Works contract payments for plant erection fall under section 194C, not technical services, and no default arises after recipient taxation.

Payments for erection, testing, commissioning and trial operation of plant and machinery were treated as works contract consideration under section 194C, because the contracts involved execution of physical work under specified drawings and supervision and produced a tangible output; the presence of skilled engineers did not by itself make the payments fees for technical services under section 194J. Where the sub-contractors had already offered the receipts to tax, the payer was not to be treated as an assessee in default under section 201 for recovery of the same short deduction.

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Issues: Whether payments made to sub-contractors for erection, testing, commissioning and trial operation of plant and machinery were liable to tax deduction at source under section 194J of the Income-tax Act, 1961 as fees for technical services, or under section 194C as payments for work contracts; and whether, in view of the recipients having offered the amounts to tax, the assessee could still be treated as an assessee in default under section 201.

Analysis: The definition of fees for technical services in Explanation 2 to section 9(1)(vii) excludes consideration for construction, assembly, mining or like projects. The contracts in question were found to be for erection, testing, commissioning, trial operation and handing over of power-plant equipment, carried out according to BHEL's drawings and specifications and under its supervision. The activities involved work, labour, materials, fabrication, installation and related execution, resulting in a tangible physical output rather than the mere rendering of technical services. The presence of skilled engineers and technicians in execution did not convert the contracts into technical-service arrangements. The payment therefore fell within section 194C and not section 194J. It was also noted that the sub-contractors had already offered the receipts to tax, so the short deduction could not be recovered from the payer as demand under section 201.

Conclusion: The payments were governed by section 194C and not section 194J, and the assessee could not be treated as an assessee in default for recovery of the short-deducted tax.

Final Conclusion: The revenue's challenge to the deletion of demand failed, and the assessments were sustained in favour of the assessee.

Ratio Decidendi: A contract for erection, testing, commissioning and trial operation of plant and machinery, executed as a works contract resulting in a tangible output, is not a payment for technical services merely because skilled personnel are used in performance; and where the payee has already discharged tax liability, the payer is not liable to be treated as an assessee in default for recovery of the same tax again.

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