IT Appeal Nos. 68, 69 and 101/V/ of 2012 (assessment years 2008-09 and 2010-11).

D.MANMOHAN And B.R.BASKARAN , JJ.

A.V. Raghavan. For the Appellant :
K.V.N. Charya. For the Respondent :

ORDER

The order of the Bench was delivered by

B.R. Baskaran-These three appeals filed by the assessee are directed against the orders passed by Ld CIT(A), Visakhapatnam and they relate to the financial years 2007-08 to 2009-10 relevant to the assessment years 2008-09 to 2010-11. Since the issues urged in these appeals are identical in nature, they were heard together and are being disposed of by this common order, for the sake of convenience.

2. The assessee is assailing the decision of Ld CIT(A) in holding that the machineries purchased by the assessee falls in the category of "Contract for works and labour" and hence the assessee is liable to deduct tax at source u/s 194C of the Act on the payments made by it and consequently, the assessing officer was right in law in holding the assessee as "an assessee in default" in terms of sec. 201 of the Act.

3. The facts relating to the issue under consideration are narrated as under by Ld CIT(A) in his common order dated 30-12-2011 passed for the financial years 2007-08 & 2009-10 relevant to the assessment years 2008-09 and 2010-11.

     "2. The appellant company M/s. National Thermal Power Corporation Ltd. (NTPC) is in the activity of generation of thermal power at its unit, Simhadri Super Thermal Power Project (SSTPP) located at Parawada in Visakhapatnam district. TDS inspection was carried out in the premises of the SSTPP on 09-03-2009. During the course of inspection, it was noticed that the company has undertaken 1000 MW expansion of SSTPP State-II. Pursuant to this, bids were invited for various packages of works. After evaluation and discussion and issue of letters of intent, notification of award was issued to the successful bidders, the contract for various packages of works were thus, finalized with companies like ABB, BHEL, Driplex Water Engg. Ltd. etc.

    2.1 The different packages of works include design, engineering, manufacture, forwarding, erection and commissioning. After finalizing the contractor, contract agreements were executed in two parts viz.,a) first Contract and b) Second Contract. The 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, therefore, called to explain for failing to deduct tax u/s. 194C on payments made pursuant to the first contract though the first contract and the second contract were nothing but one contract together for a particular package of work. In response thereto, the deductor company submitted that the scope of work under the first contract is supply portion of plant and machinery equipment and therefore, there is no requirement to deduct tax at source u/s. 194C.

     2.3 Assessee-company in this regard relied on CBDT's circular No. 681 dtd. 08.03.1994 and on the decision of the Hon'ble Bombay High Court in the case of BDA Ltd. vs. Income Tax Officer (TDS) 281 ITR 99 (Bom) and decision of Hon'ble ITAT, Hyderabad 'B' Bench in the case of Power Grid Corpn. of India Ltd. v. ACIT 13 SOT 347. Reliance was also placed on the following case-laws.

     (a) Principal Officer, Somani Iron & Steel (P) Ltd. v. ITO [2003] 66 ITD 750 (Luck).
     (b) APSRTC v. DCIT 119 Taxman 73 (Hyd.)
     (c) CIT v. Dabur India Ltd. [2005] 198 CTR (Delhi) 375.
     (d) CIT v. Deputy Chief Accounts Officer, Markfed Khanna Branch [2008] 173 Taxman 149 (Pun & Har).
     (e) CIT v. Girnar Food & Beverages (P) Ltd. [2008] 306 ITR 23 (Guj.)
     (f) Hindustan Lever Ltd. [2008] 306 ITR 25 (Guj).

     2.4 Assessing Officer after carefully considering the arguments of the assessee held that the Board circular referred to by the assessee-company is not applicable to the facts of the case. He further relied on the decision of Hon'ble Madras High Court in the case of Mani Muthuswamy v. Personal Assistance to the Collector in Writ Petition No. 3681 of 2008. The Hon'ble Madras High Court vide its judgment dtd. 15.10.2009 held that supply of eggs to Government of Tamil Nadu as part of mid-day meals scheme is also in the nature of works contract. The Hon'ble Madras High Court in its order relied on various Supreme Court judgment including the case of M/s. Hindusthan Aeronautics Limited, Associated Cement Company Limited, State of Tamil Nadu v. Anandam viswanathan, Hindusthan Shipyard Ltd. v. State of AP and Kone Elevators (India) Limited. Finally, it is held by the Hon'ble Court that the question of works contract or sale contract is to be looked into on case to case basis. AO after elaborately quoting from the decision of Hon'ble Madras High Court held that said judgment answers all plausible reasons 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 detailed time schedule for the package which specified time frame for each sub-item of the package, separate time schedule has been clearly mentioned for engineering part of the package.

          (3) The price break up of the technical service like engineering has not been separately mentioned by the contractor and is shown as inclusive in the price of ex-manufacturing works of equipment.

