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2016 (2) TMI 892 - ITAT DELHI

2016 (2) TMI 892 - ITAT DELHI - TMI - TDS u/s 194J OR 194C - design & drawings of the work are prepared by BHEL which is executed by the contractors under the supervision of BHEL - technical services - work by subcontractors - short deduction of tax - Held that:- CIT (A) has rightly observed that the scope of work given to the sub-contractors is for erection, testing, commissioning and trial operation and handing over of boiler units, electrostatic precipitators etc. and these activities involve .....

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of labour to carry out the work/contract involves both skilled & unskilled labour. Further, we take note that for commission of power plant, qualified engineers and skilled manpower along with unskilled labour need to use by the sub-contractors for execution of the contract including testing/trial operations. The nature and scope of the subcontract as rightly held by the ld. CIT (A) was actual execution of work involving the services of technical personnel as well as non-technical personnel. In .....

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of the contract offered to the assessee by its client and hence the sub-contractors also come in the purview of the Act and the assessee has deducted the tax is u/s 194C from the payments made to it. The amounts paid to sub-contractors is either for erection, installation, fabrication, commissioning, testing & trial operation of some parts of the Power Plant and therefore cannot be termed as technical services as per the definition in Explanation 2 to section 9 (1) (vii).

We also take .....

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r : Smt. Indra Bansal, Advocate For the Respondent : Shri Manoj K. Chopra, Senior DR ORDER Per A. T. Varkey, Judicial Member These appeals, at the instance of the revenue, are filed against the order of the CIT (Appeals), Rohtak dated 18.04.2013 for the assessment years 2010-11 to 2012-13. 2. First, we take up ITA No.4474/Del/2013 for AY 2010-11, for the sake of convenience, as the facts and circumstances of all the three assessment years are similar and the grounds of appeal taken in all the th .....

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of the case the ld.CIT(A) has erred in law and facts in holding that the amount paid to sub-contractors cannot be termed as technical services as per the definition in Explanation 2 to section 9(i)(vii) of the LT. Act, ignoring the facts that as per the terms and specification of BHEL the work can be done by the qualified Engineers and technical staff only, which comes within the purview of Technical Services u/s 194-J of the I.T. Act. (iii) On the facts and in the circumstances of the case the .....

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at Heavy Electricals Ltd. (BHEL), a Govt. Enterprise, entered into two contracts with M/s Arravali Power Co. Ltd. (APCL) for Indra Gandhi Super Thermal Power Project, Jhajjar, i.e., (i) supply contract for the work of design, engineering, manufacturing, shop fabrication, assembly, inspection and testing at suppliers works, type testing, packing, forwarding to site of all equipments / materials/ special tools and mandatory spares etc.; and (ii) contract for work of transportation from manufacture .....

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supply of labour comprising of Erection/Testing, Commissioning (E/T/C) and trial operation of identified equipments/plants etc. 4.1 During the course of survey operations u/s 133A of the Act on 07.02.2012, the AO noted that the assessee deducted tax at source on the subcontracts given u/s 194C of the Income-tax Act, 1961 (hereinafter the Act ) as per the details given under:- S. No. Name of Contractor Scope of Work Total amount credited or paid (in Rs.) TDS deducted (in Rs.) 1 (i) M/s PCP Intern .....

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t. Ltd., New Delhi Material Handling, Erection, testing, Commissioning, Trial Operation and handing over of 1X20 MW Fr V GTG set including auxiliaries, Piping, associated electrical C & I Equipments, etc. at MSIL, Manesar, Haryana 2(ii) M/s Golden Edge Engineering Pvt. Ltd., New Delhi Erection, testing, Commissioning, Trial Operation and handing over of all Mechanical Electrical, C & I, Balance of Plant & Material Handling work of 1 X 17.5 MW STG & 2X75 TPH HRSG at MSIL, Gurgaon, .....

