2009 (10) TMI 556 - HC - Income Tax

TDS - writ petitions - contract of sale or a contract of work and labour - under the contract the supplier is required to give a colour coding for the eggs by adopting a particular colour for a particular day with the emblem of the State Government. It is further contended that the colouring of the eggs is to ensure misuse and also to ensure their quality but this does not change the use of the product - Held that - it has been stated that the contractors who are undergoing the above contract in different districts of Tamil Nadu on routine basis or regional taking lower/nil deductions certificate obtained from their Assessing Officers at Namakkal and Salem. - there is no valid reason as to why all the petitioners cannot avail of such a remedy especially when either themselves or persons similarly placed like them have been approaching the authorities under the provisions of the Income-tax Act while effecting supplies in other districts before through jurisdictional Assessing Officer under the Income tax Act. - dismissing the writ petitions, liberty is granted to the petitioners to work out their remedies by taking appropriate proceedings under the provisions of the Income-tax Act, 1961 and the Rules as framed thereunder

Summary

Issues Involved:
1. Whether the contract in question is a contract of sale or a contract of work and labour.
2. The applicability of Section 194C of the Income-tax Act to the transaction.
3. The maintainability of the writ petitions under Article 226 of the Constitution of India.

Issue-wise Detailed Analysis:

1. Nature of the Contract: Sale or Work and Labour

The core issue is whether the contract for supplying eggs to the noon meal centres is a contract of sale or a works contract. The petitioners argued that the contract is a mere supply of eggs, constituting a contract of sale, not a works contract. They cited the CBDT circular dated March 8, 1994, which states that tax deduction at source under Section 194C of the Income-tax Act would not apply when the contractor supplies goods according to government specifications and the ownership passes upon delivery.

The respondents contended that the contract includes various stipulations such as specific size and weight of eggs, color coding, affixing the State Government emblem, and other conditions like transportation and handling, making it a composite contract involving both goods and services, thus qualifying as a works contract.

The court referred to several Supreme Court judgments to determine the nature of the contract, emphasizing that the essence of the contract, the dominant object, and the circumstances of the transaction are crucial in making this determination. The court concluded that these are essential questions of fact, which cannot be effectively adjudicated in a writ petition.

2. Applicability of Section 194C of the Income-tax Act

The petitioners argued that Section 194C does not apply to their case, as the transaction should be considered a contract of sale. They relied on the CBDT circular and the Supreme Court decision in State of Andhra Pradesh v. Kone Elevators, which differentiates between a contract for sale and a works contract based on the intention to transfer property and the nature of the obligations.

The respondents argued that the contract is indivisible and involves both the supply of goods and services, thus falling under the purview of Section 194C, which mandates tax deduction at source.

The court noted that the determination of whether the contract falls under Section 194C involves a thorough analysis of the contract terms and factual circumstances, which are beyond the scope of a writ petition.

3. Maintainability of the Writ Petitions

The respondents contended that the writ petitions are not maintainable as they involve complex factual determinations that should be resolved through the mechanisms provided under the Income-tax Act, including appeals to the Assessing Officer and other appellate authorities.

The court agreed with the respondents, stating that the Income-tax Act provides a comprehensive framework for resolving such disputes, including the opportunity to present oral and documentary evidence. The court emphasized that the remedies under the Act are efficacious and should be exhausted before approaching the High Court under Article 226.

Conclusion:

The court dismissed the writ petitions, granting the petitioners liberty to seek remedies under the Income-tax Act. The court provided the petitioners four weeks to approach the concerned authority, during which the respondents were restrained from initiating coercive recovery measures. The court emphasized that the issue involves essential questions of fact, which are not suitable for adjudication in writ petitions. No costs were imposed, and connected miscellaneous petitions were closed.