TaxTMI 
TaxTMI 
2006 (7) TMI 262
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....case are given below. The assessee is a Central Government undertaking engaged in the activity of transmission and power distribution of electricity to various constituents across the country. During the year under consideration, the assessee was involved in three projects for which contracts were awarded to different contractors. The assessee awarded contracts to various parties to construct/execute the transmission line/sub-station. The categories of contracts entered into by the appellant with various contractors for the above purpose are as follows:- (A) Pure Supply Contracts (B) Pure Erection Contracts (C) Supply-cum-Erection Contracts (but with separate agreements in respect of supply portion) The contracts entered into with the respective contractors are identical and the scope of various contracts consisted of supply of conductor, insulators, towers and sub-stations and the erection part is incidental. The main features of various contracts are as under: 1. "SUPPLY CONTRACT" AWARD AND SCOPE: The contract inter alia includes design, manufacture, testing at works and supply of-kms. of-Conductor on F.O.R. destination delivery ....
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....of Award. Notwithstanding the break-up of the Contract Price, the Contract shall, at all times, be construed as a single source responsibility and any breach in any part of this Contract shall be treated as a breach of the entire Contract: TAXES AND DUTIES: All taxes and duties such as custom duties, excise duty, sales tax and other levies payable by you in respect of transactions, between you and your sub-suppliers, either while procuring any equipment, components, sub-assemblies, raw materials and any other items used for your consumption or dispatched directly to Powergrid from your sub-supplier's works or godown to the site are included in the Contract price and no claim on this behalf shall be entertained by the Powergrid. For transactions between you and Powergrid, Powergrid shall pay Excise Duty applicable on the scheduled date of dispatch or actual date of dispatch, whichever is lower, further no sale tax or other levies shall be payable by Powergrid for the supplies to be made under the subject packages. For payment/reimbursement of excise duty, in respect of dispatches made directly from your works, per-numbered invoices du....
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.... Contract price is exclusive of service tax payable extra on transportation and erection testing and commissioning services @ 10.2% as an applicable as the contract price. All other taxes, duties and levies are included in the Contract price and Powergrid shall not entertain any claim on account of the same. 4.2 Statutory deductions such as WCT, income-tax etc. shall be affected at source in accordance with the provisions of various tax laws as applicable from time to time. Necessary TDS Certificate shall be issued by Powergrid. 3. "CONTRACT FOR ERECTION" EXECUTED BY A "SUPPLY-CUM-ERECTION CONTRACTOR" 2.1.......The scope of work covered under the Contract, inter alia, includes the following as detailed in the Bidding Documents: (i) Preliminary survey, details survey, profiling, tower spotting/optimisation of tower locations, soil resistivity measurements, geo-technical investigation and check-survey. (ii) Selecting type of foundation for different types of towers and casting of foundation for tower footings as per Powergrid's foundation design. (iii) Protection of tower footings; (iv) Performance of all activities a....
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....ccessories for Conductor & Earthwire which are to be insured and transported to final destination site and erected/installed, tested and commissioned under this 'Erection Contract'. You shall be fully responsible for the work to be executed under the 'Supply Contract', and it is expressly understood that any breach under the 'Supply Contract', shall automatically be deemed as a breach of this Contract and any such, breach or occurrence giving us a right to terminate the 'Supply Contract' and/or recover damages under that Contract shall give us a right to terminate this Contract and/or recover damages under this Contract as well. However, such breach or occurrence in the 'Supply Contract' shall not automatically relieve you of any of your obligations under this Contract. It is expressly understood and agreed by you that the equipment/material supplied by you under 'Supply Contract', when transported to site and erected & commissioned under this Contract shall give satisfactory performance in accordance with the Bidding Documents. (iii) The Erection Insurance shall be taken by you as per the relevant provisions of Clause 38, se....
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....ia, includes the following: (i) fabrication, galvanizing and supply on Ex-works basis of all types of 400 KV Double circuit transmission line towers based on Powergrid's drawings including bolts, nuts and washers, hangers, D-shackles and all types of tower accessories like phase plate, circuit plate, number plate, danger plate, anti-climbing device etc. (ii) Other items not specified above but required as per BPS. The list of materials to be supplied by you is given at Annexure-II enclosed. 2.2 The scope of work under this Letter of Award (LOA) shall also include all such items which are not specifically mentioned in the bidding documents and/or your bid but are necessary for the successful erection, testing and commissioning of line covered under Letter of Award No......dated.....for "Erection Portion" unless otherwise specifically excluded in the bidding documents or this Letter of Award. 2.3 This Letter of Award is subject to the terms and conditions detailed hereunder: (i) The work under this Letter of Award shall be performed by you strictly in line with Bidding Documents and all its subsequent amendments/errata referre....
