IN THE INCOME TAX APPELLATE TRIBUNAL, NAGPUR BENCH

1 ITA Nos.110, 111 & 112/Nag/2011

IN THE INCOME TAX APPELLATE TRIBUNAL,

NAGPUR BENCH, NAGPUR

BEFORE SHRI MUKUL K. SHRAWAT, JUDICIAL MEMBER AND

SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER.

I.T.A. Nos. 110, 111,112 & 113/Nag/2011

Assessment Years : 2008-09, 2009-10 & 2010-11..

Maharashtra State Power Asstt. Commissioner of

Generation Co. Ltd., Mumbai. Vs. Income-tax (TDS), Circle-2,

PAN AAECM 2935R Nagpur.

Appellant. Respondent.

Appellant by : Shri J.D. Mistri.

Respondent by : Shri Narendra Kane.

Date of Hearing : 02-11 -2015.

Date of Pronouncement : 18

th

Dec., 2015.

O R D E R

Per Shri Shamin Yahya, A.M.

ITA Nos. 110,111 & 112/Nag/2011 are appeals by the assessee directed against

the common order of learned CIT(Appeals)-II, Nagpur dated 28-03-2011 and pertain

to assessment year 2008-09, 2009-10 and 2010-11. ITA No. 113/Nag/2011 is directed

against separate order of learned CIT(Appeals) of even date and pertains to

assessment year 2010-11.Common grounds are raised in these appeals read as under:

1:0 Re.: Considering the Appellant as an ‘assessee in default’ u/s 201(1)

r.w.s. 194C of the Income-tax Act, 1961:

1.1 The Commissioner of Income-tax (Appeals) has erred in confirming the

action of the Assessing Officer of holding that the provisions of section

194C are applicable to the payments made by the Appellant to BGR

Energy System (India) Ltd. (“BGR”) and Bharat Heavy Electricals Ltd.

(“BHEL”) (for AY 2010-11 in ITA 113 to Larsen & Tubro Ltd. L&T) for

supply of equipments and thereby holding that the Appellant was an

‘assessee in default’ since it has not deducted tax at source while making

2 ITA Nos.110, 111 & 112/Nag/2011

payments in terms thereof in accordance with the provisions of section

194C.

1.2 The Appellant submits that considering the facts and circumstances of its

case and the law prevailing on the subject the contracts in question were

contracts for supply of equipments and not a contract for carrying out any

work and hence the provisions of section 194C are not applicable thereto

and the stand taken by the Assessing Officer in this regard is

misconceived, incorrect and erroneous and the Commissioner of Income-

tax (Appeals) ought to have held as such.

1.3 The Appellant submits that the impugned order passed by the Assessing

Officer treating it as an ‘assessee in default’ be struck down as bad in law.

2:0 Re: General

2.1 The Appellant craves leave to add, alter, amend, substitute and/or modify

in any manner whatsoever all or any of the foregoing grounds of appeal at or

before the hearing of the appeal.

Since facts are identical we adjudicate the issue by referring to the facts and figures

of learned CIT(Appeals)’ common order mentioned above.

2. Brief facts of the case are as follows:

The appellant company is wholly owned by the Government of Maharashtra

through ‘MSEB Holding Co. Ltd.’ engaged in the activity of generation of electricity.

During the F.Yrs. 2007-08, 2008-09 and 2009-10, the appellant company was setting

up a power plant at Khaparkheda and had inter-alia entered into the following

agreements:

a) Agreement dt. 03-07.2007 being the ‘Letter of Award for Supply of

Equipments for Balance of Plant ‘ entered into with GEA Energy System

(India) Ltd.. (GEA) now known as BGR Energy System (India) Ltd. (BGR)

and

b) Agreement dt. 27-06-2007 being the Contract Agreement entered into by the

appellant with Bharat Heavy Electrical Ltd. (BHEL).

3.1 In addition to the above, the appellant has also entered into other contracts with

BGR and BHEL and for erection, testing and commissioning of the plants purchased

by it for BGR and BHEL and for carrying out the civil and structural works required

for the said plants. No tax was deducted on the payment made for the first contract on

the ground that this was a purely purchase/supply contract. However, tax was

3 ITA Nos.110, 111 & 112/Nag/2011

deducted on the payments made for other two contracts on the ground that they were

for erection and testing and also for carrying out the civil and structural works

required for the said plant.

3.2 During the course of spot verification carried out by the DCIT(TDS) on

30.12.2009, it was noticed by the DCIT(TDS) that the appellant has not deducted tax

at source on the payments made by it to BGR and BHEL on the ground that it only

pertained to supply of equipment.

