Karnataka Power Transmission Corporation Ltd. Vs. Asst. CIT (ITAT Bangalore) – When parties enter into two separate contracts, one for material and one for labor, the transaction would not be one and indivisible, but would fall into two separate agreements, one of work or service and the other of sale. In such a case, the provisions of section 194C would apply only to the labor contract and not to the materials contract. The supply portion of the contract being for supply of equipment does not require deduction of tax at source.
THE INCOME TAX APPELLATE TRIBUNAL,
BANGALORE BENCH ‘A’
ITA Nos. 1011, 1013, 1015, 1017 & 1019/Bang/2010
(Asst. years 2005-06 to 2009-2010)
M/s Karnataka Power Transmission Corporation Ltd., vs The Income-tax Officer
ORDER
PER BENCH:
These five appeals instituted by KPTCL, Mysore bivision – a State Government Public Sector Company – are directed against the consolidated order of the Ld. CIT (A), Mysore, in ITA Nos: 17 to 21/CIT(A)/MYS/09-10 dated: 31.8.2009 for the assessment years 2005-06 to 2009-10.
2. The KPTCL, [‘the assessee’ in short] had raised ten identical grounds for the AYs under dispute, out of which, ground Nos: 1 and 10 being general no specific issues involved, they have become non-consequential. In the remaining grounds, the substances of issues raised are reformulated as under:
(i) the Ld. CIT (A) ought to have accepted the explanation offered and refrained from confirming the levy of tax and interest u/s 201 (1) and 201(1A) of the Act: that the assessee was not a defaulter and the provisions of s.201(1) and 201(1A) of the Act were not applicable;
(ii) the CIT(A) ought to have appreciated that the with regard to the value of materials supplied to the contractors, they belong to the assessee and, thus, the question of deduction of tax at source by applying the provisions of s. 194Cofthe Act would not arise; d
(iii) without prejudice, the CIT(A) ought to have appreciated that the recipient having paid the tax on the amount received from the assessee, there was no obligation on the part of the assessee to pay tax u/s 201(1) of the Act as ruled by the Hon’ble Supreme Court and, thus,, levy of tax as well as interest u/s 201(1A) are liable to be cancelled.
3. As the issues raised were identical pertaining to the same assessee, they were heard, considered together and disposed off in this common order for the sake of convenience and clarity.
4. Briefly stated, the assessee was a State Government Public Sector company, carrying on the business of transmission of electricity from electricity generating points to various electrical sub-stations in the State through the network of transmission lines and sub-stations. The assessee’s premises were subjected to an operation u/s 133A of the Act on 28.1.2009 to verify the compliance with TbS provisions. buring the course of survey, it was noticed that the assessee had entered into agreements with various contractors for setting up of electrical sub-stations. The sub-stations were established in order to segregate the load of one station or to improve the reliability of power supply and to meet the increasing demand for power supply. It was noticed by the Revenue during the verification of the agreements that the assessee had entered into separate agreements for supply of materials, erection work and for civil work portion etc., It was, further, noticed that when the assessee was deducting tax at source while making payments on civil work and erection portion, however, no TbS was effected on payments towards supply of material portion. buring the course of proceedings u/s 201(1) and 201(1A) of the Act, it was the view of the AO that as the assessee ought to have deducted tax at source on the supply of material portion also, it was required to explain such inaction on the part of the assessee.
5. Brushing aside the assessee’s detailed explanation, the AO went ahead in concluding, after detailed reasons recorded in the impugned orders under challenge, that the assessee should have deducted tax at source on the supply portion also which it had failed to do so, the assessee was treated as an ‘assessee in default’ and, accordingly computed the taxes as well as interest thereon u/s 201 and u/s 201(1A) of the Act for the assessment years under dispute.
