ITO, ROHTAK vs. THE SENIOR MANAGER (FINANCE), JHAJJAR

O R D E R PER A.T. VARKEY, JUDICIAL MEMBER :

These appeals, at the instance of the revenue, are filed against the order of the CIT (Appeals), Rohtak dated 18.04.2013 for the assessment years 2010-11 to 2012-13. 2. First, we take up for AY 2010-11, for the sake of convenience, as the facts and circumstances of all the three assessment years are similar and the grounds of appeal taken in all the three years are also similar.

3. The grounds of appeal taken by the revenue for AY 2010-11 are reproduced below :-

“(i) On the facts and in the circumstances of the case the ld. CIT(A) has erred in law and fact in deleting the demand of Rs.4,71,74,238/- for the F.Y. 2009-10, created on account of short deduction of tax from the payment made to different parties for the work done by them which falls under the provisions of section 194-J of the LT. Act. (ii) On the facts and in the circumstances of the case the ld.CIT(A) has erred in law and facts in holding that the amount paid to sub-contractors cannot be termed as technical services as per the definition in Explanation 2 to section 9(i)(vii) of the LT. Act, ignoring the facts that as per the terms and specification of BHEL the work can be done by the qualified Engineers and technical staff only, which comes within the purview of Technical Services u/s 194-J of the I.T. Act. (iii) On the facts and in the circumstances of the case the ld. CIT(A) has erred in the law and facts in applying the ratio of case law of provision to section 201(1) of the Act, as the same is incorporated in the Act from 1.07.2012 and not from the retrospective effect. (iv) That the appellant craves for the permission to add, delete or amend the ground of appeal before or at the time of hearing of appeal.”

4. The aforesaid grounds are inter-connected, therefore, the same are disposed off collectively as under.

Brief facts of the case are that M/s. Bharat Heavy Electricals Ltd.

(BHEL), a Govt. Enterprise, entered into two contracts with M/s Arravali Power Co. Ltd. (APCL) for Indra Gandhi Super Thermal Power Project, Jhajjar, i.e., (i) supply contract for the work of design, engineering, manufacturing, shop fabrication, assembly, inspection and testing at suppliers works, type testing, packing, forwarding to site of all equipments / materials/ special tools and mandatory spares etc.; and (ii) contract for work of transportation from manufacturers works/place of dispatch, port clearance and port charges, inland insurance, delivery at site, receipt, unloading, handling, storage, insurance & in-plant transportation at site, complete installation; supervision, pre-commissioning, commissioning, completion of facilities, conducting performance and guarantee tests and handing over to APCL of all equipments / materials and special tools covered under Steam Turbine Generator Package. Further, BHEL has sub-contracted certain work including supply of labour comprising of Erection/Testing, Commissioning (E/T/C) and trial operation of identified equipments/plants etc.

4.1 During the course of survey operations u/s 133A of the Act on 07.02.2012, the AO noted that the assessee deducted tax at source on the sub- contracts given u/s 194C of the Income-tax Act, 1961 (hereinafter ‘the Act’) as per the details given under:-

S.No. Name of Contractor Scope of Work Total amount TDS credited or deducted paid (in Rs.) (in Rs.) 1(i) M/s PCP Erection testing, 22,83,14,963/- 40,51,585/- International Ltd., commissioning Chandigarh and trial operation of Power Cycle Piping, Boiler and LP Piping packages for unit nos.1, 2 and 3 of 3 X 500 MW units at APCPL, Jhajjar, Distt. Jhajjar, Haryana 1(ii) M/s PCP Erection testing, 22,83,14,963/- 40,51,585/- International Ltd., commissioning Chandigarh and trial operation of two boilers of unit no.1 and 3 of 3 X 500 MW units at APCPL, Jhajjar, Distt. Jhajjar, Haryana

