G.S. PANNU, A.M. ORDER This is appeal by appellant against order dt. 25th Feb., 2004 of CIT(A), Karnal, relating to financial year 2001-02. In this appeal, appellant has challenged action of Revenue authorities in creating demand for short deduction of tax at source under s. 201(1) of IT Act and charging interest on tax so short deducted in terms of s. 201(1A) of Act. 2 . facts giving rise to aforesaid appeal are as follows : appellant is company incorporated under Companies Act, 1956. It came into existence on 17th March, 1997 with object of generation of power in State of Haryana. appellant had two thermal plants-one at Faridabad and another at Panipat. Panipat thermal plant entered into agreement with M/s BHEL for designing, engineering, manufacturing, supply, erection, testing and commissioning for retrofit of ESPs. copy of agreement between appellant and BHEL is placed at pp. 1 to 10 of appellant s paper book. contract is in form of purchase order dt. 29th Jan., 1990. major and important terms of contract, insofar as they are relevant for purpose of adjudicating present appeal, are as follows : preamble to agreement/purchase order reads as follows : "With reference to above correspondence and discussions held with you from time to time, HSEB is pleased to place order on you for design, engineering, supply, erection, testing and commissioning for retrofit of ESPs on turnkey basis including dismantling of existing MPs on 2 x 110 MW units I and II of Panipat TPS including associated civil works with pile foundation on following terms and conditions" : 2.1 Clause 6 of contract gives out description of material/work and it reads as follows : Total price Description of material/work (in Rs. lakhs) Complete design, engineering, 1360.00 manufacturing, supply of two ESPs for 2 (For works x 110 MW sets at Panipat TPS including excluding (i) all material, maintenance tools and freight railway tackles as per tender specification and siding, charged, extended scope of work as agreed if any paid by during various meetings referred above. HSEB) 85.00 (ii) Freight and Insurance lakhs Complete civil works including pile 173.00 (iii) foundations lakhs Erection, testing and commissioning of two ESPs for 2 x 110 280.00 (iv) MW sets at PTPs Panipat including lakhs required dismantling at site Cost of spares for three years 12.1766 (v) manual operation lakhs 1910.1766 Total lakhs 2.2 Another important clause is cl. 3 of terms and conditions of contract, which reads as follows : Delivery Commissioning of Unit-I : 18 months from (a) Guaranteed delivery period for date of receipt of PO by site from date of acceptance of tender BHEL along with advanced. (b) Time required for complete Unit-II : 24 months from erection, testing and commissioning of date of receipt of PO by equipment from date of supply BHEL along with advance. 2.3 Clause 10 of contract with regard to terms of payment is also very material and it reads as follows : "Terms of Payment : following terms of payment shall be applicable for retrofit of EPS s observed for Panipat stage. We require payment to be made by HSEB against confirmed and irrevocable letter of credit. Supply of Equipment : (i) 10 per cent of supply price as interest-free advance shall be paid at time of placement of orders. (ii) 85 per cent of supply price, along with 100 per cent taxes and duties shall be paid on pro rata tonnage basis against proof of dispatch. (iii) Balance 5 per cent of supply price on completion of supply of EP for each unit against bank guarantee of equivalent amount in form acceptable to owner from scheduled bank. Bank guarantee shall be valid for period of one year from date of commissioning of each unit or 10 months from date of supply completed whichever is earlier. Erection and Commissioning : (i) 10 per cent of contract price for erection and commissioning as interest-free advance at time of placement of order. (ii) 10 per cent of contract price for erection and commissioning of opening of site office. (iii) 75 per cent of contract price for erection and commissioning of pro rata tonnage of erection. (iv) Balance 5 per cent of contract price for erection and commissioning on commissioning of each unit against bank guarantee of equivalent amount in form acceptable to owner from scheduled bank. Bank guarantee shall be valid for period of one year from date of commissioning of each unit. Terms of payment for civil works (i) 10 per cent interest-free advance along with order. (ii) 30 per cent on completion of civil foundation for first unit. (iii) 30 per cent on completion of civil foundation for 2nd unit. (iv) 20 per cent on completion of control room construction. (v) 5 per cent on completion of floor of ESP area. (vi) 5 per cent on commissioning against bank guarantee of equivalent amount valid for one year from date of commissioning." 2.4 appellant had made payments to M/s BHEL with reference to aforesaid contract in various financial years commencing from financial year 1988-89 to financial year 2001-02. details of aforesaid payments are as follows : Details of year-wise payment and TDS paid against work order upto 31st March, 2002 D. ETC A. Supply B. Civil C. Freight E. Other F.Y. of and PVC work and insurance charges 2 ESPs TDS TDS TDS TDS TDS Amt. Amt. Amt. Amt. Amt. paid paid paid paid paid 1988- 20000 Nil Nil Nil Nil Nil Nil Nil Nil Nil 89 (Adv) 39100 1989- 13030000 Nil 1700000 (paid in Nil Nil 2600000 Nil Nil Nil 90 (Adv) 1996-97) 1995- 10482702 Nil 6600000 151800 4294048 Nil 2416883 55,588 Nil Nil 96 (Adv) 1996- 104563108 Nil 2224773 51170 1125222 Nil 5553900 127742 7000000 Nil 97 1997- 45622971 727827 1901299 43,730 392856 Nil 12719996 292561 Nil Nil 98 1998- 1832196 42140 705163 16219 1858720 Nil 12713267 291803 Nil Nil 99 (PVC) 1999- 648878 Nil 1029627 72652 613154 Nil 8355045 183810 Nil Nil 2000 2000- 528483 Nil Nil Nil 397845 Nil 3628202 83,447 Nil Nil 01 2001- 1161265 Nil 1453543 30994 233098 Nil 1443000 33,189 Nil Nil 02 G. 176944338 769967 15614495 155665 8914945 Nil 49434293 