2012 (2) TMI 52 - HC - Income Tax

Work Contract vs Contract for sale purchase of product - product manufactured out of raw materials supplied by a foreign company who had direct interest in the assessee company - product manufactured to the specification of the assessee utilizing the technical know-how supplied by it - labeling the product with the brand name of the assessee - supplying the entire product only to the assessee and not to anyone else Held that -This is not simply a situation of a product manufactured to the specifications of the assessee, being sold to the assessee at the price fixed by the seller but this is to be held as a specific contract for manufacturing of a particular product notwithstanding the fact that the seller had paid the price for the raw-material directly to the foreign company supplying raw material, but had interest in the assessee company in India and having a definite communication. Further, situation contemplated u/s.194C i.e. the payment being carrying out any work which is to improve the situation of such nature and of course preceded between the contract between the assessee and the manufacturer company. Therefore, it is held provisions of Section 194C are applicable to the assessee and is clearly attracted to the present situation Decided in favor of Revenue.

Issues Involved:
1. Whether the transactions between the assessee and TPL constitute a contract for sale or a contract for work, impacting the applicability of TDS under Section 194C of the Income Tax Act, 1961.
2. Whether the Appellate Authorities erred in classifying the transactions as a contract for sale of goods rather than a work contract, thereby affecting the application of Section 194C.

Issue-wise Detailed Analysis:

1. Nature of the Contract: Contract for Sale vs. Contract for Work

The primary issue was whether the transactions between the assessee and TPL were a contract for sale or a contract for work. The Revenue argued that the transactions were in the nature of a work contract, necessitating TDS under Section 194C of the Income Tax Act, 1961. The assessee company marketed pharmaceutical products, and one of its products was manufactured by TPL using raw materials supplied by a foreign company, NOVA Nordisk, Denmark. The agreements stipulated that the entire product manufactured using the supplied raw materials was to be sold exclusively to the assessee company.

The court examined the agreements and found that the Indian manufacturing company was compelled to sell the entire output to the assessee company, indicating a controlled manufacturing process rather than an independent sale of goods. The price fixation formula, known as conversion charges, further linked the transaction to a manufacturing contract rather than a simple sale. The court concluded that the transaction was not a contract for the sale of a product but a contract for manufacturing, thus attracting Section 194C.

2. Error by Appellate Authorities in Classification

The Appellate Commissioner and the Tribunal had previously ruled in favor of the assessee, interpreting the transactions as a contract for the sale of goods based on Board Circular No.681 of 1984. They concluded that since the assessee did not supply the raw materials, the transaction was a sale of goods, and Section 194C was not applicable. However, the Revenue contended that the authorities had oversimplified the situation and ignored the complex interlinking agreements among the three parties involved.

The court agreed with the Revenue, noting that the agreements dictated the terms of manufacturing and sale, including the use of technical know-how and labeling with the assessee company's brand name. The court emphasized that the agreements created a specific contract for manufacturing a particular product, controlled by the assessee company, rather than an independent sale by TPL. Therefore, the court found that the Appellate Authorities had erred in their classification and that Section 194C was indeed applicable.

Conclusion:

The court held that the transactions between the assessee and TPL were contracts for manufacturing, not contracts for the sale of goods. Consequently, the provisions of Section 194C of the Income Tax Act were applicable, and the assessee was required to deduct tax at source. The court set aside the orders of the Appellate Commissioner and the Tribunal, restoring the order of the Assessing Authority, which had correctly applied Section 194C and estimated the interest payable under Section 201(1A). The appeal by the Revenue was allowed, with each party bearing its own costs.

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