Agreement for the supply of equipments-No TDS deductible u/s 194C of Income Tax Act as per provisions of law, case laws, circulations & clarifications-ITAT
ABCAUS Case Law Citation:
ABCAUS 2063 (2017) (09) ITAT
The Revenue had filed this Appeal against the order passed by the CIT(A) deleting the addition made by the Assessing Officer (AO) u/s 201(1)/201(1A) of the Income Tax Act, 1961 (Act)
Assessment Year : 2011-12
Important Case Laws Cited/relied upon by the parties:
P.S. & Company v. State of Andhra Pradesh 56 STC 283
CIT vs. Silver Oak Laboratories Pvt. Ltd. (SC)
State of Himachal Pradesh vs. Associated Hotels of India Ltd. (SC)  29 STC 474
CIT-vs-Glenmark Pharmaceuticals Ltd 324 ITR 199(Bom)
CIT Vs. Reebok India Co 306 ITR 124 (DEL)
CIT vs. Dabur India Ltd. 283 ITR 197 (Del)
Brief Facts of the Case:
The Revenue had received the information that the Deductor assessee (MTNL) had awarded contract works to M/s HCL Infosystems Ltd. connected with the project of Common Wealth Games, 2010 (CWG-2010) held in New Delhi. The project was for supply of equipment installation testing commissioning of communication work infrastructure for CWG-2010 and the total cost of the project was Rs. 332 crores approx. In order to verify the compliance by the deductor assessee with reference to the TDS provisions under Chapter XVII-B of the Act, a query letter was issued to the assessee calling some information from the assessee details of TDS deducted on the above payments, along with copies of acknowledgements of filing quarterly e-TDS returns.
The assessee did not furnish any information / response. As the matter involved time limitation, AO passed order u/s. 201(1) /201(1A).
The AO assumed that the assessee had paid / credited all the above mentioned contract amount during FY 2010-11 and accordingly the assessee was liable to deduct tax at source amounting to Rs. 6.64 crores in accordance with the provisions of section 194C/194J from these amounts credited/ paid. As there was no evidence brought before the AO to establish that this tax was deducted at source, the assessee was deemed to be in default for this amount. Further the assessee was also liable to pay interest u/s 201(1A) on this amount. Thus total demand of Rs. 8.63 crores was raised against the assessee.
Against the assessment order, assessee appealed before the CIT(A), who allowed the appeal of the assessee.
Aggrieved with the order of the CIT(A), the Revenue was in appeal before the Tribunal.
Observations made by the Tribunal:
The ITAT observed that the contract was on turnkey basis for supply of equipments and for installation services, deployment, redeployment etc.. It involves two aspects:
(i) Supply of equipments
(ii) Services of installation, deployment, redeployment
It was noted that M/s. HCL Infosystems Ltd. Supplied the equipments as per the specifications of the assessee but M/s. HCL Infosystems Ltd. had purchased the said equipments from person other than such customer i.e. not from MTNL
The Tribunal noted that as per sub-clause (e) of clause (iv) of the Explanation to Section 194C of the Income Tax Act 1961, work does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from person, other than such customer.
It was also noted that CBDT Circular No 681 dated 08/03/1994 states that Section 194C would not cover a contract for the sale of goods,
The Tribunal noted the following judgments/decisions of the various High Courts:
Andhra Pradesh High Court
The High Court, based on various decisions of the Hon’ble Supreme Court , issued following guidelines to determine whether a contract is ‘works contract’ or ‘contract for sale of goods:
A contract where not only work is to be done but execution of such work requires goods to be used may take one of the three forms as under:
The contract may be for work to be done for remuneration and for the supply of materials used in the execution of the work for a price.
It may be a contract for work in which use of the materials is accessory or incidental to the execution of the work.
It may be a contract for supply of goods where some work is required to be done as incidental to the sale.
Where the contract is of the first type it is a contract consisting essentially of two parts – one for the sale of goods and the other for work and labour. The second type of work is clearly a contract for work and labour not involving sale of goods. The third type is contract for sale where the things are sold as chattel and some work is undoubtedly done but it is done merely as incidental to the sale.
