Gujrat High Court has held in CIT vs Krishak Bharti Cooperative Ltd that TDS u/s 194C will not be applicable on transportation of goods if such transportation is incidental to contract of sale.
In this case where assessee entered into a contract with GAIL for supply of gas to its
consumption points through pipelines and in addition to price of gas
it had agreed to make separate payments for transportation of gas, it was held that
contract was a contract for purchase of gas and not a work contract
Facts
The assessee, a co-operative society, was
engaged in the manufacturing of fertilizers. For such activities, it
consumed natural gas. It entered into a contract with the Gas Authority
of India Limited (GAIL) for the supply of gas to its consumption points
through pipelines. It in addition to the price of gas had agreed to make
separate payments for transportation of gas from outlets of GAIL to
different points in its factory.
The Assessing Officer held that the contract
between the assessee and GAIL was a work contract and, therefore, the
assessee was required to deduct tax at source under section 194C from
the payments made to GAIL.
On appeal, the Commissioner (Appeals) upheld the
order of the Assessing Officer holding that the instant case would fall
under clause (c) of Explanation III to section 194C.
On second appeal, the Tribunal held that the
assessee did not hire any service for carriage of goods and, therefore,
the case would not fall in clause (c) of Explanation III to section 194C.
The contract was a contract for purchase of gas
from GAIL up to the assessee's gas metering station. Transporation
charges in the gas supply contract were part of purchase cost of gas.
The object of the
contract was essentially transfer of chattel qua chattel, i.e., natural gas up to the factory premises until then the property in question, i.e., the gas was of GAIL.
Clearly this was a contract for sale of goods and not a work contract.
Revenue's arguments
Instant case was covered by clause (c) of Explanation III to section 194C.
The assessee in addition to price of gas had
agreed to bear the transportation charges separately and such charges
were to be paid monthly.
There was also escalation clause in the contract
permitting increase in such charges on yearly basis after completion of
first year of the contract.
Issue involved
Whether the contract between the assessee was a work contract or a contract for purchase of gas?
Whether instant case fell within the four corners of section 194C in particular under clause (c) of Explanation III to section 194C?
HELD
From the statutory provision of section 194C,
it can be seen that in case of carrying out of any work in pursuance of
any contract between the contractor and any of the specified bodies
provided under different clauses of sub-section (1) of section 194C,
which includes cooperative society, there had to be a deduction of 1 per
cent or 2 per cent, as the case may be, at the time of credit of such
sum to the account of the contractor or at the time of payment in cash
or by issuance of cheque or draft or any other mode, whichever is
earlier.
Term 'work' in turn has been explained in Explanation III to section 194C, which shall also include besides others, carriages of
goods and passengers by any mode of transportation other than by
railways.
If the assessee had entered into any contract
for carrying out any work of carriage of goods with the seller, his
case would certainly fall under clause (c) of Explanation III to section 194C and in turn tax had to be deducted at source as specified in sub-section (1) thereof.
Though the assessee agreed to make separate
payment for transportation of gas from outlets of GAIL to the different
points in factory, such condition cannot be seen in isolation and has to
be viewed in the background of other conditions contained in the
contract.
Combined reading of the terms and conditions
contained in the contract would reveal that the gas had to be delivered
by the seller to the buyer through pipelines and equipments laid down,
owned and maintained by the seller. The seller also had the right to use
such pipeline for distribution of gas in favour of other purchasers.
Most significantly the contract provided that the title of gas shall
pass from the seller to the buyer at the point of delivery of gas. The
delivery point shall be at the down stream flange of the pipeline at the
outlet of the gas metering station.
It thus becomes clear that in the contract
itself it was envisaged between the assessee and GAIL that gas would be
supplied by GAIL to the assessee at the receiving point of the
assessee's factory.
Therefore, the contract essentially was for
purchase and sale of gas.
Transport of gas by the seller was a step towards execution of contract
for sale of gas and there was no contract for carriage of goods.
It may be that the transportation component
of gas was paid separately by the assessee to GAIL. Here also the
transportation charges did not depend on the consumption of quantity of
gas but was of fixed monthly charges to be borne by the assessee as part
of the agreement between the parties.
HIGH COURT OF GUJARAT
Commissioner of Income-tax (TDS)
v.
Krishak Bharati Cooperative Ltd.*
AKIL KURESHI
AND SONIA GOKANI, JJ.
TAX APPEAL NO. 618 OF 2010†
JULY 12, 2011
K.M. Parikh for the Appellant.
