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Income Tax Appellate Tribunal, BANGALORE BENCH ‘C’, BANGALORE
Before: SHRI VIJAY PAL RAO & SHRI JASON P BOAZ
order of the CIT(A) dated 28-03-2014 arising from the orders passed u/s 201 & 201(1A) of the IT Act, 1961.
The assessee has raised common grounds in these appeals. The ground for the AY: 2006-07 are as under;
“1.On the facts and circumstances of the case, the ld.CIT(A) erred in upholding the order passed by the AO under section 201 & 201(1A) of the Act for the relevant assessment year.
2. The ld.CIT(A) erred in holding that the provisions of section 194C of the Act is applicable to the entire contract value by treating the same as composite contract.
3. The ld.CIT(A) ought to have appreciated the claim of the appellant along with documents enclosed that contract entered by the appellant with M/s Enercon was a divisible contract and not composite or indivisible contract.
On the facts, theld.CIT(A) ought to have accepted the explanation of the appellant and ought not to have confirmed the levy as made by the AO u/s201 & 201(1A) of the Act.
5. The ld.CIT(A) ought to have appreciated that case law relied by the department are distinguishable and not applicable to the appellant’s case.
6. Without prejudice, the additions sustained by the CIT(A) are arbitrary, excessive, unreasonable and ought to be deleted in toto.
7. For these and other grounds that may be urged at the time of hearing of the appeal, the appellant prays that the appeal may be allowed”.
The assessee is a private ltd. company deriving income from lease and power generation charges. The assessee filed an application seeking certificate of exemption from deducting tax at source in respect of the rent paid to M/s New Generation Apparels, Bangalore. A survey u/s 133A of the Act was conducted in the business premises of the assessee on 05-06-2008 which revealed that assessee has made payments to M/s Enercon (Ind.)Ltd amounting to Rs.3,83,00,000/- without deducting tax at source. The said payment was made during the three assessment years from 206-07 to 2008-09. Consequently, the AO passed a common order u/s 201 & 201(1A) of the Act on 30-01-2009 holding that the payments made by the assessee to Ms/s Enercon (Ind.) Ltd were liable to tax deducted at source and accordingly, the AO quantify the amount of TDS and the interest u/s 201 & 201(1A) of the Act as under; AY Payments 201(1)Rs. 201(1A) Rs Total (Rs.) made(Rs)
2006-07 2,40,50,000 5,39,682 1,99,682 7,39,364 2007-08 95,00,000 2,13,180 55,090 2,68,270 2008-09 47,50,000 1,07,635 18,298 1,25,933 Total 3,03,00,000 8,60,497 2,73,070 11,33,567
4. Aggrieved by the action of the AO the assessee filed appeal before the CIT(A) and contended that the payment in question made to M/s Enercon (Ind.) Ltd., comprises three components namely., payment for supply of equipments and machinery, payment for supply of industrial construction work and payment for commissioning of Enercon (Ind.) Ltd., (Supra). The assessee also pointed out that as far as the payments for construction work as well as commissioning the assessee deducted TDS and paid to the department. As far as the payment for supply of windmill equipment the assessee contended that this payment does not fall under the provisions of sec.194C and therefore, there was no question of deducting TDS on said payment. The CIT(A) did not accept the contention of the assessee and held that the contract under which the payments are made is an indivisible and composite contract. Therefore, the assessee paid the remuneration for comprehensive composite deal of setting up of windmill. Thus, the CIT(A) held that the entire value of contract is liable for TDS at the rate of 2%.
Before us the learned AR of the assessee submitted that though, there was only one contract between the parties however, the payment made to M/s Enercon…(Supra) are separately shown towards the supply of windmill equipment and accessories construction, supply of industrial/construction work as well as commissioning. He has referred to the invoices issued by M/s Enercon and submitted that the invoices categorically given the separate details of payment regarding supply of windmill turbines and other accessories. Even separate invoices were issued in respect of separate work and supply of equipments. Therefore, the payments towards the supply of equipment does not fall under the ambit of sec.194C. In support of her contention, she has relied upon the decision of the Hon’ble Gujarat High Court in case of CIT Vs Hindustan Lever Ltd., and submitted that the Hon’ble High Court held that the transactions including sale and supply of goods would not amount to work contract and therefore, the assessee was not liable to deduct tax at source u/s 194C. Further, when the work contract is for supply of material, it cannot be a contract for work and labour. The learned AR, than relied upon the decision of the Hon’ble Delhi High Court in case of CIT Vs Reebok India Co.306 ITR 124 and submitted that a similar view has been taken by the Hon’ble Delhi High Court in the case by upholding the finding of the Tribunal that transaction between the assessee the manufacturer was that of purchase and sale of goods and not of work contract u/s 1494C of the said Act. The learned AR has also relied upon the decision of the co-ordinate Bench of this Tribunal dated 23-03-2011 in case of M/s Karnataka Power Transmission Corpn.Ltd (KPTCL) Vs ITO I & 109(B)/2010 wherein the Tribunal has considered the fact that the break-ups of separate agreement reflecting separate consideration given in the tender document and therefore, the assessee was under no obligation to deduct tax at source u/s 194C towards the payment made for supply portion and consequently, there was no question of assessee be held liable to deduct tax u/s 201 and charging interest u/s 201(1A) of the Act.
