TMI Blog2013 (9) TMI 644X X X X Extracts X X X X X X X X Extracts X X X X ..... he time and situs of passing of the property and as to whether the property passes "brick by brick" on the theory of accretion or as a chattel qua chattel- If the erection portion cannot be taken as the main object of these contracts, title in goods was transferred as movables prior to erection. The erection portion being subsequent to passing of title by execution of the supply portion, it cannot be said that the erection portion controls the supply portion, though the fulfillment of the conditions of the erection contract has a bearing on the fulfillment of the condition of supply portion of the contract, and though in some cases both the contracts are in the same document. The scope and object of each part of the contract is different - Though the supply portion and erection portion dovetail into each other, the erection portion does not control the supply portion and the supply contract does not become a works contract, just because there is an obligation cast on the supplier to erect the equipment which by that time has become the property of the purchaser. In view of the foregoing discussions, "Supply Contract" entered into by the assessee is in the nature of "Contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e scope of work of the First Contract includes design, engineering, manufacturing, shop fabrication, assembly, inspection and testing at supplier's works, type testing, packaging, forwarding to site of all equipment/material/special tools and tackles and mandatory spares covered under the package for a price that is notified in the award. The scope of work under second contract include transportation from manufacturer's works/place of dispatch, port clearance port charges, inland insurance, delivery at site, receipt, unloading, handling, storage, insurance and inplant transportation at site, complete installation, supervision, pre-commissioning, commissioning, completion of facilities, conducting performance guarantee tests and handling over to NTPC of all equipment/material and special maintenance tools and tackles covered under the package for a price that is notified in the award. 2.2 Thus, the total value of contract has been split into two parts. The company has been deducting tax at source u/s. 194C from payments made under the second contract and has not deducted any tax at source from the payments made pursuant to the first contract. The deductor company, was, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easons the assessee would like to give in support of its stand. It is further observed by the Assessing Officer that the Hon'ble Supreme Court held that each contract has to be specifically looked into to decide whether a particular contract is a contract for sale or for contract for work and no inflexible rule or magic formula can be applied as a thumb rule. Following the spirit of various judgments of Hon'ble Supreme Court, Assessing Officer went on to examine the issue in detail. The invitation of bids, instructions to bidders and other relevant documents were examined and Assessing Officer held that the contract for supply and erection is a composite contract in the light of the following reasons: (1) Agreements entered with the parties are for a "package" of a certain item of work commencing from design engineering to installation commissioning inter-alia involving manufacture, packing, forwarding, testing, mandatory spares etc. (2) Design and engineering which is to be finalized in consultation with the assessee company within a time schedule is by itself a technical service which attracts deduction of tax at source under section 194J. In the detai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 2009-10 relevant to the assessment year 2010-11, the assessing officer raised demand u/s 201(1) of the Act and also charged interest u/s 201(1A) of the Act. 4. The assessee challenged the orders passed by the assessing officer by filing appeals before Ld CIT(A). The first appellate authority, after going through the terms and conditions of the contract held that the contract awarded by the assessee is composite contract only, even though two separate contracts were entered into between the parties, viz., (a) for supply of equipments and (b) for installation. The Ld CIT(A) held that the various clauses mentioned in the "Instruction to bidders" clearly show that the contracts entered into by the assessee herein are inseparable. Further the Ld CIT(A) held that the dominant intention of the assessee in giving the contracts to the successful bidders is for the installation and commissioning of complete facility and not for supply of materials. He further held that the parts of machineries, however big or substantial it may be, do not constitute any meaningful finished products for the assessee unless they are installed and commissioned. Accordingly he held that the contract for su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source u/s 194C of the Act on the payments made towards supply contract also. 9. The Ld CIT(A) has decided this issue against the assessee by holding that (a) the entire contract is inseparable, even though the assessee has entered into two different contracts; and (b) the contract is essentially a "Contract for work and labour" and not a "Contract for sale". 10. In order to hold that the two distinct contracts entered into by the assessee are essentially a "Composite contract", the Ld CIT(A) has referred to the various clauses of "Instruction to the Bidders" issued by the assessee. The discussions made by Ld CIT(A) and the decision taken by him are extracted below for the sake of convenience: 3.7 NTPC Limited invited bidders for steam generator package for the power plant at Visakhapatnam. The advertisement for the same is as under: "NTPC invites sealed bids from eligible bidders for Supply and installation of Steam Generator with electrostatic Precipitator package consisting of two (2) Steam Generating units each having rates out put of 1590 TPH complete with all Accessories and Auxiliaries including Pressure parts, integral Piping, fittings, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es" means the plant and equipment to be supplied and installed, together with the services to be carried out by the contractor under the contract. The words "plant and equipment", Installation services" etc., shall be construed in accordance with the respective definitions given to them in the General Conditions of Contract. 2.2 Goods and services to the supplied:- All countries and areas are the eligible source countries for goods and services to be supplied under this contract and accordingly goods and services to be supplied under this contract may have their origin in any country and area; 5.2 Entering into a supply and installation of facilities:- The Bidder is advised to visit and examine the site where the facilities are to be installed and its surroundings and obtain for itself on its own responsibility all information that may be necessary for preparing the bid and entering into a contract for supply and installation of the facilities. The costs of the visiting the site shall be borne by the bidder fully. 