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2025 (4) TMI 909 - AT - Income TaxTDS u/s 194C - non-deduction of tax on contract manufacturing of goods/products as per terms of agreements - interest levied by the AO u/s 201(1) and u/s 201(1A) - HELD THAT - During the course of hearing the revenue did not bring anything on record to controvert the above findings of the coordinate bench in assessee s own case for AY 2017-18 2023 (7) TMI 1075 - ITAT MUMBAI holding that the payments made under the SOR agreements did not fall within the ambit of Section 194C of the Act and therefore the assessee did not have any liability to deduct tax at source on such payments u/s 194C of the Act. Accordingly all the grounds raised by the Revenue stands dismissed Accordingly respectfully following the decision of the coordinate bench we hold that there is no infirmity in the decision of the CIT(A) in deleting the tax under section 201(1) and interest under section 201(1A) levied by the AO. The grounds raised by the revenue are thus dismissed.
The core legal questions considered in the appeals relate to the applicability of provisions under the Income Tax Act, 1961, specifically whether the payments made under certain contract manufacturing or sale or return (SOR) arrangements attract tax deduction at source (TDS) under section 194C, and consequently whether the assessee can be held as an assessee in default under section 201(1) and liable for interest under section 201(1A) for non-deduction of TDS on such payments. The issues also encompass the characterization of the arrangements as either 'works contracts' or contracts for sale of goods, and the consequent tax implications.
The principal issues examined are:
Issue-wise Detailed Analysis: 1. Applicability of Section 194C and Characterization of the Agreements as 'Works Contract' or Sale of Goods Legal Framework and Precedents: Section 194C mandates deduction of tax at source on payments made to contractors for carrying out any work, including supply of labour, under a contract. The Explanation to section 194C defines 'work' to include various activities, including manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer. Importantly, the Explanation clarifies that 'work' does not include manufacturing or supplying a product by using material purchased from a person other than the customer, which is treated as a contract for sale. The Finance (No. 2) Act, 2009 amended this provision to clarify ongoing litigation regarding outsourcing contracts, distinguishing contracts involving customer-supplied materials (works contracts) from contracts where the manufacturer sources materials independently (sale contracts). The Memorandum explaining the Finance Bill 2009 emphasized that the amendment applies from 1 October 2009 onwards. In a binding precedent, the Hon'ble Bombay High Court held that where the manufacturer procures raw materials independently and the property in goods passes only upon delivery, the contract is a contract of sale and not a works contract under section 194C. The Court emphasized that the mere fact that specifications are provided by the purchaser does not convert the contract into a works contract. The Court noted that the legislative intent was to remove ambiguity and affirm the existing understanding that contracts involving independently sourced materials are contracts for sale. Court's Interpretation and Reasoning: The Tribunal, following the coordinate bench decision for AY 2017-18, examined the nature of the SOR agreements and contract manufacturing arrangements. It noted that:
The Tribunal observed that the AO's reliance on dictionary meanings of 'work' was incorrect since the statute provides an inclusive definition. It also rejected the AO's contention that the SOR arrangements were composite contracts involving predominant labour supply, noting that the primary transaction is supply of goods. Key Evidence and Findings: The Tribunal relied on detailed vendor confirmations obtained under sections 133(6) and 131 of the Act, which affirmed the independent nature of vendors, their ownership of goods until delivery, and the principal-to-principal basis of transactions. The Tribunal also examined sample agreements, invoices, and insurance policies to confirm the nature of the transactions. Application of Law to Facts: Applying the statutory definition and judicial precedents, the Tribunal concluded that the payments under the SOR and contract manufacturing agreements do not fall within the definition of 'works contract' under section 194C. Consequently, the assessee was not obligated to deduct tax at source under section 194C on such payments. Treatment of Competing Arguments: The Revenue argued that the SOR arrangements were composite contracts involving significant labour and manufacturing efforts, thus attracting section 194C. The Tribunal found these arguments unsubstantiated on facts and noted that the Revenue failed to controvert the coordinate bench's findings or produce any new evidence to distinguish the facts for the years under appeal. Conclusions: The Tribunal upheld the CIT(A)'s deletion of tax and interest levied under sections 201(1) and 201(1A) for non-deduction of TDS on contract manufacturing and SOR payments, holding that these transactions are contracts for sale and not works contracts. 