Income Tax Appellate Tribunal - Rajkot
Essar Oil Ltd. vs Income-Tax Officer on 28 February, 2000
Equivalent citations: [2001]77ITD92(RAJKOT)
ORDER
Behari Lal, AM
1. This appeal has been directed against the order of the CIT(A)-II, Rajkot, dated 24-3-1999, for the assessment year 1998-99. The main grounds of appeal, taken by the assessee, are as follows :
"(I) All the below mentioned grounds of appeat are independent and without prejudice to each other.
(II) Learned Commissioner of Income-tax (A), erred in law as well as on facts in holding that contract for supply of material, contract for constructions and contract for labour-cum-erection are composite contract. He ought to have held that all these contracts are distinct and separate.
(III) Learned CIT(A) erred in law as well as on facts in holding that even the contract for supply of material is also works contract on which tax is required to be deducted under section 194C. Without prejudice to above, he ought to have held that provisions of section 194C docs not apply to contract for supply of material as it is not works contract.
(IV) Learned CIT(A) erred in law as well as on facts in holding that payment of Rs. 72.60 crores in pursuance of agreement for supply of material is also liable for TDS under section 194C of the Act. He ought to have held that provisions of section 194C docs not apply to agreement for supply of material and consequently no tax is required to be deducted on payments of Rs. 72.60 crores made towards purchase of material.
(V) Learned CIT(A) erred in law as well as on facts in holding that certificate issued under section 197(1) does not apply for whole of assessment year. He ought to have held that certificate issued under section 197(1) applies to whole assessment year retrospectively."
2. The assessee is a company engaged in the setting up of an oil refinery at Vadinar, Jamnagar. According to the assessee, the company entered into three different agreements with M/s. Essar Projects Ltd. (EPL), a sister concern, to facilitate setting up of the refinery. The details of the agreements are as follows :
(a) Agreement for supply of Indian Sourced Equipment and Material Rs. 1,100 crores
(b) Contract for labour-cum-erection Rs. 438 crores
(c) Contract for construction of refinery Rs. 455 crores
3. The Income-tax Officer (TDS), called for information from the assessee regarding the tax deducted at source on payments made to EPL from 1-4-1997 to 9-9-1997. The assessee submitted that the total amount of payment made was Rs. 1,02,20,90,752 and the total lax deducted at source was Rs. 2,68,98,960. The 1TO (TDS) passed orders under section 194C(I) r.w.s. 201(1) of the IT Act, raising a demand of Rs. 1,84,41,814 being the short deduction of tax at source on the above payments made to EPL from 1-4-1997 to 9-9-1997.
4. The assessee preferred an appeal before the CIT(A)-II, Rajkot. The learned CIT(A) reduced the amount of short deduction of tax at source under section 194C of the Act from Rs. 1,84,41,814 to Rs. 78,77,973.
5. During the course of hearing, the learned representative of the assessee submitted that the contractor, EPL, submitted a certificate under section 197(1) of the Act issued by the Assessing Officer of EPL authorising the assessee to credit and make payment without deduction of lax at source during financial years 1995-96 and 1996-97. The contractor also submitted a certificate, dated 9-9-1997 under section 197 authorising deduction at 1% during financial year 1997-98. Accordingly, the assessee has made the deduction of tax at source. The learned representative further contended that tax is deductible at source, under section 194C at 1% of the amounts credited or paid under a contract for labour-cum-erection of Rs. 438 crores and contract for construction of Rs. 455 crores only. No tax, according to him, is deductible at source on the amount credited or paid under contract for supply of Indian sourced equipment and material. The learned representative submitted that these contracts, viz. (i) supply of Indian sourced equipment and material, (ii) for labour-cum-erection and (iii) for construction, cannot be termed as one composite contract for works, i.e., for construction of the refinery because there are three separate contracts and each contract has, inter alia, its own independent scope of work and responsibilities, price, time schedule for completion of respective obligation, the standard of performance, warranties, owners' responsibilities, etc. He also brought to our notice that there are independent clauses for suspension and termination in each contract. He also stated that each contract is liable to be suspended or terminated by the assessee independent of the other two contracts which may or may not be suspended or terminated. He referred to the Supreme Court case of State of Himachal Pradesh v. Associated Hotels of India Ltd, [1972] 29 STC 474, which has been relied upon by the learned CIT(A), and stated that the above case of the Hon'blc Supreme Court supports, in fact, the assessee's case because there are separate contracts for supply of Indian sourced equipment and material, labour-cum-erection and construction. He further stated that scope of work and responsibilities, time schedule, standards of performance, price, payment schedule, owners' responsibilities, warranties, etc. are different in all the three contracts and are defined in each contract agreement separately. The billing is done separately. The ownership in equipment supplied stands transferred to the assessee immediately on despatch. Thus, according to him, the supply made under contract for supply is transfer of a chattel, qua chattel. The learned representative has further stated that it is not a case of complete or turn key contract for the entire refinery including all its equipments, etc. "According to him, the contract is awarded only for Indian sourced equipment and material. The imported equipments and materials, which form significant part of total refinery, do not come within the purview of contractor's scope. Thus, the contract is not for supply of the entire plant and erection material. As far as supply of materials, such as cement, steel, etc. to be made by the contractor under the contract is concerned, the learned representative stated that the assessee is not disputing its obligation to deduct tax al source because it is part of one contract only. According to him, Indian sourccd equipment and material to be supplied under contract for supply stands on different footing because it is not supplied as part of labour-cum-erection contract or construction contract.
