Income Tax Appellate Tribunal - Delhi
Senior Accounts Officer (O And M), ... vs Income Tax Officer on 28 April, 2006
Equivalent citations: (2006)103TTJ(DELHI)584
ORDER
G.S. Pannu, A.M.
1. This is an appeal by the appellant against the order dt. 25th Feb., 2004 of GIT(A), Karnal, relating to the financial year 2001-02. In this appeal, the appellant has challenged the action of the Revenue authorities in creating a demand for short deduction of tax at source under Section 201(1) of the IT Act and charging interest on tax so short deducted in terms of Section 2O1(1A) of the Act.
2. The facts giving rise to the aforesaid appeal are as follows: The appellant is a company incorporated under the Companies Act, 1956. It came into existence on 17th March, 1997 with the object of generation of power in the State of Haryana. The appellant had two thermal plants-one at Faridabad and another at Panipat. The Panipat thermal plant entered into an agreement with M/s BHEL for designing, engineering, manufacturing, supply, erection, testing and commissioning for retrofit of ESPs. A copy of the agreement between the appellant and the BHEL is placed at pp. 1 to 10 of the appellant's paper book. The contract is in the form of purchase order dt. 29th Jan., 1990. The major and important terms of the contract, insofar as they are relevant for the purpose of adjudicating the present appeal, are as follows:
The preamble to the agreement/purchase order reads as follows:
With reference to the above correspondence and discussions held with you from time to time, HSEB is pleased to place an order on you for the design, engineering, supply, erection, testing and commissioning for retrofit of ESPs on turnkey basis including the dismantling of the existing MPs on 2 × 110 MW units I and n of Panipat TPS including the associated civil works with pile foundation on the following terms and conditions:
2.1 Clause 6 of the contract gives out the description of the material/work and it reads as follows:
Description of matenal/work Total price (in Rs. lakhs) (i) Complete design, engineering, manufacturing, 1360.00. supply of two ESPs for 2 × 110 MW sets at (For works excluding Panipat TPS including all the material, freight railway siding, maintenance tools and tackles as per tender charged, if any paid by specification and extended scope of work as HSEB) agreed during various meetings referred above. (ii)Freight and Insurance 85.00 lakhs (iii) Complete civil works including pile foundations 173.00 lakhs (iv) Erection, testing and commissioning of two ESPs 280.00 lakhs for 2 × 110 MW sets at PTPs Panipat including required dismantling at site (v) Cost of spares for three years manual operation 12.1766 lakhs Total 1910.1766 lakhs
2.2 Another important clause is Clause 3 of the terras and conditions of the contract, which reads as follows:
Delivery Commissioning of
(a) Guaranteed delivery period for site from Unit-I : 18 months from the date
the date of acceptance of tender of receipt of PO by BHEL along
with advanced.
(b) Time required for complete erection, Unit-II : 24 months from the date
testing and commissioning of the of receipt of PO by BHEL along
equipment from the date of supply with advance.
2.3 Clause 10 of the contract with regard to terms of payment is also very material and it reads as follows:
Terms of Payment:
The following terms of payment shall be applicable for the retrofit of EPS as observed for Panipat stage. We require payment to be made by HSEB against a confirmed and irrevocable letter of credit.
Supply of Equipment:
(i) 10 per cent of supply price as interest-free advance shall be paid at the time of placement of orders.
(ii) 85 per cent of the supply price, along with 100 per cent taxes and duties shall be, paid on pro rata tonnage basis against proof of dispatch.
(iii) Balance 5 per cent of the supply price on completion of supply of EP for each unit against a bank guarantee of equivalent amount in form acceptable to the owner from a scheduled bank. Bank guarantee shall be valid for a period of one year from the date of commissioning of each unit or 10 months from the date of supply completed whichever is earlier.
Election and Commissioning:
(i) 10 per cent of the contract price for erection and commissioning as interest-free advance at the time of placement of order.
(ii) 10 per cent of the contract price for erection and commissioning of opening of the site office.
(iii) 75 per cent of the contract price for erection and commissioning of pro rata tonnage of erection.
(iv) Balance 5 per cent of the contract price for erection and commissioning on commissioning of each unit against a bank guarantee of equivalent amount in a form acceptable to the owner from a scheduled bank. Bank guarantee shall be valid for a period of one year from the date of commissioning of each unit.
Terms of payment for civil works
(i) 10 per cent interest-free advance along with order,
(ii) 30 per cent on completion of civil foundation for first unit.
(iii) 30 per cent on completion of civil foundation for 2nd unit,
(iv) 20 per cent on completion of control room construction,
(v) 5 per cent on completion of floor of ESP area.
(vi) 5 per cent on commissioning against bank guarantee of equivalent amount valid for one year from date of commissioning.
