TaxTMI 
TaxTMI 
2002 (6) TMI 177
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....oduce the same in the body of this order. It may be pointed out that the assessee has taken eight similar grounds in all the three appeals, out of which ground No.8 is additional ground. The application of the assessee for admitting the additional ground (ground No.8) was considered and decided by us vide our order dated 7-1-2002. The detailed order for rejecting the prayer of the assessee has also been noted on the order sheet dated 7-1-2002. Thus, only seven grounds are to be adjudicated in each of these appeals. 4. Shri S.K. Garg, FCA appeared on behalf of the assessee and made detailed submissions. On behalf of the Department, Shri D.K. Shrivastava, ld. Sr. DR (CIT-ITAT), appeared and made oral as well as written submissions. It may be pointed out that the assessee had filed a paper book containing 372 pages. The assessee had also filed a brief synopsis of the case running into seven pages. This synopsis was submitted on 3-9-200l. In reply to the written submission of the assessee, the Department has also filed written submission dated 14-1-2002. These written submissions have been taken on record and are being considered, while adjudicating the issues involved in these three....
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....bsp; ----------- ---------- 2,03,29,855 7,97,86,052 (sic) 32,86,002 ------------- ----------- ---------- (b) The Assessing Officer initiated proceedings under section 201(1A) of Income-tax Act, 1961, and required the assessee to show cause as to why liability for not deducting income tax at source and for not remitting the same to the credit of the Central Government account, may not be fixed. In response, the assessee furnished reply dated 23-2-1994, contending that the agreements were for supply/purchase of furnace at different sites. It was also submitted that the agreement....
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....s and these bills were for various kinds of works for assistance in setting up the project. The ld. Commissioner (Appeals) did not accept the contention of the assessee that the contracts were covered by sales of goods and no services was involved. On the other hand, he held that the company i.e. M/s GEC India had rendered services, which were for setting up the project on turnkey basis and also for parting with the technology and technical information like designs and drawings etc. According to him, therefore, the assessee was bound to deduct tax at source. Thus, he upheld the order of the Assessing Officer regarding the liability of tax and interest levied by him in all the three assessment years. We consider it proper to reproduce paras 16, 17 & 18 of the order of the ld. Commissioner (Appeals), which are as under: "16. I have discussed some of the clauses of the contract which shows that M/s GEC India was not only required to supply the equipment of a particular specification keeping in view the latest technology but detailed engineering documents of the equipment i.e. concerned technology is also to be given to the appellant by the GEC India Ltd. It was further required to ca....
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....was only 'Sale of Goods', then this should have been Sale of Goods only. The other services would not have come. In other words 'Sale of Goods' and when delivery takes place, thereafter services, like erection, installation, cold runs, commission etc. take place. The appellant was, therefore, bound to deduct tax at source. The tax and interest levied by the Assessing Officer is, therefore, confirmed." (e) The assessee has challenged the findings of the ld. Commissioner (Appeals) before us in these appeals. . In the setting of the above background, we proceed to consider the grounds of appeal taken by the assessee. 6. The stand of the assessee is that the contracts in pursuance of which the assessee made payments were not for carrying out "any work" within the meaning of section 194C so as to attract the liability for deduction of tax at source and in the event of failure to do so the liability under section 201(1)(1A) of the Act. 6(I). In support of this stand, the assessee has raised following pleas in the grounds of appeal : (A) That the payment made by the assessee in pursuance of the contract entered into with M/s GEC India Ltd. were not covered under the provisions of sec....
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....nd for this they were required to carry out cold and hot trial runs and demonstrate performance of desired standard; (e) The GEC Alsthom also undertook to comply with standards, laid down by UPSEB and other competent authorities concerned in the supply of all equipments and machinery. (f) The GEC Alsthom also undertook to guarantee performance for 2 years after start of operation." 6(III). On behalf of the assessee, detailed arguments have been submitted to support the contention that the provisions of section 194C are not applicable in its case. In this regard, reliance has been placed on the following decisions : (1) Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 (SC) (2) Chamber of Income-tax Consultants v. CBDT [1994] 209 ITR 660 (Born.) (3) S.R.F. Finance Ltd. v. CBDT [1994] 211 ITR 861 (Delhi) (4) All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276 (Guj.) (5) Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.) (6) Rakesh Raj & Associates v. CBDT [1997] 223 ITR 282 (Punj. & Har.) (7) Rajasthan Tax Consultants Association v. CBDT [1998] 229 ITR 657 (Raj.) (8) Birla Cement Works Ltd. v. CBDT [2001] 248 ITR 216 (SC) (9) Bombay Goods Transpo....
