TaxTMI 
TaxTMI 
2013 (9) TMI 644
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.... of sec. 201 of the Act. 3. The facts relating to the issue under consideration are narrated as under by Ld CIT(A) in his common order dated 30-12-2011 passed for the financial years 2007-08 & 2009-10 relevant to the assessment years 2008-09 and 2010-11. "2. The appellant company M/s. National Thermal Power Corporation Ltd. (NTPC) is in the activity of generation of thermal power at its unit, Simhadri Super Thermal Power Project (SSTPP) located at Parawada in Visakhapatnam district. TDS inspection was carried out in the premises of the SSTPP on 09-03-2009. During the course of inspection, it was noticed that the company has undertaken 1000 MW expansion of SSTPP State-II. Pursuant to this, bids were invited for various packages of works. After evaluation and discussion and issue of letters of intent, notification of award was issued to the successful bidders, the contract for various packages of works were thus, finalized with companies like ABB, BHEL, Driplex Water Engg. Ltd. etc. 2.1 The different packages of works include design, engineering, manufacture, forwarding, erection and commissioning. After finalizing the contractor, contra....
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....td. [2005] 198 CTR (Delhi) 375. (d) CIT v. Deputy Chief Accounts Officer, Markfed Khanna Branch [2008] 173 Taxman 149 (Pun & Har). (e) CIT v. Girnar Food & Beverages (P) Ltd. [2008] 306 ITR 23 (Guj.) (f) Hindustan Lever Ltd. [2008] 306 ITR 25 (Guj). 2.4 Assessing Officer after carefully considering the arguments of the assessee held that the Board circular referred to by the assessee-company is not applicable to the facts of the case. He further relied on the decision of Hon'ble Madras High Court in the case of Mani Muthuswamy v. Personal Assistance to the Collector in Writ Petition No. 3681 of 2008. The Hon'ble Madras High Court vide its judgment dtd. 15.10.2009 held that supply of eggs to Government of Tamil Nadu as part of mid-day meals scheme is also in the nature of works contract. The Hon'ble Madras High Court in its order relied on various Supreme Court judgment including the case of M/s. Hindusthan Aeronautics Limited, Associated Cement Company Limited, State of Tamil Nadu v. Anandam viswanathan, Hindusthan Shipyard Ltd. v. State of AP and Kone Elevators (India) Limited. ....
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....ntire scope of work narrated in both the parts. (6) The price of package agreed for the entire scope of work covers both part as is evident from the price schedules enclosed to the contract agreements. (7) The minutes of the meeting held between the assessee- company and the contractors on several issues like, commercial, technical work schedule and quality assurance and inspection over both the parts of the contract further signifying the obligation of the contractor for the scope of work covered under both parts of the contract. 2.5 To conclude it is held by the Assessing Officer that the main objective of the assessee-company is to get a particular package of work from a contractor starting from design and engineering and ending with installation and commissioning. All inter-alia jobs like procurement, manufacturing etc. are all inclusive in the package. Thus it is held by the Assessing Officer that the first contract and second contract together constitute a composite contract attracting tax deduction at source on all the sums paid to contrac....
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....ee has entered into two separate contracts for procurement and installation of plant and equipments required for commissioning 1000MW SSTPP Stage-II. According to the assessee, the first contract is entered up to the stage of making the plant and equipment ready at the site of the manufacturer and the second contract is entered in connection with the transportation from manufacturer's place, installation and commissioning, conducting performance and guarantee tests and handing over of all the equipments. The assessee has treated the second contract as "Contract of Work" and accordingly deducted at source u/s 194C of the Act. However, the first contract was treated by the assessee as a "Contract for sale" and hence it did not deduct tax at source u/s 194C of the Act. 7. The Ld CIT(A) has concluded that both the contracts are composite contracts and further they are inseparable one. Further the Ld CIT(A) has held that the entire contract can only be considered as a "Contract for work and labour". Accordingly, the Ld CIT(A) has held that the assessee is liable to deduct tax at source on the first contract also. 8. For the sake of convenience, we shall term the first contract as "Sup....