JUDGMENT
Akil Kureshi, J. - Revenue is in appeal against the judgment of the Tribunal dated 5.9.2008 raising following questions for our consideration:-
"[i] Whether, on
the facts and in the circumstances of the case, the Income Tax Appellate
Tribunal is right in law in coming to the conclusion that the contract
between the gas suppliers and the assessee is a contract for sale of
goods and not work contract so as to attract the provisions of Section
19AC of the Income Tax Act?
[ii] Whether the
Income Tax Appellate Tribunal has committed an error in applying the
ratio of various judgments of the Honourable Supreme Court where the
facts and issues were different?
[iii]
Whether, on
the facts and in the circumstances of the case, the impugned order
passed by the Income Tax Appellate Tribunal is contrary to the evidence
and material on the record of the case and is suffering from
non-application of mind and, hence, perverse or not?"
2. The respondent assessee is a Co-operative
Society principally engaged in the manufacturing of fertilizers. For its
such activities, it consumes natural gas. Such gas is supplied by
different agencies through pipelines.
3. It is the case of the Revenue that while
purchasing gas from gas supplying agencies, the assessee entered into a
work contract for transport of such gas from seller's premise to the
buyer's consumption points. It is the case of the Revenue that upon
payment of such work contract, the assessee was required to deduct
appropriate TDS at appropriate rate under Section 194C of the income Tax
Act, 1961.
4. The Assessing Officer was of the opinion that,
in facts of the case
section 194C of the Act would apply. The assessee carried the issue in
appeal. CIT (Appeals) also held in favour of the Revenue observing that
Clause (c) of Explanation III to Section 194C would cover a situation
repelling the assessee's contention that only in case of transport of
goods and passengers, such clause would operate.
5. The assessee went further in appeal before the
Tribunal. The Tribunal, by the impugned judgment, allowed the appeal
reversing the orders passed by the Revenue authorities, upon which the
Revenue has filed this appeal before us.
6. The Tribunal was of the opinion that the
assessee did not hire any service for carriage of goods and that,
therefore, the case would not fall in clause (c) of Explanation III to
Section 194C of the Act. To come to such a conclusion, the Tribunal
referred to various clauses of the agreement between the assessee and
the Gas Authority of India Limited ("GAIL'' for short). To this issue,
we may advert to at a slightly later stage. At this stage, it would be
sufficient to note that the Tribunal allowed the Appeal making following
observations:-
"A distinction between a sale and works contract is
very significant particularly under the sales-tax laws. Before the
introduction of tax on work contract, the sale-tax was levied on sales
and it could not be levied on works contract. What is the exact scope of
expression 'work contract' has been considered by the Hon'ble Supreme
Court in a number of cases and by and large distinction between the two
also seems to have been adopted for the purpose of Income-Tax Act. In
the present case, it is a contract for purchase of gas from various gas
suppliers up to the assessee's gas metering station at Hazira, Surat.
Transportation charges in the gas supply contract are part of purchase
cost of gas. This can easily be inferred from the above referred
invoice. The object of the contract between suppliers of gas and
assessee is essentially transfer of chattel qua Chattel i.e., natural
gas up to the factory premises at Hazira until then the property in
question i.e. the gas is of suppliers. This being the factual position,
the payment for the purchase of natural gas and as per the contract of
the assessee, it is only asking for supply of natural gas from the
producers for the purpose of use of this gas or burning in assessee's
factory or manufacturing of urea. Clearly this is a contract for sale
goods and not a work contract as held by the lower authorities. In view
of the above, we quash me orders of the lower authorities and allow the
appeals of the assessee."
7. Counsel for the Revenue drew our attention to
the provisions contained in clause (c) of Explanation
III to Section 194C of the Act and vehemently contended that the
Tribunal erred in reversing the orders passed by the Revenue
authorities. He submitted that Section 194C of the Act was clearly
attracted. The case on hand was covered by clause (c) of Explanation III
to section 194C of the Act. He submitted that the assessee had agreed
to bear the transportation charges separately and that such charges were
to be paid monthly. Our attention was drawn to Article 4.02 of the
contract between the assessee and GAIL, wherein it was provided inter
alia that the buyer i.e. (the assessee) in addition to price of gas
mentioned in Article 11, shall pay to the seller, monthly transportation
charges of Rs. 49,58,250/- plus taxes with effect from 1.4.1996 for the
facilities provided by the seller (GAIL) for supply of gas to the point
of delivery located at the buyer's premises. There is also escalation
clause permitting increase in such charges on yearly basis after
completion of first year of the agreement.