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....t. (F) The agreements if construed as a whole, go to establish that they were for carrying out the work within the meaning of section 194C(1). (G) The provisions of section 194J were not at all relevant, because the amendment inserted with effect from 1-7-1995, was to attract liability of tax deduction at source under conditions mentioned therein. 7 (II). In support of the above arguments, the revenue has placed reliance on the following decisions :- .. (i) Associated Cements Co. Ltd s case (ii) Birla Cement Works case (iii) State of H.P. v. Associated Hotels of India Ltd [1972] 29 STC 474 (SC) (iv) Vanguard Rolling Shutters & Steel Works v. CST [1977] 39 STC 372 (SC) (v) Associated Cement Co. Ltd. v. CIT[1979] 120 ITR 444 (Pat.) 8. In view of the arguments advanced by the parties before us in support of their respective contentions and in view of the grounds taken by the assessee in these appeals, and also in view of the material placed before us, we have to consider and decide the following issues :- I. Whether the GEC India Ltd. rendered services and whether on such services provisions of section 149C are applicable? II. Whether the contracts/agreements entered into b....
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....y of professional fees by insertion of a new section, viz., section 194E. The said proposal was, however, dropped at the time of passing of the said Bill. The legislative intent of section 194C becomes further clear from the fact that while incorporating section 194H in the Act in the year 1991 to provide for deduction of tax at source in respect of payments made by way of commission, brokerage, etc., "payments made for professional services" were specifically excluded from the scope and ambit of the said section: (ii) The Bombay High Court also considered the issue in the case of Bombay Goods Transport Association and held that the circular dated 8-3-1994, was based on erroneous reading of decision of Hon'ble Supreme Court of India in Associated Cement Co. Ltd.'s case. (iii) In the case of Madras Bar Association the Hon'ble Madras High Court also considered the relevant circular letters and held that Circular No. 681 issued by CBDT is violative of Articles 14 and 265 of Constitution of India and opposed to section 194C. In so far as it requires deduction at source from payments made by way of professional fee to Advocates, Solicitors, Tax Practitioners and Chartered Accountants ....
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....tising, contract of goods transport simpliciter, persons engaged in the business of brokers as commission agents without carrying any work for their principal or professionals rendering professional services by charging fees during the course of the profession, are not amenable to the provisions of section 194C of the Act. The earlier Circular No. 86 dated 29-5-1972, and Circular No. 93 dated 26-9-1972, contemporaneously clarifying the ambit and scope of the provisions concerning service contracts held out the correct view and there was no justification for issuing instructions to alter the construction on the basis of the decision in the case of Associated Cement Co. [1993] 201 ITR 435 (SC). Circular Nos. 666 dated 8-10-1993, and 681 dated 8-3-1994, were liable to be quashed." (vi) The matter was also considered by the Hon'ble Calcutta High Court in the case of Calcutta Goods Transport Goods Association. After referring to the decision of Hon'ble Supreme Court of India in the case of Associated Cement Co. Ltd. 50 case relating to scope of tax deduction at source under section 194C of the Act, the Hon'ble Court observed that the decision of Hon'ble Supreme Court of India has not b....
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....ssociated Cement Co. Ltd. and, thus, the circular was not valid and was liable to be quashed. The Hon'ble Court also made following observations:- "The impugned circular issued by the Board is held to be beyond the scope of section 119 and the result of misreading of section 194C of the Act. The Board had earlier taken a different view about the applicability of section 194C while issuing directions in its two circulars dated 29-5-1972, and 26-9-1972, but, later on, giving an erroneous and misconceived interpretation to the observations of the Supreme Court in Associated Cement Co. Ltd. [1993] 201 ITR 435, the Board issued unsustainable and illegal directions [Circular No. 681 see [1994] 206 ITR 299 dated 8-3-1994]. The intention of the Legislature, while enacting section 194C, is clear and unambiguous and it shall have to be seen in the background of subsequent legislative acts which have already been discussed earlier. Once a provision by way of enactment of section 194E was attempted to be made in the Act in the year 1987, and since that effort did not materialize, a new provision ultimately came to be inserted in section 194J in the year, 1995. The impugned circular No. 681, d....