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n Pvt. Ltd., Vijayawada Erection, testing, Commissioning and trial operation of TG & auxiliaries of 3 X 500 MW units 1 - 3 at APCPL, Jhajjar, Distt. Jhajjar, Haryana. 13,29,13,484/- 22,31,867/- Total 44,13,90,207/- 77,64,321/- 4.2 From the perusal of details given by the assessee, the AO noted that the aforesaid four contractors had provided such services which fell under the purview of Professional & Technical Services" and therefore, tax was liable to be deducted u/s 194J of the A .....

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elders & instruments technicians etc. to carry out the work as per specifications. This shows that the contractors are required to employ qualified engineers and highly skilled manpower to execute certain activities and therefore it is evident that these contractors are providing technical services. (ii) From the agreements, it is noted that the contractor has to do testing work of all the equipment and machinery erected and commissioned by it as per the terms and specifications of BHEL. Tes .....

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cated nature as constant network monitoring is required for error free quality of service wherein technical experts monitor physically the equipments as well as the network. This proves that this is not only a case of installing a system but it is also a case of providing technical services by the contractors to BHEL. The AO held that the assessee is covered under the provisions of section 194J in respect of the payments to above mentioned contractors and accordingly, the AO raised demand u/s 20 .....

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at 10% in respect of payments made towards "fee for technical services". Technical services has been defined in Explanation 2 to clause (vii) of sub-section (1) of section 9 as under:- Explanation 2 - for the purpose of the clause, fees for technical services means any consideration (including any lumpsum consideration] for the rendering of any managerial, technical or consultancy services (including the provision of service of technical or other personnel) but does not include consid .....

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rs. Further, the contractor has to obtain materials including equipments and has to bare taxes on such materials. As per section 194C of the Act, any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall deduct and deposit TDS at the specified rates and sum. As per clause (iv) (e) of Explanation to section 194C, "Work" shall inc .....

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k given to the sub-contractors is for erection, testing, commissioning and trial operation and handing over of boiler units, electrostatic precipitators etc. These activities involve construction work, welding, erection, alignment, transportation of equipment and materials etc. with the help of men & machines, which are beyond the scope of technical services as defined in section 9 of the Act. The contracts awarded by the appellant are for the Erection/Testing/ Commissioning of Plant & M .....

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ntract was actual execution of work involving the services of technical personnel as well as non-technical personnel. What the appellant intended to get from its sub-contractor was a physical output, a tangible structure and not merely the services of its qualified engineers/ staff. 6.2 Any payment for technical services in order to be covered u/s 194J, should be a consideration for acquiring or using technical know-how provided or made available by human element. The work entrusted for the sub- .....

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6.3 The basis of the AO to conclude that the scope of the contract comes under the provisions of section 194J since the testing, trial operations etc. cannot be handed by labourers but only be done by qualified engineers etc. is misplaced and misconceived as what is executed by the sub-contractors is erection/ installation, commissioning, testing & trial operation etc. which involves procurement of materials including equipments by the sub-contractors, fabrication etc. and thereafter instal .....

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t only technical services and not a physical output, as per the terms of the contract. What the appellant got from the sub-contractors was a physical output, a tangible structure and not merely the services of qualified engineers/ staff. If the logic of the AO is applied then, even the execution of buildings/roads contracts etc., which employ engineers and skilled personnel, would amount to receipt of technical services and not execution of works contract. The case laws relied upon by the AR are .....

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not be deemed as an assessee in default and the disputed short deduction of tax cannot be demanded from the appellant as per the case law of Hon'ble Supreme Court in Hindustan Coca Cola Beverage (P) Ltd. V. CIT (2007) 163 taxman 355. This ratio has also been inserted subsequently w.e.f. 01.07.2012 as proviso to section 201(1) of the Act. 6.5 In view of the above, the tax & interest levied by the AO u/s 201 (1) & 201 (1A) is deleted and the grounds of appeal are allowed. As the facts .....

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ction 194-J of the LT. Act. He further submitted that the ld.CIT(A) has erred in holding that the amount paid to sub-contractors cannot be termed as technical services as per the definition in Explanation 2 to section 9(i)(vii) of the I.T. Act, ignoring the facts that as per the terms and specification of BHEL the work can be only done by the qualified Engineers and technical staff only, which comes within the purview of Technical Services u/s 194-J of the I.T. Act. He submitted that the ld. CIT .....