1668149 7000000 Nil Total 2.5 Under provisions of s. 194C of IT Act, any person responsible for paying any sum to any resident for carrying out any work in pursuance of contract, shall at time of credit of such sum or at time of payment deduct tax at source at such percentage as is mentioned in s. 194C. chart of payment of TDS by appellant has already been set out above. AO was of view that contract between appellant and M/s BHEL was composite contract and therefore appellant ought to have deducted tax at source in respect of payments for supply of materials as well as payments for execution of civil work, erection, designing and commissioning and also freight and insurance. According to appellant, contract in question was divisible contract, comprising of one part of contract for supply of equipments and other two parts of contract for dismantling existing machinery and for clearing site and making necessary infrastructure for installation of machinery. According to assessee, it is only in respect of consideration attributable to civil as well as erection, designing and commissioning, appellant was under obligation to deduct tax at source and not in respect of supply of materials. AO, however, referred to decision of Rajkot Bench of Tribunal in case ofEssar Oil Ltd. vs. ITO (2001) 71 TTJ (Rajkot) 599 : (2001) 77 ITD 92 (Rajkot), wherein it was held that in case of composite contract deduction of tax at source has to be on entire sum payable including material and labour. AO held that it was composite contract where supply of material was only incidental to execution of contract and TDS ought to have been deducted on gross payments made to contractor in pursuance of composite contract. AO, accordingly, worked out tax short deducted and also levied interest on such short deduction of tax at source. 2.6 On appeal by appellant, CIT(A) confirmed order of AO. Hence, present appeal by appellant before Tribunal. 3 . We have heard elaborated submissions of learned counsel for appellant and learned Departmental Representative. We have already set out important terms of contract between appellant and M/s BHEL. bare perusal of components of consideration for contract would clearly show that primary or dominant intention of appellant was to purchase material namely, two ESPs for its power plant at Panipat. Freight and insurance payable in respect of its supply and cost of material constituted major portion of contract value. cost of spares will also fall in this category. As rightly contended by learned counsel for appellant, before installing plant, it was necessary to dismantle existing plant and also to do necessary civil work for erecting new plant. This by itself would not mean that contract in question was composite contract for erection and commissioning of plant together with materials required for such commissioning of plant. As held by Hon ble Supreme Court in case of State of Himachal Pradesh & Ors. vs. Associated Hotels of India Ltd. 29 STC 474 (SC), in case of composite contract, one has to find out primary object of transactions and intention of parties while entering into it. On facts of this case, we find that primary object of appellant was to purchase plant in question and civil work, erection and commissioning was only incidental to purchase material by appellant. In other words, contract for supply of equipments and contract for erection and commissioning of plant are two separable contracts, though there is only one common purchase order. We are, therefore, of view that Revenue authorities were not justified in considering gross payments made by appellant to BHEL for purpose of determining TDS by appellant. We have also perused decision of Rajkot Bench of Tribunal in case of Essar Oil Ltd. (supra). We are of view that facts of aforesaid case are clearly distinguishable from facts of present case. It was case where contract was for construction of refinery and contractor was to supply material to be used for construction. In present case, supply of power generator was independent transaction and its erection was only ancillary or incidental to purchase of power generator. We are also of view that in each case terms of contract need to be analyzed before coming to conclusion whether it was composite contract or not. As already stated, in present case, contract, insofar as it relates to supply of material, freight insurance and supply of spare parts, is clearly separable from other part of contract relating to carrying out civil work, commissioning and erection of power generators. 3.1 In view of discussion above, we direct AO to work out short deduction of tax at source, if any, by excluding payments towards supply of machinery, spare parts as well as freight and insurance. 3 . 2 In one of grounds of appeal, appellant has stated that contractor, namely, M/s BHEL has already paid tax on amounts paid by appellant to it and, therefore, appellant cannot be treated as appellant-in- default in terms of s. 201 of Act. In this connection, our attention was drawn to decision of Hon ble Gujarat High Court in case of CIT vs. Rishikesh Apartments Co-operative Housing Society Ltd. (2001) 171 CTR (Guj) 288 : (2002) 253 ITR 310 (Guj). We have considered submissions of appellant and we are of view that documents on record do not establish case pleaded by appellant. We, however, deem it fit and proper to direct AO to verify this aspect and in case it is found that contractor has offered sums received from appellant to tax then in that event appellant should not be proceeded against as appellant in default under s. 201 of Act, as laid down by Hon ble Gujarat High Court in case of Rishikesh Apartments Co-operative Housing Society Ltd. (supra). We are of view that other grounds of appeal raised by appellant do not require any consideration in view of our decision on main contentions of appellant. 3.3 In result, appeal is allowed for statistical purposes. *** Senior Accounts Officer (O&m), Haryana Power Generation Corpn. Ltd. v. Income-tax Officer