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TMI Blog2005 (11) TMI 202X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the customer and how the goods are supplied whether chattel-qua-chattel and if it is so, then it will be considered a 'sale' instead of 'works contract'. Also there is no definition of contract or sale in the IT Act which can solve the present issue. Therefore, to solve this issue we have to rely upon various other Acts and the interpretations made by Courts of law vis-a-vis the present case. The manufacturers are also independent establishment engaged in business of manufacturing of footwear and other goods and the assessee has issued the purchase order in favour of the manufacturers for supply of footwear and other goods and manufacturers were manufacturing the goods at their premises and they were not captive units of the assessee. The manufacturer as per agreement para 2.4 had the sale responsibility of purchase of raw material regarding quality of the products produced thereunder and the assessee was under no obligation to designate any such supplier. As per para 15.2.1 of the agreement the manufacturer is an independent manufacturer under the agreement and its personnel and other representative shall not act as nor be agents or employees of purchaser a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances of the case, the learned CIT(A) erred in not considering the fact that the deductor company has full control over the manufacturing activities, raw material supply, patterns, specifications, samples, prices of the products and sale of the products, apart from other elements in regard to whole venture of manufacturing and subsequent alleged sales thereof. 3. Learned CIT(A) also erred in not considering the fact that the commercial value of products thus produced is nil in case the purchaser does not accept the production because of any reason. 4. On the facts and in the circumstances of the case, the learned CIT(A) erred by ignoring the CBDT, Circular No. 715 (Question No. 15) dt. 8th Aug., 1995 [(1995) 127 CTR (St) 13]. 5. On the facts and in the circumstances of the case, the order of the Hon'ble Supreme Court in the case of State of Tamil Nadu vs. Anandam Viswanathan (1989) 73 STC 1 (SC) : (1989) 1 SCC 613 applied, wherein the issue of contract vis-a-vis sale/purchase has been dwelt with in great detail and, it was held that the transactions of similar nature are the transactions of contract and not that of sale and purchase. 6. The appellant craves leave to add, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re or supply any product using any confidential information or bearing any of the trademarks of any persons other than the purchaser. (v) Purchaser has right to inspect with reference to the material manufactured for the purchaser. (vi) The goods can't be supplied in the open market. (vii) If the goods don't meet the quality specifications, the material can't be used by the supplier and should be destroyed under the supervision of M/s Reebok. (viii) The principal object of the buyer is to get the material manufactured as per the prescribed specifications with his quality control and not to purchase material as available in the market. Thus, it is apparent from the terms of agreement/arrangement/contract that the manufacturer/contractor is fully chained and does not have the freedom or autonomy to move even a centimetre without the consent of the purchaser. In view of the above facts, the assessee was asked to explain how activity of outsourcing of goods is not covered within the ambit of s. 194C? The contention of the assessee, through his Authorised Representative in various submissions, has been that goods outsourced are in the nature of purchase of goods and sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s section.' 9. The wording of the above clearly suggests that while formulating the above, the framers had in mind, the transaction with the manufacturer who manufactures goods of the nature to be utilized by different parties in their transactions and not of the prescribed specification and confidentiality clause and restrictions on the sale of such goods to other parties. The contents of Circular No. 681, sub-cl. (b) of cl. (vi) of para 7 would not be applicable in transactions wherein the goods were manufactured on Prescribed specifications of the purchaser. It was in this background that various queries received were examined and clarified through Circular No. 715, dt. 8th Aug., 1995. This circular at the outset states: 'The Finance Act, 1995 has enlarged the scope of income-tax deduction at source by making various amendments. In regard to the changes introduced through the Finance Act, 1995, a number of queries have been received from the various associations and professional bodies on the scope of TDS. It would be desirable to clarify the doubts by issuing a public circular in the form of question answers.' 10. The relevant Question No. 15 of the circular reads: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of goods or a job/work contract. 15. I have considered the submissions of the assessee and the judicial decisions relied upon by the assessee and other decisions relevant to the issue, filed by the assessee. A transaction may appear to be sale or purchase of goods but one has to analyze the real character of the whole transaction. Salient contents of such agreements of the assessee, are analyzed in para 3, supra. 16. The provisions of s. 194C are, applicable to every work which are in the nature of contract . What is a contract? Sec. 194C reads as follows: 'Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work ..... in pursuance of a contract between the contractor and (a) Any company; shall, at the time of credit of sum to the account of the contractor or at the time of payment ......, whichever is earlier, deduct an amount equal to- (i) one per cent in case of advertising (ii) in any other case two per cent.' 17. It is an undisputed fact that the entire manufacturing activity of the vendor is controlled by the assessee starting from supply of raw materials, intermediaries, to supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd goods and were not capable of any use to anyone else and, thus, had no commercial value. 