TaxTMI 
TaxTMI 
2013 (4) TMI 635
X X X X Extracts X X X X
X X X X Extracts X X X X
.... refinery, for a sum of Rs. 1,100 Crores; Rs. 438 Crores & Rs. 455 Crores respectively. 3. It was noticed by the ITO that these contracts were allotted to its sister concern viz., Messrs. Essar Projects Limited which had obtained a Certificate u/s. 197(1) of the Income Tax Act, 1961 ["Act" for short] for tax deduction at a lower rate on various contract payments to be made to M/s. Essar Projects Limited by Messrs. Essar Oil Limited [the appellant]. On account of non-deduction of tax at source; while making payments during the period from 1st April 1997 to 9th September 1997, objections were raised by the Income Tax Officer, by whom a show cause notice was also issued as to why the assessee-company should not be treated as a defaulter for recovery of dues towards TDS amount. It was adjudicated by the ITO holding that the assessee was in default for not deducting the TDS in payments made to M/s. Essar Projects Limited @ 2% for the period from 1st April 1997 to 9th September 1997. As the total payment made to Messrs. Essar Projects Limited in the given period was to the tune of Rs. 92,20,90,752/=, the TDS deductible @ 2% was Rs. 1,84,41,814/=. 4. The appellant-Company, while submitt....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d the decision of the Bombay High Court in the cases, reported in Bombay Goods Transport Association v. CBDT [1994] 210 ITR 136 and Chambar of Income-tax Consultants v. CBDT [1994] 209 ITR 660. Conclusively, it held that Section 194 of the Act had been amended to give overriding effect to all these judgments relating to the payments made to the professionals, and accordingly, from all the factual situation, it held that Section 194C would be applicable when the effect of three contracts result into a work contract which includes supply of labour. 7. The Commissioner [Appeals] relied on Clause 2.3 of the Contract dated 25th March 1997 to opine that the said clause makes it abundantly clear that all the three contracts are essentially a composite contract for the works relating to construction of a refinery at Vadinar, and therefore, the supply of material was to be treated as the works contract. The TDS was deductible from the entire payment made to Messrs. Essar Projects Limited for the construction of refinery. 8. When this issue travelled to the Tribunal, it concurred with the findings of the CIT [A] by discussing at length not only the order of CIT [A] but also independently e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....under sub-section (2A) where, in the case of any income of any person, income tax is required to be deducted at the time of credit or, as the case may be, at the time of payment at the rates in force under the provisions of Sections 192, 193, 194, 194A, 194D, 194-I, 194K, 194L and 195, the Assessing Officer is satisfied that the total income of the recipient justifies the deduction of income tax at any lower rate or no deduction of income tax application made by the assessee in his behalf, give him such certificate as may be appropriate. (2) Where any such certificate is given, the person responsible for paying the income shall, until such certificate is cancelled by the Assessing Officer, deduct income tax at the rates specified in such certificate or deduct no tax, as the case may be. (3) The Board may, having regard to the convenience of assessees and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which and the circumstances under which, an application may be made for the grant of a certificate under subsection (1) and the conditions subject to which such certificate may be granted and providing for all other m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sing charges were in the nature of rent, as defined in Explanation to section 194-I of the Act and therefore, tax ought to have been deducted at 20 per cent under the said provisions as against deduction of tax at 2 per cent under Section 194C of the Act. 14. The Assessing Officer therefore levied interest under Section 201(1A) of the Act on the amount of tax alleged to be short deducted. This decision also notes a circular issued by the CBDT to put an end to the controversy and the circular declaring that no payment visualized under Section 201(1) of the Act should be enforced after the tax deductor has satisfied the officer-in-charge of TDS, that taxes due have been paid by the assessee. It further says that this will not alter the liability to charge interest under Section 201(1A) of the Act till the date of payment of taxes by the assessee or the liability for penalty under Section 271C of the Act. 15. In the case between CIT v. Eli Lilly & Co. (India) (P.) Ltd. [2009] 312 ITR 225, the assessee was under obligation to deduct tax at source under Section 192 (1) of the Act and where the assessee was under a genuine and bona fide belief that it was not under any obligation to de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t the contract into one of sale of those materials. In every case, the court would have to find out what was the primary object of the transaction and the intention of the parties while entering into it. It may in some cases be that even while entering into a contract of work or even service, parties might enter into separate agreements, one of work and service and the other of sale and purchase of material to be used in the course of executing the work or performing the service. In such cases, the transaction would not be one and indivisible, but would fall into two separate agreements, one of work or service and the other of sale." 17. In light of aforementioned discussion, the first point that requires to be regarded by this Court is whether the appellant herein entered into contract with Essar Projects Limited - the contractors for the purpose of deduction of tax at source under the provision of Section 194C of the Act for establishing of a refinery at Vadinar near Jamnagar; whether same is one contract or three separate contracts for supply of equipments/materials, labour-cum-erection and for construction. Section 194C of the Act contemplates that in pursuance of the contract....