3.3 The AO has, during the course of proceedings u/s 201 & u/s 201(1A), verified

the contracts and held that there was a composite contract on which tax is deductible

at source as per provisions of section 194C. The A.O. has arrived at this conclusion

based on the terms and conditions in the various agreements entered into by the

appellant and BHEL and BGR Systems.

3.4. The AO has also considered the bid specification for the Khaparkheda TPS

Expansion Project 1x500 MW issued by appellant and observed as follows:

“The intent of this specification is to enter into single point responsibility

contract. However, with single point responsibility two separate contracts, one

for design, engineering, manufacture, testing at works, supply and the other for

installation, erection, testing and commissioning of main plant comprising of

steam generator, steam turbine generator and other associated auxiliaries and

balance of plant equipment for Khaparkheda TPS expansion project 1x500W

covering completely the scope of work specified in the accompanied

specification forming completely coordinated and engineered main plant

package all in accordance with the specifications as detailed out in the various

sections of this bid document.”

3.5 The AO has considered the provisions of section 194C of the I.T. Act and held

that there was a works contract between the appellant – Mahagenco on the one hand

and BHEL and BGR Systems on the other hand. The supply contract and that of

erection were in essence a composite contract, which attracted the provisions of

section 194C. The AO has thus levied an interest u/s 201(1A) of Rs.96,88,494/-,

Rs.2,89,56,270/- and Rs.13,10,98,180/-.

4 ITA Nos.110, 111 & 112/Nag/2011

4. Before the learned CIT(Appeals) the assessee raised common grounds for all

the three years. Further more the assessee raised the following additional ground

before the learned CIT(Appeals):

“ The appellant submits that the recipient viz. BGR Energy Systems (India)

Ltd. (BGR) and Bharat Heavy Electricals Ltd. (BHEL) have already made

payment of advance taxes on the amount received by them from the appellant

during the year under consideration and hence the tax deductible by the

appellant on the said payments cannot be recovered from the appellant.”

The assessee submitted before the learned CIT(Appeals) that though the bid was a

composite bid the same had distinctly/separately identifiable contracts for the three

clearly distinguishable portions :

i) Supply of equipment;

ii) Erection and

iii) Civil works.

No tax is required to be deducted on the contract for supply of equipment. On the

erection and civil works component, TDS has been done as per provisions of section

194C. Appellant has also relied on the following decisions :

i) Senior Accounts Officer (O&M), Haryana Power Corporation Ltd. vs.

ITO [2006] 103 TTJ 584 (Del).

ii) Power Grid Corporation of India Ltd. vs. ACIT [2007] 112 TTJ 654

(Hyd).

iii) ACIT vs. Andhra Pradesh Power Generation Corporation Ltd. [2009]

TIOL 346 ITAT (Hyd).

The assessee further countered the various observations of the AO. Considering the

above Learned CIT(Appeals) opined that the contracts awarded to BGR Systems Ltd.

and BHEL were composite contracts. For this proposition the learned CIT(Appeals)

referred to the following AO’s reasoning :

“i) The contracts for supply of equipment and subsequent erection,

commissioning and testing with BHEL for the Boiler Turbine Generator

were awarded based on a single bid.

ii) The main object or intention of the owner was to set up main plant of

Thermal Power Unit at Khaparkheda. The A.O. has relied on the intent

5 ITA Nos.110, 111 & 112/Nag/2011

of bid specifications and pointed out that subsequent to the single bid an

order was placed with BHEL for supply and installation of 500 MW

capacity, main plant BTG package with project completion schedule.

The Balance of Package contract was entered into with BGR Systems for

an EPC contract on turnkey basis, so that all inputs are made available to

BHEL by BOP contractor as per requirement of the main plant BTG

package in the project completion schedule.

iii) As per the award of the contract, the responsibility of the contractor for

the successful completion of the plant / equipment as per specification

and a breach in one contract shall automatically be construed as a breach

of other contract which will confer a right on the owner to terminate the

other contract also at the risk and the cost of the contractor.”

5. Considering the above, learned CIT(Appeals) agreed that the entire spectrum of

activities from supply of equipment to erection and commissioning of BTG with

BHEL and BGR Systems have the elements of a composite contract. Learned

CIT(Appeals) observed that the intention of the Mahagenco is to “put up” a power

plant as specified in the bid document. That the contract was awarded to BHEL to set

up the BTG plant. BHEL is a public sector enterprise which is engaged in engineering

and manufacturing in the power sector. In respect of the BTG contract dated 27-06-

2007 with BHEL, AO has pointed out that although the supply of machinery was by

terms of a separate contract there were no explicit clauses regarding transfer of title of

machinery. That on the contrary, the AO has observed it was only from date of

successful completion of the trial operation of the unit that the plant shall be taken

over by the owner. That as far the BOP contract with BGR Systems, it is noticeable

from the agreement clause in the contractor’s obligation/liabilities itself specifies that

the “contract shall be a turnkey contract on the basis of supply cum erection on a

single source responsibility. That thus the terms and conditions of the contract

agreement and the obligations and liabilities of the contractor, clearly indicate that

there is a composite contract.

