2006 (2) TMI 160 - HC - Income Tax

Liability to deduct tax at source under section 194C assessee placing orders for supply of printed materials by relying on Circular no. 715, tribunal is right in law in considering supply of printing and packaging materials as a contract for sale and not a services/works contract - hence there was no liability of assessee to deduct tax at source

Summary

Issues:
1. Whether the Tribunal correctly deleted the demand raised by the Income-tax Officer in respect of works contract of printed materials?
2. Whether the Tribunal correctly deleted the interest demand raised by the Income-tax Officer?
3. Whether the Tribunal was correct in considering the supply of printing and packaging materials as a contract for sale and not a services/works contract?

Analysis:
1. The Appellant-Revenue challenged the Tribunal's order deleting the demand raised by the Income-tax Officer, arguing that the assessee had entered into a "works contract" by getting materials with design printed after providing specifications. The Appellant contended that tax should have been deducted at source under section 194C of the Income Tax Act before payment to suppliers. The Tribunal, however, considered it a contract for sale, not works contract, based on Circulars issued by the Central Board of Direct Taxes. The Court upheld the Tribunal's decision, stating that a contract for the supply of materials cannot be considered a contract for work and labor under Section 194C.

2. The Appellant also challenged the deletion of interest demand by the Income-tax Officer. The Tribunal's decision was based on the same reasoning as in the first issue, where the nature of the contract was considered a sale of materials, not a works contract. The Court found no error in the Tribunal's decision, as it was consistent with the Circulars issued by the CBDT.

3. The final issue revolved around whether the supply of printing and packaging materials constituted a contract for sale or a services/works contract. The Appellant argued that it was a works contract requiring tax deduction at source. However, the Tribunal relied on Circulars issued by the CBDT, which clarified that in cases of sale, no deduction under section 194C of the Act is necessary. The Court agreed with the Tribunal's interpretation, emphasizing that when the contract is for the supply of materials, it does not fall under the provisions of Section 194C.

In conclusion, the High Court dismissed the appeals, upholding the Tribunal's decision that the supply of printed materials constituted a contract for sale, not a works contract, based on the Circulars issued by the CBDT.