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.....0 CONTRACT PRICE: 3.1 We agree to pay.............. 3.2 Notwithstanding the break-up of the contract price, the contract shall, at all times, be construed as a single source responsibility contract and any breach in any part of this contract shall be treated as a breach of the entire contract. 3.3 Powergrid shall be entitled to deduct income-tax and other taxes in accordance with the provisions of Income-tax Act/other taxation laws as applicable from time to time. Necessary TDS certificate shall be issued by Powergrid. 4.0 Taxes & Duties: 4.1 Taxes and duties under this Contract shall be governed by the provision of clause 15, section - INB of Bidding Document (Vol-I) and as per the following: 4.2 As all supplies under this contract are brought-out items, the contract price is inclusive of all taxes and duties and Powergrid shall not entertain any claim on account of the same. However, wherever sale-in-transit is effected, Powergrid shall issue requisite sales tax declaration forms to you. In respect of erection contracts, the assessee had deducted taxes at source duly applying the provisions of section 194C of the Income-ta....
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.... (Appeals) has stated at para 2.3 that he does not agree with the contention of the appellant. According to him, the transmission equipment/towers were manufactured by the supplier in one sample case i.e. in the case of M/s. Tata Projects, as per the requirements and specification given. The appellant was not purchasing transmission equipment/towers in open market but bids/offers were invited from the contractors and after examination of the same, a letter of award was issued. This clearly showed that the transaction was not a direct purchase from the market but only in respect of future execution of a specified contract. The letter of award contained conditions of contract, technical specification, bid form, prices and other schedules and technical data requirement. The learned Commissioner (Appeals) has further stated at para 2.4 that the relevant clauses of the agreement stated as under: "2.1 First contract" or "supply contract" which, inter alia, includes design, engineering, manufacture, type testing, training of Powergrid's personnel and supply of goods. 2.2 Scope of supplies under the contract also includes all such items, equipments and materials which....
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.... installation and commissioning and completion of the whole work including the expiry of the defects liability period. The Commissioner (Appeals) relied upon certain orders/judgments rendered by Tribunals and High Courts and circulars, which were as per his opinion not apposite to the facts of the present case, and held that the contracts entered into by the appellant were "works contract". Aggrieved the assessee has filed the present appeal before this Tribunal. 3. The learned counsel for the assessee in addition to his oral submissions, has filed detailed written submissions submitting that: the order of the Commissioner (Appeals) is unsustainable on facts and in law and is liable to be set aside. The Commissioner (Appeals) while holding that the contracts entered into by the appellant are works contract, lost sight of the relevant provisions of the Income-tax Act, 1961, valid tests and guidelines laid down by various Benches of Income-tax, Appellate Tribunal, the jurisdictional High Court/other High Courts as well as the Hon'ble Supreme Court. The Hon'ble jurisdictional High Court in the case of P.S. & Co. v. State of Andhra Pradesh [1984] 56 STC 283 (AP) laid down th....
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....nsfer or accession. The Hon'ble Apex Court while saying so has followed the principles laid down by it in the case of Hindustan Shipyard [1999] 115 STC 96 and clarified that it is not the bulk of the material used in the construction alone but the relative importance of the material qua the work, skill and labour of the payee which also has to be seen, but it is a relevant parameter. In the present case, where the contract of Supply and Erection is given to the same party, the value of the Erection Contract as can be seen from the Annexure is minimal. It cannot therefore control the interpretation of the contract. Further the Hon'ble Supreme Court while considering the issue of "installation of lift" which is comparable to the facts of the present case, on facts came to the conclusion that it is one in the nature of sale. The Hon'ble Court observed that since the obligation of the assessee therein was only to supply and install the lift manufactured and brought to site in knocked-down state to be assembled by assessee and the customer's obligation was to undertake work connected in keeping site ready for installation as per drawings, held that the contract was a ....
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.... 176 that it is necessary to discern the dominant object and intention of the parties for determining the nature of contract. Merely because certain specifications were given to the seller, the nature of the contract would not be altered. He submitted that the issue in the present case is squarely covered by the aforesaid Tribunal's order. The learned counsel further submitted that just because the "Supply Contract" and "Erection Contract" were entered into with the same party in some cases, the nature of contract will not alter. He drew the attention of the Bench to the decision of the Hon'ble Bombay High Court wherein the said Court while dealing a similar issue in the case of CST v. Walchandnagar Industries [1985] 58 STC 89, at page 94 referred to a judgment of Hon'ble Supreme Court in the case of State of Madras v. Gannon Dunkerley & Co. [1958] 9 STC 353 wherein it was held that "the parties may enter into two contracts, one for sale and one for service. Even when such contracts are in one document they can be separate, far more so when they are in two separate documents." 3.2 He then has drawn the attention of this Bench to the decision of this Tribunal in the c....