6. Learned CIT(Appeals) further observed that the appellant has relied on

Explanation (iv)(e) to section 194C for supporting his definition of work, which

essentially contemplates manufacture or supply of a product. That appellant has

further emphasized that in this case, no material was purchased from Mahagenco by

6 ITA Nos.110, 111 & 112/Nag/2011

either BHEL or BGR systems. Therefore, clause (e) to Explanation (iv) to section

194C is applicable. In this connection learned CIT(Appeals) referred to clause (e) of

Explanation (iv) to Section 194C and observed that since the relevant clause of the

Explanation is applicable only in the context of ‘manufacturing’ or ‘supplying’ a

product, it was necessary to appreciate whether the ‘setting up of a power plant’ can

be equated with manufacturing or supply of a product. Learned CIT(Appeals) in this

regard referred to the definition of ‘manufacture’ in the dictionary and opined hat

setting up of a power plant cannot be appropriately described by the word

“manufacture” Learned CIT(Appeals) further referred to the assessee’s contention

that when the explanatory notes to the Finance Bill excluded “construction contract”

from amended Explanation (iv)(e), it only refers construction of building. However,

learned CIT(Appeals) was not convinced. She observed as under :

“ The Chambers 20

th

Century dictionary defines construction as “act of

constructing anything piled together, building”. The definition thus envisages

the emergence of a structure. Thus although the definition includes the

building, erection of a power plant can be reasonably held to be an activity of

construction. It is thus evident that term “construction” is more suitable to the

act of putting up a power plant than the term “manufacturing”. Therefore,

appellant’s argument that a power plant is merely set up and not constructed is

specious.”

7. Learned CIT(Appeals), therefore, rejected the reliance of the assessee’s counsel

on the decision of Hon’ble jurisdictional High Court in the case of CIT vs. Glenmark

Pharmaceuticals Ltd. 324 ITR 199. Learned CIT(Appeals) proceeded to conclude as

under :

“ The appellant’s case is that there is no “construction” of a power plant.

Rather the activity falls within the ambit of ‘works’ contract. As the supply of

equipment was not from the customer, tax had to be deducted only on the

erection, commissioning and testing contract. However, as discussed in para

6.4 above the contracts entered into the appellant can be held to be composite

construction contracts. It is further clear that a construction contract is outside

the purview of clause (e) of Explanation (iv) to section 194C.

It is also the appellant’s argument that the contractor has not sourced the

material from a person other than the customer and the contractor itself has

supplied the equipment to put up the power plant as per the terms of the

7 ITA Nos.110, 111 & 112/Nag/2011

customer. As pointed out by the A.O. and as evident from the explanatory

notes to the amended section 194C, this was a clarification introduced in

respect of outsourcing contracts. Appellant has itself stated vide submission dt.

14.02.2011 that the contract in question was not an outsourcing contract.

Further, as held by A.O., the contract for supply and the contract for erection,

commissioning and testing of the power plant cannot be artificially bisected

and a composite contract exists for construction of a power plant. Therefore,

the need for looking the source of supply of the components would not arise in

the appellant’s case because the explanatory note itself excludes the

construction contract for supply of equipments and erection, commissioning

and testing is a composite contract, the intention of which is to set up or

construct a power plant.”

8. Learned CIT(Appeals) further held that the decision of the Tribunal relied upon

by the AO in the case of Essar Oil Ltd. vs. ITO 77 ITD 92 was entirely applicable.

Learned CIT(Appeals) further found fault with the assessee’s distinguishing the

decision of the Hon’ble Madras High Court in the case of Ansaldo Energia SPA vs.

ITAT 310 ITR 237. Learned CIT(Appeals) further found that following case laws

relied upon by the assessee distinguishable:

a) Haryana Power Generation Corporation 103 TTJ (Del).

b) Power Grid Corporation vs. ACIT 112 TTJ 654.

c) ACIT vs. Andhra Pradesh Power Generation Corporation [2009] TIOL 346

ITAT Hyderabad.