19. In view of the above, the real test is whether the goods produced as per the specification of the buyer have any market value if for any reason these are not purchased by the buyer. In cl. 6(2)(iv) of the agreement with M/s Moja Shoes Ltd., the terms provide as follows: 'C-Grade Products-Non-saleable products with apparent defects to be destroyed at the supplier's expense and without any right of the supplier to the purchase price.' 20. The terms of the agreements of category 1 and category 2 and the arrangement with category 3 suppliers do not leave an iota of doubt to the effect that the goods manufactured by the vendors have no commercial value to the manufacturer unless accepted by the purchaser. The goods rejected and classified as 'B' grade have to be destroyed in the presence of the purchaser, (i.e., Reebok). Consequently, the case of the assessee is squarely covered by the decision, supra, of Tribunal Bench, Pune. Hence, the assessee on facts and on merits comes within the ambit of s. 194C. 21. Accordingly, I hold that the whole transaction between the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... using any confidential information or bearing of any of the trademarks other than the purchaser, it is to be clarified that Reebok products have its brand name and the assessee would, therefore, ensure that its brand name is not misused. The manufacturer is free to manufacture goods of other manufacturers and to that extent the assessee duly filed a letter with the AO that Moja Shoes is manufacturing products of other brands also as required by the AO. It is a normal practice that any purchaser will inspect the goods before the goods are delivered to the purchaser. This is to ensure that goods are manufactured as per the specifications of purchaser. The manufacturer is manufacturing goods carrying Reebok brand name and, therefore, as a prudent business practice the assessee has to ensure that the goods which are manufactured under the brand name of Reebok are not to be sold in the open market with Reebok label/logo except through him or outlets authorized by him. In order to protect its brand name it is important that if the goods are not according to the specifications of the assessee-company, the goods manufactured bearing the brand name/logo of Reebok be destroyed. 28. It is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h person only after such article or thing is delivered, the contract will be a contract for sale and as such outside the purview of s. 194C. It is explained that the term carrying out in the said section suggests executing the contract rather than a transfer of goods or a mere supply or sale of goods. If a person engages services of another and gives a job to manufacture goods or articles and for the purpose supplies him raw material it could be a case of contract of work. In such cases, the provisions of s. 194C would undoubtedly be applicable. But, if on other hand, a manufacturer, on his own purchases material and manufactures product which he sells to the assessee, and it may be that such product be customer specific, it is still a case of sale and not carrying out of any work. In such sale which is customer specific, the fact that the goods manufactured are according to the requirement of the customer does not mean or imply that any work has been carried out on behalf of the contractee. A distinction between a sale and work contract is very significant particularly under the sales-tax laws. 29. It is argued that the AO has mentioned that the assessee-company supplies the mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered into by the appellant. In a recent decision pronounced by the Bombay High Court in the case of BDA Ltd. VS. ITO, the decision of Pune Tribunal in the same case relied upon by the AO has been reversed. The Bombay High Court while holding that s. 194C does not apply to the above transaction has stated as under: It is not disputed that M/s Mudranika is an independent establishment engaged in the business of supplying printed packaging material to various establishment, and it is not a captive unit of the assessee. The assessee had issued a purchase order in favour of M/s Mudranika for supply of printed labels as per the specifications provided by it, and the raw materials required for the same were not supplied by the assessee. M/s Mudranika has been supplying such printed labels to other establishments as per their respective specifications. The printing work was not being carried out in the premises of the assessee. This supply of printed labels cannot be compared and equated with the supply of printed question papers to the universities and educational institutions. M/s Mudranika would not print such labels with the specifications of the assessee beyond the quantity specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the contract documents and not merely the form, which has to be looked into. An opinion can be formed that the contract is one whose main object is transfer of property in a chattel as a chattel to the buyer, though some work may be required to be done under the contract as ancillary or incidental to the sale, then it is a sale. If the primary object of the contract is the carrying out of work by bestowal of labour and services and materials are incidentally used in execution of such work then the contract is one for work and labour. (c) If the thing to be delivered has any individual existence before the delivery as the sole property of the party who is to deliver it, then it is a sale. (d) The bulk of material used in construction belongs to the manufacturer who sells the end-product for a price, then it is a strong pointer to a conclusion that the contract is in substance one for the sale of goods and not one for work and labour. However, the test is not decisive. It is not the bulk of the material alone but the relative importance of the material qua the work, skill and labour of the payee, which have to be weighed. If