8. Reliance was placed by the Revenue in the case of Central Board of Direct Taxes v. Cochin Goods Transport Association [1999] 236 ITR 993/103 Taxman 29 (Ker.) and in the case of Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435/67
Taxman 346 (SC).
9. Having heard learned counsel for the Revenue and
having perused the documents on record, we are of the opinion that the
above mentioned clause of the agreement between the assessee and the
seller cannot be seen in isolation. The entire contract of sale of gas
has to be perused to ascertain whether the case of the assessee fell
within the four corners of Section 194C of the Act,
in particular under clause (c) of Explanation III to section 194 of the
Act.
10. We are concerned with assessment year 2005-06. In the present case. At the relevant time, Section 194C reads as under:-
"194C.(1) Any person responsible for paying any sum to
any resident (hereinafter in this section referred to as the contractor)
for carrying out any work (including supply of labour for carrying out
any work) in pursuance of a contract between the contractor and-
(a) the Central Government or any State Government; or
(b) any local authority; or
(c) any corporation established by or under a Central, State or Provincial Act; or
(d) any company, [or]
(e) any co-operative [society ; or]]
(f) any authority, constituted in India by
or under any law, engaged either for the purpose of dealing with and
satisfying the need for housing accommodation or for the purpose of
planning, development or improvement of cities, towns and villages, or
for both, or
(g) any society registered under the
Societies Registration Act, 1860 (21 of 1860) or under any law
corresponding to that Act in force in any part of India; or
(h) any trust; or
(i) any University established or
incorporated by or under a Central, State or Provincial Act and an
institution declared to be a University under section 3 of the
University Grants Commission Act, 1956); (3 of 1956) [or]
(j) any firm,]
shall, at the time of credit of such sum to the account
of the contractor or at the time of payment thereof in cash or by issue
of a cheque or draft or by any other mode, whichever is earlier,
[deduct an amount equal to-
(i) one per cent in case of advertising,
(ii) in any other case two per cent, of such sum as income-tax on income comprised therein.]
| (2) ** | ** | ** |
| Explanation I- & II** | ** | ** |
Explanation III- For the purposes of this section, the expression "work" shall also include -
| (a) & (b)** | ** | ** |
(c) carriage of goods and passengers by any mode of transport other than by railways;
| (d)** | ** | **" |
11. From the above statutory provision, it can be
seen that in case of carrying out of any work in pursuance of any
contract between the contractor and any of the specified bodies provided
under different clauses of sub-section (1) of Section 194C of the Act,
which includes cooperative society, there had to be a deduction of 1% or
2%, as the case may be, at the time of credit of such sum to the
account of the contractor or at the time of payment in cash or by
issuance of cheque or draft or any other mode, whichever is earlier.
Term 'work' in turn has been explained in Explanation III
to Section 194C of the Act, which shall also include besides others,
carriage of goods and passengers by any mode of transportation other
than by railways.
12. In that view of the matter, if the assessee had
entered into any contract for carrying out
any work of carriage of goods with the seller, his case would certainly
fall under clause (c) of Explanation III to Section 194C and in turn tax
had to be deducted at source as specified in sub-Section (1) thereof.
13. The question, however, is did the assessee have any contract for carnage of goods with the seller?
This crucial question has to be decided upon the terms of
the contract between the parties. As already noted, though the assessee
agreed to make separate payment for transportation of gas from outlets
or GAIL to the different points in the assessee's factory, in our view,
such clause cannot be seen in isolation and has to be viewed in the
background of other conditions contained in the contract.
14. In the order of the Tribunal challenged before
us, such conditions have been reproduced in the order. These conditions
read as follows:-
"4.01 GAS shall be delivered by the SELLER
to the BUYER at the Outlet of Gas Metering Station located at BUYER'S
premises at Hazira. GAS will be transported from the crown stream flange
of pipeline at the Outlet of the Gas Metering Station hereinafter
referred to as point of delivery by means of pipeline to be provided and
maintained by the SELLER,
4.02 Gas Metering Station and building needed for the
same shall be set up/Constructed and maintained by the SELLER. The land
needed for the Purpose of such GAS Metering Station/Building shall be
provided by the BUYER free of cost. The SELLER may use the said location
in consultation with the BUYER for effecting deliveries to another
parties in the area without affecting the supply of GAS by the SELLER to
the BUYER as per the CONTRACT.