9. Learned CIT(Appeals) concluded as under :

“

It is evident that A.O. has considered the entirety of the facts and held that it is a composite

contract comprising of different elements. The different elements from supply of equipment to the

erection, commissioning and testing is thus constitutes a seamless and integrated activity in terms of

the composite contract. A.O. has also rightly relied on the fact that a single source responsibility and

cross breach clauses spelt out in the terms of the contract to put up the power plant and the intention

of the appellant was to construct a power plant. Further there was no transfer of chattel as the title of

goods was not passed on to the appellant by the contractors. Therefore, the A.O. rightly held that, the

assessee has committed a default by non deduction of tax uls.194C on the following amounts:

F.Yrs.

Contractual payments to BHEL Contractual payments to BGR

2007-08

2008-09

2009-10

Rs.l,39,59,15,583/-

Rs.5,52,44,55,338/-

Rs.324,51,97,895/-

Rs. 1

0,40,00,0001-

Rs.2,09

,06,11,083/-

Rs.307,19,33,656/-

8 ITA Nos.110, 111 & 112/Nag/2011

I, therefore, uphold the findings of the A.O. that interest is leviable

u/s,

uls.201(IA)

of LT.Act.

/ As regards the additional ground raised for A.Yr.2010-11, the appellant has

pointed out that the recipient BGR Energy System India Ltd. and BHEL have already

made payments of advance tax on the amounts received by them. Therefore, they are

not liable to TDS on the said payments. This ground is covered in favour of the

appellant by the decision of the Hon'ble Supreme Court in the case of M/s. Hindustan

Coca Cola Beverage Pvt.Ltd. vs. CIT 293 ITR 226, the Hon'ble Supreme Court has held

as follows:

"Be

that as it may, the circular No. 275/201/95-IT(B) dated 29.01.1997

issued by the Central Board of Direct Taxes, in our considered opinion,

should put an end to the controversy. The circular declares "no

demand visualized under section 201

(1)

of the Income Tax Act should

be enforced after the tax deductor has satisfied the officer-in-charge of

TDS, that taxes due have been paid by the deductee-assessee.

However, this will not alter the liability to charge interest under section

201

(1

A) of the Act till the date of payment of taxes by the deductee-

assessee

or

the liability for penalty under section

271 C

of the Income

Tax Act.

A.O. may verify the factual position and give relief accordingly.

This ground is allowed. ”

10. Against the above order, assessee is in appeal before us.

11. We have heard both the counsel and perused the records. Learned counsel

of the assessee Shri J.D. Mistri, vehemently argued that the Revenue authorities

have totally erred in treating all the contracts as composite contracts. He

submitted that both the bids were a composite bid. The same had

distinctly/separately identifiable contracts for the three clearly distinguishable

portions viz. supply equipment, erection, civil works. He submitted that no tax

is required to be deducted on the contract for the supply of equipment. Learned

counsel further submitted that learned CIT(Appeals) has erred in distinguishing

the decisions relied upon by the assessee. Learned counsel took us through the

paper book and referred to the agreements under bide specification to support

the point canvassed by him. Learned counsel further placed reliance upon the

following decisions :

1) M/s Vivek Pharmachem (India) Ltd. vs. ITO ITA No. 66 to

69/JP/2012 of ITAT, Jaipur Bench order dated 25-05-2012

9 ITA Nos.110, 111 & 112/Nag/2011

2) CIT vs. Executive Engineer (Hon’ble High Court of Karnataka)

I.T. Appeal No. 92 to 97 of 2014 order dated August 18, 2015.

3) NTPC vs. ITO in ITA No. 68, 101 & 69/V/2012 vide order dated

22-07-2013 of ITAT Visakhapatnam Bench.

4) Senior Accounts Officer (O&M), Haryana Power Generation

Corpn. Ltd. Vs. ITO (2006) 103 TTJ 584 (Del.).

5. Power Grid Corporation of India Ltd. vs. ACIT (2007) 108 ITD

340 (Hyd.).

6. ACIT vs. Andhra Pradesh Power Generation Corporation Ltd.

(2009) TIOL 346-ITAT-HYD.

7. Ishikawajma-Harima Heavy Industries Co. Ltd. vs. Director of

Income-tax (2007) 288 ITR 408 (SC).

8. CIT vs. Hundai Heavy Industries Co. Ltd. (2007) 291 ITR 482

(SC).

9. DIT vs. LG Cable Ltd. (2011) 197 taxman 100 (Delhi).

10. Decision of the Authority For Advance Rulings (Income-tax), New

Delhi in the case of Joint Stock Company Foreign Economic

Association ‘Technopromexport’ 322 ITR 409.

11. Technip Itlay Spa vs. Add.CIT (2011) 43 SOT 488 (Delhi).

12. CIT vs. Glenmark Pharmaceuticals Ltd. (2010) 324 ITR 199.

13. Karnataka Power Transmission Corporation Ltd. vs. ITO (2011) 11

taxmann.com 313 (Bang.- ITAT).

Learned counsel contended that these case laws are applicable and fully support

the case of the assessee.

10 ITA Nos.110, 111 & 112/Nag/2011

12. Learned counsel further referred to the decision of Hon’ble Gujarat High

Court in the case of Essar Oil Ltd. vs. ITO and submitted that the same was

distinguishable on facts and hence not applicable.

13. Per contra learned D.R. relied upon the orders of the authorities below.

14. We have carefully considered the submissions and perused the records.

15. First we deal with the additional ground adjudicated by the learned

CIT(Appeals).(This is not applicable to ITA 113). In the additional ground

learned CIT(Appeals) has held that the assessee has claimed that the recipients

BGR Energy System (India) Ltd. and BHEL have already made payment of

advance tax on the amount received by them. Therefore, they are not liable to

TDS on the said payment. In this regard learned CIT(Appeals) concluded that

this ground was covered in favour of the assessee by the decision of Hon’ble

Supreme Court in the case of Hindustan Coca Cola Beverage P. Ltd. vs. CIT

293 ITR 226. Learned CIT(Appeals) held that the AO may verify the factual

position and give relief accordingly.

16. Now we find that in the above referred decision of the Hon’ble Apex

Court it was expounded that if the deductor has satisfied the AO that tax due

had been paid by the deductee-assessee, then tax deductor will not be liable.

However, Hon’ble Apex Court has clarified that this will not alter the liability to

charge interest u/s 201(1A) of the Act till the date of payment of taxes by the

deductee-assessee.

17. When enquired in this regard by the Bench, both the counsel were not in

a position to furnish the actual position of tax liability fastening upon the

assessee after considering the above decision of Hon’ble Apex Court. Hence we

are of the opinion that to the extent the assessee gets relief as above, the issue

11 ITA Nos.110, 111 & 112/Nag/2011

raised by the assessee before us will be otiose. Be as it may, we adjudicate

herein below the issue on merits.

18. We find that it is a plea of the assessee that the assessee has entered into

distinct/separately identifiable contracts for three clearly distinguishable

portions viz. supply equipment, erection and civil works. It is the assessee’s

plea that on the contract for supply equipment no tax is to be deducted. The

authorities below have opined that the three contracts as mentioned above were

part of a composite contract. For this proposition authorities below have held

that this was a composite contract as the bid specification document mentioned

that the intention of this specification is to enter into single point responsibility

contract. Further it was held that contract for supply of equipment and

subsequent erection, commissioning and testing were awarded based on a single

bid. That the main object or intention of the owner was to set up main power

plant of thermal unit. That as per award of the contract the responsibility of the

contractor for successful completion of plant/equipment as per specification and

a breach in one contract shall automatically be construed as breach of other

contract which will confer a right of a owner to terminate the other contract also

at a risk and cost of the other contractor. These factors have been taken into

account by the authorities below in holding that the entire spectrum of activities

have the elements of the composite contracts.

19. We find that identical issue was considered by Hon’ble High Court of

Karnataka in the case of CIT vs. Karnataka Power Transmission Corporation

Ltd. [2012] 21 taxmann.com 473 (Kar.). We may gainfully refer to the

expositions of the Hon’ble High Court as under :

“FACTS

The assessee was a State Government Public Sector company carrying

on business of transmission of electricity from the electricity generating

point to various electrical sub-stations in the State through its network of

/

12 ITA Nos.110, 111 & 112/Nag/2011

transmission lines and sub-stations. It had entered into contract agreements

on total turnkey basis or partial turnkey basis with various contractors for

setting up of its electrical sub-stations. In total turnkey contracts, the

contractor was required to establish electric sub-stations and lines using his

own material including the electrical transformer, whereas in partial

turnkey contracts, the assessee supplied electrical transformer while

contractor used his own other material to execute the contract. In total

turnkey contract, as the contractor used his own transformer, value of

supply portion was higher and in partial turnkey contract, value of supply

portion was relatively lower as transformer was supplied by the assessee.

In either event, 80 to 85 per cent of the consideration was towards the

supply of materials and barely 20 to 15 per cent was towards erection and

civil works. The assessee-company had entered into three independent

contracts with the contractors, viz., agreement for supply, agreement for

civil work, and agreement for erection work. While tax was being deducted

at source for civil work and erection work, the tax was not deducted at

source towards payments made on supply portion. The assessee

contended that section 194C deals with deduction of tax at source on

composite contracts for erection and installation of plant and machinery

but in its case there were separate contracts for supply of goods and

erection/installation charges and, therefore, section 194C was not attracted.