the major component of the end-product is the material c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a suit. The property in the suit length had passed to the customer and physical possession over the suit length by the tailor thereafter was merely that of a bailee entrusted with the suit length. However, if the tailor promises to stitch and deliver the suit for a price agreed upon, investing his own cloth and stitching materials such as lining, buttons and threads and utilizing his own skill and labour then though the customer might have chosen the piece of cloth as per his own liking as to the texture, colour and quality and given his own instructions in the matter of style, the transaction would remain a contract for sale of goods, that is a stitched suit piece inasmuch as the object of the contract was to transfer property in the stitched suit piece along with delivery of the suit by the tailor to the customer, all investments, whether of material or of skill and labour having been made by the tailor incidental to the fulfillment of the contract. Yet another illustration is provided by Benjamin. A doctor or veterinary surgeon who supplies medicines does so as an incident to a contract for professional services, which include diagnosis and advice over and above any work in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more than one statute, the authority implementing any of the statutes should so interpret the provisions that all the statutes can be given effect to. This principle, called the doctrine of harmonious construction enables various statutes to stand side by side and yet not come in the way of one another in realising the awoved objective of each such legislation. Viewed thus, there is all the more reason to accept the ratio of the Supreme Court decision mentioned hereinabove. Even though the appellant has advanced the alternative pleas of the tax having been paid by the deductee and invoked the provisions of s. 191 r/w CBDT Circular No. 275/201/1995-IT(B), dt. The 29th Jan., 1997 and Circular No. 715 relating to the printing job relied upon by the AO, keeping the aforesaid decision reached by me in view, I do not consider it necessary to advert to these. 31. The learned counsel for the assessee has pointed out to various clauses of the agreements with manufacturer, i.e., M/s K.D.S. Fashion and Sports Gear and with M/s Moja Shoes (P) Ltd. as under: (i) Paper book 4, para 15.2.1 In performing obligations under this agreement, manufacturer is an independent manufacturer and its personn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y vide Appeal Nos. 44 of 2003 and 1 of 2004 and is in favour of assessee. The learned counsel has also pointed out the guidelines given by CBDT vide para 7(b) of Instruction No. 1107 which are clarifications regarding Supreme Court judgment in Associated Cement Co. Ltd. vs. CIT (1993) 111 CTR (SC) 165: (1993) 201 ITR 435 (SC) as under: Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing: passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and as such outside the purview of this section. 33. We have considered the facts of the case. The AO mainly relied upon the decision in the case of BDA Ltd. vs. ITO, where it has been held that supply of printed material as per specification supplied by the buyer is not a sale but a work contract. The said decision has been decided against the Revenue by the Hon'ble Bombay High Court as pointed out by the counsel of the assessee. The AO has relied upon Circular No. 715, dt. 8th Aug., 1995, where the CBDT has given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he customer? If it is the former, it is a 'sale' : if it is the latter, it is a 'works contract'. These views find support from the significant judgment of three Judges Bench of the Supreme Court in the case of State of A.P. vs. Kone Elevators (India) Ltd. (2005) 140 STC 22 (SC), where the manufacturer has manufactured the lifts as per specification of the assessee and installed at the premises of the assessee as the same was held to be a transaction of sale and not of a 'works contract'. In the present case, the transfer of the property by the manufacturer as a finished article is as a chattel and the ownership passes on to the assessee only on taking the delivery of the goods and before the delivery of the goods the ownership remains with the manufacturer only. Therefore, necessarily following the above judgments in the case of State of AP vs. Kone Elevators (India) Ltd. the contract of the assessee with the manufacturer is that of purchase and sale. As per the said judgment the works contract is one where the ownership passes to the customer by accession during the procession of work i.e., as and when work is in process, the ownership passes on to the cus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stomer. As an independent the manufacturer will be solely responsible for determining the means and methods for performing the required tasks. As per para 5.4 of the agreement the prices charged and each term and condition applied by manufacturer with regard to each of the products shall be no less favourable than the prices charged for equivalent footwear or terms or conditions applied with regard to any other person for whom manufacturer produces footwear. 37. In view of above discussions, the present case falls under the category of contract for purchase and sale and not a works contract under s. 194C of the Act. The views taken by the AO are of no assistance to the learned Departmental Representative who has relied upon the order of the AO. (ii) State of Tamil Nadu vs. Anandam Viswanathan (1989) 1 SCC 613 In this case there was a contract comprising primarily the confidential nature of work and incidentally technical skill and material supplied by the contractor and the finished product, i.e., printed question papers were not commercially marketable product and, therefore, such transaction constituted works contract. 38. In the present case, the finished product are commerciall ..... X X X X Extracts X X X X X X X X Extracts X X X X
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