2007 (7) TMI 349 - AT - Income Tax

TDS u/s 194C - Works Contract Or Contract to Sale - supply of outsourced manufactured goods - Original Equipment Manufacturers (OEMs) - HELD THAT - The dominant object underlying the arrangement is manufacture and sale by the OEM. Having carefully perused the agreements before us we also find that the authorities below have proceeded on the erroneous assumption that goods rejected by the assessee cannot be sold by the OEMs. That is factually incorrect. The OEMs are free to dispose of the goods in whatever manner they deem fit but they are forbidden from affixing assessee s trademark on the same. That restriction is quite justified to protect the legitimate business interests of the assessee. The trademark can only be affixed in the case where the goods are purchased by the assessee and rightly so because the trademark belongs to the assessee and is to be used for his business purposes. Ld DR s argument that only off the shelf goods can be considered to be purchases and made to order goods is to be considered as works contract is devoid of any merits sustainable in law. In view of these discussions and respectfully following the co-ordinate Benches in the case of ITO vs. Willmar Schwabe India (P) Ltd. 2005 (3) TMI 398 - ITAT DELHI-D we hold that the supply of outsourced manufactured goods by the OEMs constitutes an outright sale and cannot be treated as a works contract within the scope of s. 194C. The impugned TDS demands raised on the assessee are thus indeed vitiated in law and not warranted by the facts of the case. These demands should accordingly be set aside. We order so. In the result the appeal is allowed.

Summary

Issues:
Whether the assessee was required to deduct tax at source under section 194C of the IT Act for purchases made to specifications by Original Equipment Manufacturers (OEMs).

Analysis:
The case involved the question of whether the assessee was liable to deduct tax at source under section 194C of the IT Act for purchases made to specifications by OEMs. The assessee, a well-known name in consumer electronic goods, outsourced manufacturing to OEMs and affixed its brand name only after quality control. The AO held the assessee liable for non-deduction of tax at source, considering the transactions as works contracts. The CIT(A) upheld the AO's decision. The assessee contended that the transactions were on a principal-to-principal basis and not covered by section 194C. The counsel cited precedents emphasizing sale of goods over works contracts. The Tribunal noted that property passed at the time of sale, making it a purchase, not a works contract. It found the restrictions on OEMs justified to protect the assessee's business interests. The Tribunal ruled in favor of the assessee, holding the transactions as outright sales, not works contracts under section 194C.

The Tribunal considered the dominant object of the arrangement, the passing of property in goods, and the manufacturing risk borne by the vendor. It rejected the argument that only off-the-shelf goods were purchases, distinguishing between sale contracts and works contracts. The Tribunal emphasized that goods rejected by the assessee could still be sold by OEMs, with restrictions on trademark use. The Tribunal's decision was based on the factual and legal analysis, setting aside the TDS demands against the assessee. The Tribunal concluded that the outsourced manufactured goods by OEMs constituted outright sales, not works contracts under section 194C, and ruled in favor of the assessee.

The Tribunal's decision was based on a thorough examination of the agreements, rejecting the erroneous assumption that rejected goods could not be sold by OEMs. The Tribunal upheld the counsel's arguments, emphasizing the sale of goods over works contracts. It found the restrictions on trademark use justified and held that the transactions were not works contracts under section 194C. The Tribunal set aside the TDS demands against the assessee, ruling in favor of the assessee and allowing the appeal.