Court rules contract divisible, no tax deduction required on supply portion. Revenue appeal dismissed.

The High Court affirmed the Tribunal's decision that the contract between the parties was divisible into separate agreements for supply, erection, and civil works, not a composite contract. Consequently, the assessee was not obligated to deduct tax under Section 194C on the supply portion, and interest under Section 201(1A) was not leviable. The Court held that the contracts were treated separately based on tender documents and agreements. The Revenue's appeal was dismissed, and the substantial questions of law favored the assessee.

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Issues Involved:
1. Whether the contract between the assessee and the contractor is a composite contract or a divisible contract.
2. Whether tax should be deducted at source under Section 194C of the Income Tax Act on the supply portion of the contract.
3. Whether interest under Section 201(1A) of the Income Tax Act is leviable on the assessee for not deducting tax on the supply portion.

Detailed Analysis:

Issue 1: Nature of the Contract
The primary issue was whether the contract between the assessee and the contractor was a composite contract or a divisible contract. The Revenue argued that the contract was composite, encompassing supply, erection, and civil works, and thus, tax should be deducted on the entire contract value. The Tribunal, however, concluded that the contract was divisible into three separate agreements: one for supply, one for erection, and one for civil works. The Tribunal's decision was based on the tender notification, bidding documents, and the agreements between the parties, which indicated that the contracts were treated separately for supply, erection, and civil works.

Issue 2: Tax Deduction under Section 194C
The Tribunal held that the assessee was not obligated to deduct tax under Section 194C on the supply portion of the contract. The Tribunal noted that the supply of equipment was a separate and distinct contract for sale, falling within the exception provided in paragraph (7)(vi)(b) of the Board's Circular. The term "work" in Explanation IV to Section 194C excludes manufacturing or supplying a product according to the requirement or specification of a customer using materials purchased from a person other than the customer. The Tribunal found that the contractor supplied equipment as per the assessee's specifications using materials not procured from the assessee, thus categorizing the supply contract as a sale rather than a work contract.

Issue 3: Levy of Interest under Section 201(1A)
Since the Tribunal held that the assessee was not liable to deduct tax on the supply portion, it also concluded that interest under Section 201(1A) was not leviable. The Tribunal's decision was based on the finding that the supply contract did not fall under the definition of "work" as per Section 194C, and thus, no tax deduction was required.

Conclusion:
The High Court affirmed the Tribunal's decision, agreeing that the contract was divisible and not composite. The Court emphasized that the intention of the parties, as evidenced by the tender documents and agreements, was to treat the supply, erection, and civil works as separate contracts. Consequently, the assessee was not in default for not deducting tax on the supply portion, and the levy of interest under Section 201(1A) was also set aside. The appeal by the Revenue was dismissed, and the substantial questions of law were answered in favor of the assessee.

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