2(i) M/s Golden Edge Material Engineering Pvt. Handling, Ltd., New Delhi Erection, testing, Commissioning, Trial Operation and handing over of 1X20 MW Fr V GTG set including auxiliaries, Piping, associated electrical C & I Equipments, etc. at MSIL, Manesar, Haryana 2(ii) M/s Golden Edge Erection, testing, 1,43,33,585/- 2,78,257/- Engineering Pvt. Commissioning, Ltd., New Delhi Trial Operation and handing over of all Mechanical Electrical, C & I, Balance of Plant & Material Handling work of 1 X 17.5 MW STG & 2X75 TPH HRSG at MSIL, Gurgaon, Haryana

(i) The contracts are not only for erection/installation but also for commissioning, testing & trial operation of various equipments. Clause 38.1 of "Special Conditions of Contract" states that the contractor shall deploy all the skilled workmen like millwright fitters, welders & instruments technicians etc. to carry out the work as per specifications. This shows that the contractors are required to employ qualified engineers and highly skilled manpower to execute certain activities and therefore it is evident that these contractors are providing technical services.

(ii) From the agreements, it is noted that the contractor has to do testing work of all the equipment and machinery erected and commissioned by it as per the terms and specifications of BHEL. Testing work cannot be handled by unqualified and untrained persons but only by qualified engineers and technical staff. (iii) Further, the contractors have to undertake trial operations of different equipments installed by it as per the instructions and specifications given by BHEI and the trial operations cannot be handled by labourers and they can only be handled by qualified engineers, supervisors and technicians. In such a network, the level of human intervention is much higher and of sophisticated nature as constant network monitoring is required for error free quality of service wherein technical experts monitor physically the equipments as well as the network. This proves that this is not only a case of installing a system but it is also a case of providing technical services by the contractors to BHEL.

The AO held that the assessee is covered under the provisions of section 194J in respect of the payments to above mentioned contractors and accordingly, the AO raised demand u/s 201 (1) & 201 (1A) of Rs.4,71,74,238/- for the year under consideration i.e. AY 2010-11. Similar demands of Rs.6,03,09,297/- for the AY 2011-12 and of Rs.1,52,56,813/- for the AY 2012-13 were raised.

