TMI Blog1998 (5) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord. The assessee did not deduct tax at source on the said payments. Assessing Officer issued a show-cause notice dated 2-12-1996 asking the assessee to explain the reasons for non-deduction of tax at source. Vide reply dated 10- 12-1996, the assessee submitted that no TDS was deducted at source as the supply order was to be considered as supply of goods and not as a contract payment, in view of the CBDT Circular No. 681, dated 8-3-1994, para 7 (vi)(b), wherein it is mentioned that where the contractor undertakes to supply any article or thing fabricated according to the specification given by the Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and as such outside the purview of section 194C of the Income-tax Act. Assessing Officer, however, declined to accept. the plea taken by the assessee and held that preparation of photo I-cards could not be treated as contract for sale. He refer-red to para 7(i) of CBDT Circular No. 681, wherein it was mentioned that the provisions of section 194C shall apply to all types of contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be held as production of an article which is then sold for a certain consideration. CIT(A) further referred to the specification of size in relation to I-cards, the paper to be used, photograph of the elector and its size, emblem of the Election Commission of India to be printed, code number representing the State and the constituency and other details to be incorporated in the I-cards. He held that the description of the job clearly indicated that it was not merely a contract for sale of goods but it was a contract for carrying out of certain work which was necessary to be done for the purpose of preparation of the card. He also held that Circular No. 681 had been held to be illegal as far as TDS on fees for professional services, contract for carriage, advertisement, etc., He observed that the nature of operation to be performed in the present case indicated that the contract was for carrying out of work. With reference to the condition for payment of 9096 on delivery of lots of 10000 each, CIT(A) held that the same represented only a mode of payment and that the same would not change the character of assignment as one for work and not one for purchase of goods. He further hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of I-cards by the supplier to the assessee. He highlighted that clauses 2 and 3 of the agreement provided that material is to be arranged by contractor/ supplier and that, as per clause 5, the risk was that of the contractor, as it was provided that if material used is not in accordance with the specifications, then I-cards prepared would be rejected and such I-cards will be destroyed by the contractor at his expenses in the presence of any officer authorised by the Government and that contractor shall not be entitled to any kind of payment or damage with regard to rejected I-cards. He submitted that the ownership of I-cards did not pass to the assessee till the tests were carried out and I-cards were accepted. He also emphasised that the machinery and other infrastructure was on contract and that contractor was engaged in the manufacturing activities of producing the cards, as per specifications laid down by the Government. He referred to clause I 0 of the said agreement, wherein it is provided that the Government will pay Rs. 10 for every complete I-cards supplied by the contractor as per supply order along with duplicate legible miniature of the card on A-4 sheet. He thus empha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and as such outside the purview of the section. He also referred to sub-clause (c) of clause (vi), wherein She decision of Hon'ble Supreme Court in the case of Associated Hotels of India Ltd [1972] 29 STC 474 has been mentioned. It is observed by the Apex Court that; 'the test is whether or not the work and labour bestowed end in anything that can properly become the subject 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 a chattel.' Ld. counsel thus emphasised that in view of the above provisions of the circular, which are still valid, in the present case the contract is primarily of manufacturing and su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the object was to collect tax @ 2% on income comprised in the payment made to contractors and that section 194C was not a charging section. He referred to the Budget Speech of the Finance Minister, where in the last paragraph Hon'ble Minister mentioned that, "I hope, this alliance between the Revenue department and the contractors will lead to prompt payments all round". He also referred to the commentary, Sampath Iyengar, Ninth edition, Vol. 5, page 6221, where instruction No. 1234 issued by CBDT has been mentioned. He submitted that in the present case, contractor has paid taxes due on the amount of contract. He submitted that for a.y. 1995-96, contractor has paid the amount of Rs. 88.78 lakhs as advance-tax (page 82 of the paperbook) and for the next 1996-97, total tax paid by the contractor is Rs. 52,80,832 (pages 101 - 102 of the paperbook). He, therefore, submitted that the object and purpose of section 194C is squarely met in the present case as the contractor has paid more than what was due under the provisions of the section ibid He also referred to the provisions of section 194C(4), whereunder a person can apply to the Assessing Officer for not deducting any tax at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of tax not deducted from the date on which such tax was deductible to the date on which such tax is actually paid He submitted that in this case, both the dates, ie. when tax was deductible and when tax is actually paid, are not ascertainable and, therefore, no interest could be charged under the said provisions. He emphasised that chargeability of tax and collection thereof forms an integrated code. He referred to the aforesaid decision of the Tribunal in Munak Investment (P.) Ltd's case and the decision in the case of CIT v. B.C Srinivasa Setty [1981] 128 ITR 294 (SC), wherein it was observed that charging section and the computations provisions together constitute an integrated code and when there was a case to which the computation provisions cannot apply at all, it was evident that such a case was not intended to fall within the charging section. In view of the foregoing, ld. counsel urged that the order of CIT(A) upholding the charging of tax and interest ought to be set side. 5. Ld. Departmental Representative, Shri Rakesh Goyal, on the other hand, relied on orders of the tax authorities. He submitted that the Case of the assessee squarely and clearly fell within the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be accepted. Ld. D.R. relied on the following case law: (a) Associated Cement Co. Ltd. 