6. Aggrieved, the assessee took up the issues with the Ld. CIT (A) for relief. After due consideration of the lengthy contentions put-forth by the assessee’s A.R., perusing the observations made by the AO in her impugned orders under challenge, analyzing the provisions of s.194C of the Act, extensively quoting the rulings in the cases on which the assessee had placed strong reliance, the Ld. CIT (A) had observed thus:
“(On page 12) 6…………..In view of the fore-going, it is held that considering the nature of the contract which is found to be composite, the appellant was liable to deduct tax on supply portion of the contract also. The AO’s action in demanding tax and mandatory interest u/s 201 (1A) is, therefore, upheld. around Nos.1 to 4 are dismissed in view of the discussion made above.
In ground No.5, the appellant has raised the contention that the recipient has paid the tax on the amount received from the appellant. In the written submissions, the appellant has referred to the decision of Supreme Court in the case of Hindustan Coco Cola Beverage P. Ltd. v. CIT 293 ITR 226 in this connection. No details or evidence was, however, given at the time of appeal hearing. At the time of last hearing, the appellant asked for more time for producing confirmation from contractors regarding tax payment. However, since sufficient opportunity has been provided to the appellant, no further time was given. In the absence of any supporting details and evidence on the above ground, appeal fails.”
7. Agitated, the assessee has come up with the present appeals. buring the course of hearing, the forceful submissions made by the Ld. A R are summarized as under:
(i) S. 201(1) was not at all applicable in the case of the appellant as there was no requirement to deduct tax at source. S. 201 require a person who is required to deduct any sum in accordance with the provisions of the Act. Here, as there was no requirement to deduct any sum, s.201(1) is not applicable;
(ii) The appellant floats tenders for supply of goods, erection and civil engineering works. For supply of goods, an agreement was executed. Some ofthe significant clauses contained in the tender were that –
‘35.2. In case of award of contract, a divisible contract covering the entire scope of the partial/total turnkey package will be entered into with the successful bidder. There shall be three separate contracts as under:
(a) for supply of goods; (b) for erection works; d (c) for civil engineering works.’
‘3″.3. For contractor supplied equipments/materials:
3″.3.1. Transfer ofthe title in respect of equipment and materials supplied by the contractor to the KPTCLpursuant to the terms of the contract shall pass on to the KPTCL with negotiation of dispatch documents.’
3″.3.2. This transfer of title shall not be construed to mean the acceptance and the consequent ‘taking over’ of equipment and materials. The contractor shall continue to be responsible for the quality and performance of such equipment and materials and for their compliance with the specifications until ‘taking over’ and the fulfillment of guarantee provisions ofthis contract.’
‘3.2. the scope of work shall also include supply/erection/civil works* portion of all such items which are not specifically mentioned in the contract documents but, which are needed for successful, efficient, safe and reliable operation of the equipment unless otherwise specifically excluded in the specifications under ‘exclusions or letter of award.
(iii) 3.5. It is expressly agreed to by the contractor that notwithstanding the fact that the contract is termed as supply, for convenience of operation of the other contracts, namely, erection contracts and civil contracts* are also the integral parts of the composite contract on single source responsibility basis sand the contractor is bound to perform the total contract in its entirety and non-performance of any part or portion of the contract shall be deemed to be a breach of the entire contract. [*the clause shall be suitably modified in the agreement of supply/erection/civil works portion]’
(iv) the dispute between the appellant and the AO was mainly with regard to the agreement for supply and the AO had treated the agreement for supply of goods as part of the composite contract which, according to the appellant, was a wrong interpretation arrived at by the AO, considering only some portion of the documents referred to in her order;
(v) though the complete contract work was awarded to a single contractor, still such contract was required to execute separate agreements for each of the work which means three contracts were documented separately and were considered as three contracts for all practical purposes;
– the materials/equipments purchased were in the absolute ownership ofthe appellant and it was the appellant who supplied these materials for performing the other two contracts by the contractor. With regard to the supply, it was only a contract of sale for purchase of such materials/equipments which were purchased for consideration with a specific requirement;
– the intention was quite clear that right from step one, both the parties knew that there would be three contract agreements that were to be executed and honoured separately;
– thus, the transaction between the appellant and the contractor while executing the agreement for supply of goods was essentially one of sale ofgoods and certainly not in the nature of works contract; – relies on the case laws:
