2023 (11) TMI 948 - HC - Income Tax

Short deduction of TDS - TDS u/s 194C OR 194J - testing and commissioning of technical works - primary/dominant object of the contract - To set up that thermal power plant the assessee entered into two sets of contracts - admissibility of divide an otherwise indivisible/composite contracts executed by the assessee with the BHEL and CIPL - principle of indivisibility of a composite contract - contracts for the works done under the head of services of Transportation Insurance Erection Installation Testing and Commissioning of BTG awarded to BHEL and also the work done under the head of Erection Installation and Commissioning of BOP awarded to CIPL - HELD THAT - Essence the contract involved in the present case and that involved in the case of The Senior Manager (Finance) Bharat Heavy Electricals Ltd. Jhajjar 2016 (12) TMI 955 - PUNJAB AND HARYANA HIGH COURT were similar-to set up a thermal power plant. In both cases the dispute arose upon a survey. That inconsequential similarity apart it is undisputed that in both cases the element of testing and commissioning of technical works etc. were part of the main contract-to set up a thermal power plant including therein the work of Transportation Insurance Erection Installation Testing and Commissioning of BTG and also Commissioning of BOP. As decided in The Senior Manager (Finance) Bharat Heavy Electricals Ltd. Jhajjar (supra) the contract entered into between the respondent and each of the contractors therefore did not involve the supply of professional or technical services at least within the meaning of section 194J. The consideration paid under the contracts therefore was hot for the professional or technical services rendered by the contractors to the respondent. Section 194J is therefore not applicable to the present case. In view of our finding that the contract does not fall within section 194J the dismissal of the appeal would follow in any event. The respondent has not denied that the present case falls under section 194C. Had the respondent contended that section 194C is also not applicable it would have been necessary to consider whether the contract falls within the ambit of section 194C. Thus work of testing etc. had to be performed by the contractor not by way of independent work awarded to it but by way of execution of the whole contract that was to set up a thermal power plant. Thus Punjab and Haryana High Court has principally reasoned that the primary/dominant object of the contract would govern or subsume the other object/clause therein. In absence of any internal tool shown to exist (in the contract) we are unable to reach an inference that the contracting parties i.e. assessee on one hand and BHEL and CIPL on the other had intended to treat the work of Testing and Commissioning separate/independent of the contract to set up BTG and BOP by those contracting parties. Further in absence of any enabling law it never became open to the taxing authorities to overlook the dominant object of the contract and reach to a conclusion because part of the contract involved Testing Commissioning etc. necessarily there would exist component of fees for technical services by necessary implication. Then in Bangalore Metro Rail Corporation Ltd 2022 (7) TMI 336 - KARNATAKA HIGH COURT has further reasoned that an indivisible/composite contract may not be bifurcated to cull out any indivisible component of such contract to make a higher deduction of tax at source. Thus that Court applied the principle of indivisibility of a composite contract. It may not be bifurcated to subject a part of the contract to higher TDS. Thus that Court applied the principle of indivisibility of a contract that may not be artificially dissected at the hands of a taxing authority to the prejudice of the assessee. On plain reading the contracts executed by the assessee with BHEL and CIPL were indivisible contracts for BTG and BOP respectively. The taxing authorities exist to apply the taxing statute to the proven facts of a case. Such facts are not for the taxing authority to imagine or presume or assume. Therefore the burden existed on the revenue authorities to establish that they were enabled in law and also that the proven facts of the case permitted them divide an otherwise indivisible/composite contracts executed by the assessee with the BHEL and CIPL. Unless that exercise had been carried out by the assessing authority no presumption was available in law. Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the Tribunal erred in annulling the assessment order and concluding that TDS was required under Section 194C and not under Section 194J.
2. Whether the Tribunal erroneously granted relief to the assessee in the absence of proper books to establish the exact expenditure incurred for technical services.

Summary:

Issue 1: Tribunal's Annulment of Assessment Order and TDS Requirement

The appeals were filed under Section 260A of the Income Tax Act, 1961, against the order dated 20th February 2018 by the Income Tax Appellate Tribunal, Delhi Bench "C"� New Delhi. The primary issue was whether TDS should be deducted under Section 194C (2%) or Section 194J (10%) of the Act. The assessee, engaged in the business of power generation, had entered into contracts with BHEL and CIPL for setting up a thermal power plant. The contracts involved services like Transportation, Insurance, Erection, Installation, Testing, and Commissioning of BTG and BOP. The assessing authority had determined the assessee to be in default for deducting TDS at a lower rate under Section 194C instead of the higher rate under Section 194J. The Tribunal, however, annulled the assessment order, following the reasoning of the Punjab and Haryana High Court in a similar case, concluding that the contracts were indivisible and primarily for setting up the thermal power plant, not for technical services. The High Court agreed with the Tribunal, stating that the contracts were composite and could not be dissected to impose a higher TDS rate.

Issue 2: Absence of Proper Books and Erroneous Relief

The assessing authority argued that the assessee had not maintained separate accounts to establish the actual payments made for Testing and Commissioning of BTG and BOP, which should be classified as "fees for technical services" under Section 194J. The Tribunal, however, granted relief to the assessee, considering the contracts as indivisible. The High Court did not address this issue separately, as the first issue's resolution rendered it moot.

Conclusion:

The High Court dismissed the appeal, agreeing with the Tribunal's decision that the contracts were indivisible and primarily for setting up the thermal power plant, not for technical services. The first question of law was answered in favor of the assessee, and the second question was left unanswered. The appeal was dismissed with no order as to costs.