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2011 (7) TMI 400 - AT - Income TaxContract of sale or work contract - TDS u/s 194C - Purchase of printing plastic pouches packing materials - Assessee company purchases packing material i.e. small pouch big pouch outer pouches and boxes etc. from the companies and persons who deal in the manufacturing of the laminated articles etc. as per their own specifications - Held that - The property has passed to the assessee by virtue of a sale of contract and as such outside the purview of Sec. 194C. - in view of judgement of the Bombay High Court in the case of BDA Ltd. (2004 -TMI - 9433 - BOMBAY High Court) decided in favour of assessee.
Issues Involved:
1. Applicability of TDS on payments for the purchase of raw material/packing materials. 2. Refund of TDS amount with interest. 3. Observations regarding the AO's future conduct. 4. Consideration of Board Circular No. 715 regarding TDS applicability on payments for packing/printed materials. Issue-wise Detailed Analysis: 1. Applicability of TDS on payments for the purchase of raw material/packing materials: The core issue in the departmental appeal is whether the payment received for printing on pouches as per the assessee's specifications constitutes a 'contract of sale' or a 'contract for work' under Section 194C of the Income Tax Act, 1961. The assessee, a manufacturer of tobacco khaini, was surveyed under Section 133A, revealing non-deduction of TDS on the purchase of printing plastic vouchers. The ITO TDS considered the payment for packaging material as a 'contract for work' and thus subject to TDS under Section 194C. The CIT(A), however, held that these transactions were 'contracts of sale' and not liable for TDS, relying on various judicial precedents, including the Bombay High Court's decision in BDA Ltd. vs. ITO. 2. Refund of TDS amount with interest: The CIT(A) directed the AO to refund the TDS amount with interest, concluding that the payments for the purchase of raw materials/packing materials fell under the Sale of Goods Act and thus were not subject to TDS under Section 194C. The Revenue's appeal contested this direction, arguing that the assessee admitted its default during survey proceedings. 3. Observations regarding the AO's future conduct: The CIT(A) observed that the AO should not repeat such mistakes in the future, implying a need for a more thorough examination of the nature of contracts to determine the applicability of TDS. The Revenue argued that the CIT(A) ignored the detailed findings of the AO, who held that the assessee was liable for TDS on payments for packaging materials. 4. Consideration of Board Circular No. 715: The Revenue contended that the CIT(A) did not consider Board Circular No. 715, which clarifies that TDS under Section 194C is applicable to payments for the purchase of packing/printed materials. The CIT(A) relied on Circular No. 13/2006, which directs examining each contract individually to determine whether it is a 'contract of sale' or a 'contract for work.' Judgment Analysis: The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal. It concluded that the assessee's transactions were 'contracts of sale' and not 'contracts for work,' thus not liable for TDS under Section 194C. The Tribunal noted that the ownership of the packaging materials passed to the assessee only upon delivery, and the suppliers paid sales tax/excise duty, reinforcing the nature of the transactions as sales. The Tribunal also referred to various judicial precedents, including decisions of the Jurisdictional High Court and the Supreme Court, which supported the view that such transactions are contracts of sale. The Tribunal emphasized that the property in the goods did not belong to the assessee until delivery, and the suppliers were independent entities, further supporting the conclusion that the transactions were outside the purview of Section 194C. Conclusion: The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order that the payments for the purchase of raw materials/packing materials were 'contracts of sale' and not subject to TDS under Section 194C. The Tribunal directed the AO to refund the TDS amount with interest, as per the CIT(A)'s order.
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