          (4) The obligation of the contractor begins from design & engineering and ends with successful commissioning of the package after conducting necessary tests.

          (5) Though the entire contract has been split into two parts viz. first contract and second contract, the responsibility of contractor covers the entire scope of work narrated in both the parts.
          (6) The price of package agreed for the entire scope of work covers both part as is evident from the price schedules enclosed to the contract agreements.

          (7) The minutes of the meeting held between the assessee- company and the contractors on several issues like, commercial, technical work schedule and quality assurance and inspection over both the parts of the contract further signifying the obligation of the contractor for the scope of work covered under both parts of the contract.

     2.5 To conclude it is held by the Assessing Officer that the main objective of the assessee-company is to get a particular package of work from a contractor starting from design and engineering and ending with installation and commissioning. All inter-alia jobs like procurement, manufacturing etc. are all inclusive in the package. Thus it is held by the Assessing Officer that the first contract and second contract together constitute a composite contract attracting tax deduction at source on all the sums paid to contractors pursuant to the first contract agreement. It is thus held that the assessee-company is deemed to be an assessee in default within the meaning of section 201 of Income-tax Act, 1961."

The assessing officer noticed that the contractors have declared the amount given by the assessee herein during the financial years 2007-08 and 2008-09 relevant to the assessment years 2008-09 and 2009-10 in their respective books of account. Accordingly the assessing officer did not raise demand u/s 201(1) of the Act, but only charged interest u/s 201(1A) in these two years. For the financial year 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 supply of machineries is clearly and indisputably a "contract for work and labour" and not a "contract for sale". Accordingly he upheld the decision of the assessing officer in treating the assessee as an assessee in default in terms of sec. 201(1) of the Act for failure to deduct tax at source u/s 194C of the Act on the payments made towards the Contract for supplying machineries.

5. Aggrieved by the orders passed by Ld CIT(A), the assessee has filed this appeal before us.

6. We have heard the rival contentions and carefully perused the material available on record. It is an undisputed fact that the assessee has entered into two separate contracts for procurement and installation of plant and equipments required for commissioning 1000MW SSTPP Stage-II. According to the assessee, the first contract is entered up to the stage of making the plant and equipment ready at the site of the manufacturer and the second contract is entered in connection with the transportation from manufacturer's place, installation and commissioning, conducting performance and guarantee tests and handing over of all the equipments. The assessee has treated the second contract as "Contract of Work" and accordingly deducted at source u/s 194C of the Act. However, the first contract was treated by the assessee as a "Contract for sale" and hence it did not deduct tax at source u/s 194C of the Act.

7. The Ld CIT(A) has concluded that both the contracts are composite contracts and further they are inseparable one. Further the Ld CIT(A) has held that the entire contract can only be considered as a "Contract for work and labour". Accordingly, the Ld CIT(A) has held that the assessee is liable to deduct tax at source on the first contract also.

8. For the sake of convenience, we shall term the first contract as "Supply contract" and the second contract as "Installation Contract". The question that essentially arises for our consideration is whether the assessee is liable to deduct tax on the amount covered by "Supply contract" or not. There is no dispute with the proposition that the assessee would not be liable to deduct tax at source, if the supply contract is considered as a "Contract for sale". On the contrary, if the view of the Ld CIT(A) that the supply contract falls in the category of "Contract for works" is found to be correct, then the assessee would be liable to deduct tax at 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, Milling System with Raw Coal Feeders, PA fans, draft System including ID&FD fans, Regenerative Air Pre-Healers (RAPH) & Steam Coil Air Pre-Heater (SCAPH). Fuel Oil pressurizing & Firing System, Ducting, Dampers, Expansion Joints, Thermal Insulation and cladding, Audiliary PRDS, Auxiliary Steam Piping, Complete Control and Instrumentation System, Elevators in Boiler area and Passenger elevators for ESP/VFD control room, all steel structures for steam Generator Power Cycle Piping, Mill Reject handling system, electrostatic Precipitator, H.P. Chemical dosing, Equipment cooling water system for steam generator and Auxiliaries, Plant and Instrument Air Compressors, Plant Performance analysis, Diagnosis and Optimization (PADO), Vibration isolation & Spring system etc. for Simhadri Super Thermal Power Project, stage-II (2×500MW) situated at Simhadri Dist. Visakhapatnam, State of Andhra Pradesh, India as per provisions of Bidding Documents No.CS-3530-101-2.

     NTPC intends to finance this package through External Commercial Borrowings and other sources".

     3.8 From the above advertisement, it can be seen that bids are called for supply & installation together and not separately. Perusal of following specific clauses of the instructions to bidders is necessary to look into the intention of NTPC.

