2006 (7) TMI 262 - AT - Income Tax

Tribunal Rules Supply Contracts as Sale of Goods, Not Attracting TDS u/s 194C of Income-tax Act.

Power Grid Corporation Of India Limited. Versus Assistant Commissioner Of Income-tax, Circle 14 (3) Tds, Hyderabad.

Power Grid Corporation Of India Limited. Versus Assistant Commissioner Of Income-tax, Circle 14 (3) Tds, Hyderabad. - ITD 108, 340, TTJ 112, 654, Issues Involved:1. Whether the supply of materials constituted a works contract or a sale contract.2. Applicability of Board Circular No. 681, dated 8-3-1994.3. Whether the independent supply order should attract TDS under section 194C of the Income-tax Act, 1961.Issue 1: Whether the supply of materials constituted a works contract or a sale contract.The assessee, a Central Government undertaking involved in power transmission and distribution, had awarded contracts for supply and erection of transmission lines and substations. The contracts included Pure Supply Contracts, Pure Erection Contracts, and Supply-cum-Erection Contracts. The Assessing Officer classified these as works contracts, arguing that the supply involved design and manufacture, making it a works contract rather than a sale. The Commissioner of Income-tax (Appeals) upheld this view, stating that the transactions were not direct purchases from the market but were for future execution of specified contracts, thus constituting works contracts.Issue 2: Applicability of Board Circular No. 681, dated 8-3-1994.The assessee contended that the Board Circular No. 681, which clarifies that section 194C does not cover contracts for the sale of goods, was not applied correctly. The Commissioner (Appeals) relied on Circular No. 715, which deals with contracts involving work, such as advertising, broadcasting, and catering, and argued that the contracts in question were composite and indivisible, thus falling under section 194C.Issue 3: Whether the independent supply order should attract TDS under section 194C of the Income-tax Act, 1961.The assessee argued that the supply contracts were distinct and did not attract TDS under section 194C, as they were contracts for the sale of goods. The Tribunal examined the nature of the contracts, the intention of the parties, and the transfer of property in goods. It was found that the contracts involved the supply of goods as chattels, with the title passing on delivery ex-works, thus constituting sale contracts. The Tribunal concluded that section 194C was not applicable to these supply contracts, and the assessee's appeal was allowed.Detailed Analysis:1. Nature of Contracts:The Tribunal analyzed the nature of the contracts, distinguishing between supply and erection contracts. It noted that the supply contracts involved the delivery of goods as chattels, with the title passing on ex-works dispatch, indicating a sale contract. The erection contracts, where the assessee had deducted TDS, were treated separately and did not affect the classification of supply contracts.2. Application of Circulars:The Tribunal considered the applicability of Board Circulars No. 681 and No. 715. It emphasized that Circular No. 681 clarified that contracts for the sale of goods are outside the purview of section 194C. The Tribunal found that the contracts in question were for the supply of goods, with the property passing as chattels, and thus Circular No. 681 was applicable.3. Judicial Precedents:The Tribunal referred to various judicial precedents, including the Supreme Court's decisions in Hindustan Shipyard and Kane Elevators, which provided guidelines for distinguishing between contracts for sale and works contracts. It concluded that the contracts in question were sale contracts, as the property in goods passed as chattels, and the work involved was incidental to the supply.Conclusion:The Tribunal allowed the assessee's appeal, holding that the supply contracts were contracts for the sale of goods and did not attract TDS under section 194C. The Tribunal emphasized the importance of the intention of the parties, the transfer of property in goods, and the nature of the contracts in determining the applicability of section 194C.