The Assessing Officer, however, held that the performance and execution

of contract was as a composite contract and, therefore, the tax was

deductible by the assessee on the entire consideration paid under the three

contracts treating same as a composite contract. Therefore, he assessed tax

payable on the supply portion and also levied interest on the said amount.

On appeal, the Commissioner (Appeals) affirmed the order of the

Assessing Officer. On second appeal, the Tribunal held that the entire

arrangement between the assessee and its contractors could, at best, be

called as divisible contract and that it should be characterized as a supply

contract. Ultimately, the Tribunal held that the assessee could not be

characterized as the assessee in default, when there was no obligation on

the part of the assessee to deduct tax under section 194C for supply

portion.

On the revenue's appeal:

HELD

A harmonious reading of the general terms and conditions of the contract

makes it clear that after the bid offered by the contractor is accepted and

the assessee decides to award the contract to the successful bidder, a

divisible contract covering the entire scope of the partial/total turnkey has

to be enterea into with the successful bidder. The assessee has to enter into

13 ITA Nos.110, 111 & 112/Nag/2011

three separate contracts, one for supply of goods; secondly for erection

works and thirdly, for civil engineering works and clause 14.0 deals with

taxes and dues and it reserves to the divisible contract, i.e., the three

separate contracts and any taxes and duties which are payable are in

respect of these three separate contracts. However, clause

3.5

of the

proforma of contract agreement makes it clear that notwithstanding the

fact that three separate contracts have entered into, all the three are

integral parts of the composite contract on single sole responsible basis.

The contractor is bound to perform the total contracts in its entirety. No

performance of any part or portion of the contract would be treated as

breach of entire contract. It is because of its inconsistent clause where at

one place it is mentioned as three separate agreements and at other

place all the three are referred to as the composite agreement, that in

order to clarify what exactly the parties meant it become necessary to

introduce clause 7.0 providing how the contract is to be construed. Clause

7.1

expressly state that notwithstanding anything stated elsewhere in the

bid documents, the contract to be entered into would be treated as divisible

contract resulting in three separate contracts, one for supply of goods, the

second for erection and the third for the civil engineering works covering

the entire scope of the partial/total turnkey package. Therefore, the

intention is clear. There is no ambiguity in the language. The contract that

is entered into is not a composite contract. It is a divisible contract. Three

contracts entered into are separate contracts. Though the work, that is

entrusted to the contractor is to be completed by him by performing all the

three separate contracts, the contract as such is divisible contract.

Therefore, the parties have entered into three separate contracts on the

very same day. [Para 11]

From the terms of the contract it is clear that the moment there is

negotiation

of dispatch documents, the equipments/materials are supplied under the

agreement of supply from the contractor to assessee, the title in the goods

passes. It is, therefore, assessee in order to enable the contractor to carry

out its obligation under the other contracts hand over the goods

so

supplied to them. The moment the materials are supplied under the

agreement of supply and title passes to the assessee, the agreement for

supply comes to an end. In order to see that the ultimate object of entering

into contract is achieved, it is made clear in the agreement for supply, that

the obligation under the contract would not come to an end. The moment

the machinery and the material is supplied under the agreement of supply,

the obligation of the contract continues till the work entrusted to them is

complete. That, by itself, would not ma ke it a composite contract. It is

14 ITA Nos.110, 111 & 112/Nag/2011

clearly expressed in the contract, how these contracts have to be construed.

The three agreements are separate and, therefore, the transaction in

question cannot be construed as a case

of

composite contract and the

assessing authority as well as the appellate commissioner were not

justified in holding that it is a composite contract and TDS ought to have

been deducted from the entire consideration under section

194C. [Para

12]

It is not in dispute that in respect of agreement for supply, which is a

distinct contract, no TDS is deductible under section 194C as it is not a

contract for carrying out any work. Carrying out any work is a sine quo

non to attract section 194C. A contract under which a contractor agrees to

supply material which may be used by him later in carrying out the work

will not render the agreement to supply a contract for carrying out any

work. In fact, the amendment in 2009 explain this position, when they

amended the definition

0)

'Work' as contained in Explanation to clause 4

sub-clause (e). [Para 13]