     1.2 NTPC intends to make financing arrangements for the subject package by means to Buyers Credit from International Banks through the Export Credit Agencies of the Country concerned to the extent the goods and services covered in the package are imported from OECD countries. For the above purpose, the Export Credit Agencies require certain procedural formalities to be completed by the equipment supplier of their country. The bidder shall, in case of award of contract, facilitate completion of such formalities as may be required by the respective Export Credit Agency to enable NTPC to avail Buyers Credit for funding eligible goods and services covered in the package. The aforesaid option of funding is also intended to be availed by NTPC for supply of goods and services from OECD countries by the sub-vendors/sub-contractors of the Bidder. The Bidder shall make similar compliance in respect of its sub-vendors/sub-contactors to the extent the goods are imported from concerned OECD country.

     2.1 For the purposes of these bidding documents, the word "facilities" 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 to perform the work properly and expeditiously within the time period specified. The evidence shall specifically cover, with written details, the installed manufacturing and/or fabrication capacities and present commitments (excluding those anticipated under these bidding documents). If the present commitments are such that the installed capacity results in an inadequacy of manufacturing and/or fabrication capacities to meet the requirements appropriate to the works covered in his bid, then the details of the requirements appropriate to the works covered in his bid, then the details of alternative arrangements to be organized by the Bidder and/or his collaborator/associate for this purpose and which shall meet the Employer's approval, shall also be furnished.

         (vi) has established quality assurance systems and organization designed to achieve high levels of equipment/system reliability, both during his manufacturing and/or fabrication and field installation activities".

     10. Bid Prices
     10.1 Unless otherwise specified in the Technical Specifications, Bidders shall quote for the entire facilities on a "Single responsibility" basis such that the total bid price covers all the contractors obligations mentioned in or to be reasonably inferred from the bidding documents in respect of the design, manufacture including procurement and subcontracting (if any), delivery, construction, installation, commissioning, completion of the facilities and conductance of guarantee tests for the facilities including supply of mandatory spares (if any). This includes all requirements under the Contractor's responsibilities for testing, pre-commissioning and commissioning of the facilities, conducting guarantee tests and, where so required by the bidding documents, the acquisition of all permits, approvals and licenses etc., the operation, maintenance and training services and such other items and services as may be specified in the bidding documents, all in accordance with the requirements of the General Conditions of Contract and Technical Specifications.

     10.2 Bidders are required to quote the price for the commercial, contractual and technical obligations outlined in the bidding documents. If a bidder wishes to make a deviation to the provisions of the bidding documents, such deviation shall be listed in attachment 6 or in attachment 6A of its bid, 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's country as of seven (7) days prior to the last date for submission of bids.

         (d) Installation Services shall be quoted separately in Schedule No. 4 and shall include rates or prices for all labour, contractors equipment, temporary works, consumables and all matters and things of whatsoever nature, charges for insurance covers other than inland transit insurance, operations and maintenance services, the provision of operations and maintenance manuals, training of employer's personnel etc. and other services as identified in the bidding documents and necessary for the proper execution of the installation services, including all taxes, duties, levels including of service tax and charges payable in the employer's country, as of seven (7) days prior to the deadline for submission of bids.

     28. Award Criteria
     28.4 The mode of contracting with the successful bidder will be as per stipulation outlined in GCC Clauses 3.6 and briefly indicated below:

          (i) First Contact: For CIF (Indian Port of entry) supply of plant and equipment including type test charges and mandatory spares to be supplied from abroad.

          (ii) Second Contract: For Ex-works (India) supply of domestically manufactured plant and equipment including type test charges and mandatory spares.

          (iii) Third Contract: For providing all services i.e., port handling, port clearance and port charges for the imported goods, further loading inland transportation for delivery at site, inland transit insurance, unloading, storage, handling at site, installation, insurance covers other than inland transit insurance, testing, commissioning and conducting Guarantee tests in respect of all the equipments supplied under the "First Contract" & the 'Second Contract' and all other services as specified in the Contract Documents.

          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 contractor.

     29. Employer's right to accept any bid and to reject any or all bids:

     29.1 The employer reserves the right to accept or reject any bid, and to annul the bidding process and reject all bids at any time prior to award of contract, without thereby incurring 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 shall furnish performance securities for ten percent (10%) of contract price for all the contracts and in the form provided in the section "Forms and Procedures" of the bidding documents."

     General Conditions of Contract (GCC)

          "Project Manager" means the person appointed by the Employer in the manner provided in GCC sub-clause 17.1 (Project Manager) hereof and named as such in the SCC to perform the duties delegated by the Employer.

          "Facilities" means the Plant and Equipment to be supplied and installed, as well as all the installation Services to be carried out by the Contractor under the Contract.

          "Completion" means that the Facilities (or a specific part thereof where specific parts are specified in the SCC) have been completed operationally and structurally and put in a light and clean condition and that all work in respect of Pre-commissioning of the Facilities or such specific part thereof has been completed and commissioning has been attained as per Technical specifications.