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to carry out a work. It is a clear indication of legislature that the 'work' in sub-section is not intended to be confined to or restricted to 'works contract'. 'Work' envisaged in the sub-section, therefore, has wide import and covers 'any work' which one or the other of the organizations specified in the sub-section can get carried out through a contractor under a contract and further it includes obtaining by any of such organizations supply of labour under a contract with a contractor for carrying out its work which, would have fallen outside the 'work', but for its specific inclusion in the sub-section." 20. It emerges from the record as also from the decision of the Tribunal that Essar Oil Limited - the appellant herein entered into a contract with EPL - the contractor for establishing a Refinery Plant at Jamnagar. The question arose with regard to deduction of tax at source under the provisions of Section 194C of the Income Tax Act as there were three separate contracts viz., one for Supply of Indian sourced equipments and materials; second for labour-cum-erection; and third for construction of refinery. As it was emphasized by the Department that this amounts to only one co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f this decision and also as ruled out by the Patna High Court in case of Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444, Section 194C of the Act would be applicable to all types of contracts. It further emphasized upon the fact that these three contracts reiteratively refer to the original document which is an agreement dated 7th November 1994, and therefore also, it concluded that later agreements were only amendments to the original agreement. They were inseparable part of the original agreement dated 7th November 1994. Logically also, it was of the opinion that when contract is for erection of a Refinery Plant, without supply of material, it is not possible and contract for construction of building, dam, air ports, railways are in the nature of contracts for work and labour and their liability to deduct tax at source from the payment made in respect of such contracts. 23. Thirdly, with regard to deduction of tax at source, in the aforementioned discussion, when it held that it was a composite contract of the assessee appellant that EPL and the rest were merely amendments to the original agreement, it concluded that tax was to be deducted on the total amount paid to the co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by cheque or draft to deduct an amount equal to two percent where payment is to be made to other than an individual or a HUF under Section 194C of the said Act. 27. Assessing Officer under Section 197 of the Act, on an application moved by an assessee can issue a certificate for less deduction or no deduction of Income-tax on being satisfied with justification and till such certificate remains in existence, this benefit continues. However, as a consequence of failure to deduct or pay any sum in accordance with the provision of this Act, the assessee is deemed to be in default in respect of such tax. If such person, without good and sufficient reason, fails to deduct and pay such tax, penalty under Section 221 is contemplated as provided under Section 201 of the Act. 28. Question therefore would be whether the contract entered into by the appellant-assessee with Essar Projects Ltd was a contract for labour/service or contract for sale of material or was it contract for constructing oil refinery essentially and therefore, non deduction of tax at source would make appellant a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....one involving both a contract of work and labour and a contract of sale. Nevertheless, the distinction between the two rests on a clear principle. A contract of sale is one whose main object is the transfer of property in, and the delivery of the possession of, a chattel as a chattel to the buyer. Where the principal object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one of work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale ; neither the ownership of materials, nor the value of the skill and labour as compared with the value of the materials, is conclusive, although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract is in substance one for work and labour or one for the sale of a chattel." 34. What is sought to be canvassed by the appellant is that parties entered into separate contracts; one for work and service and other for sale & purchase of materials to be used in the course of executing the work and therefore, transaction be treated divisible and not one. 35....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t Clearance and Inland Transportation of Non Indian Sourced Equipment and Materials, Site preparation, Construction of all buildings, bridges, structures and various units and facilities, all enabling facilities and permanent General work and erection and installation of all Equipment and materials and carrying out of commissioning, start-up and performance testing of all process units, offsites, utilities and infrastructural facilities of the Refinery in its entirety." 37. On the basis of such clause, the Commissioner came to the conclusion that three contracts were composite contracts i.e. for construction of refinery at Vadinar. We have no reason to take a different view. Particularly, in view of the background that three separate agreements were created long after the initial contract for construction of refinery was executed between the parties and such agreements were referred to as amendments in the original agreement, it cannot be disputed that there was one single integrated agreement for construction of refinery plant. 38. In case of State of A.P. v. Kone Elevators (India) Ltd. [2005] 140 STC 22 (SC), the Supreme Court observed that there is no standard formula by which....