's case wherein it has been observed that section 194C had a wide import and covered 'any work which could be got carried out through a contractor under a contract including the obtaining of supply of labour under a contract with a contractor for carrying out any work and that the said section was not confined or restricted in its application to 'works contracts'. (b) Chamber of IT Consultants v. CBDT [1994] 209 ITR 660 (Bom.) wherein it was observed that the circulars issued by the CBDT during the last two decades explaining the scope and ambit of section 194C are clearly in the nature of contemporaneous exposition which can legitimately be used as aids in the construction of the said provision. In the ultimate analysis, Hon'ble High Court held that Circular No. 681 is illegal and based on an erroneous reading of the observations of the Supreme Court in Associated Cement Co. Ltd's case and is without jurisdiction in so far as it requires deduction of tax at source under section 194C in respect of payments of fees for professional services. (c) Bombay Goods Transport Association v. CBDT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erpretation of the provisions of section 194C and that they relate to manufacturing of an article or goods and cannot be applied in this case. He also referred to the decision of Hon'ble Supreme Court in the case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297/64 Taxman 442 for the proposition that the provisions of section 194C have to be read as a whole and it cannot be deduced therefrom that the transactions involved in the present case are anything other than carrying out of work. He also emphasised that in case it is held that the transactions involved in the present case fall outside the scope of section 194C, there would be a chain reaction and nobody will deduct at source. He, therefore, prayed that in case the Tribunal accepts the contention of the assessee, it could be spelled out that it is an exception considering the facts and the circumstances of case and it is not being laid as a general proposition. 5.1 With reference to argument of ld. counsel for bona fide belief, ld. D.R. insisted that it is the legal duty of all the assessees to deduct tax at source under section 194C and that even the legal opinion on the basis of which the assessee is purported to hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case law relied upon by both the parties. It is observed that the main thrust of ld. counsel is that the expression 'carrying out any work' as used in section 194C does not cover the activity of preparation and supply of I-cards by HARTRON to the assessee and that it is a case of supply of goods. Ld. counsel relied heavily on Circular No. 681, para 7(vi)(b). As against this, ld D.R. has tried to submit that the process of preparing I-cards for each individual and supplying the same to the assessee squarely falls within the expression 'carrying out of work' and that it could not be treated as a case of sale of goods. He has relied on various decisions, mentioned above, whereby Circular No. 681 has been held to be illegal in relation to various payments. We may mention that the expression work has been defined in Explanation III to section 194C w.e.f. 1-7-1995 to include advertising, broadcasting and telecasting including production of programmes for such broadcasting or telecasting, carriage of goods and passengers by any mode of transport other than by railways and caterring. Obviously, the purpose of the definition, as inserted by the Finance Act, 1995 w.e.f. 1-7-1995, is to set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e court in that case may be considered to have decided such an issue by implication. It was held that there was no warrant whatsoever for the said assumption and that Circular No. 681 in so far as it purports to issue: directions in paragraphs 7-8 explaining the scope of section 194C was to be quashed as being violative of articles 14 and 265 of the Constitution of India and opposed to section 194C in so far as it required deduction at source from payments made by way of professional fees to advocates. It also held that the said circular was illegal and without jurisdiction in respect of application for deduction of tax under section 194C in respect of contracts for mere carriage of goods. It is also observed that the aforesaid Circular No. 681 has been struck down by various courts only with reference to requirements of deduction of tax at source in relation to particular payments and that the remaining part of the circular which requires that the provisions of section 194C will not cover contracts for sale of goods, has not been the subject-matter of any decision brought to our notice. Thus, we feel that paragraph 7(vi)(b) and (c) are still relevant for properly construing the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4C of the Act. We feel that the transaction of preparing I-cards according to the specifications laid down by the assessee can also be said to fall within para 7(vi) of the said circular, issued by CBDT. It is also observed that the assessee had submitted before CIT(A) (pages 66-70 of the paperbook) that its case squarely falls within the said paragraph 7(vi)(b) and it accordingly did not deduct tax at source. The said pleas of the assessee also find mention in order of CIT(A). Thus, in such situation we feel that where two interpretations are possible flours the assessee has to be adopted having e Apex Court in the case of CIT v. Vegetable Products Ltd.[1973] 88 ITR 192. Further, the assessee acted bona fide in this case on the said belief and did not deduct tax at source. It is also observed that the tax due on payments in question in both the assessment years has been paid by the contractor and, therefore, we feel that the alternative submission of the assessee that the object of the provisions of section 194C read with section 191 has been met, has to be accepted. Ultimately, no loss of revenue has been caused to the Department as the tax due has been paid by one of the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