     3.6 Construction of the Contract.

     3.6.2 The award of separate Contracts shall not in any way dilute the responsibility of the contractor for the successful completion of the Facilities as per Contract Documents and a breach in one contract shall automatically be construed as a breach of the other contract(s) which will confer a right on the Employer to terminate the other Contract(s) also at the risk and the cost of the Contractor.

     3.7 Entire Agreement
     Subject to GCC Sub-clause 16.4 hereof, the Contract constitutes the entire agreement between the Employer and contractor with respect to the subject matter of contract and supersedes all communications, negotiations and agreements (whether written or oral) of parties with respect thereto made prior to the date of Contract.

     Subject Matter of Contract
     7. Scope of Facilities:

     7.1 Unless otherwise expressly limited in the Technical Specifications, the Contractor's obligations cover the provision of all Plant and Equipment including spares and the performance of all services required for the design, the manufacture (including procurement, quality assurance, construction, installation, associated civil, structural and other construction works, pre-commissioning and delivery) of the Plant and Equipment and the installation, commissioning, completion of 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 be as specified in Article 2 (contract Price and Terms of Payment of the contract agreement).

     11.2 The Contract Price shall be adjusted in accordance with provisions of Appendix-2 (Price Adjustment) to the Contract Agreement.

     11.3 Subject to GCC Sub-clause 9.2, 10.1 and 35 (Unforeseen Conditions) hereof, the Contractor shall be deemed to have satisfied itself as to the correctness and sufficiency of the Contract Price, which shall, except as otherwise provided for in the Contract, cover all its obligations under the Contract.

     12. Term of Payment
     12.2 No payment made by the Employer herein shall be deemed to constitute acceptance by the Employer of the Facilities or any part(s) thereof.

     21.3 Transportation
     21.3.1 The contractor shall at its own risk and expense transport al the Plant and Equipment and the contractor's Equipment to the site by the mode of transport that the contractor judges most suitable under all the circumstances.

     21.3.4 The contractor shall be responsible for obtaining, if necessary, approvals from the authorities for transportation of the plant and equipment and the contractor's equipment to the site. The Employer shall use its best endeavors in a timely and expeditious manner to assist the Contractor in obtaining such approvals, if requested by the contractor. The Contractor shall indemnify and hold harmless the Employer from and against any claim for damage to roads, bridges or any other traffic facilities that may be caused by the transport of the Plant and Equipment and the contractor's equipment to the site.

     21.4 Customs Clearance

     The Contractor shall, at its own expense, handle all imported plant and equipment including spares and contractor's equipment at the point(s) of import and shall handle any formalities for customs clearance, including liability for port charges etc., if any subject to the Employer's obligations under GCC sub-clause 14.2 provided that if applicable laws or regulations require any application or act to be made by or in the name of the Employer, the Employer shall take all necessary steps to comply with such laws and regulations. In the event of delays in customs clearance due to fault of the Employer, the Contractor shall be entitled to an extension in the Time for completion, pursuant to GCC Clause-40.

     23.6 If any plant and Equipment or any 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 and Equipment, the responsibility for care and custody thereof together with the risk of loss or damage thereto shall remain with the contractor pursuant to GCC Clause-32 (care of facilities) hereof until completion of the facilities or the part thereof in which such plant and equipment are incorporated.

