2006 (5) TMI 419 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 194C of the Income-tax Act to the purchase of packing materials.
2. Determination of whether the transaction constitutes a "works contract" or a "contract for sale."
3. Assessment of interest levied under Section 201(1A) for non-deduction of tax at source.

Issue-wise Detailed Analysis:

1. Applicability of Section 194C of the Income-tax Act to the purchase of packing materials:
The appellant, a registered co-operative society dealing in milk and milk-products, made purchases of packing materials from successful bidders on tenders issued by the Karnataka Co-operative Milk Producers' Federation Ltd. (KCMP). The Income-tax Officer considered these transactions as specific work-orders for printed packing material and invoked Section 194C of the Income-tax Act, treating the appellant as an assessee-in-default for non-deduction of tax at source. The CIT(A) upheld this view, stating that the specific work-order for printed packing material qualifies as a "works contract" under Section 194C.

2. Determination of whether the transaction constitutes a "works contract" or a "contract for sale":
The appellant argued that the purchase of packing materials is a contract for the sale of goods, not a works contract, as the suppliers are successful bidders from the KCMP tenders. The appellant emphasized that the transaction is treated as a sale for sales tax and excise duty purposes, and no raw material is supplied by the appellant. The CIT(A) relied on the decision of the Supreme Court in the case of State of Tamil Nadu v. Anandam Viswanathan, which distinguished between contracts for sale and works contracts based on the intention and nature of the transaction.

The Tribunal considered the relevant facts and case laws, including the Supreme Court's decisions in State of Himachal Pradesh v. Associated Hotels of India Ltd. and State of Tamil Nadu v. Anandam Viswanathan. The Tribunal noted that the primary object of the transaction was the supply of goods, with printing being incidental. The CBDT Circular No. 681 clarified that if the property in the article passes to the buyer only after delivery, it is a contract for sale. The Tribunal held that the appellant's procurement of packing materials was a purchase of goods, not a works contract, and thus, Section 194C was not applicable.

3. Assessment of interest levied under Section 201(1A) for non-deduction of tax at source:
Since the Tribunal concluded that the transaction was a contract for sale and not a works contract, the appellant was not required to deduct tax at source under Section 194C. Consequently, the appellant could not be treated as an assessee-in-default, and interest under Section 201(1A) was not leviable.

Conclusion:
The Tribunal allowed the appeals, holding that the appellant was not required to deduct tax at source under Section 194C, and thus, could not be treated as an assessee-in-default. Consequently, interest under Section 201(1A) was also not applicable. The decision of the CIT(A) was overturned, and the appeals were allowed in favor of the appellant.