The Hon’ble Apex Court in the case of Silver Oak Laboratories had held as under:
“Our attention, in fact, is invited to the amendment in Section 194C of the Act vide Finance (No.2) Act, 2009, with effect from 1st October, 2009, which defines “work” to include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer. In fact, it is clarified that the definition of the word “work” will 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.”
The Hon’ble Apex Court in the case of Associated Hotels of India Ltd. had held as under:
“If the main object underlying the contract is to transfer property in or delivery of possession of a chattel as chattel, then the contract is one for sale. The test, observed their Lordships, is whether or not the work and labour bestowed ended in anything that can properly become the subject matter of a sale. Neither the ownership of the materials nor the value of the skill and labour, as compared with the value of the materials is” conclusive, although such matters may be taken into consideration in determining whether the contract is in substance one for work and labour or one for the sale of chattel.”
Bombay High Court
The Hon’ble Bombay High Court had observed as under:-
“The expression “carrying out any work” in section 194C would not include a case where (i) where the property in the article or thing passes to the customer upon delivery, and (ii) the material that was required was not purchased/ sourced from the purchaser/customer, but was purchased or independently obtained by the manufacturer from a person other than the customer. The rationale behind this was that where a customer provides the material, what the manufacturer does is to convert the material in to a product desired by the customer, the contract essentially involves work of labour and not a sale.”
Delhi High Court
Hon’ble Delhi High Court in the case of Reebok India Co had held as under:-
“The Tribunal also considered various decisions of High Courts as well as the Supreme Courts and then returns a conclusive finding that the transaction between the assessee and the manufacturer was that of purchase and sale of goods and not the works contracts under section 194C of the said act.”
Hon’ble Delhi High Court in the case of Dabur India Ltd. had held as under:-
“In the instant case also the supply of corrugated boxes was to be made with some labels printed on the same. The question that was raised before the Tribunal, therefore, was whether the supply of such boxes was a contract for sale of chattel and as such outside the purview of Section 194C of the IT Act, 1961. The Tribunal has, relying upon the decision of the Supreme Court in Associated Hotels (supra) and the order passed by the Pune Bench of the Tribunal in Wadilal referred to above, held that the dominant object underlying the contract in the instant case was the supply of goods in the form of corrugated boxes.”
The ITAT also noted the clarification regarding the word ‘work’ in section 194C as appearing in the Memorandum explaining the provisions of the Finance Bill 2009 which read as under:
“To bring clarity on this issue, it is proposed to provide that “work” shall not include manufacturing or supplying a product according to the requirement or specification of a customer by using raw material purchased from a person other than such customer as such a contract is a contract for ‘sale’. This will however not apply to a contract which does not entail manufacture or supply of an article or thing (e.g., a construction contract). It is also proposed to include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer, within the definition of ‘work’. It is further proposed to provide that in such a case TDS shall be deducted on the invoice value excluding the value of material purchased from such customer if such value is mentioned separately in the invoice. Where the material component has not been separately mentioned in the invoice, TDS shall be deducted on the whole of the invoice value.”
The ITAT noted that M/ s. HCL Infosystems Ltd. supplied equipments which were not purchased from MTNL. Hence, TDS provisions did not fall applicable on the supply of equipments. Further since billing for the supply of equipments was separate from that of the services, TDS would not be deducted on the supply of equipments. Thus, TDS would only be liable to be deducted on the value of Professional services availed by the assessee u/s 194J of the Income Tax Act 1961. The assessee has duly complied with the law by deducting TDS on services provided by M/s. HCL Infosystems Ltd.
The ITAT opined that based on the above mentioned facts, provisions of law, case laws, circulations and clarifications it was clear that MTNL was not liable to deduct TDS on the said transaction of Supply of equipments.
CIT(A) rightly held that the action of AO of holding assessee company as in default was without any cogent basis.