     3.8 From the perusal of above clauses of the agreement it can be seen that the intention of the contract is and has always been composite contract with supply of material forming only a part of the entire contract. As already discussed the advertisement is for the entire package of supply and installation and not separately for supply and installation. Clause 1.2 also says that financing arrangement will be made for the entire package. Clause 2.1 clearly states what the word "facilities" for the purposes of bidding documents means and it states that facilities means plant and equipment to be supplied and installed, together with services to be carried out. Clause 5.2 reiterates that a single bid may be prepared for entering into contract for supply and installation. Clause 8.3 (c) which speaks of bidder's qualification requires that the bidder should provide satisfactory evidence of his qualification for both supply and installation. Sub-clause (iv) of the said clause requires that the bidder should have adequate facilities of design manufacture and fabrication whereas sub-clause (vi) requires that the bidder should have established quality assurance systems to achieve reliability in both manufacturing and installation. These clauses thus show that the contractor should have both capabilities as both the works are inseparable. There is no indication in the bid document that contractors having a separate manufacture or installation facilities only will be eligible for separate packages. Clause 10.1 clearly states that the bidder shall quote for the entire facilities on a "single responsibility" basis such that the total bid price covers al the contractor's obligations. Clause 10.2 also clarifies that the bidders are required to quote price for commercial, contractual and technical obligations. Here also there is no indication that contractor can quote only for the part of the facilities or part of the job. Thus there is no intention to call bids for supply and/or installation separately. Clause 10.4(b) says that contractor can quote separate rates for plant 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 entire contract including supply s liable to be terminated. Such termination would not be possible if the employer has entered into three separate contracts for supply and installation wherein the responsibility of each contract will end with performance of that contract only. This simply means that till the facility is finally installed and tested successfully the entire responsibility rests with the contractor. Unless the facility is totally installed and tested contractor cannot claim that first part of that contract is over and any incapability to install the facility will not effect the supply contract. This clearly shows that whatever equipment is supplied to NTPC is not on "Chattel-qua-Chattel" basis. Vide clause29, the employer reserves the right to accept or reject any bid. Employer is not interested in accepting a part of the bid but only the entire bid. To illustrate this if three bids are received in which one bidder quotes less for supply of material and the other bidder quotes lesser amount for installation, the employer is not interested in accepting supply part of bid from one contractor and installation part of bid from another contractor. Thus whatever is to be accepted or rejected is the entire bid and not part of the bid i.e., first contract or second contract. This shows that the employer is treating the entire bid as a single contract though an artificial distinction with regard to supply and installation is made. Clause-3- speaks of notification of award which states that the entire award will constitute formation of contract and not parts of the bid. Clause-31 also clearly states that the employer will send to the bidder the contract agreement incorporating all agreements between the parties. Here also there is no intention about separation of the contract. Clause-32 which speaks of performance security states that successful bidder shall furnish performance securities at 10% of entire contract price for all the contracts.

     3.9 It would be pertinent to discuss some of the general conditions of contract (G.C.C.) which are part of instructions to bidders. Here also the "facilities" means both the supply and installation showing that the contract is given for the entire facilities. The term completion is also defined which means that the facilities have to be completed operationally and structurally as per technical specifications. Clause 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 total contract and not for part of contract. Clause 12.2 which speaks of terms of payment clearly states that no payment made by the employer shall be deemed to constitute acceptance by the employer of facilities or any part thereof. This clause thus shows that separate payment made for supply of any items shall be subject to conditions of the contract including breach of contract. Clause 21.3 which speaks of transportation says that the contractor shall at its own risk and expense transport all the plant and equipment to the site. The contractor shall be responsible for obtaining all the clearances as necessary. Regarding customs clearance also the clause says that the contractor shall handle all the material related issues on his own. Clause 23.6 says that if any plant and equipment or any part of facilities fails to pass any test, contractor shall replace such equipment. This clearly indicates that the material already supplied is subject to proper installation and there is no transfer on a chattel-qua-chattel basis. Clause-31 which speaks of transfer of ownership of facilities states that ownership of the plant and equipment shall be transferred to the employer when the plant and equipment are e loaded from the work to the site and upon endorsement of the dispatch documents in favour of the employer. However clause-31.5 introduced a non-obstante clause which says that notwithstanding the transfer of ownership the responsibility for care and custody together with risk or loss of damage shall remain with the contractor till completion of facilities or part thereof in which such plant and equipment are incorporated. This clause clearly says that the so called transfer of ownership is only on paper and the contractor is responsible for the equipment till complete installation. This clause also goes against the assessee's argument that the plant and equipment is transferred chattel-qua-chattel and hence supply is a separate contract."

     With these discussions, the Ld CIT(A) concluded that there is no intention on the part of the assessee to dissect the supply contract and installation contract, though it has entered into two separate contracts. Accordingly the Ld CIT(A) held that the two individual contracts cannot be capable of being defined as a specific separate contracts. Accordingly the Ld CIT(A) affirmed the view of the assessing officer that both 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 reading of instructions to bidders and also the analysis of various clauses, as pointed out by Ld CIT(A), clearly show that the assessee intended to view both supply contract and installation contract as part and parcel of same contract only.

12. Even if both the contracts viz., supply contract and installation contract is considered as representing two parts of the same contract, the question that still requires examination is whether the "Supply Contract" would fall in the category of "Contract of sale" or "Contract of work". In our view, even if both the contracts are considered as parts of a composite contract, it would not automatically give rise to the presumption/view that the supply contract should be considered as a "Contract of works". The Ld CIT(A) has also judicially noticed that there is thin line differentiating a "Contract of sale" from a "Contract of work". The Courts have made it very clear that this question has to be decided on case by case basis on due consideration of the facts surrounding in each case.
13. In this regard, the Ld CIT(A) has referred to certain case law and for the sake of convenience, we extract below the relevant observations made by him.