4.03 The BUYER, in addition to price of GAS mentioned
in Article 11, shall pay to the SELLER monthly transportation charges of
Rs. 49,58,250/- (Rupees forty nine lakhs fifty eight thousand two
hundred and fifty only) plus taxes with effect from 1.4.1996 (First
April One Thousand Nine hundred and Ninety Six) thereon for the
facilities provided by the SELLER for supply of GAS to the point of
delivery located at the BUYER'S Premises. The above monthly
transportation charges shall be increased by 3% ( three percent) on
yearly rest basis with effect from 01.04.1997 (First April one Thousand
Nine hundred and Ninety Seven). The BUYER shall pay the above monthly
transportation charges to the SELLER in addition to payment of invoice
for supply of GAS to be raised as per Article 11 & 12 hereinafter.
Provided further, in case monthly transportation charges are not paid by
the BUYER within 3(three) working days of presentation of invoice, the
SELLER will present the invoice for the same to a Bank against Letter of
Credit and draw the amount.
4.04 The BUYER shall make all proper and adequate
arrangement for receiving GAS at the outlet of Gas Metering Station at
its own risk and cost. Should any defect in the BUYER'S intake
arrangement arise, the same shall be rectified by the BUYER themselves.
4.05 For effecting deliveries of GAS as aforesaid the
SELLER shall install and maintain at its own risk and cost, the piping
control, regulation and metering equipment in the aforesaid Gas Metering
Station and all other accessories. The said equipment so installed by
the SELLER shall remain the property of the SELLER and the
SELLER.
SELLER shall have the right to remove such equipment at any time within
twelve (12) months after the expiry of the contract. The SELLER shall
have the right to use the BUYER'S utilities essentially required for
installation, operation and maintenance of GAS metering station and
allied equipment required for the supply of GAS on payment of such
charges for utilities only as may be mutually agreed. All Statutory
approvals shall be obtained by the SELLER.
4 6 The title of Gas shall pass from the SELLER to the
BUYER at the point of delivery of GAS. The delivery point shall be at
the down stream flange of the pipeline at the outlet of the Gas Metering
Station."
15. Combined reading of the terms and conditions
noted hereinabove would reveal that the gas had to be delivered by the
seller to the buyer through pipelines and equipments laid down, owned
and maintained by the seller. The seller also had the right to use such
pipeline for distribution of gas in favour of other purchasers. Most
significantly, para 4.6 of the agreement provided that the title of gas
shall pass from the seller to the buyer at the point of delivery of gas.
The delivery point shall be at the down stream flange of the pipeline
at the outlet of the Gas Metering Station.
16. It thus, becomes clear that in the contract
itself it was envisaged between the assessee and GAIL that gas would be
supplied by GAIL to the assessee at the receiving point of the
assessee's factory. For such purpose GAIL would be laying down its
pipelines and other equipments and would maintain such paraphernalia.
GAIL would also have the right, to use such pipelines and equipments for
the purpose of distributing gas to other gas consumers. As already
recorded, most significantly, the ownership of the gas passed on from
GAIL to the assessee only at the point of delivery and not before.
17. In our view, the agreement essentially was for
purchase and sale of gas. Transportation of gas was only a part of the
entire sale transaction. Laying down the pipeline and supplying gas
through such pipeline were the steps in furtherance of the terms of such
a contract. Clear understanding of the parties that the ownership of
gas would pass on to the buyer at the delivery point would clearly show
that transport of gas by the seller was a step towards execution of
contract for sale of gas and there was no contract for carriage of
goods. We are not unmindful of the decision of the Apex Court in case of
Associated Cement Co. Ltd. (supra) wherein it was
observed that Section 194C(1) does not require that a contract to carry
out a work or the contract to supply labour to carry out work should be
confined to "works contract." However, in the present case we are not
faced with such a situation. We only find that there was no contract
between GAIL and the assessee for carriage of goods. Transportation of
gas by GAIL was only in furtherance of contract of sale of gas.
18. In view of the above discussion, we are of the
opinion that the Tribunal committed no error in coming to the conclusion
that the case was not covered under Section I94C of the Act. It
may be that the transportation component of gas was paid separately by
the assessee to GAIL. Here also the transportation charges did not
depend on the consumption of quantity of gas but was of fixed monthly
charges to be borne by the assessee as part of the agreement between the
parties. The ownership of the gas vested in GAIL till it was
transported and delivered to the assessee's premises at the outlet of
the gas metering station. The pipeline was laid down by GAIL and was
permitted to be utilized for further onward transportation of gas to
other consumers.
19. Combined effect of the above observations and
conclusions would be that the assessee entered into a contract for
purchase of gas and that there was no work contract entered into between
the assessee and GAIL. Application of Section 194C therefore, does not
arise. Tribunal, therefore, in our view, committed no error. Appeal is
therefore, dismissed.
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