6. Regarding the "Complete Responsibility" clause in the contract for supply of Indian sourccd equipment and material, relied upon by the learned CIT(A) to hold that all the three contracts, in fact, is a composite contract, the learned representative has stated that "Complete Responsibility" clause is only in the contract for supply of Indian sourced equipment and material and it is not there in the other two contracts. The learned representative gave justification for this clause by slating that the same is from the point of view of making the supplier aware of his responsibility to ensure suitability of equipment and materials supplied. According to him, if the contracts for erection and construction would have been composite contract such "Complete Responsibility" clause would have been more appropriate in other contracts. He also contended that all these contracts are given to one contractor for practical consideration and perfect coordination. The very purpose is to make the contractor responsible. But by this "Complete Responsibility" clause three independent contracts do not become one composite contract. He again emphasised that each contract is capable of being suspended or terminated irrespective of the other two contracts continuing and this clearly establishes that each contract is independent and they arc not a composite contract.
7. The learned representative relied on the Sales Tax Case of Associated Holds of India Ltd. (supra) wherein the Hon'ble Supreme Court has laid down "It may in some cases be that even while entering into a contract of work or even service, parties might enter into separate agreements, one of work and service and the other of sale and purchase of materials to be used in the course of executing the work or performing the service. In such cases, the transaction would not be one indivisible but should fall into two separate agreements, one of work or performance and the other of sale".
8. The learned representative also argued that the certificate dated 9-9-1997 submitted by the contractor was for deduction of lax at source at 1%. The application for the certificate was made on 6-8-1997. According to him, the certificate applied to the amount expected to be credited/paid during the financial year 1997-98 in pursuance of the contract. Thus, he slated that the certificate applies to all credits/payments during the financial year 1997-98. He also referred to the earlier two financial years 1995-96 and 1996-97 where the certificates were issued to the contractor for credit/payment without deduction of tax at source. Thus, according to him, the asscssec's action of not deducting tax at source on payments from 1-4-1997 to 9-9-1997 and making deduction of lax at source al 1% after receipt of the certificate on the entire amount was a bona fide action.
Thus, according to him, the certificate should be held valid at least from the date of application, i.e., 6-8-1997 if not from 1-4-1997.
9. In the alternative, it is submitted that the contractor has filed its return of income for the financial year 1997-98 and huge refund of Rs. 3.82 crorcs is due to it as per return. Therefore, the question of demanding shortfall from the assessee should not arise. He also contended that the conduct of the assessee should also be kept in mind for collecting the shortfall.
10. The learned departmental representative, however, contended that only one contract, dated 7-11-1994 was signed by the contractor and the assessee for supply of Indian sources equipment and material, labour-cum-erection and construction. Three separate contracts were signed on 25-3-1997. Reference to the original contract signed on 7-11-1994 is found in all the three contracts signed on 25-3-1997. All the three works are mentioned in the original contract signed on 7-11-1994. The learned departmental representative also invited our attention to the provisions of section 194C. According lo him, the entire work of the refinery has been done in pursuance of a contract which was signed on 7-11-1994 and, therefore, this contract is the basic document in terms of which the work of the refinery is being carried out. The learned departmental representative also invited our attention to pages 4 & 7 of the paper book filed by the department during the course of hearing. Page 7 is a copy of the letter written by EPL lo the asscssee-company where it has been clearly mentioned :
"Even though EPL raises RA hills regularly on completion on various milestones separately i.e., towards procurement, labour-cum-ereclion and construction activities in line with the above contract, the payments that are being released by you as 'On Account'."
It is further stated in the letter "Kindly note that EPL has adjusted the amount of Rs. 78,77,97,333 (Rupees Seventy Eight Crores Seventy Seven lakhs Ninety Seven Thousand Three Hundred Thirly Three only) received between 4th August, 97 and 8th September, 97 in the following manner (1) Towards procurement Rs. 72,60,00,000 (2) Towards Labour-cum-erection Rs. 6,17,97,333".