     "4.5 Various judicial authorities have held that there is thin line differentiating between contracts for works and contracts for sale. An air-conditioner manufacturer may undertake a 'work contract' for designing, fitting and commissioning of air conditioning equipment. This is contract for work and not contract of sale. Property in air conditioning equipment passes as an incidental to the works contract. Here, there is no sale of 'goods'. It is a 'works contract' and not liable to CST as held in the case of State of Madras v. Voltas Ltd. [1963] 14 STC 446 and 861 (Mad HC) also indirectly approved in Batliboi v. STO [2000] 119 STC 583 (Guj HC DB). Laying of pipe line is yet another example of works contract, where passing of property in the pipe is incidental to works contract. In Vanguard Rolling Shutters v. CST [1977] 39 STC 372 (SC) it was observed that it is difficult to lay down any rule of universal application to decide whether a contract is a works contract or contract for sale of goods. If the contract is primarily for supply of materials at prices agreed and the work or service is incidental to the execution of contract, it will be contract for sale. On the other 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 the present case is examined it can be seen that as a part of contract what is handed over to NTPC by BHEL is basically an unfinished plant/equipment which unless is installed and commissioned will be of no use to the employer i.e. NTPC on chattel-qua-chattel basis and hence the contract cannot be said to be a contract for sale though sale of certain material is involved as part of the entire contract. The Hon'ble Supreme Court in the case of P.M. Venkatachalam Pillai v. State of Madras [1969] 23 STC 72 (Mad.) held that whether there is sale of goods or there is work to be done depends upon the facts of each case, the intention of the parties, the essence of the contract. The primary object of the transaction and the intention of the parties, is the sole test. In State of Tamil Nadu v. Anandam Viswanathan [1989] 1 SCC 613 = [1989] 73 STC 1 (SC), it was observed that nature of contract can be found only when intentions of parties are found out. The fact that in the execution of works contract some materials are used, and the property in the goods so used, passes to other party, the contractor undertaking the work will not necessarily be deemed, on that account, to sell the materials. Primary difference between a contract of work or service and a contract for sale is that in the former, there is in the person performing or rendering service, no property in the thing produced as a whole, notwithstanding that a part or even the whole of the material used by him may have been his property. Where the finished product supplied to a particular customer is not a commercial commodity in the sense that it cannot be sold in the market to any other person, the transaction is only a works contract.

     4.7 When the facts of the present case are examined in the light of the Hon'ble court judgment cited above, 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 is of installation and commissioning of facilities and supply is only a part of such contract though it is a major part of such contract. In Hindustan Shipyard vs. State of Andhra Pradesh 2000 AIR SCW 2582, after reviewing entire case law, following principles were involved - (1) It 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 depends on the facts of each case and intention of the parties and essence of contract as held by the Hon'ble Supreme Court in the case of Chandrabhan Gosain v. State of Orissa. Similarly, in Sentinel Rolling Shutters & Engg. Co. (P) Ltd. v. CST AIR 1978 SC 1747, there was a contract for erection and installation of a rolling shutter. The Supreme Court held that such erection and installation cannot be said to be incidental to the manufacture of the shutter and its supply. It is a fundamental and integral part of the contract because without it, the rolling shutter does not come into being. The roller shutter comes into existence as unit when the component parts are fixed in position on the premises and it becomes the property of the customer as soon as it comes into being. There is no transfer of property in the rolling shutter by the manufacturer to the customer as a chattel. It is essentially a transaction for fabricating component parts and fixing them on the premises so as to constitute a rolling shutter. The contract is, thus clearly and indisputably a contract for work and labour and not for sale. Similarly in the present case the power pant and the turbine which is used in the power plant comes into existence as a unit when all the component parts are fixed in position on the premises and it becomes property of NTPC as soon as it comes into being. There is no transfer of property in parts of turbine by manufacture to the customer as a chattel. It is essentially a transaction for fabricating component parts and fixing them on the premises so as to constitute a turbine. Thus in the present case also the contract is clearly and undisputedly a contract for work and not for sale. The distinction between a works contract and a contract for sale is thus well settled. In the case of a contract for sale, the thing produced as a whole has an individual existence as the sole property of the party who produced it sometime before the delivery and the property therein passes only under the contract relating thereto to the other party for a price as was held by Supreme Court in Ram Singh & Sons Engg. Works v. CST AIR 1979 SC 545; case an in the case of CST v. Purshottam Premji [1970] 26 STC 38 (SC) and also in the case of State of Himachal Pradesh v. Associated Hotels of India Ltd. AIR 1972 SC 1131. Mere passing of the property in an article or commodity during the course 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)) and Rolling Shutters (Paragraph 4.7 of his order) are not applicable to the facts of the instant case. The scope of work in Supply Contract (First contract) is stated as under by Ld CIT(A) in paragraph 2.1 of his order:—

     "The 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."