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....989] 73 STC 1 which are relied upon by the Assessing Officer and the Commissioner (Appeals) and submitted that they cannot be applied to the present case because the Pune Bench of the Tribunal and the Hon'ble Apex Court in the said cases were dealing with the issue pertaining to printing and supply of multi-coloured receipt books and the printing and supply of question papers to the university. The said products are not comparable to the supply of equipment like towers and conductors. It was submitted that the supply contracts entered into by the appellant involve manufacturing activity and are not works/service-oriented contracts. The contention of the Revenue that the finished product supplied to the assessee is not a commercial commodity in the sense that it cannot be sold in the market to any other person and therefore the transaction is works contract is totally wrong and misplaced statement. As per assessee such a statement is a general statement, which is not borne out from the record. It is submitted that the specification mentioned by the assessee are common to Power Transmission sector on the following reasons: a. Standard specified are IS/ANSI/IEE/IEC etc., ....
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....espectfully submitted that the facts in the case of Variety Body Builders turned on its own facts. On the facts of the said case, the intention of the parties at the time of entering into the contract was not to transfer any completed railway coach, and Hon'ble Supreme Court having regard to the said facts held that the contract performed was a works contract. 3.6 The judgment of Hon'ble Kerala High Court in the case of Waves Electronics (P.) Ltd. v. State of Kerala 82 STC 143 is also not applicable as in the said case the nature of contract was predominantly skill oriented and the value is only incidental. Therefore, the law laid down in the said case cannot be applied to the facts of the present case. 3.7 Other judgments relied upon by the Assessing Officer and the Commissioner (Appeals) are also not relevant for the issue under consideration as they were rendered in a different context. The contention of the revenue that all the equipments supplied by the contractors are as per specification of the appellant and therefore it is a "works contract" is devoid of merits and unsubstantiated. As already submitted, the averment that the items supplied by the contractors a....
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....2 The scope of work under this Letter of Award shall also include all such items which are not specifically mentioned in the bidding documents and/or your bid but are necessary for the successful erection, testing and commissioning of line covered under Letter of Award No. SR-STR/C-54902-L165-3/PKG-A2/AL-II/784, dated 6-2-2001 for "Erection Portion" unless otherwise specifically excluded in the bidding documents or this Letter of Award. 2.3(ii) The "Erection Contract" for performance of all; other activities viz., inland transportation, insurance, taking delivery and storage of towers/tower extensions including bolts, nuts and spring washers, hangers, D-Shackles and all types of tower accessories like phase plates, number plates, anti-climbing devices, danger plate etc. And line material namely earth wire, hardware fittings and accessories for conductor and earth wire, unloading, storage at site of Powergrid's supplied materials, i.e., conductor and insulator; detailed survey, including profiling, tower spotting/optimization of tower locations, soil resistivity measurements and geo-technical investigations, check survey, casting of foundation for tower footing as per P....
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....irst Contract" and/or recover damages under that contract shall give us a right to terminate this contract and/or recover damages under this contract as well. However, such breach or occurrence in the "First Contract" shall not automatically relieve you of any of your obligations under this Contract. It is expressly understood and agreed by you that the equipment/materials erected and commissioned by you under this contract which are supplied by you under the "First Contract" shall give satisfactory performance in accordance with the bidding documents." Clause 9 of the agreement entered into with contractors reads as under: "In view of the criticality of project implementation, Powergrid requested B & C to complete the commissioning of the line by 28 months from the date of LOA. B&C agreed for the same. However, they requested Powergrid that liquidated damages for delay should be made leviable based on the commissioning period of 36 months from the date of LOA, which is the specified commissioning period. for this line. Powergrid agreed for the same. B&C, however, agreed that PV shall (be) applicable as per the agreed commissioning period of 28 months, from the date of ....
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....contract in substance, tax has to be deducted at source from the gross payments under the supply as well as erection portion of the contracts. 4.1 The learned D.R. submitted that the clauses in the letter of award clearly indicate that even in a contract for supply of equipment, it may be noticed that the equipments which are engineering goods are required to be manufactured strictly as per the specifications of the assessee and utilized for a specific requirement of the assessee. The equipments supplied were not standard goods and were not capable of any use to anyone else and thus had no commercial value. Further it is provided in the contract that the assessee has sufficient control over the equipments manufactured at every stage of the manufacturing process till they are finally delivered. If it is sale of goods per se, there is no question of buyer having control over the manufacture of goods at every stage of the manufacturing process of the seller. If the contract is for supply of off the shelf goods or bought out goods, the finished product along with its operational manual is only given. That is not the case here as the scope of the contract includes design, engineering....