When the statute was amended to clarify the word 'work' under section

194C by introducing the aforesaid clause, it is obvious that the amendment

is only clarificatory in nature and, therefore, it is retrospective. The

Parliament did not intend to change the law because of conclusion which

resulted in litigation. The Parliament thought it fit to clarify by way of

amendment

so

that the litigation could be avoided. In view of the aforesaid

clarification and the statutory provision, it is clear that 'work' did not

include manufacturing or supplying a product according to the

requirement upon specification of a customer by using raw materials

purchased from a person other than such customer, as such a contract is a

contract for sale. Further, it is also clarified that TDS shall be deducted on

the invoice value excluding the value

0)

material purchased from such

customer, if such value is mentioned separately in the invoice. It is only in

cases where the material component has not been separately mentioned in

the invoice, TDS shall be deducted on the whole of the

invoice value. Therefore, whatever ambiguity which prevailed earlier is

clarified. When in a composite contract, an invoice is raised separately

mentioning the value of the material supplied, no deduction is permissible

under section 194C. In a case where three separate agreements are

entered into and one such agreement is agreement for supply of material,

merely because the said agreement is a part of a composite transaction,

section194C cannot be pressed into service to deduct tax at source. The

whole object

0)

introducing the section is that it should deduct tax in respect of payments

made for a works contract. No deduction is permissible in respect of

15 ITA Nos.110, 111 & 112/Nag/2011

contract for supply of material for carrying out work. In fact, the Tribunal,

by a detailed consideration of the statutory provisions, the various terms of

the contract, the legal position as explained in the various judgments, has

rightly come to the conclusion that the transaction in question is not a case

of composite contract. It is a case of the distinct contracts and the contract

for supply of materials is

a separate distinct contract in respect of which no deduction is permissible

under section 194C. [Para

14}

In that view of the matter, there is no merit in this appeal and same is to be

dismissed. [Para

15]”

..•. •

20. Now we examine the present case on the anvil of above said exposition.

In the present case also we have three contracts, one for supply of

goods/equipment, another for erection and another for civil engineering works.

The dispute in the present case also is with respect to the deduction of tax with

respect to the contract pertaining to supply of goods. The examination of the

general terms and conditions of the contract here also proves that after the bid

offered by the contractor is accepted and the assessee decides to award the

contract to the successful bidder, a divisible contract covering the entire scope

of the partial/total turnkey has to be entered into with the successful bidder.

The term of contract as mentioned in the above case dealt with by the Hon’ble

High Court is also similar here. The Hon’ble High Court in the above case law

has dealt upon the objections of the Revenue that breach of one contract shall

automatically be construed as breach of other contract. The Hon’ble High Court

expounded that this was done in order to see that the object of entering into

contract is achieved, it is made clear in the agreement for supply that obligation

under the contract would not come to an end. That the moment the machinery

and the material is supplied under the agreement of supply the obligation of

contract continues till the work extended to them is complete. The Hon’ble

High Court has expounded that this by itself would not make it to a composite

contract. It is clearly expressed in the contract how the contracts have to be

construed.

16 ITA Nos.110, 111 & 112/Nag/2011

21. Upon careful consideration of the facts and circumstances of the present

case, in our considered opinion, the same is identical to the issue dealt with by

the Hon’ble Karnataka High Court as above. Learned D.R. could not point out

any feature in the contract in the present appeal whether distinguish it from the

facts mentioned in above appeal dealt by the Hon’ble High Court. Hence

following the above decision, we hold that the contract of supply of material is a

separate distinct contract and on which no deduction is permissible u/s 194C.

22. Similar view was expressed by Hon’ble Karnataka High Court in the case

of CIT vs. Executive Engineer in I.T. Appeal Nos. 92 to 97 of 2014 vide order

dated August 18, 2015. The Hon’ble High Court in para 7 and 8 of the above

decision has held as under :

“7. We

are, also, of the opinion that the clauses of the contract

particularly, clause 3.5 of the contract agreement, make it clear that three

separate contracts have been entered into, but all the separate contracts

were integral parts of a composite contract on single sale responsible

basis. The invoices raised on the basis of the said composite contract

separately mentioning the value of the material supplied, no deduction is

permissible under Section

194C of the Act. Section 194C of the Act cannot be pressed into service

to deduct tax at source. The whole object of introduction of that Section

is to deduct tax in respect of payments made for works contract. No

division is, therefore, permissible in respect of a contract for supply of

materials for carrying out the work. It is in a case of distinct contracts.

The contract for supply of material being a separate and distinct contract,

no division is permissible under Section 194C of the Act. Section 194C

has sufferedan amendment also with effect from October 1, 2009 and the

provision has been made very clear without any ambiguity.

8.Thus, we can conclude safely that if a person executing the work,

purchases the materials from a person other than the customer, the

same would not fall within the definition of 'work' under Section 194C

of the Act.”