The learned AR then relied upon the decision of the Hon’ble jurisdictional High Court in case of CIT Vs KPTCL 208 Taxmann 73 wherein the finding of this Tribunal has been upheld by the Hon’ble High Court. Thus, the learned AR has submitted that the payment made towards supply of equipments does not fall under the scope of sec.194C of the Act.
On the other hand, learned DR has submitted that it is a composite contract and therefore, the entire work carried out by M/s Enercon India Ltd is a work contract and consequently, the provisions of sec.194C are applicable on the payment made by the assessee under the contract. In support of his contention, he has relied upon the decision of the Hon’ble Supreme Court in case of Sentinel Rolling Shutters and others Vs Commissioner Sales Tax, AIR 1978 SC 1747.
The learned DR submitted that in the said case, the assessee got the work of rolling shutters erection and installation and therefore, the assessee was not liable to pay sales tax. Thus, the learned DR has submitted that the in the said case the Hon’ble Supreme Court has held that the contract was a contract of work and labour and not a contract for sale. In the case in hand, the entire work was carried out by M/s Enercon India Ltd under the contract which is work and labour and not contract of sale. He has relied upon the orders of the authorities below.
We have considered the rival submissions and material on record. The assessee has entered into an agreement with M/s Enercon India Ltd for supply erection and commissioning of windmill for a total consideration of Rs. 3.83 Crores. This payment was spread over for three assessment years 2006-07 to 2008-09. The AO has reproduced the details of the payment inpara-3 of its order;
10.1.2006 To Vysya Bank 0376 C No.259127 being adv.paid to purchase Of windmill from Enercon Ind.Ltd. 1,15,50,000 30.1.2006 To Vysya Bank 0376 C No.259436 being adv.paid towards Purchase for windmill from Enercon 1,25,00,000 21.11.2006 To Vysya Bank 0083 C No.8586601 issued to Enercon 50,00,000 03.01.2007 To Vysya Bank ltd -0083 C No.858603 issued to Enercon 25,00,000 26.02.2007 To Vysya Bank ltd -0083 C No.858604 issued to Enercon 20,00,000
22.09.2007 To Vysya Bank 376 C No.607421 issued to above party towards supply of windmill balance paid 47,50,000 Total payment…. 3,83,00,000
The total payment of Rs.3,83.00 Crores the break-up in three major part which are given by the AO in para-6 as under; a. Supply of windmill equipment with its accessories Rs.3370000/- b. Civil & industrial construction work Rs. 2600000/- c. Commission of Enercon make wind turbine Rs. 2000000/- Total… Rs.38300000 As it is clear from the details reproduced by the AO that separate payments were made by the assessee for purchase of windmill for civil and industrial construction work and for commissioning of windmill. We further note that the assessee produced the invoices raised by M/s Enercon. The bills were raised separately for supply of wing turbine converter and other accessories and components. Therefore, there is a clear segregation of the payment as well as the consideration in respect of the supply of windmill and other components, civil and industrial construction work as well as the commissioning charges. Though, all these work and supply of windmill are covered under the single contract, however, each and every item of work as well as supply has been separately valued and priced. We further note that the predominant part of the contract is supply of windmill equipment and other accessories amounting to Rs.3.37 Crores, out of the total contract price of Rs.3.83 Crores. Since the assessee has already deducted the tax and paid the same to the Government in respect of the remaining amount of Rs.46.00 Crores towards civil and industrial construction work as well as commissioning charges therefore, the only dispute before us is regarding the payment towards the supply of windmill equipment with its accessories of Rs.3.37 Crores. It is manifest from the purchase order for wind energy converters and other equipment as well as the purchase order for civil and electrical work that the assessee placed separate orders for purchase of the equipment including the wind turbine converters and other accessories for separate consideration whereas for civil and electrical work for erection of the windmill orders were also placed separately. The invoices raised by the Enercon also clearly exhibit the separate consideration for the purchase of wind turbine converters and other accessories. Rather separate invoices were issued for supply of wind mill device and civil and industrial construction. Further, it is clear from the undisputed details of the payments that predominant part of the agreement is supply of windmill equipments and only a small part of payment is in respect of civil and industrial construction work and commissioning work. Therefore, the contract in question was more of supply of windmill equipment and turbine converter than the work of civil and industrial construction as well as commissioning. In the case of CIT Vs KPTCL (Supra) the Hon’ble jurisdictional High Court consiered the question of law which is framed under para-7 as under;
“i) Whether the Tribunal was right in splitting up the contract which, according to the revenue was one ALB of the composite contract into parts such as part of the contract attributable to the value of the materials involved n the execution of the work and other part of the contract such as civil works and taking the view that tax was required to be deducted at source only in respect of the work part of the contract and not material part of the contract? ii) Whether the Tribunal was justified in concluding that interest under section 201(1A) of the IT Act, is not leviable, as the assessee was not liable to make any deductions in respect of the value of the material part of the contract, though the contract was one of whole contract?