In the case of Air conditioning works and Pipe line works referred to in the case law, those machineries were directly installed at the customer's place. Similar is the position in the case of Rolling Shutters also. Where as, in the instant case, the machinery manufactured by the supplier as per the design specified by the assessee herein is assembled and tested at the supplier's work place, meaning thereby, the functioning of the entire machinery is tested at the place of the supplier. Further these machineries are specialized machineries which consist of highly technical and complicated systems. Hence, in our view, it may not be correct to equate them with Air conditioners, Rolling Shutters and Pipe line systems. Under this scenario, in our view, the Ld CIT(A) has misdirected himself in making following observations in paragraph 4.6 of his order.

     "Taking cue from the above decisions if the present case is examined it can be seen that as a part of contract what is handed over to NTPC by BHEL is basically an unfinished plant/equipment which unless is installed and commissioned will be of no use to the employer i.e., NTPC. In this back ground it can be stated that the plant/equipment did not get transfer to NTPC on chattel-qua-chatttel basis and hence the contract cannot be said to be a contract for sale though sale of certain material is involved as part of the entire contract."

The fallacy in the observations made by Ld CIT(A) can be better understood with an example. A windmill, which is known to everybody, may be machinery having a simple mechanism. However, the windmill, as it is cannot be transported as it is, from the supplier's place to the customer's place, just like a domestic air conditioner, Television set etc., for the simple reason that there is lack of transport facilities 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 major part of such contract…..

     Similarly in the present case the power plant and turbine which is used in power plant comes into existence as a unit when all the component parts are fixed in position on the premises and it becomes property of NTPC as soon as it comes into being. There is no transfer of property in parts of turbine by manufacturer to the customer as a chattel. It is essentially a transaction for fabricating component parts and fixing them on the premises so as to constitute a turbine. Thus in the present case also the contract is clearly and undisputedly a contract for work and not for sale."

The observations of Ld CIT(A) that the Steam Generators, that were ordered by the assessee, can not be sold in the open market does not appear to have any backing, even if it is assumed that the observations of Ld CIT(A) that it is a custom made product. It is not the case of the Ld CIT(A) that the assessee is implementing the Thermal Power Project by adopting an altogether new and unique technology, which is implemented for the first time in the world, in which case, there is a possibility to say that these machineries do not have demand in the open market. Probably, the Ld CIT(A) appears to have been guided by the decision rendered in the case of State of Madras v. Voltas Ltd. [1963] 14 STC 446 (Mad.) in connection with the custom made air conditioning system and accordingly taken the view that these complicated and specialized machineries are akin to custom made and simple air conditioning or pipe line systems or Rolling shutters.

16. The Ld CIT(A) has also judicially noted down the decision rendered by Hon'ble Supreme Court in the case of Hindustan Aeronautics Ltd. v. State of Orissa [1984] 55 STC 327 in paragraph 4.5 of his order. In the said case, HAL imported materials and components on behalf of Government of India and manufactured air crafts on behalf of the Government of India. Since the materials belonged to Government of India since the stage of import, it was held that the contract entered with HAL is a works contract. The ratio of the said decision is that in contract of work, the 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 of 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 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 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 and Equipment, the responsibility for care and custody thereof together with the risk of loss or damage thereto shall remain with the contractor pursuant to GCC Clause-32 (care of facilities) hereof until completion of the facilities or the part thereof in which such plant and equipment are incorporated."

These clauses clearly show that the ownership of the machineries were intended to be transferred to the assessee herein on their shipment along with dispatch documents, meaning thereby the impugned machineries have individual existence and the property therein continue to remain with the suppliers till they are dispatched to the assessee herein. We have already noticed that the suppliers have to inspect and test the equipments before dispatch to the customer. Hence, we are unable to agree with the view entertained by Ld CIT(A) that the contract entered by the assessee involves mere fabrication of parts of machineries and further there is no transfer of property therein on chattel-qua-chattel basis and hence they cannot be categorized as a contract of sale.

18. The rationale behind splitting up the entire contract into Supply Contract and Installation Contract could be visualized by us and we are inclined to explain the same. The machineries purchased by the assessee are specialized and complicated machineries involving high degree of precision and technical expertise. Hence, it is inconceivable that the supplier would be in a position to bring the parts there of and assemble them at the site of the assessee, as in the case of Rolling Shutters/Pipe Line/Custom made Air conditioning system. The supplier has to necessarily test the efficacy and safety of all the components at his work place and ensure its satisfactory functioning before transporting the same to the assessee's work place. Since these machineries are huge in size, they cannot be transported as it is. Hence, these machineries have to 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 parties to construct/execute the transmission line/sub-station. It also entered into different types of contracts viz., Pure supply contracts, Pure erection contracts and Supply and erection contracts (but with separate agreements in respect of supply portion). The above said assessee also did not deduct tax at source on the supply portion of the contract, even though it complied with the provisions of sec. 194C in respect of erection portion of the Contract. The issue, whether the supply portion of the contract, constituted "Contract of sale" or "Contract of Work" came to the consideration of Hyderabad bench of Tribunal. The head notes of the said case as reported in ITD reads as under:—