8.3 (c) Attachment 3 : Bidder's qualification (iv) has adequate design, manufacturing and/or fabrication capability and capacity available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as applicable. The bidder shall provide the additional price, if any for withdrawal of the deviations, pursuance of ITB Sub-clause 8.3(f). 10.4 In the schedules, Bidders shall give the required details and a breakdown of their prices as follows: (a) Plant and equipment (including type tests) and mandatory spares manufactures or fabricated within the Employer's country (Schedule No. 2) shall be quoted on EXW (ex-factory, ex-works, ex-warehouse or off the-shelf, as applicable) basis and shall be inclusive of all costs as well as duties and taxes paid or payable on components and raw materials incorporated or to be incorporated in the facilities. However, sales tax (not the surcharge in lieu of Sales Tax), Local Tax including Entry Tax/Octroi (if applicable) and other levies in respect of direct transactions between the Employer and the Bidder shall not be included in the Ex-works price but shall be quoted separately in Schedule No. 7. Further, taxes and other levies if any, on type tests on equipment with respect to direct transaction shall be quoted separately. The taxes, duties and levies quoted by the Bidder in Schedule No. 7 shall be applicable in the Employer' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any liability to the affected Bidder or bidders or any obligation to inform the affected Bidder or bidders of the grounds for the employer's action. 30. Notification of award of entire contract not any part of contract. 30.1 Prior to the expiration of the period of bid validity, the Employer will notify the successful bidder in writing by registered letter or by telex to be confirmed in writing by registered letter, that its bid has been accepted. The notification of award will constitute the formation of the contract. 31. Signing the Contract Agreement 31.1 At the same time as the Employer notifies the successful Bidder that its bid has been accepted, the Employer will send to the Bidder the Contract Agreement provided in the bidding documents, incorporating all agreements between the parties. 31.2 Within twenty-eight (28) days after receipt of the Notification of Award, the successful Bidder/Assignee of foreign bidder (if applicable) shall sign and date the contract agreement and 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the facilities and carrying out guarantee tests for the facilities in accordance with the plans, procedures, specifications, drawings codes and any other documents as specified in the Technical Specifications. Such specifications include, but are not limited to, the provision of supervision and engineering services; the supply of labour, materials, equipment, spare parts (as specified in GCC Sub-clause 7.3 below) and accessories; Contractor's Equipment; construction utilities and supplies; temporary materials, structures and facilities; transportation (including without limitation, unloading and hauling to, from and at the Site), insurance and storage, except for those supplies, works and services that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y part of the facilities fails to pass any test and/or inspection, the Contractor shall either rectify or replace such plant and equipment or part of the facilities and shall repeat the test and/or inspection upon giving a notice under GCC Sub-Clause 23.3. 31. Risk distribution 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant and equipment and mandatory spares. Bu the important point to be noted here is that there is no clause saying that the employer i.e., NTPC can give the contract of only one of the schedules i.e. supply, transportation and installation separately and severally. Though the prices are quoted separately the contract is a single 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 enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use 3.6 of G.C.C. speaks of construction of contract wherein clause 3.6.2 clearly says the award of separate contracts shall not in any way dilute the responsibility of the contractor for successful completion of facilities as per the contract documents and a breach in one contract shall automatically be construed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contracts constitute two components of a composite contract. 11. From the copy of notice inviting tenders, which was extracted by Ld CIT(A), we notice that the assessee has called for bids for supply and installation of "STEAM GENERATOR WITH ELECTRICAL PRECIPITATOR PACKAGE" consisting 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand, where contract is primarily a contract of work and labour and materials are supplied in execution of such contract, it is a works contract. In Hindustan Aeronautics Ltd. v. State of Orissa [1984] 55 STC 327 (SC), HAL imported materials and components on behalf of the Government 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is difficult to lay down any inflexible rule (2) Transfer of property of goods for a price is the linchpin of definition of sale. Main object of parties has to be found out. Substance of the contract and not form is to be looked into. (3) 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 depe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse of performance of a transaction does not render the transaction to be one of sale. Even in a contract purely of work or service, it is possible that articles may have to be used by the person executing the work and the property in such 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)) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to accommodate such a huge sized equipment. One wind blade itself requires gigantic sized truck for transportation. Hence, the wind mill is usually dismantled at the supplier's place 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 majo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Ownershi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be necessarily dismantled for the purpose of easy transportation. There 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Grid Corporation had individual existence and 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 emphasiz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 performed by the "supplier". Though the assessee claims that the design specification are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortion 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 by many other concerns, to our mind, this is not a relevant test. The issue is as to the time and situs of passin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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