Dominant object of contract to prevail over part of contract

In a recent legal judgment, the High Court of Allahabad, in the case of Commissioner of Income-tax (TDS)
v. Lalitpur Power Generation Co. Ltd., has ruled in Favor of the Assessee, emphasizing the dominance of
Section 194C over Section 194J for Tax Deduction at Source (TDS) where technical services are an integral
part of an indivisible contract.

Background – Lalitpur Power Generation Co. Ltd. (Assessee) was engaged in the business of power
generation. It entered into contracts with Bharat Heavy Electric Ltd. (BHEL) and Carbery Infrastructure
Pvt. Ltd. (CIPL) for setting up a thermal power plant. TDS was deducted at a rate of 2% under Section
194C.

Issue Involved – The Assessing Officer (AO) contended that payments to BHEL were for testing and
commissioning of Boiler Turbine Generator (BTG), and payments to CIPL were for the installation and
commissioning of the Balance of Plant (BOP). Hence, the AO argued that these services were technical in
nature and TDS should have been deducted under Section 194J at a higher rate of 10%.

Court’s Ruling – The High Court held that the contracts executed by the Assessee with BHEL and CIPL
were indivisible contracts for BTG and BOP, respectively. The AO’s attempt to break down the composite
nature of the contract, based on the part of technical services involved, was deemed erroneous and
impermissible in law. The court emphasized that in the absence of any internal tool or legal provision
allowing the AO to dissect an indivisible contract, TDS should be governed by Section 194C, not Section
194J. The court cited similar judgments from Punjab and Haryana High Court and Karnataka High Court in
support of its decision.

[2023] 156 taxmann.com 698 (Allahabad)[16-11-2023]

Prajjwal Sharma, Article Assistant, SW India