     "TDS - Under s. 194C - Works Contract vis-à-vis Contract for sale - If equipments are manufactured as per the design, engineering etc. supplied by the supplier, it would not result in a works contract especially when all the materials belong to the supplier, even though it produced a tailor made product - Erection portion being subsequent to passing of title by execution of supply portion, it cannot be said that the erection portion controls the supply portion even though fulfillment of erection contract is a condition precedent to fulfillment of supply contract - As the title in the equipments manufactured as per the design, engineering etc. supplied by assessee passed on to the assessee before commencement of the erection contract and assessee had entered the same in its stock register before issuing the same for erection, it was a contract for sale not attracting s. 194C - Assessee having already deducted tax at source qua the erection portion, provisions of s. 194C shall not apply to remaining sale portion."

In the instant case also, all the materials belonged to the suppliers, even though they manufactured the machineries as per the design, engineering etc. approved by the assessee. The property in the machineries passed on to the assessee on execution of supply portion. Hence, it cannot be said that the installation portion of the contract would control the supply portion.

20. However, Ld CIT(A) has taken the view that the decision rendered by Hyderabad bench in the case of Power Grid Corpn. of India Ltd. (supra) is not applicable to the facts of the instant case. The Ld CIT(A) has opined that the insulators, transmission equipments that were supplied to Power 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 emphasized the fact that the intention of the parties in the contract would to a large extent determine the issue. The Hon'ble Court laid down the following as the probable tests that should be conducted before determining the nature of contract:

          (i) Whether it was one for transfer of property or for work and labour;
           (ii) How and when property of dealer passed to the customer i.e., whether by transfer or accession.

     The Hon'ble Apex Court while saying so has followed the principles laid down by it in the case of Hindustan Shipyard [1999] 115 STC 96 and clarified that it is not the bulk of the material used in the construction alone but the relative importance of the material qua the work, skill and labour of the payee which also has to be seen, but it is a relevant parameter. In the present case, where the contract of supply and erection is given to the same party, the value of the erection contract as can be seen from the annexure is lesser than the value of the supply contract. It cannot therefore control the interpretation of the contract, specifically when the property in the goods have passed ex-works on delivery and not on the theory of accession. The assessee took possession of the goods and the title passed on to it as a chattel prior to commencement of the erection portion of the contract.

     5.5 Further the Hon'ble Supreme Court while considering the issue of "installation of lift" on facts came to the conclusion that it is one in the nature of sale. The Hon'ble Court observed that since the obligation of the assessee therein was only to supply and install the lift manufactured and brought to site ready for installation as per drawings, held that the contract was a 'sale contract' and not a "works contract". The Hon'ble Court also noticed that the major component of the end-product is material consumed in producing the lift delivered. The skill and labour employed for converting main components into the end-product were only incidental. The learned CIT(A) failed to consider any of the above tests while coming to the erroneous conclusion that the contracts entered into by the appellant were works contract. If the facts of the present case are tested by applying the principles laid down by the Jurisdictional High Court and the Hon'ble Supreme Court, the obvious answer that would emerge is that this is a "supply contract" and 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 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 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. The mere fact that the supplier has to perform many obligations cast on it by virtue of the contract after delivery of goods does not change the nature of transaction. The 'supply' portion of the contract are the predominant object and intention of the parties. Erection is relatively minor portion as compared to the supply of portion. If the erection portion cannot be taken as the main object of these contracts, title in goods was transferred as movables prior to erection. If equipment are manufactured as per the design, engineering, etc., specified by the customer, it would not result in a works contract especially when all the material belong to the supplier, even though it produced a tailor-made product. 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. The title in the goods in respect of equipment/material to be supplied as per the terms of contract is to be transferred "ex-work" on dispatch as movable property. The critical test to be applied is as to when the title in the goods is transferred. Thus as the title in the goods were passed on to the assessee, before the commencement of the works or erection contract and as admitted by the assessee, had treated these goods as its property and entered the same as such in its stock register before issuing the same for erection, it is a contract of sale and s. 194C has no application. On erection portion 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 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."

The facts prevailing in the case of Power Grid Corpn. of India Ltd. (supra) have been narrated by the Tribunal as under:—

     “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".'

In the instant case also, prevailing facts are identical in nature.

24. In view of the foregoing discussions, we do not have any hesitation to conclude that the "Supply Contract" entered into by the assessee is in the nature of "Contract of sale" and hence the provisions of sec. 194C shall not apply to it. Accordingly, we set aside the orders passed by Ld CIT(A) in all the three years and direct the assessing officer to delete the relevant demands raised in the hands of the assessee u/s 201(1) and 201(1A) of the Act in all the three years.

25. In the result, all the appeals filed by the assessee are allowed.

The order pronounced in the open court on 22-07-2013.