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....ee that the Board Circular No. 681 should have been followed by the Assessing Officer, the learned D.R. submitted that in fact Board's Circular No. 715, dated 8-8-1995 issued later is binding on the Assessing Officer. Moreover validity of Circular No. 681 was also challenged before the Courts as a result of which Circular No. 715 was issued. Therefore, Circular No. 681 has to be read along with Circular No. 715 and not in isolation. He then went on to distinguish the decisions relied on by the assessee and submitted that in view of the legal position and for the elaborate reasons mentioned in the order under section 201(1), read with section 201(1A) and the order of the first appellate authority, sought sustenance of the order of the lower authorities. 5. We have carefully considered the rival submissions. The crux of the issues involved in this appeal is whether section 194C is applicable to payments made to contractors who were given separate contracts for supply as well as for erection. To resolve the issue we have to decide first whether the contracts in question are contracts of sale or they are work contracts. While the argument of the assessee is that the contracts co....
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....tracted by us as referred above, the inescapable conclusion is that the contract entered into by the appellant-corporation with its fabricators was a contract for purchase/sale of bus bodies and cannot be construed as a contract of work and labour simpliciter. The dominant object and intention between the parties was to construct and sell and purchase the bus bodies in terms of the requirements and specifications indicated by the appellant-corporation and deliver them duly fitted on the chassis supplied. Whole exercise involved resulted into purchase and sale of bus bodies in fact. Merely because specifications are provided by the appellant-corporation to suit the bus bodies according to appellant's requirements, does not alter the basis crux and character of the contract, which in the instant case is nothing but the contract of sale and purchase. The materials involved in the construction of the bus bodies were to be procured by the fabricators and thereafter bus bodies were to be constructed and to be fitted on the chasis supplied by the appellant-corporation. At no point of time, appellant had any property or ownership in the material used in bus body building or in the bus ....
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....ody and delivery thereof, the customers bears no risk in respect of it. It is not stray words used in the contract that by themselves would govern the intention of the parties. The contract will have to be read as a whole and the terms therein will have to be read as a whole and the terms therein will have to be interpreted in the context of each other and also taken together. Undoubtedly, the idea of construction is involved in the process of bus bodybuilding. But the point is whether the parties bargained only for work and labour or for delivery of the bus body as such fitted to the chasis. In other words, if the parties intended that there should be delivery of bus bodies as units or as bus bodies though fitted to the chasis, that will be a case where the property passed only at the time of delivery. Such a transaction will be a sale of goods. That precisely is the position in this case. We agree with the Tribunal that the turnover in respect of these transactions was rightly charged to sales-tax.' Similar issue was dealt with by the Hon'ble Supreme Court in the case of Patnaik & Co. v. State of Orissa [1965] 2 SCR 782/16 STC 364 in which Hon'ble Supreme Cou....
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....n'ble Court observed that since the obligation of the assessee therein was only to supply and install the lift manufactured and brought to site in knocked-down state to be assembled by assessee and the customer's obligation was to undertake work connected in keeping site ready for installation as per drawings, held that the contract was a 'sale contract' and not a "works contract". The Hon'ble Court also noticed that the major component of the end-product is material consumed in producing the lift delivered. The skill and labour employed for converting main components into the end-product were only incidental. The learned Commissioner (Appeals) failed to consider any of the above tests while coming to the erroneous conclusion that the contracts entered into by the appellant were works contract. If the facts of the present case are tested by applying the principles laid down by the jurisdictional High Court and the Hon'ble Supreme Court, the obvious answer that would emerge is that this is a "supply contract" and not "works contract". The nature of a contract as to whether it is 'contract for sale' or "works contract" will depend on the terms of the c....
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....f the contract, and though in some cases both the contracts are in the same document. The scope and object of each part of the contract is different. Though the supply portion and erection portion dovetail into each other, the erection portion does not control the supply portion and the supply contract does not become a works contract, just because there is an obligation cast on the supplier to erect the equipment which by that time has become the property of the purchaser. The title in the goods in respect of equipment/material to be supplied as per the terms of contract is to be transferred "ex-work" on dispatch as movable property. The critical test to be applied is as to when the title in the goods is transferred. Thus as the title in the goods were passed on to the assessee, before the commencement of the works or erection contract and as admitted by the assessee had treated these goods as its property and entered the same as such in its stock register before issuing the same for erection, it is a contract of sale and section 194C has no application. On erection portion as admitted TDS is made. The order in the case of Essar Oil Ltd. does not apply to the facts of this case....
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....ara '7' (vi) the provisions of this section will not cover contracts for sale of goods. (a) since contracts for the construction, repair, renovation or alteration of buildings or dams or laying of roads or airfields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labour, income-tax will have to be deducted from payments made in respect of such contracts. Similarly, contracts granted for processing of goods supplied by the Government or any other specified persons, where the ownership of such remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by the contractor. (b) Where, however, the contract undertakes to supply any article or thing fabricated according to the specifications given by the Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or t....