Technical services has been defined in Explanation 2 to clause (vii) of sub-section (1) of section 9 as under:- Explanation 2 - for the purpose of the clause, fees for technical services means any consideration (including any lumpsum consideration] for the rendering of any managerial, technical or consultancy services (including the provision of service of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "salaries". This shows that construction activity has been kept out of the purview of section 194J. 6.1 The reading of clauses 6, 7 & 11 of the contract with M/s PCP International show that it is in the nature of contract for work and labour and the same is to be carried out under the supervision of BHEL engineers. Further, the contractor has to obtain materials including equipments and has to bare taxes on such materials. As per section 194C of the Act, any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall deduct and deposit TDS at the specified rates and sum. As per clause (iv) (e) of Explanation to section 194C, "Work" shall include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer. In the present case, the design & drawings of the work are prepared by BHEL which is executed by the contractors under the supervision of BHEL. The scope of work given to the sub-contractors is for erection, testing, commissioning and trial operation and handing over of boiler units, electrostatic precipitators etc. These activities involve construction work, welding, erection, alignment, transportation of equipment and materials etc. with the help of men & machines, which are beyond the scope of technical services as defined in section 9 of the Act. The contracts awarded by the appellant are for the Erection/Testing/ Commissioning of Plant & Machinery and are in the nature of carrying out any work including supply of labour for carrying out such work. The supply of labour to carry out the work involves both skilled & unskilled labour. Qualified engineers and skilled manpower along with unskilled labour were used by the sub-contractors for execution of the contract including testing/trial operations. For the construction of Power Plant, the services of technical personnel including engineers is inevitable. The scope of the sub- contract was actual execution of work involving the services of technical personnel as well as non-technical personnel. What the appellant intended to get from its sub-contractor was a physical output, a tangible structure and not merely the services of its qualified engineers/ staff. 6.2 Any payment for technical services in order to be covered u/s 194J, should be a consideration for acquiring or using technical know-how provided or made available by human element. The work entrusted for the sub-contractors is part of the contract offered to the appellant by its client and hence the sub-contractors also come in the purview of IT Act and (he appellant has deducted the tax is u/s 194C from the payments made to it. The amounts paid to sub- contractors is either for erection, installation, fabrication, commissioning, testing & trial operation of some parts of the Power Plant and therefore cannot be termed as technical services as per the definition in Explanation 2 to section 9 (1) (vii). 6.3 The basis of the AO to conclude that the scope of the contract comes under the provisions of section 194J since the testing, trial operations etc. cannot be handed by labourers but only be done by qualified engineers etc. is misplaced and misconceived as what is executed by the sub-contractors is erection/ installation, commissioning, testing & trial operation etc. which involves procurement of materials including equipments by the sub-contractors, fabrication etc. and thereafter installation, testing & trial operation which clearly in the scope of "work" as defined in section 194C of the Act. Any work of erection, testing, commissioning and trial operation etc. involves utilization of material and manpower. Manpower includes skilled professionals like engineers, technicians etc. and unskilled labour etc. because professionals & skilled personnel were employed in the execution of the sub-contract does not mean, by any stretch of imagination, that appellant got only technical services and not a physical output, as per the terms of the contract. What the appellant got from the sub-contractors was a physical output, a tangible structure and not merely the services of qualified engineers/ staff. If the logic of the AO is applied then, even the execution of buildings/roads contracts etc., which employ engineers and skilled personnel, would amount to receipt of technical services and not execution of works contract. The case laws relied upon by the AR are relevant and applicable to the facts of the appellant. 6.4 In any case, the sub-contractors have already offered the payments received from the appellant to tax, as per the evidence furnished by the AR. As per section 191 of the Act, a person shall be treated as assessee in default only when (i) he does not deduct tax at source as required under the Act from the payments made to the assessee; and (ii) the assessee has also failed to pay such tax directly. In view of the above, the appellant cannot be deemed as an assessee in default and the disputed short deduction of tax cannot be demanded from the appellant as per the case law of Hon'ble Supreme Court in Hindustan Coca Cola Beverage (P) Ltd. V. CIT (2007) 163 taxman 355. This ratio has also been inserted subsequently w.e.f. 01.07.2012 as proviso to section 201(1) of the Act. 6.5 In view of the above, the tax & interest levied by the AO u/s 201 (1) & 201 (1A) is deleted and the grounds of appeal are allowed. As the facts of the other appeals are also similar, the tax & interest levied by the AO u/s 201 (1) & 201 (1A) in those appeals are also deleted. In the result, all the appeals are allowed.”

6. Ld. DR relied on the order of the Assessing Officer and submitted that the ld. CIT(A) has erred in law and fact in deleting the demand of Rs.4,71,74,238/- created on account of short deduction of tax from the payment made to different parties for the work done by them which falls under the provisions of section 194-J of the LT. Act. He further submitted that the ld.CIT(A) has erred in holding that the amount paid to sub-contractors cannot be termed as technical services as per the definition in Explanation 2 to section 9(i)(vii) of the I.T. Act, ignoring the facts that as per the terms and specification of BHEL the work can be only done by the qualified Engineers and technical staff only, which comes within the purview of Technical Services u/s 194-J of the I.T. Act. He submitted that the ld. CIT(A) has also erred in the law and facts in applying the ratio of case law of provision to section 201(1) of the Act, as the same is incorporated in the Act from 1.07.2012 and not from the retrospective effect. Therefore, he pleaded to set aside the order of the ld. CIT (A) and restore that of the Assessing Officer.