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....ust be for carrying out "any work"; (iii) the work is being carried out through the contractor; (iv) consideration for the contract should exceed Rs. 10,000, i.e., the amount fixed by section 194C and (v) the payment is made to the contractor for the work carried out by him. 11. So far as controversy regarding the nature of the work involved in carriage of goods, the Hon'ble Supreme Court of India upheld the view of Hon'ble Punjab & Haryana High Court taken in the case of Ekonkar Dashmesh Transport Co., wherein it was held that the circular issued by the Board, in so far as it provides that the Transport contracts fall within the mischief of section 194C is legal and valid arid the challenge to this provision in the circular cannot be sustained. 11.1 So far as the applicability of Explanation 3 is concerned, the Hon'ble Court was of the view that Explanation 3 is not clarificatory or retrospective in operation and section 194C is not applicable to transport contracts i.e. contracts for carriage of goods before insertion of Explanation 3. This view was taken on the basis of following observations made by the Hon'ble Court :- "Two interpretations are reasonably possible on the qu....
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....r sale of material, then such negligible component cannot be a significant factor for deciding the nature of work, because it is the substance and predominant nature of the work, which has to be taken into account. 14. In view of the above discussion, we decide the issue No.1 in negative. Issue No.2 15. The crux of this issue is as to whether payments made by the assessee company were for "carrying out any work" within the meaning of section 194C so as to attract the liability for deduction of tax at source or the payments were for supply of machinery and equipments only. In otherwords, whether the contract/contracts between the assessee and GEC India Ltd. were for carrying out any work, or work contract or were for purchase and supply of goods. 16. The assessee has taken the stand that these agreements were basically sale agreements as these were meant for supply of the equipments etc., whereas the stand of the Department is that the agreements and contracts entered into between the assessee company and GEC were work contracts. The plea of the Department in this regard is that the agreements, though broken in three parts were, in substance, one composite contract providing for....
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.... the work goes into the making of the goods to be supplied, so that the two are inseparable. This point has unfortunately not been appreciated. In the former type of contract, the determination of "the substance" is a matter of degree, involving an assessment of the relative importance of the two elements, but the latter type the designation of the contract as one of work or sale must depend upon either an arbitrary formula or a superficial impression." [Quoted from the decision of Hon'ble Supreme Court of India in the case of Hindustan Shipyard Ltd. v. State of A.P. Judgment Today 2000 (8) page 32, at page 41]. 20. In the case of Hindustan Shipyard Ltd. the Hon'ble Supreme Court of India has laid down the following test :- "There may be three categories of contracts: (i) The contract may be for work to be done for remuneration and for supply of materials used in the execution of the work for a price; (ii) It may be a contract for work in which the use of the materials is accessory or incidental to the execution of the work; and (iii) it may be a contract for supply, of goods where some work is required to be done as incidental to the sale. The first contract is a composite contr....
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....y have been defined. These articles are being reproduced as under :- "Article 3 : Contract price & Terms of payment In consideration of the Scope of supply as per the Contract for Equipment Supply, Contract price as detailed in Annexure 2 shall become payable to the Supplier in accordance with the terms of payment specified in Annexure 2. The Supplier shall submit within 3 months of signing of the contract the break-up of contract price for the various units. Article 4 : Contract Price is Firm and Fixed The Contract Price stipulated in Article 3 above shall not be subject to escalation for the entire contract delivery period except Price Variation on the Transformers. For this price variation of Transformers, IEEMA PVC 'E' Series Formulae for power transformer above 8 MVA upto and including 245 KV, will be applicable with base dated 1-3-1992, and subject to a ceiling of Rs. 15 lakhs. The relevant IEEMA PVC 'E' Series Formulae for power transformers above 8 MVA up to and including 245 KV, will be applicable with base dated 1-3-1992, and subject to a ceiling of Rs. 15 lakhs. The relevant IEEMA PVC formulae is enclosed in Annexure V. In the event of delivery dates being postponed....