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..... Chemical dosing, Equipment cooling water system for steam generator and Auxiliaries, Plant and Instrument Air Compressors, Plant Performance analysis, Diagnosis and Optimization (PADO), Vibration isolation & Spring system etc. for Simhadri Super Thermal Power Project, stage-II (2x500MW) situated at Simhadri Dist. Visakhapatnam, State of Andhra Pradesh, India as per provisions of Bidding Documents No.CS-3530-101-2. NTPC intends to finance this package through External Commercial Borrowings and other sources". 3.8 From the above advertisement, it can be seen that bids are called for supply & installation together and not separately. Perusal of following specific clauses of the instructions to bidders is necessary to look into the intention of NTPC. 1.2 NTPC intends to make financing arrangements for the subject package by means to Buyers Credit from International Banks through the Export Credit Agencies of the Country concerned to the extent the goods and services covered in the package are imported from OECD countries. For the above purpose, the Export Credit Agencies require certain procedural formaliti....
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....cy of manufacturing and/or fabrication capacities to meet the requirements appropriate to the works covered in his bid, then the details of the requirements appropriate to the works covered in his bid, then the details of alternative arrangements to be organized by the Bidder and/or his collaborator/associate for this purpose and which shall meet the Employer's approval, shall also be furnished. (vi) has established quality assurance systems and organization designed to achieve high levels of equipment/system reliability, both during his manufacturing and/or fabrication and field installation activities". 10. Bid Prices 10.1 Unless otherwise specified in the Technical Specifications, Bidders shall quote for the entire facilities on a "Single responsibility" basis such that the total bid price covers all the contractors obligations mentioned in or to be reasonably inferred from the bidding documents in respect of the design, manufacture including procurement and subcontracting (if any), delivery, construction, installation, commissioning, completion of the facilities and conductance....
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....ates or prices for all labour, contractors equipment, temporary works, consumables and all matters and things of whatsoever nature, charges for insurance covers other than inland transit insurance, operations and maintenance services, the provision of operations and maintenance manuals, training of employer's personnel etc. and other services as identified in the bidding documents and necessary for the proper execution of the installation services, including all taxes, duties, levels including of service tax and charges payable in the employer's country, as of seven (7) days prior to the deadline for submission of bids. 28. Award Criteria 28.4 The mode of contracting with the successful bidder will be as per stipulation outlined in GCC Clauses 3.6 and briefly indicated below: (i) First Contact: For CIF (Indian Port of entry) supply of plant and equipment including type test charges and mandatory spares to be supplied from abroad. (ii) Second Contract: For Ex-works (India) supply of domestically manufactured plant and equ....
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....return it to the employer. 32. Performance Security 32.1 Within twenty-eight (28) days after receipt of the Notification of Award, the successful Bidder shall furnish performance securities for ten percent (10%) of contract price for all the contracts and in the form provided in the section "Forms and Procedures" of the bidding documents." General Conditions of Contract (GCC) "Project Manager" means the person appointed by the Employer in the manner provided in GCC sub-clause 17.1 (Project Manager) hereof and named as such in the SCC to perform the duties delegated by the Employer. "Facilities" means the Plant and Equipment to be supplied and installed, as well as all the installation Services to be carried out by the Contractor under the Contract. "Completion" means that the Facilities (or a specific part thereof where specific parts are specified in the SCC) have been completed operationally and structurally and put in a light and clean c....
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....hat will be provided or performed by the employer, as set forth in Appendix 6 (scope of works and supply by the Employer) to the Contract Agreement. 9. Contractor's Responsibilities 9.1 The contractor shall design, manufacture (including associated purchase and/or subcontracting), install and complete the facilities and carry out the guarantee tests with due care and diligence in accordance with the contract. 11. Contract Price 11.1 The Contract Price shall be as specified in Article 2 (contract Price and Terms of Payment of the contract agreement). 11.2 The Contract Price shall be adjusted in accordance with provisions of Appendix-2 (Price Adjustment) to the Contract Agreement. 11.3 Subject to GCC Sub-clause 9.2, 10.1 and 35 (Unforeseen Conditions) hereof, the Contractor shall be deemed to have satisfied itself as to the correctness and sufficiency of the Contract Price, which shall, except as otherwise provided for in the Contract, cover all its obligations under the Contract. 12. Term of Payment &nb....
