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2024 (4) TMI 267 - HC - Income TaxTDS liability u/s 194C - 'Contract for Sale' and not a 'Works Contract' - Scope of the term Work - Seeking issue a Certificate u/s 197 r.w.s. 206(C)(9) for NIL Tax Deduction at Source (TDS) on all sales effected by the Petitioner/ Company - dealings between the buyer and seller were continuing smoothly until the Buyer started deducting TDS (Tax Deducted at Source) @ 2% under section 194 (C) on all Sale Invoices of the Petitioner Company with effect from May, 2019 - HELD THAT - The onus of proving the transactions between the assessee and the HUL that it does not fall under section 194C completely lies with the assessee. He is required to provide sufficient documents in support of the transaction that it is not a contract under the meaning of section 194C of the Act, rather it is a contract for sale and falls under circular no.05/2010 issued by the CBDT. As per the purchase agreement entered into between the assessee and HUL, whether the materials used in manufacturing the products sold to HUL cannot be assessed and/or judged from the reading/ analysis of the agreement. The views in respect to purchase of materials can be only assessed from the verification of purchase invoices and books of accounts and confirmation from the HUL. Based on the Departmental analysis the rate of deduction has been derived and accordingly approval has been given by the competent authority. Based on the Estimated Net Profit of the assessee for the F.Y. 2020-21, the rate of deduction has been derived and accordingly approval has been given. The contention of the petitioner is not pertinent in this instant case, since the Petitioner itself submitted application in F.No.13 claiming receivable for the Hindustan I.ever as contractual receipts . Further it had not made M/s. Hindustan lever Limited as a party to this case which indicates that it primarily had no objection with M/s. Hindustan Lever Limited treating it's payment to the applicant as contractual payment . Petitioner's claim that the Hindustan lever had been wrongly deducting tax at source under section 194C, treating the contractual agreement for manufacturing of Hindustan Lever Limited products as works contract is not legally tenable since for all purposes the functioning of the applicant in respect of its transaction with Hindustan lever/ comes under the domain of works contract . Further, it is also noted that the applicant had regularly claimed amount receivable from Hindustan Lever as 'contractual amount in F.No.13 filed in earlier Financial Years including Financial Year 2019-20 and even in F. No. 13 filed for the Financial Year 2020-21. Petitioner did not adduce any documents/correspondences disputing the deduction of tax at source under section 194C of the I.T. Act by the Hindustan Lever Ltd. Evidently, the Petitioner did not consider such action by Hindustan Lever Limited as dispute suitable for agitation with Hindustan Lever Limited, unless rate of IDS for the Financial Year 2020-21 has been fixed at 1.25%.
Issues Involved:
1. Whether the transactions between the Petitioner and Hindustan Unilever Ltd. (HUL) constitute a "Contract for Sale" or a "Works Contract" under Section 194C of the Income Tax Act, 1961. 2. The legality of the Certificates issued under Section 197 of the Income Tax Act, 1961, and the rate of TDS deduction specified therein. 3. Whether the rejection of the Petitioner's application for NIL/reduced TDS was arbitrary and violative of Article 19(1)(g) of the Constitution of India. Comprehensive Summary: I. Contract for Sale vs. Works Contract: The Petitioner contended that the agreement with HUL was a "Contract for Sale" and not a "Works Contract" as defined under Section 194C of the Income Tax Act, 1961. The Petitioner argued that it procured raw materials independently and only one raw material from HUL, treating it as a separate transaction. The Petitioner cited Clause 5.6 of the Purchase Agreement to substantiate that it was not acting as an agent for HUL but as an independent entity. The Opposite Party (Income Tax Department) argued that the agreement between the Petitioner and HUL was clearly a "works contract" as per Section 194C. They emphasized that the Petitioner had itself applied for non-deduction under Section 197, indicating it as a "contractual receipt." The Department further argued that the materials used in manufacturing could only be verified through purchase invoices and books of accounts. The Court noted that the term "work" under Section 194C includes manufacturing or supplying a product using materials provided by the customer, which would classify the transaction as a "works contract." The onus was on the Petitioner to provide sufficient documents to prove otherwise, which they failed to do. II. Legality of Certificates Issued Under Section 197: The Petitioner challenged the Certificates issued by the Assistant Commissioner of Income Tax, which specified the TDS rates at 1.25% and 1.20% for different periods, arguing that these were arbitrary and without basis. The Petitioner sought a NIL TDS certificate, claiming financial loss due to the higher TDS rates. The Opposite Party argued that the rates were derived based on the Departmental analysis and the Estimated Net Profit of the Petitioner. They contended that the Petitioner had accepted these rates in previous applications and had not made HUL a party to the case, indicating no objection to the TDS deductions. The Court found that the rates were derived based on a thorough analysis and were approved by the competent authority. The Petitioner's repeated applications for lower TDS rates were not supported by adequate documentation to justify NIL TDS. III. Rejection of Application for NIL/Reduced TDS: The Petitioner claimed that the rejection of their application for NIL/reduced TDS was arbitrary and violated Article 19(1)(g) of the Constitution of India. They argued that the continued collection of TDS at higher rates caused financial hardship. The Opposite Party maintained that the rejection was based on the lack of sufficient documentation from the Petitioner to prove that the transactions did not fall under Section 194C. The Court upheld this view, stating that the Petitioner did not provide adequate evidence to support their claim for NIL/reduced TDS. Court's Conclusion: The Court concluded that the transactions between the Petitioner and HUL fell within the purview of "works contract" under Section 194C of the Income Tax Act, 1961. The Certificates issued under Section 197 specifying the TDS rates were legally valid and based on proper analysis. The rejection of the Petitioner's application for NIL/reduced TDS was not arbitrary or illegal. Both Writ Petitions were disposed of accordingly.
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