2009 (3) TMI 648 - AT - Income Tax

Summary

Issues Involved:
1. Violation of principles of natural justice.
2. Applicability of section 194C to expenses incurred for manufacturing.
3. Levy of interest u/s 201(1A) for non-compliance with section 201(1).

Summary:

1. Violation of Principles of Natural Justice:
The first ground of appeal was dismissed as not pressed by the assessee's AR.

2. Applicability of Section 194C:
The assessee, a public limited company engaged in manufacturing and marketing pharmaceutical products, was subject to a survey u/s 133A. The Department found that the assessee also got products manufactured by third-party manufacturers. The Assessing Officer (AO) deemed these agreements as works contracts, attracting section 194C, and issued a show-cause notice for non-deduction of tax at source. The assessee contended that these were purchase transactions, not works contracts. However, the AO held that the agreements were works contracts due to the specific terms and conditions binding the manufacturers, thus treating the assessee as a defaulter u/s 201(1) and determining TDS and interest liabilities.

On appeal, the CIT(A) upheld the AO's decision, stating that the transactions were works contracts due to the control and specifications imposed by the assessee on the manufacturers. The CIT(A) referenced the Supreme Court's decision in Sentinel Rolling Shutters & Engg. Co. (P.) Ltd. v. CST, emphasizing the need to determine the primary object of the transaction.

3. Levy of Interest u/s 201(1A):
The CIT(A) confirmed the AO's action of charging interest u/s 201(1A) due to the assessee's failure to deduct tax at source.

Tribunal's Decision:
The Tribunal examined the agreements and found that the manufacturers had their own establishments, licenses, and incurred costs for raw materials, labor, excise duty, and sales tax. The property in the goods passed to the assessee only upon delivery. The Tribunal referred to Circular No. 681 and relevant case laws, including BDA Ltd. v. ITO (TDS) and Reebok India Co., concluding that these transactions were contracts for the sale of goods, not works contracts. Consequently, section 194C was not applicable, and the assessee was not in default u/s 201(1) or liable for interest u/s 201(1A).

Conclusion:
The appeal filed by the assessee was allowed, ruling out the application of section 194C and the associated liabilities.