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.... to be imported into the country where the Site is located shall be transferred to the Employer upon loading on to the mode of transport to be used to convey the plant and equipment (including spare parts) from the country of origin to that country and upon endorsement of the dispatch documents in favour of the employer. 31.2 Ownership of the Plant and Equipment (including spare parts) procured in the country where the site is located shall be transferred to the Employer when the plant and equipment (including spare parts) are loaded on to the mode of transport to be used to convey the plant and equipment (including spare parts) from the works to the site and upon endorsement of the dispatch documents in favour of the employer. 31.5 Notwithstanding the transfer of ownership of the Plant and Equipment, the responsibility for care and custody thereof together with the risk of loss or damage thereto shall remain with the contractor pursuant to GCC Clause-32 (care of facilities) hereof until completion of the facilities or the part thereof in which such plant and equipment are incorporated. 3.8 From the perus....
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.... contract and there is no intention to split the contract and give it to different persons. Clause 28 speaks of award criteria. Clause 28.4 says that the award shall be made into first contract, second contract and third contract. However, it is specifically stated that all the above contracts will contain a cross-fall breach clause specifying that breach of one contract will constitute breach of the other contracts which will confer a right on the employer to terminate the other contracts also at the risk and the cost of the contractor. This in my opinion is the most important clause regarding the award of contract which clearly shows the inseparability of the entire contract though it might have been split into supply and installation contract separately. This clause clearly shows that if there is any breach of contract for installation or testing the entire contract including supply s liable to be terminated. Such termination would not be possible if the employer has entered into three separate contracts for supply and installation wherein the responsibility of each contract will end with performance of that contract only. This simply means that till the facility is finally inst....
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....rued as a breach of other contract which will confer a right on the employer to terminate the other contracts also. This once again clarifies the intention of the employer to show that the entire contract is a single contract. Clause 3.7 of G.C.C. states that the contract constitutes the entire agreement and supersedes all communications, negotiations and agreement. Clause-7 of G.C.C. which defines scope of facilities clearly states in no uncertain terms that performance of all services required for design, manufacturing, commissioning and completion of facilities and carrying out guarantee tests is part of the contract. Clause-9 which stipulates contractor's responsibility clearly states that contractor shall design, manufacture, installation and complete the facilities and carry out guarantee tests. Clause-11 which speaks of contract price indicates that the price is for the total contract and not for part of contract. Clause 12.2 which speaks of terms of payment clearly states that no payment made by the employer shall be deemed to constitute acceptance by the employer of facilities or any part thereof. This clause thus shows that separate payment made for supply of any items sh....
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....of two steam Generating units each having required specifications. These machineries were going to be used in the Super Thermal Power Project implemented by the assessee at Visakhapatnam. Thus, what was proposed to be purchased, for which global bids were invited, is specialized machinery. No doubt, the notice inviting bids as well as the "instructions to bidders" clearly show that the assessee has viewed both supply of machineries and their installation as forming part of same contract. However, for the reasons best known to it, the assessee has entered into two separate contracts, one for supply of machineries and other for their installation. The revenue authorities have taken the view that the splitting up of the total work into two separate contracts is only on paper to suit the convenience of the assessee, but the assessee has intended to look both of them as a single contract. A careful reading of instructions to bidders and also the analysis of various clauses, as pointed out by Ld CIT(A), clearly show that the assessee intended to view both supply contract and installation contract as part and parcel of same contract only. 12. Even if both the contracts viz., supply contr....