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....ments shall be supplied to the Purchaser, as provided by their sub-suppliers, Supplier shall also supply properly documented information such as detailed specification, unpriced Purchase orders, etc. to enable the Purchaser to directly procure such items from the concerned sub-supplier, in future. 9.7 Purchaser shall have full right, of access to all benefits free of cost for know-how that are accruing to the Supplier by way of upgradation of technology, improvements & modernization in plants, equipment know-how and technology developed, by Supplier through their own in house R & D efforts upto a period of five (5) years from the date of successful commissioning." "Performance guarantee has also been laid down in article 1O, which is as under :- "The Supplier warrants that the Equipment shall perform to the parameters laid down in Annexure 4. The Supplier shall demonstrate the performance of equipment as per the details given in Annexure 4." 27. In Article 16, the conditions regarding supply of items in shares have been laid down, just for reference, we may refer to the following conditions: "Article 16: Spares/consumables: Commissioning items - The Supplier shall supply the ....
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....e not required to repeat the same. 37. It may be pointed out that in Annexure III to this contract, the contract price has been fixed at Rs. 3,31,000 net inclusive of all taxes. The terms of payments have also been given in this annexure. 38. The third contract is for design, manufacture, procurement of supply of equipment and it is dated 30-9-1994. The copy of this agreement is available at pages 214 to 234 of paper book. In this agreement also, same terminology and same terms have been adopted. The contract price, the terms of payment, the warranty period are similar in this agreement as in the other two agreements. The mode of payment has been given in Annexure 3, which is available at page 233 of the paper book. 39. The other salient feature in relation to these agreements relates to payments for purchases made. Annexure 'A' available at page 235 of the paper book describes the items purchased, contract value and the Bills raised. These details, which are contained in annexure No. I are being reproduced below : Sl. No. Contract for Purchase/ Contract value Bill raised against &....
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....d in the paper book. Invoice dated 31-3-1995 shows the total net sales at Rs. 5,10,578. The details of accessories supplied are mentioned in this bill. Likewise, in the other bills dated 31-8-1995, 4-9-1995, 31-7-1995, 31-8-1996 etc., the details of items and prices thereof have been mentioned. 42. After examining the various clauses and stipulations of the agreements mentioned above and also bills of payment and payments actually made, we are led towards irresistible conclusion that the agreements entered into between the assessee and GEC India Ltd. were agreements for sale or supply of goods and were not merely work contracts. 43. The issue relating to the nature of contract regarding manufacture and supply of ships came for consideration before the Hon'ble Supreme Court of India in the case of Hindustan Shipyard Ltd. 44. In that case, the Hon'ble Supreme Court of India has laid down the following test :- "14. The principles deducible from the several decided cases may be summed up as under :- 1. It is difficult to lay down any rule or inflexible rule applicable alike to all transactions so as to distinguish between a contract for sale and a contract for work and labour. 2....
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....f work contract and contract for sale was examined and the Hon'ble Supreme Court of India had laid down the principles on these supplies. Hence the ratio of that case is fully applicable to the present matter. 49. So far as the decision of Tribunal in Vadilal Diary International Ltd.'s case is concerned, we are unable to agree with the contention of Shri D.K. Srivastava that this decision is not applicable. 50. After considering the entire relevant material including the agreements, the vouchers and payment bills and also considering the nature of equipments supplied and ancillary work of supervision, designing etc. done by the supplier company, we are of the opinion that the composite character of the transactions involved in the three agreements was that of sale of goods. On perusal of the bills filed by the assessee which are available in the paper book at pages 242 to 368, it is found that these basically relate to supply of material by the said company and disclose the price of net sale relating to various parts, equipments and goods. The sale bills also include the amount of sales tax and excise duty etc. A reference, in this regard, may be made to the bill dated 30-3-1994,....
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....gon and not a work contract. Thus, on the basis of the above mentioned facts and analysis of the relevant judicial decisions, it is found that the agreements were agreements for sale and not for carrying out work so as to attract the provisions of section 194C. 53. This issue is, therefore, decided in favour of the assessee. 54. Ground Nos. 3, 4 & 5 are decided in favour of the assessee. Issue No.3 Ground No.6. 55. Through this ground, it is pleaded that ld. Commissioner (Appeals) has not considered the relevant material submitted before him and therefore he has not correctly appreciated the nature of agreements. 56. At the time of hearing, the learned counsel for the assessee pointed out that in the installation of the equipments, the civil work and labour included were provided by the assessee itself at its own cost. In this regard, reference was made to the reply letter dated 30-6-2000, submitted before the Commissioner (Appeals), a copy of which is available at pages 1 to 3 of the paper book and also to the reply dated 13-4-1999 available at pages 4 to 7. 57. In this regard, the reference was also made to the reply letters written by the assessee to the Commissioner (App....