The amount of Rs. 72,60,00,000 has been mentioned at page 4 of the paper book and the date of contract mentioned is 7th November, 1994. Thus, according to the learned departmental representative, the payment has been made as per the contract, dated 7-11-1994 where all the three works "have been mentioned. There is only an amendment to the agreement signed on 7-11-1994, as has been mentioned at page 4, as on 25th March, 1997. Therefore, according to the learned departmental representative, the basic document is the agreement of contract signed on 7-11-1994 and the latter three agreements are only amendments to the original document. He vehemently argued that the payments are being made as per the agreement signed on 7-11-1994 and, therefore, there is only one contract for the entire work of the refinery. He further relied on the order of the learned CIT(A). He also stated that the provisions of section 194C arc applicable even if it is the payment for goods.
11. Regarding the contention of the learned representative that the certificate issued on 9-9-1997 was for the entire amount paid during the year under consideration, the learned departmental representative contended that the certificate issued on 9-9-1997 does not specify that the same was effective from i-4-1997. According to him, the default was already committed before the issue of the certificate. He referred to Circular No. 774 issued by the CBDT. The Circular is dated 17th March, 1999 and it has been clearly mentioned therein :
"The certificate issued under section 197(1) of the Income-tax Act will be applicable only in respect of credits or payments, as the case may be, subject to tax deduction made at source on or after the dale of such certificate."
The learned departmental representative also invited our attention to page 6 of the departmental paper book where the various contracts laken by EPL have been mentioned. It has been clearly mentioned that the contract of refinery plant belonging to the assessee was taken as per contract dated 7-11-1994. Thus, according to the learned departmental representative, the documents mentioned above have not left anything in doubt about the dale of contract which was signed on 7-11-1994.
12. Regarding the machinery, imported by the assessee, it is stated by the learned departmental representative that the contractor has nothing to do with the imported machinery as the same belonged to the assessee and the same is not going to have any effect on the agreement of contract signed on 7-11-1994.
13. So far as the bona fide belief is concerned, the learned departmental representative stated that the same cannot be entertained in view of the fact that tax deducted at source has to be paid from year to year as per the provisions of law. The learned departmental representative pointed out that the assessee informed the ITO (TDS), vide its letter dated 20-11-1997 that the company had not made any payment to EPL from 1-4-1997 to 9-9-1997 (page 11 of the departmental paper book). Again, the assessee informed the ITO (TDS), vide letter dated 30-1-1998, that the amount of Rs. 88,77,97,333 (TDS deductible) was paid to EPL for the period 1 -4-1997 to 9-9-1997 (page 10 of the departmental paper book). The learned departmental representative also invited our attention to the letter from the assessee, addressed to the ITO, Jamnagar, dated 14-2-1998 (page 9 of the departmental paper book) wherein it has been mentioned that the said certificate would cover only the amounts mentioned therein and the amount not exceeding the amount mentioned in the certificate would be liable for TDS at the rate of 1%. Thus, according to the learned departmental representative, the assessee was itself aware that the certificate issued on 9-9-1997 was applicable only to a particular amount paid on or after 9-9-1997. Thus, according to him, there was no bona fide belief on the part of the assessee for not deducting the TDS on the amounts paid during the period 1-4-1997 to 9-9-1997. The learned departmental representative also referred to certain specific pages in the subsequent three contracts where reference to the original contract dated 7-11-1994 has been made.
14. The learned representative of the assessee contended that the original contract dated 7-11-1994 has undergone a change because new work has come into existence. He also pointed out that separate bills have been prepared for supply of materials. Even the total contract value has been mentioned in the new contracts for supply of materials. He also argued that genuine substitution had been made in the original contract with the subsequent three contracts and this was the need of the business. He also referred to the Contract Act and slated that the recipient had appropriated the amount as per the principles laid down in the Contract Act. Regarding the wrong information filed by the assessee before the 1TO (TDS), he pointed out that the same was an error committed because of computci- failure (page 9 of the departmental paper book).
15. We have heard the rival submissions. We have also gone through the various documents filed before us by the learned representative of the assessee and also by the department, during the course of hearing. The firsl main point for consideration is whether the assessee entered into one contract with EPL, the contractors, for the puipose of deduction of tax a! source under the provisions of section 194C of the Act, for the establishment of a refinery plant at Vadinar near Jamnagar or there were three separate contracts for the supply of Indian sourced equipment material, labour-cum-erection and construction. According to the department, there was only one contract signed on 7-11-1994 whereas the learned reprcsentative of the assessee vehemently argued that there were three separate contracts, (i) for supply of Indian sourced equipment and material, (ii) labour-cum-erection and (iii) for construction. According to the provisions of section 194C, "any person responsible for paying any sum to any resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to two per cent of such sum as income-tax on income comprised therein." It is clarified that the term "any work" means "any and not only a works contract" which has its special connotation in the tax law. In (he case ot Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435, the Hon'blc Supreme Court laid down: "the provisions of section 194C arc applicable to all types of contracts for carrying out any work, such as transport contracts, service contracts, labour contracts, material contracts as well as works contracts. In the case of Associated Hotels of India Ltd. (supra), the Hon'ble Supreme Court observed :