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....vernment of India and manufactured aircrafts on behalf of Government of India. The good belonged to Government of India but were entrusted to HAL for manufacture of aircrafts to be delivered to Air Force. It was held that it is a works contract. It was observed that in contract for work, person producing has no 'property' in the thing produced as a whole, even if part or even whole of material used by him may have been his property. In contract for sale, the thing produced as a whole has individual existence as sole property of the party who produces it some time before delivery and the property therein passes only under the contract relating thereto to the other party for a price. In State of Gujarat v. Kailash Engineering Co. [1967] 19 STC 13 (SC) = AIR 1976 SC 2108, it was held that if unfinished goods are held as property of buyer, it is a works contract. 4.6 Taking cue from the above decisions if the present case is examined it can be seen that as a part of contract what is handed over to NTPC by BHEL is basically an unfinished plant/equipment which unless is installed and commissioned will be of no use to the employer i.e. NTPC on chattel-qua-chattel....
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.... If the thing to be delivered has individual existence before the delivery as sole property of the party who is to deliver it, it is a sale. (4) If bulk of material used belongs to the manufacturer who sells the end product, it is strong pointer that the contract is for sale of goods and not of work and labour. However, the test is not decisive. Similarly the Hon'ble Supreme Court in the case of State of Madras v. Gannon Dunkerley & Co. AIR 1958 SC 560, had held that no tax can be levied on works contract, as tax can be levied only on 'sale of goods' as defined in Sale of Goods Act. In an indivisible works contract, there is no sale of goods as there could be no agreement to sell materials as such and moreover, the property does not pass as movables. The material used therein becomes property of the other party on the theory of accretion and, as such, no sales tax can be levied on such material. Whether a contract is a contract for work or not depends on the facts of each case and intention of the parties and essence of contract as held by the Hon'ble Supreme Court in the case of Chandrabhan Gosain v. State of Orissa. Similarly, in Sentinel Rolling Shutters & Engg. Co. (P) Ltd. v. ....
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....h articles passes to the other party. That would not convert the contract into one of sale of those articles. Sale of goods normally means an agreement between the parties for the sale of the very goods in which eventually the property passes. 4.8 If the ratios of above judgments are applied to the present case it can be seen that unless and until the facility is entirely installed the parts of that facility however big or substantial they may be do not constitute any meaningful finished products for them to be put under the purview of sale of goods. Thus the contract in this case has to be seen as a contract for design, supply, installation and commissioning of stem generator and it cannot be divided into only supply of material though parts of the steam generator are substantially valuable". 14. In our view, the case law pertaining to designing and fitting of air conditioner and laying of pipe lines (Paragraph 4.5 of order of Ld CIT(A)) and Rolling Shutters (Paragraph 4.7 of his order) are not applicable to the facts of the instant case. The scope of work in Supply Contract (First contract) is stated as under by Ld CIT(A) in paragraph 2.1 of his order:-....
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.... and the various parts of the same are transported separately. Thereafter, all the parts will be assembled and installed at the work place of the customer. Upon such installation, the wind mill will become operational. This is the scenario with all huge sized machinery. Hence, we are unable to agree with the view expressed by the Ld CIT(A) that the suppliers have only handed over unfinished plant/equipment, as it is contradictory to the expressed intention of the parties as per the scope of first contract. 15. Further, in paragraph 4.7 of the order, Ld CIT(A) has made following observations:- "...it becomes clear that the plant and equipment which is supplied to by BHEL cannot be sold in the open market to any other person and is not useful to others as such because it is a custom made product and it is of no value without completion or installation. Thus what the contract speaks of is of installation and commissioning of facilities and supply is only a part of such contract though it is a major part of such contract..... Similarly in the present case the power plant and turbine which is used in power plant comes into existence a....
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....n the instant case, the suppliers of the machineries continued to be owners of the same till they are dispatched to the assessee herein. This position is very clear on reading of various clauses of instructions to bidders, which we are going to discuss in the ensuing paragraphs. 17. A careful perusal of the "Instruction to bidders" in the instant case would show that the assessee intended that the property in the machinery would pass on to him on shipment of the same, subject to endorsement of the dispatch documents in favour of the assessee. It is very much clear on reading of the following clauses. "Transfer of ownership 31.1 Ownership of the Plant and equipment (including spare parts) to be imported into the country where the Site is located shall be transferred to the Employer upon loading on to the mode of transport to be used to convey the plant and equipment (including spare parts) from the country of origin to that country and upon endorsement of the dispatch documents in favour of the employer. 31.2 Ownership of the Plant and Equipment (including spare parts) procured in the country where the si....