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rk to be carried out by the contractor as mentioned in scope of work. In this regard, he referred to various clauses of the contract as under :- (i) As per clause 1 of the contract, the contractor shall execute the work of "Erection, testing, commissioning and trial operation of Power Cycle Piping, Boiler and LP Piping packages for unit nos.1, 2 and 3 of 3 X 500 MW units at APCPL, Jhajjar Distt, Jhajjar , Haryana, and more particularly described in the tender specifications including drawin .....

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d character of the Works to be executed by him. (iii) Clause 7 of the contract states that contractor shall carry out and complete the execution of the said works to the entire satisfaction of the engineer or such other officer authorized by BHEL, within the agreed time schedule. (iv) Clause 11 of the contract states that all applicable charges on account of octroi, terminal and other taxes including sales tax or other duties on material obtained for execution of the said works shall be borne an .....

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itions of Contract Section III A which shows that the said contract is for work and labour. He further referred to various clauses of the contract to highlight this fact. Relying on the provisions of section 194C, he submitted that the subject contract are a contract for work and labour and BHEL has prepared the Design & Drawings and has Technical Know-how to get the work executed by the contractors which is being executed under the supervision and to the satisfaction of the BHEL. Therefore, .....

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that the sub-contracts by BHEL are in the nature of contracts for work and labour and not in the nature of Technical fee and the payments are in the nature of contracts covered u/s 194C and not in the nature of Technical Fee covered by u/s 194J. He further relied on the decision of ITAT, Pune Bench in Glaxosmithkline Pharmaceuticals Limited vs. ITO and Hon ble Karnataka High Court in CIT vs. Nova Nordisk Pharma India Ltd. order dated 05.01.2012 in Appeal No.1262/2006. 7.1 He submitted that as p .....

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d that in the light of CIT v. Bharti Cellular Ltd. [2008] 175 Taxman 573 (Delhi), expression 'fees for technical services' as appearing in section 194J would have reference to only technical service rendered by a human, it would not include any service provided by machines or robots. He submitted that the contracts awarded by M/s APCPL and sub-contracted by BHEL to various sub-contractors are for E/T/C of plant & machinery which is construction of Boiler & Turbine, hence section .....

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on/ Testing/ Completion (E/T/C) of plant & machinery and are in nature of carrying out any work (including supply of labour for carrying out any work). The supply of labour to carry out the work involved both skilled and unskilled labour. He submitted that qualified engineers, highly skilled manpower alongwith unskilled labour were used by subcontractors for execution of certain activities of E/T/ C including 'testing work', 'trial operations'. He further submitted that such .....

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der of the ld. CIT (A) be upheld on these issues and stated that AO erred in holding the assessee in default and relied on the order of the Hon ble Supreme Court in Hindustan Coca Cola Beverages vs. CIT - (2007) 163 taxmann 355 / 293 ITR 226. 8. We have heard both the sides on these issues and perused the material on record. As per Section 194J of the Act, deduction of tax at 10% in respect of payments made towards "fee for technical services" and the definition of technical services h .....

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consideration which would be income of the recipient chargeable under the head "salaries". A bare reading of the above definition of technical services it is vivid that construction activity has been kept out of the purview of section 194J of the Act. Now, when we go through the contract clauses 6, 7 & 11 with M/s PCP International shows that it is in the nature of contract for work and labour and the same is to be carried out as per the drawing and specification given by the asse .....

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e) of Explanation to section 194C, "Work" shall include 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. We find in the present case, the design & drawings of the work are prepared by BHEL which is execut .....

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ven in section 9 of the Act. The ld. CIT (A) correctly stated that the contracts awarded by the assessee are for the Erection/Testing/ Commissioning of Plant & Machinery and are in the nature of carrying out any work including supply of labour for carrying out such work. We take note that the supply of labour to carry out the work/contract involves both skilled & unskilled labour. Further, we take note that for commission of power plant, qualified engineers and skilled manpower along wit .....

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