manufactured are according to the requirement of the customer does not mean or imply that any work has been carried out on behalf of the contractee. A distinction between a sale and works contract is very significant particularly under the sales-tax laws. Before the introduction of tax on work contract, the sale-tax was levied on sales and it could not be levied on works contract. What is the exact scope of expression 'work contract' has been considered by the Hon'ble Supreme Court in a number of cases and by and large distinction between the two also seems to have been adopted for the purpose of Income-tax Act. In the present case, it is a contract for purchase of gas from various gas suppliers up to the assessee's gas metering station at Hazira, Surat. Transportation charges in the gas supply contract are part of purchase cost of gas. This can easily be inferred from the above referred invoice. The object of the contract between suppliers of gas and assessee is essentially transfer of chattel qua Chattel i.e., natural gas up to the factory premises at Hazira until then the property in question i.e., the gas is of suppliers. This being the factual position, the payment for the purchase of natural gas and as per the contract of the assessee, it is only asking for supply of natural gas from the producers for the purpose of use of this gas for burning in assessee's factory for manufacturing of urea. Clearly this is a contract for sale goods and not a work contract as held by the lower authorities. In view of the above, we quash the orders of the lower authorities and allow the appeals of the assessee.
We, therefore, following the decision of the ITAT 'D' Bench, Ahmedabad in the case of M/s. Krishak Bharati Cooperative Ltd. (supra), hold that the assessee was not required to deduct TDS under section 194C in respect of gas transmission charges amounting to Rs.38,43,900/- paid in the previous year relevant to the assessment year under appeal to Gas Authority of India Ltd. (GAIL). Consequently, the transportation charges paid to GAIL amounting to Rs.38,43,900/- cannot be disallowed under section 21 ITA No.3323/Ahd./2010 40(a)(ia) of the I.T. Act, 1961. Resultantly, the addition of Rs.38,43,900/- is deleted and the appeal of the assessee is allowed.
6. In the result, the appeal of the Assessee is allowed.
Order pronounced in the Open Court on 30.06.2011
Sd/- Sd/-
(A.N.Pahuja) (T.K.Sharma)
Accountant Member Judicial Member
Dated : 30/06/2011
Copy of the order is forwarded to :
1) The Assessee
2) The Department
3) CIT(A) concerned
4) CIT concerned
5) D.R., ITAT, Ahmedabad
True Copy
By Order
Deputy Registrar, ITAT, Ahmedabad
Talukdar/Sr.P.S.