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....e after, all the parts have to be assembled at the work place of the assessee to make it functional. Thus, these machineries would become functional only upon their successful installation. Accordingly, it appears that the assessee has split the total contract into two separate contracts viz., the first contract for supply of machinery and the second contract for its installation. Since the second contract would involve carrying of "work" in terms of sec. 194C of the Act, the assessee has deducted tax at source on the payments made under second contract. Since the assessee has considered the first contract as mere "Contract of sale", it has not deducted tax at source. 19. At this stage, we feel it apposite to discuss about the decision rendered by the Hyderabad bench of Tribunal in the case of Power Grid Corpn. of India Ltd. v. Asstt. CIT [2007] 108 ITD 340. In the said case, the assessee therein was engaged in transmission and distribution of electricity to various constituents across the country. In connection with implementation of its expansion projects, the assessee therein awarded contracts to various parties to construct/execute the transmission line/sub-station. It also en....
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....hence part of contract was for supply of equipment. We are unable to agree with the view of the Ld CIT(A) on this point. In the instant case also, in our view, it cannot be said that the machineries or part of machineries supplied by the suppliers do not have individual existence. Further, as in the case of Power Grid Corporation case, they become functional only upon their installation. Hence, it may not be correct to presume that the machineries or part of machineries do not have any value unless they are assembled and made functional. 21. The Hyderabad bench of Tribunal, in the case of Power Grid Corpn. of India Ltd. (supra) has followed the ratio laid down by Hon'ble Supreme Court in the case of State of Andhra Pradesh v. Kone Elevators (India) Ltd. [2005] 140 STC 22. The relevant discussions made by the Tribunal are extracted below:- "5.4 The Hon'ble Supreme Court in the case of Kone Elevtors (India) Ltd. (supra) considering the case of installation of lifts held that the contract is a "contract for sale". The Hon'ble Apex Court, while enumerating the tests to be considered while deciding the nature of contract emphasized the fact that the intention ....
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....'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 contract and its execution. In the present case, the contractors have to fabricate towers as per tested quality of conformity with International Standard-(IS) : 2062. Further the contractor has been given the option to use other equivalent grade of structural steel angle sections and plates conforming to latest International Standards. The contractor fabricates and manufactures the tower with steel sections as per International Standards. The material is that of "the supplier" and not of the "purchaser". The "supplier" does not work on the material supplied by the "purchaser". There is no accretion of material to the purchaser, part by part, unit by unit. The rest of the equipment such as insulators, conductors, transformers, circuit breakers, etc., are standard equipments. The relevant technical specification is specified by the 'purchaser'. The title in the goods passes as a chattel on delivery though certain obligations are still necessarily to be....
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....g the same for erection, it is a contract of sale and s. 194C has no application. On erection portion as admitted TDS is made". 22. In the case of Kone Elevators (India) Ltd. (supra), the assessee therein brought the lift to the site in knocked-down state and then assembled it at the customer's place. The Hon'ble Supreme Court held that the transaction was a "Contract of sale" and not "Works Contract". In the instant case also, the machineries were dispatched by the suppliers to the assessee in knocked down state and upon such dispatch, the property in the machinery passed on to the assessee. 23. In our view, the ratios laid down by the Hon'ble Supreme Court in the case of Kone Elevators (India) Ltd. (supra) and by the Hyderabad bench of Tribunal in the case of Power Grid Corpn. of India Ltd. (supra) are applicable to the facts prevailing in the instant cases. Following observations made by the Tribunal in the case of Power Grid Corpn. of India Ltd. (supra) prove that the view taken by Ld CIT(A) in the instant case is not correct. "Though the assessee claims that the design specification are not unique in the sense that the same specifications are used b....