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2009 (2) TMI 502 - AT - Income TaxDeduction of tax at source u/s 194C - Assessee in default - Whether the work done by the manufacturers can be said to be sale of goods to the assessee or carrying out any work in pursuance of contract ? - HELD THAT - Here is a case in which the assessee had simply placed the orders for the manufacture of medicines according to its own specification and all other relevant decisions for the manufacturing have been left to the wisdom of the manufacturer. The assessee is only interested in the output coming up to its standard and how that output is achieved is the job of the manufacturer. The checks provided by the assessee cannot alter the real character of the transaction. Simply because the assessee monitors the manufacturing from time to time to ensure that the medicines manufactured by the parties are as per its specifications, that will not put the assessee into the shoes of manufacturer more so when the establishments are of the third parties and they have their own labour force with all the infrastructure. Not only the cost of raw material has to be incurred by the manufacturers but even the excise duty is also paid by them directly. Further when such manufacturers make the sale of such goods to the assessee the sales tax is also paid by them. It is not as if the manufacturers had done some process or added the value to the material supplied by the assessee. On the contrary it is a case where the manufacturer has produced the goods at its own, though subject to the assessee s specifications, supervision and control and later on sold such goods to the assessee. The property in goods passes over to the assessee only when such goods were manufactured and delivered to it. We find that there is complete identity of facts with those considered by the Hon ble jurisdictional High Court in the case of BDA Ltd. v. ITO (TDS) 2004 (3) TMI 11 - BOMBAY HIGH COURT inasmuch as that the goods were manufactured by the manufacturers in their own establishments, albeit in accordance with the specifications of the assessee. The raw material cost and other ancillary costs were also incurred by the manufacturers. Even the excise duty was paid by them and it was only when the goods were sold to the assessee that the property in them passed over to it. Under these circumstances we are of the considered opinion that the agreements of the assessee with the manufacturers cannot be termed as works contract . The impugned order is, therefore, set aside and the applicability of section 194C is ruled out. That being the position there cannot be any question of treating the assessee as in default u/s 201(1) or charging any interest u/s 201(1A). In the result, the appeals filed by the assessee are allowed and those of the revenue are dismissed.
Issues Involved:
1. Applicability of Section 194C of the Income Tax Act. 2. Classification of the transactions as "works contract" or "sale of goods." 3. Liability for deduction of tax at source (TDS). 4. Interest under Section 201(1A). Detailed Analysis: 1. Applicability of Section 194C of the Income Tax Act: The core issue was whether payments made by the assessee to third-party manufacturers for the production of consumer health products should be subjected to TDS under Section 194C. The Assessing Officer (AO) opined that these transactions were works contracts, thus necessitating TDS under Section 194C. 2. Classification of the Transactions as "Works Contract" or "Sale of Goods": The AO considered the transactions as works contracts because the manufacturers produced goods as per the assessee's specifications and under its supervision. Key clauses from the contracts indicated that the manufacturers were bound by the assessee's formulations, trademarks, quality control procedures, and confidentiality agreements. However, the Tribunal found that the manufacturers bore all input costs, including raw materials, labor, excise duty, and sales tax. The property in goods passed to the assessee only upon delivery, indicating a sale of goods rather than a works contract. The Tribunal referred to Circular No. 681, which clarifies that contracts for the sale of goods are outside the purview of Section 194C, whereas contracts for processing goods supplied by the purchaser are considered works contracts. 3. Liability for Deduction of Tax at Source (TDS): The Tribunal concluded that the transactions were contracts for the sale of goods, not works contracts. Therefore, Section 194C was not applicable, and the assessee was not liable to deduct TDS. The Tribunal emphasized that the manufacturers operated independently, incurring all costs and risks until the goods were delivered to the assessee. 4. Interest under Section 201(1A): The CIT(A) had ruled that the demand under Section 201(1) was invalid since the payees had included the payments in their income and paid taxes. However, interest under Section 201(1A) was deemed mandatory, but it should be restricted to the date of tax payment by the payees. The Tribunal, having ruled out the applicability of Section 194C, found no basis for treating the assessee as in default under Section 201(1) or for charging interest under Section 201(1A). Conclusion: The Tribunal allowed the assessee's appeals and dismissed those of the revenue, ruling that the transactions were contracts for the sale of goods, not works contracts. Consequently, Section 194C was not applicable, and the assessee was not liable for TDS or interest under Section 201(1A).
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