TMI Blog2000 (2) TMI 217X X X X Extracts X X X X X X X X Extracts X X X X ..... (IV) Learned CIT(A) erred in law as well as on facts in holding that payment of Rs. 72.60 crores in pursuance of agreement for supply of material is also liable for TDS under section 194C of the Act. He ought to have held that provisions of section 194C does not apply to agreement for supply of material and consequently no tax is required to be deducted on payments of Rs. 72.60 crores made towards purchase of material. (V) Learned CIT(A) erred in law as well as on facts in holding that certificate issued under section 197(1) does not apply for whole of assessment year. He ought to have held that certificate issued under section 197(1) applies to whole assessment year retrospectively." 2. The assessee is a company engaged in the setting up of an oil refinery at Vadinar, Jamnagar. According to the assessee, the company entered into three different agreements with M/s. Essar Projects Ltd. (EPL), a sister concern, to facilitate setting up of the refinery. The details of the agreements are as follows: (a) Agreement for supply of Indian Sourced Equipment and Material Rs. 1,100 crores (b) Contract for labour-cum-erection Rs. 438 crores (c) Contract for construction of refine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded or terminated by the assessee independent of the other two contracts which may or may not be suspended or terminated. He referred to the Supreme Court case of State of Himachal Pradesh v. Associated Hotels of India Ltd. [1972] 29 STC 474, which has been relied upon by the learned CIT(A), and stated that the above case of the Hon'ble Supreme Court supports, in fact, the assessee's case because there are separate contracts for supply of Indian sourced equipment and material, labour-cum-erection and construction. He further stated that scope of work and responsibilities, time schedule, standards of performance, price, payment schedule, owners' responsibilities, warranties, etc. are different in all the three contracts and are defined in each contract agreement separately. The billing is done separately. The ownership in equipment supplied stands transferred to the assessee immediately on despatch. Thus, according to him, the supply made under contract for supply is transfer of a chattel, qua chattel. The learned representative has further stated that it is not a case of complete or turn key contract for the entire refinery including all its equipments, etc. According to him, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into separate agreements, one of work and service and the other of sale and purchase of materials to be used in the course of executing the work or performing the service. In such cases, the transaction would not be one indivisible but should fall into two separate agreements, one of work or performance and the other of sale". 8. The learned representative also argued that the certificate dated 9-9-1997 submitted by the contractor was for deduction of tax at source at 1%. The application for the certificate was made on 6-8-1997. According to him, the certificate applied to the amount expected to be credited/paid during the financial year 1997-98 in pursuance of the contract. Thus, he stated that the certificate applies to all credits/payments during the financial year 1997-98. He also referred to the earlier two financial years 1995-96 and 1996-97 where the certificates were issued to the contractor for credit/payment without deduction of tax at source. Thus, according to him, the assessee's action of not deducting tax at source on payments from 1-4-1997 to 9-9-1997 and making deduction of tax at source at 1% after receipt of the certificate on the entire amount was a bona fide a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding to the learned departmental representative, the payment has been made as per the contract, dated 7-11-1994 where all the three works have been mentioned. There is only an amendment to the agreement signed on 7-11-1994, as has been mentioned at page 4, as on 25th March, 1997. Therefore, according to the learned departmental representative, the basic document is the agreement of contract signed on 7-11-1994 and the latter three agreements are only amendments to the original document. He vehemently argued that the payments are being made as per the agreement signed on 7-11-1994 and, therefore, there is only one contract for the entire work of the refinery. He further relied on the order of the learned CIT(A). He also stated that the provisions of section 194C are applicable even if it is the payment for goods. 11. Regarding the contention of the learned representative that the certificate issued on 9-9-1997 was for the entire amount paid during the year under consideration, the learned departmental representative contended that the certificate issued on 9-9-1997 does not specify that the same was effective from 1-4-1997. According to him, the default was already committed befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the certificate issued on 9-9-1997 was applicable only to a particular amount paid on or after 9-9-1997. Thus, according to him, there was no bona fide belief on the part of the assessee for not deducting the TDS on the amounts paid during the period 1-4-1997 to 9-9-1997. The learned departmental representative also referred to certain specific pages in the subsequent three contracts where reference to the original contract dated 7-11-1994 has been made. 14. The learned representative of the assessee contended that the original contract dated 7-11-1994 has undergone a change because new work has come into existence. He also pointed out that separate bills have been prepared for supply of materials. Even the total contract value has been mentioned in the new contracts for supply of materials. He also argued that genuine substitution had been made in the original contract with the subsequent three contracts and this was the need of the business. He also referred to the Contract Act and stated that the recipient had appropriated the amount as per the principles laid down in the Contract Act. Regarding the wrong information filed by the assessee before the ITO (TDS), he pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sale; neither the ownership of the materials nor the value of 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 of work and labour or one for the sale of chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land, where the intention plainly is not to sell the article but to improve the land or the other chattel, and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour." 16. In view of the Apex Court decision in the above-mentioned case, it becomes very clear that the provisions of section 194C would be applicable if the principal objective of the work undertaken by the payee of the price is not the transfer of the article but to improve the land or chattel. The contract is not to sell the article but to bring in improvement in the work undertaken. The consideration is not for the transfer of the chattel but for the labour and work done and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the learned CIT (Appeals). The contract was for construction of a refinery at Vadinar near Jamnagar. Therefore, the assessee entered into an agreement with EPL for construction of the refinery. For construction of the refinery the contractor will have to arrange labour, he may also have to arrange for some imported and Indian equipment and materials but it does not mean that the main contract, which is for the construction of the refinery, would be further sub-divided into sub-contracts. Once contract is given for the construction of the refinery, there cannot be any further separate contracts for different types of materials and labour. Therefore, we do not find any force in the arguments advanced by the learned representative of the assessee. 18. In the case of Associated Cement Co. Ltd., the Hon'ble Supreme Court held: "...there is nothing in the sub-section which could make us hold that the contract to carry out a work or the contract to supply labour to carry out a work should be confined to 'works contract'." It is further held "'any work' means any work and not a 'works contract', which has a special connotation in the tax law...'Work' envisaged in the sub-section, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inal agreement, dated 7th November, 1994. The contract has been given for the erection of the refinery plant. The erection is not possible without supply of materials. Therefore, supply of materials is a part and parcel of the main contract. The contract for construction of buildings, dams, laying of roads, air fields, railway lines, erection or installation of plant and machinery are in the nature of contracts for work and labour and they are liable to deduct tax at source from the payments made in respect of such contracts. In such a 'work contract', there cannot be separate contracts for materials and other things. There is always one composite contract. 21. Under the above circumstances and the material on record, we fully agree with the learned CIT(A) that there is one composite contract for the purpose of deduction of tax at source under section 194C of the Act. 22. The next point is regarding the deduction of tax at source. It has been stated by the learned representative that tax has been deducted as per the provisions of law and there is no fault on the part of the assessee. The learned representative contended that the provisions of section 194C do not apply to agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or after 9-9-1997. This certificate has no application to the amount paid between the period 1-4-1997 to 9-9-1997 as the default had already been committed before the issue of the certificate on 9-9-1997. Moreover, it has not been mentioned in the certificate that the same will have effect from 1-4-1997. Therefore, the default committed before 9-9-1997 cannot be rectified by the certificate issued on 9-9-1997. The learned departmental representative also invited our attention to Circular No. 774, dated 17-3-1999 issued by the CBDT, which has already been quoted in para. 11 above. It is clear from the circular that it will not have any retrospective effect and that the certificate issued on 9-9-1997 is applicable to the amount paid on or after 9-9-1997. We see no infirmity in the finding of the learned CIT(A) on this issue also. 25. Regarding the contention of the learned representative that the Assessing Officer of the contractor allowed the assessee to credit or pay without deduction of tax at source for the financial years 1995-96 and 1996-97 and, therefore, the action of the assessee was bona fide for not deducting tax at source on payments made from 1-4-1997 to 9-9-1997, we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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