While deciding the question of law the Hon’ble High Court has held in para-13 to 16 as under;
“13. It is not in dispute that in respect of agreement for supply, which is a distinct contract, no TDS is deductible under section 194C as it is not a contract for carrying out any work. Carrying out any work is a sin qua non to attract section 194C. A contract under which a contractor agrees to supply material which may be used by him later in carrying out he work will not render the agreement to supply a contract for carrying out any work. In fact, the amendments in 2009 explains his position. When they amended the definition of “work” as contained in Explanation to Clause-4 sub-clause(e). In fact, the object and reasons for substituting section 194C of the Act makes it clear that the amendment was introduced to bring clarity on the issue which reads as under;
Clarification regarding ‘work’ under section 194C.
There is ongoing litigation as to whether TDS is deductible under section 194C on outsourcing contracts and whether outsourcing constitutes work or not. To bring clarity on this issue, it is proposed to prove that ‘work’ shall not include manufacturing or supplying a product according to the requirement or specification of a customer by using raw material purchased from a person other than such customer as such a contract is a contract for ‘sale’. This will however, not apply to a contract which dies not entail manufacture or supply of an article or thing (e.g. a construction contract) It is also proposed to include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer within the definition of work. It is further proposed to provide that in such a case TDS hall be deducted on the invoice value excluding the value of material purchased from such customer if such value is mentioned separately in the invoice. Where the material component has not been separately mention in the invoice, TDS shall be deducted on the whole of the invoice value.
When the statute was amended to clarify the word ‘work’ under section 194C by introducing the aforesaid clause, it is obvious tht the amendment is only clarificatory in nature and therefore it is retrospective. The Parliament did not intend to change the law becusa of conclusion which resulted in litigation. The Parliament though it fit to clarify by way of amendment so that the litigation could be avoided. In view of the aforesaid clarification and the statutory provision, it is clear that ‘work’ did not include manufacturing or supplying a product according to the requirement upon specification of a customer by using raw materials purchased from a person other than such customer, as such contract is a contract for sale. Further, it is also clarified TDS shall be deducted on the invoice value excluding the value of material purchase from such customer, if such value is mentioned separately in the invoice. It is only in cases where the material component has not been separately mentioned in the invoice. TDS shall be deducted on the whole of the invoice value. Therefore, whatever ambiguity which prevailed earlier is clarified. When in a composite contract, if an invoice is raised, separately mentioning the value of the material supplied, no deduction is permissible under section 194C. In a case where three separate agreements entered into and one such agreement is agreement for supply of material and because the said agreement is a part of a composite transaction. Section 194C cannot be pressed into service to deduct tax at source. The whole object of introducing the section is that it should deduct tax in respect of payments made for a works contract. No deduction is permissible in respect of contract
for supply of material for carrying out work. In fact, the Tribunal by a detailed consideration of the statutory provisions, the various terms of the contract, the legal position as explained in the various judgments has rightly come to the conclusion that, the transaction in question is not a case of composite contract. It is a case of the distinct contracts and the contracts for supply of materials is a separate distinct contract in respect of which no deduction is permissible under section 194C of the Act.
In that view of the matter, we do not see any merit in this appeal. The substantial question of law framed is answered in favour of the assessee and against the revenue.
When once it is held that the authorities were not justified in levying tax by treating the assessee in default and when that finding is t aside, the levy of interest is consequential and accordingly, the levy of interest is also set aside. The second substantial question of law consequently, is to be answered in favour of the assessee and against the revenue. In that view of the matter, we do not see any merit in these appeals and accordingly, it is dismissed. No costs”.
Even in the clarification as per the definition of work as contained in the Explanation to clause-4(e) to sec.194C the value of the material purchased from such customer is required to be excluded if such value mentioned separately in the invoice. In the case in hand, there is no ambiguity about the fact that a separate consideration and value of the supply of goods/windmill turbine converter and other equipments is separately given. Therefore, in the facts and circumstances of the case, where the value/consideration of supply of windmill turbine converters and other equipment is separately given in the invoices and rather separate invoices are placed by the supplier, then the assessee is not liable to deduct any tax at source as per the provisions of sec.194C so far the payment is made for supply of the windmill turbine and other equipments. Accordingly, we set aside the orders of the authorities below and decide the issue in favour of the assessee.
In the result, the appeals of the assessee are allowed.
Pronounced in the open Court on the 17th July, 2015.