2015 (4) TMI 1264 - HC - Income Tax

Provision for Expenses - TDS u/s 194C/J - Disallowance u/s 40(a)(i) - short / non deduction of tax - HELD THAT - Appeal deserves to be admitted on the following substantial question of law (A) Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal is justified in accepting the assessee's contention that the amount covered by 'Provision for Expenses' were not credited to the account of any of the payee but was credited to 'Provision for Expenses' and therefore TDS provisions were not applicable without appreciating the provisions of sub-section (2) of section 194C, Explanation (iv) to section 194H and Explanation (ii) to section 194I ? (B) Whether on the facts and in the circumstances of the case and in law, in the context of 'Provisions for expenses', the Hon'ble Tribunal has erred in deleting the short / non deduction of tax by holding that in view of disallowances u/s 40(a)(i) / 40(a)(ia), no demand can be raised u/s 201(1) r.w.s. 194C / 194J of the Act? TDS u/s 194C - Purchase of traded goods, purchase of packing material and clinical trials - stand of the Revenue was that these are all works contract and there is a requirement of deduction of tax at source u/s 194C - HELD THAT - The Pharma company provides the formulation and specifications. The third party then manufactures the product or goods and affixes thereon the trademark of the assessee. The raw materials for manufacturing these products are procured not by the assessee or supplied by the assessee but independently by the third party. The property in the goods does not pass on to the assessee till delivery. This is termed as an agreement on principal to principal basis. That is why this is termed as a contract of sale. We do not see how this situation and in the case of Glenmark 2010 (3) TMI 289 - BOMBAY HIGH COURT is inapplicable to the present assessee. Merely because the patent is not in any way dealt with and or rights therein are retained by the assessee does not make any difference. The formulations and specifications are provided for manufacture of the goods and which are eventually sold to the assessee. In these circumstances, we do not see that the transactions partake the character of works contract in any manner. Therefore, the issue or question is covered by Commissioner of Income Tax vs. Glenmark. Transaction was of sale and the assessee was not required to deduct tax at source on payments. (BDA Ltd. vs. Income Tax Officer (TDS) 2004 (3) TMI 11 - BOMBAY HIGH COURT - Appeal cannot be entertained on Questions (C) and (D)

Summary

Issues involved:
Challenge to the order passed by the Income Tax Appellate Tribunal on two appeals, one filed by the assessee and the other by the Revenue, for the assessment year 2007-08.

Analysis:
The appeal by the Revenue challenges the Tribunal's order regarding the acceptance of the assessee's contention on the treatment of 'Provision for Expenses' and the applicability of TDS provisions. The substantial questions of law raised include whether the Tribunal was justified in not applying TDS provisions to the amount covered by 'Provision for Expenses' and erred in deleting the short/non-deduction of tax. The appellant's counsel argued for the admission of additional substantial questions of law, citing a distinction in facts from previous cases. However, the Court disagreed, emphasizing that the Tribunal had already discussed and considered the issues raised by the Revenue. The Tribunal's order highlighted the Revenue's stance on the requirement of tax deduction at source for works contract under section 194C of the Income Tax Act, 1961.

The Court referred to a previous case involving a Pharma company to establish that the transactions in question were of a sale nature and not works contract. It was noted that the Pharma company provided formulations and specifications to a third party for manufacturing products, which were eventually sold to the company. The retention of patent rights by the assessee did not alter the nature of the transactions. The Court found the present case analogous to the Pharma company case, thereby rejecting the Revenue's arguments. The Court further dismissed the appeal on questions (C) and (D) as the issues had already been addressed in previous judgments.

Consequently, the Court admitted the appeal on questions (A) and (B) and directed the Registrar to summon the original record for inspection. The assessee waived service, and the appeal was dismissed on questions (C) and (D) while being admitted on questions (A) and (B). The Court instructed the Registry to prepare a complete paper book in accordance with the Rules and notify the Tribunal accordingly.