2.4 The appellant had made payments to M/s BHEL with reference to the aforesaid contract in various financial years commencing from financial year 1988-89 to financial year 2001-02. The details of the aforesaid payments are as follows:
Details of year-wise payment and TDS paid against the work older upto 31st March, 2002 F.Y. A. Supply and B. Civil work C. Freight and D. ETC of E. Other PVC insurance 2ESPs charges Amt. TDS Amt. TDS Amt TDS Amt. TDS Amt TDS paid paid paid paid paid 1988-89 20000 Nil Nil Nil Nil Nil Nil Nil Nil Nil (Adv) 1989-90 13030000 Nil 1700000 39100 Nil Nil 2600000 Nil Nil Nil (Adv) (paid in 1996-97) 1995-96 10482702 Nil 6600000 151800 4294048 Nil 2416883 55,588 Nil Nil (Adv) 1996-97 104563108 Nil 2224773 51170 1125222 Nil 5553900 127742 7000000 Nil 1997-98 45622971 727827 1901299 43,730 392856 Nil 12719996 292561 Nil Nil 1998-99 1832196 42140 705163 16219 1858720 Nil 12713267 291803 Nil Nil (PVC) 1999- 648878 Nil 1029627 72652 613154 Nil 8355045 183810 Nil Nil 2000 2000-01 528483 Nil Nil Nil 397845 Nil 3628202 83,447 Nil Nil 2001-02 1161265 Nil 1453543 30994 233098 Nil 1443000 33,189 Nil Nil G. Total 176944338 769967 15614495 155665 8914945 Nil 49434293 1668149 7000000 Nil 2.5 Under the provisions of Section 194C of the IT Act, any person responsible for paying any sum to any resident for carrying out any work in pursuance of a contract, shall at the time of credit of such sum or at the time of payment deduct tax at source at such percentage as is mentioned in Section 194C. The chart of payment of TDS by the appellant has already been set out above. The AO was of the view that the contract between the appellant and M/s BHEL was a composite contract and therefore the appellant ought to have deducted tax at source in respect of payments for supply of materials as well as the payments for execution of civil work, erection, designing and commissioning and also the freight and insurance. According to the appellant, the contract in question was a divisible contract, comprising of one part of the contract for supply of equipments and the other two parts of the contract for dismantling the existing machinery and for clearing the site and making the necessary infrastructure for installation of the machinery. According to the assessee, it is only in respect of the consideration attributable to the civil as well as erection, designing and commissioning, the appellant was under an obligation to deduct tax at source and not in respect of the supply of materials. The AO, however, referred to the decision of the Rajkot Bench of the Tribunal in the case of Essar Oil Ltd. v. ITO (2001) 71 TTJ (Rajkot) 599 : (2001) 77 ITD 92 (Rajkot), wherein it was held that in the case of composite contract the deduction of tax at source has to be on the entire sum payable including the material and labour. The AO held that it was a composite contract where the supply of material was only incidental to the execution of contract and TDS ought to have been deducted on the gross payments made to the contractor in pursuance of a composite contract. The AO, accordingly, worked out the tax short deducted and also levied interest on such short deduction of tax at source.
2.6 On appeal by the appellant, the CIT(A) confirmed the order of the AO. Hence, the present appeal by the appellant before the Tribunal.
3. We have heard the elaborated submissions of the learned Counsel for the appellant and the learned Departmental Representative. We have already set out the important terms of the contract between the appellant and M/s BHEL. A bare perusal of the components of the consideration for the contract would clearly show that the primary or the dominant intention of the appellant was to purchase the material namely, two ESPs for its power plant at Panipat. Freight and insurance payable in respect of its supply and the cost of material constituted a major portion of the contract value. The cost of spares will also fall in this category. As rightly contended by the learned Counsel for the appellant, before installing the plant, it was necessary to dismantle the existing plant and also to do the necessary civil work for erecting the new plant. This by itself would not mean that the contract in question was a composite contract for the erection and commissioning of the plant together with the materials required for such commissioning of the plant. As held by the Hon'ble Supreme Court in the case of State of Himachal Pradesh and Ors. v. Associated Hotels of India Ltd. 29 STC 474 (SC), in the case of a composite contract, one has to find out the primary object of the transactions and the intention of the parties while entering into it. On the facts of this case, we find that the primary object of the appellant was to purchase the plant in question and the civil work, erection and commissioning was only incidental to purchase the material by the appellant. In other words, the contract for supply of the equipments and the contract for erection and commissioning of the plant are two separable contracts, though there is only one common purchase order. We are, therefore, of the view that the Revenue authorities were not justified in considering the gross payments made by the appellant to BHEL for the purpose of determining the TDS by the appellant. We have also perused the decision of the Rajkot Bench of the Tribunal in the case of Essar Oil Ltd. (supra). We are of the view that the facts of the aforesaid case are clearly distinguishable from the facts of the present case. It was a case where the contract was for construction of a refinery and the contractor was to supply the material to be used for construction. In the present case, the supply of the power generator was an independent transaction and its erection was only ancillary or incidental to the purchase of the power generator. We are also of the view that in each case the terms of the contract need to be analyzed before coming to the conclusion whether it was a composite contract or not, As already stated, in the present case, the contract, insofar as it relates to supply of the material, freight insurance and supply of spare parts, is clearly separable from the other part of the contract relating to carrying out civil work, commissioning and erection of the power generators.
3.1 In view of the discussion above, we direct the AO to work out the short deduction of tax at source, if any, by excluding the payments towards supply of machinery, spare parts as well as freight and insurance.
3.2 In one of the grounds of appeal, the appellant has stated that the contractor, namely, M/s BHEL has already paid tax on the amounts paid by the appellant to it and, therefore, the appellant cannot be treated as an appellant-in-default in terms of Section 201 of the Act. In this connection, our attention was drawn to the decision of the Hon'ble Gujarat High Court in the case of CIT v. Rishikesh Apartments Co-opemtive Housing Society Ltd. . We have considered the submissions of the appellant and we are of the view that the documents on record do not establish the case pleaded by the appellant. We, however, deem it fit and proper to direct the AO to verify this aspect and in case it is found that the contractor has offered the sums received from the appellant to tax then in that event the appellant should not be proceeded against as an appellant in default under Section 201 of the Act, as laid down by the Hon'ble Gujarat High Court in the case of Rishikesh Apartments Co-operative Housing Society Ltd. (supra). We are of the view that the other grounds of appeal raised by the appellant do not require any consideration in view of our decision on the main contentions of the appellant.
3.3 In the result, the appeal is allowed for statistical purposes.