7. Ld. AR for the assessee, reiterating the submissions made before the ld. CIT (A), submitted that the contract between BHEL and M/s PCP International Ltd., Chandigarh pertains to work to be carried out by the contractor as mentioned in scope of work. In this regard, he referred to various clauses of the contract as under :-

(i) As per clause 1 of the contract, the contractor shall execute the work of "Erection, testing, commissioning and trial operation of Power Cycle Piping, Boiler and LP Piping packages for unit nos.1, 2 and 3 of 3 X 500 MW units at APCPL, Jhajjar Distt, Jhajjar , Haryana, and more particularly described in the tender specifications including drawings and specifications in accordance with and subject to terms and conditions contained in these presents, instructions to tenderers, general conditions of contract, special conditions, annexures, letter of intent and such other instructions, specifications given to him from time to time by BHEL. (ii) Clause 6 of the contact states that the contactor shall be deemed to have carefully examined the agreement and the documents governing the same and also to have satisfied himself as to the nature and character of the Works to be executed by him. (iii) Clause 7 of the contract states that contractor shall carry out and complete the execution of the said works to the entire satisfaction of the engineer or such other officer authorized by BHEL, within the agreed time schedule. (iv) Clause 11 of the contract states that all applicable charges on account of octroi, terminal and other taxes including sales tax or other duties on material obtained for execution of the said works shall be borne and paid by the contractor.

He submitted that the reading of the clauses 6, 7 & 11 clearly shows that the contract awarded to M/s PCP International Ltd., Chandigarh is in the nature of contract for work and labour as the same is to be carried out under the supervision of BHEL Engineers. He further submitted that this fact is strengthened by the fact that the contractor has to obtain materials including equipments and has to bear the taxes on such materials. Further, he referred to special conditions of Contract Section III A which shows that the said contract is for work and labour. He further referred to various clauses of the contract to highlight this fact. Relying on the provisions of section 194C, he submitted that the subject contract are a contract for work and labour and BHEL has prepared the Design & Drawings and has Technical Know-how to get the work executed by the contractors which is being executed under the supervision and to the satisfaction of the BHEL. Therefore, he submitted that the contracts awarded by M/s APCPL and sub-contracted by BHEL to various sub-contractors are for erection or installation of plant & machinery and clearly falls under the definition of ‘work’ under section 194C of the Act. In this regard, he also relied on the CBDT Circular No.681 dated 08.03.1994.

He also relied on the decision of the Hon’ble Supreme Court in the case of State of Himachal Pradesh vs. Associated Hotels of India Ltd. – (1972) 29 STC 474. Therefore, he pleaded that the sub-contracts by BHEL are in the nature of contracts for work and labour and not in the nature of Technical fee and the payments are in the nature of contracts covered u/s 194C and not in the nature of “Technical Fee” covered by u/s 194J. He further relied on the decision of ITAT, Pune Bench in Glaxosmithkline Pharmaceuticals Limited vs. ITO and Hon’ble Karnataka High Court in CIT vs. Nova Nordisk Pharma India Ltd. order dated 05.01.2012 in Appeal No.1262/2006.

7.1 He submitted that as per section 194J of the Ac, any person, not being individual or a HUF, who is responsible for paying to a resident any sum by way of fees for professional services or fess for technical services or remuneration to directors not chargeable u/s 192 or royalty or non-compete fees referred in section 28(va) shall deduct TDS @ 10%. He submitted that for this purpose, fees for technical services shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9. He submitted that in the light of CIT v. Bharti Cellular Ltd. [2008] 175 Taxman 573 (Delhi), expression 'fees for technical services' as appearing in section 194J would have reference to only technical service rendered by a human, it would not include any service provided by machines or robots. He submitted that the contracts awarded by M/s APCPL and sub-contracted by BHEL to various sub-contractors are for E/T/C of plant & machinery which is construction of Boiler & Turbine, hence section 194J is not applicable. He submitted that it is clear that the payments made to all such contractors are for 'Works Contract', i.e. towards both supply of material and labour within the scope of section 194C, and not for professional or technical services as defined by Explanation (a) and (b) to section 194J read with section 9 (1) (vii)

Explanation 2.

7.2 Ld. AR further submitted that the contracts awarded by M/s APCPL and sub-contracted by BHEL to various sub-contractors are for Erection/ Testing/ Completion (E/T/C) of plant & machinery and are in nature of carrying out any work (including supply of labour for carrying out any work).