17 ITA Nos.110, 111 & 112/Nag/2011

23. We further find that in the present case the assessee is not liable to deduct

tax at source on the supply portion as per Explanation (iv) (e) to section 194C.

Section 194C mandates that a person responsible for paying any sum for

carrying out any work in pursuance of the contract between the contractor and a

specified person shall at the time of credit of such sum with the account of the

creditor or at the time of payment thereof deduct a specified sums as income-

tax. The term “work” mentioned in the contract has been defined in Explanation

(iv) as under:

“(iv) “work” shall include-

(a) Advertising;

(b) broadcasting and telecasting including production of

programmes for such broadcasting or telecasting;

(c) carriage of goods or passengers by any mode of transport other

than by railways;

(d) catering;

(e) manufacturing or supplying a product according to the

requirement or specification of a customer by using material

purchased from such customer,

but does not include manufacturing or supplying a product

according to the requirement or specification of a customer by

using material purchased from a person, other than such customer.

Now we examine the factual matrix of the present case on the anvil of aforesaid

provisions. In the present case it is undisputed that the assessee in this case in

carrying out the work assigned has not used any material source from the

customers. Learned CIT(Appeals) has not disputed this proposition. However,

learned CIT(Appeals) has held that relevant clause of the Explanation is

applicable only in the context of manufacturing or supplying a product. Learned

CIT(Appeals) has referred to the dictionary meaning of “manufacturing” and

has observed that the setting up a power plant cannot be described by the word

“manufacture”. Learned CIT(Appeals) has further observed that erection of a

18 ITA Nos.110, 111 & 112/Nag/2011

power plant can be reasonably held to be an activity of construction. She held

that the term “construction’ is more suitable to the act of putting up a power

plant than the term “manufacturing”.

24. We find that the above distinction brought out by the learned

CIT(Appeals) is not correct. On the contract for supply of materials para 51.0 of

the contract clearly mentions that once the equipments are supplied by BGR

and BHEL, the property was in possession to the assessee. The relevant clause

read as under :

“51.0 OWNERSHIP OF PLANT

The plant and equipment supplied by the Contractor pursuant to the

contract shall become the property of the Owner at whichever is earlier of the

following times viz:

i. When the plant and equipment is delivered /dispatched pursuant to

the contract.

ii. When the contractor has been paid any sum to which he may

become entitled in accordance with the provisions of the contract.

iii. Plant is otherwise taken over by the Owner in terms of contract.”

The Hon’ble jurisdictional High Court in the case of CIT vs. Glenmark

Pharmaceutical Ltd. 324 ITR 199 has clearly expounded that if the property in

the product manufactured passes to the customer upon delivery and the material

that was required was not sourced from the customer/purchaser but was

independently obtained by the manufacturer from a person other than customer,

the contract entered into by the assessee was not a contract for carrying on

work within the meaning of section 194C.Considered from this point of view

also the assessee is not liable for deduction of tax at source on the equipment

good supply contract.

25. As regards reliance of the Revenue on the decision of Hon’ble Gujrat

High Court in the case of Essar Oil LTD vs. ITO Income Tax Appeal No. 33

19 ITA Nos.110, 111 & 112/Nag/2011

of 2000 vide order dated September 3, 2000, we find that when on identical

issue there are contradictory decisions of different High Courts and there is no

decision of Hon’ble jurisdictional High Court, the decision that is favourable to

the assessee have to be applied. This proposition draw support from the

exposition of Hon’ble Apex Court in the case of Vegetable Products (1973) 88

ITR 192.

26. In the light of above discussion and precedents, respectfully following

the precedent from Hon’ble Andhra Pradesh High Court in the decision cited

above, we hold that the assessee was not liable to deduct the TDS on the supply

contract.

27. In the result the appeals by the assessee stand allowed.

Order pronounced in the Open Court on this 18

th

day of Dec., 2015.

Sd/- Sd/-

(MUKUL K. SHRAWAT) ( SHAMIM YAHYA)

JUDICIAL MEMBER ACCOUNTANT MEMBER.

Nagpur,

Dated: 18

th

Dec., 2015.

20 ITA Nos.110, 111 & 112/Nag/2011

Copy forwarded to :

1. Maharashtra State Power Generation Co. Ltd.,

Plot No. G-9, Prakashgad, 2

nd

floor, Anant Kanekar Marg,

Station Road, Bandra (East), Mumbai-400 051

2. A.C.I.T. (TDS), Circle-2, Nagpur.

3. C.I.T. , Nagpur..

4. CIT(Appeals)-II, Nagpur.

5. D.R., ITAT, Nagpur.

6. Guard File

True Copy

By Order

Assistant Registrar, ITAT, Nagpur

Wakode.