2002 (6) TMI 177 - AT - Income Tax

Assessee's Appeals Granted: Contracts for Supply of Goods, Not Work or Projects

The Tribunal allowed the assessee's appeals, determining that the contracts with GEC India Ltd. were for the supply of goods and not for carrying out work ... Deduction Of Tax At Source Issues Involved:1. Applicability of Section 194C of the Income-tax Act, 1961.2. Nature of contracts between the assessee and GEC India Ltd. (whether they were for carrying out work or for the sale of goods).3. Determination of whether the work was done on a turnkey project basis.Issue-wise Detailed Analysis:Issue No. 1: Applicability of Section 194C of the Income-tax Act, 1961The primary issue was whether the payments made by the assessee to GEC India Ltd. were for carrying out 'any work' within the meaning of Section 194C, thus attracting the liability for deduction of tax at source. The assessee argued that the contracts were for the supply of goods and not for services, thus not falling under Section 194C. The Department contended that the contracts were for carrying out work on a turnkey basis, thus necessitating tax deduction at source.The Tribunal referred to several judicial precedents, including the Supreme Court's decision in the case of Associated Cement Co. Ltd., which clarified that Section 194C applies to contracts for carrying out any work, including service contracts. However, professional services were excluded from the ambit of Section 194C until the introduction of Section 194J in 1995. Since the assessment years in question were 1993-94, 1994-95, and 1995-96, the Tribunal concluded that Section 194C was not applicable to the assessee's contracts, as they were not for professional services and the provisions of Section 194J were not retrospective.Issue No. 2: Nature of Contracts between the Assessee and GEC India Ltd.The Tribunal examined whether the contracts were for carrying out any work or for the sale of goods. The assessee argued that the contracts were for the supply of equipment and machinery, covered under the Sale of Goods Act. The Department contended that the contracts were composite agreements involving design, engineering, procurement, supply, installation, and commissioning, thus falling under Section 194C.The Tribunal analyzed the contracts' terms and conditions, including the scope of supply, contract price, terms of payment, and warranty clauses. It found that the contracts were primarily for the supply of goods, with incidental services related to installation and commissioning. The Tribunal referred to the Supreme Court's decision in Hindustan Shipyard Ltd., which provided a test for determining whether a contract is for the sale of goods or for work. Applying this test, the Tribunal concluded that the contracts were for the sale of goods, not for carrying out work, and thus did not attract the provisions of Section 194C.Issue No. 3: Determination of Turnkey Project BasisThe final issue was whether the work done by GEC India Ltd. was on a turnkey project basis. The Department argued that the contracts were for turnkey projects, as indicated by an affidavit filed by the assessee's Managing Director in a separate legal proceeding. The assessee contended that the civil and electrical work was carried out by the assessee itself, with GEC India Ltd. only providing supervision.The Tribunal examined the relevant materials, including the contracts and the affidavit. It found that the contracts were for the supply of goods, with the assessee bearing the cost of civil and electrical work. The Tribunal concluded that the contracts were not for turnkey projects but for the supply of goods, and thus the provisions of Section 194C were not applicable.Conclusion:The Tribunal allowed the assessee's appeals, holding that the contracts were for the supply of goods and not for carrying out work or turnkey projects. Consequently, the demand for tax and interest under Section 201(1A) for the assessment years 1993-94, 1994-95, and 1995-96 was deleted.