2. Liability as Assessee in Default under Sections 201(1) and 201(1A) Legal Framework: Section 201(1) holds a person liable as an assessee in default if they fail to deduct or pay TDS as required under the Act. Section 201(1A) prescribes interest on such defaults. Court's Interpretation and Reasoning: Since the Tribunal held that the payments do not attract TDS deduction under section 194C, the assessee cannot be held as an assessee in default under section 201(1) for non-deduction of TDS on these payments. Consequently, interest under section 201(1A) also does not arise. Key Evidence and Findings: The Tribunal noted the absence of any material to show that the assessee was required to deduct TDS under any other provision with respect to these payments. The CIT(A)'s findings deleting the tax and interest were based on detailed factual and legal analysis. Application of Law to Facts: The Tribunal applied the legal principle that liability as an assessee in default arises only if there is a statutory obligation to deduct tax at source, which was negated on the facts and law in this case. Treatment of Competing Arguments: The Revenue's appeal challenging the deletion of tax and interest was dismissed for lack of merit and failure to distinguish the facts from the coordinate bench decision. Conclusions: The Tribunal confirmed that the assessee is not liable as an assessee in default under sections 201(1) and 201(1A) for the payments in question. 3. Applicability of Coordinate Bench Decision for AY 2017-18 to AY 2013-14 and AY 2018-19 Court's Interpretation and Reasoning: The Tribunal noted that the facts for AY 2013-14 and AY 2018-19 are identical to those considered by the coordinate bench for AY 2017-18. The Revenue did not produce any material to distinguish the facts or legal position for these years. Conclusions: The Tribunal held that the coordinate bench decision squarely applies, and therefore there is no infirmity in the CIT(A)'s orders deleting the tax and interest for these years. Significant Holdings: "The term 'work' has been defined in an inclusive manner for the purposes of Section 194C of the Act in particular, and only if the 'work contract' undertaken by the payee falls within the above definition of 'work', as specifically defined in the section itself, that the provisions of Section 194C would become applicable." "The expression 'work' shall not include manufacture or supply of a product according to the requirement or specification of a customer by using material which is purchased from a person other than such customer." "The fact that specifications were provided by the assessee to the manufacturer / supplier would make no difference to the legal position." "The agreements entered into by the assessee with the manufacturers were not works contracts within the meaning of section 194C of the Act and, consequently, the assessee could not be held as an assessee-in-default under section 201(1) of the Act." "The mere deputation of sales staff, subsequent to sale of goods, cannot be viewed adversely so as to allege that these SOR arrangements are in the nature of 'works contract'." "The provision of after sales support clearly does not alter or change the nature of the SOR arrangement, which is that of supply of goods by the vendors to the assessee." "The terms of payments towards purchase of goods cannot be said to indicate that the contract is that of 'works contract' with the vendors." "The payments made under the SOR agreements did not fall within the ambit of Section 194C of the Act and therefore the assessee did not have any liability to deduct tax at source on such payments u/s 194C of the Act." "The contract entered into by the assessee is not a contract for carrying on any work within the meaning of section 194C." Final determinations on each issue are that the payments under the SOR and contract manufacturing agreements are contracts for sale of goods and not works contracts under section 194C; hence, no TDS deduction was required; consequently, the assessee cannot be held as an assessee in default under section 201(1) or liable for interest under section 201(1A); and the coordinate bench decision for AY 2017-18 applies equally to AY 2013-14 and AY 2018-19, leading to dismissal of the Revenue's appeals.
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