The supply of labour to carry out the work involved both skilled and unskilled labour. He submitted that qualified engineers, highly skilled manpower alongwith unskilled labour were used by subcontractors for execution of certain activities of E/T/ C including 'testing work', 'trial operations'. He further submitted that such manpower is used only for the execution of the contracted work and not for any other activity of the assessee. He submitted that the execution of work is done with the help of man, material, machines and equipments, etc. and is not one exclusively by qualified engineers and highly skilled manpower. Thus, assessee has not obtained 'technical services' from subcontracts. As such, he submitted that the contracts are covered by section 194C and not by 194J. He, therefore, pleaded that the order of the ld. CIT (A) be upheld on these issues and stated that AO erred in holding the assessee in default and relied on the order of the Hon’ble Supreme Court in Hindustan Coca Cola Beverages vs. CIT – (2007) 163 taxmann 355 / 293 ITR 226.

“Explanation 2 - for the purpose of the clause, fees for technical services means any consideration (including any lumpsum consideration] for the rendering of any managerial, technical or consultancy services (including the provision of service of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "salaries".

A bare reading of the above definition of technical services it is vivid that construction activity has been kept out of the purview of section 194J of the Act. Now, when we go through the contract clauses 6, 7 & 11 with M/s PCP International shows that it is in the nature of contract for work and labour and the same is to be carried out as per the drawing and specification given by the assessee and under the supervision and satisfaction of BHEL engineers and the contractor has to obtain materials including equipments and has to bare taxes on such materials.

8.1 As per section 194C of the Act, any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall deduct and deposit TDS at the specified rates and sum. As per clause (iv) (e) of Explanation to section 194C, "Work" shall include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer. We find in the present case, the design & drawings of the work are prepared by BHEL which is executed by the contractors under the supervision of BHEL. The ld. CIT (A) has rightly observed that the scope of work given to the sub-contractors is for erection, testing, commissioning and trial operation and handing over of boiler units, electrostatic precipitators etc. and these activities involve construction work, welding, erection, alignment, transportation of equipment and materials etc. with the help of men & machines, which cannot be termed as technical services as per the definition given in section 9 of the Act. The ld. CIT (A) correctly stated that the contracts awarded by the assessee are for the Erection/Testing/ Commissioning of Plant & Machinery and are in the nature of carrying out any work including supply of labour for carrying out such work. We take note that the supply of labour to carry out the work/contract involves both skilled & unskilled labour. Further, we take note that for commission of power plant, qualified engineers and skilled manpower along with unskilled labour need to use by the sub-contractors for execution of the contract including testing/trial operations. The nature and scope of the sub- contract as rightly held by the ld. CIT (A) was actual execution of work involving the services of technical personnel as well as non-technical personnel. In a turn-key project like commissioning of power plant etc. what the assessee intended to get from its sub-contractor was a physical output, a tangible structure and not merely the services of its qualified engineers/ staff.

8.2 The ld. CIT (A) has rightly observed that any payment for technical services in order to be covered u/s 194J, should be a consideration for acquiring or using technical know-how provided or made available by human element. The work entrusted for the sub-contractors is part of the contract offered to the assessee by its client and hence the sub-contractors also come in the purview of the Act and the assessee has deducted the tax is u/s 194C from the payments made to it. The amounts paid to sub-contractors is either for erection, installation, fabrication, commissioning, testing & trial operation of some parts of the Power Plant and therefore cannot be termed as technical services as per the definition in Explanation 2 to section 9 (1) (vii).

8.3 We also take note that in any case, the sub-contractors have already offered the payments received from the assessee to tax and so the short deduction of tax cannot be demanded from the assessee as per the case law of Hon'ble Supreme Court in Hindustan Coca Cola Beverage (P) Ltd. V. CIT (2007) 163 taxman 355. 8.4 In view of the above, we do not find any infirmity in the order of the ld. CIT (A) and the same is upheld. The grounds of revenue’s appeal are rejected.