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TMI Blog2011 (2) TMI 488X X X X Extracts X X X X X X X X Extracts X X X X ..... ash outflow. Although services were taken, it is difficult to say that the residuals and the losses left by the assessee in favour of AIL are purely consideration for the job that is done. The market fluctuations in the price structure of the raw material and the end product cannot be just ignored in the whole transaction nor the process loss. The process loss could be either more or less than the percentage agreed to between the parties. - the residual that is left by the assessee, apart from covering the labour cost of processing, also includes the protection from market fluctuations as also protection from adverse process loss. - Decided in favor of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... e same has not been done. The assessee's act of non-deduction of tax at source on this so-called alleged payment according to AO, attracted disallowance under the provisions of section 40(a)(ia) of the Act. Accordingly, he made a disallowance at 1,11,53,566 which was added to the declared income. 4. Before the CIT(A), it was argued that there was no possibility of manufacturing 100 kgs of Atta out of 100 kgs of wheat or 100 kgs of dalia out of 100 kgs of wheat. There would be processing loss in the form of fodder, wastage, dust etc. This aspect of the matter has not been appreciated by the AO. During the course of submissions, it was also submitted that byproduct which includes choker/cattle feed, refraction and other wastage amounted to 10,09,041 kgs which could be valued at 31,93,782. Reliance was placed on a certificate from Wholemeal Atta Manufacturers Association, Delhi where it was mentioned that the output of atta varies from 86% to 92% and choker and refraction amounts to 7% to 13%, while the balance is shortage on account of dust and loss due to moisture etc. The amount of 31,93,782 which was worked out by the assessee was on the basis of the certificate obtained fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products which are being retained by the party which has taken the job work of grinding. Therefore to assume that the total amount retained by the other party, which is treated as payment only consists of atta or daliya does not appear to be logical or scientific. (b) Keeping in view the fact that the total amount of retention/payment made to M/s AIL has only been treated as atta and daliya by the Assessing Officer also does not appear to be fair and justified. From the assessment order itself it appears that this issue had not been elaborately considered by the Assessing Officer or fully elaborated by the appellant during the assessment proceedings. Accordingly opportunity was provided to the Assessing Officer to comment upon the issue of valuation contended by the AR of the appellant. The Assessing Officer has not commented upon the merits of the valuation and has ignored the certificate of the Wholemeal Atta Manufacturers Association as well as the certificate obtained from M/s AIL. In my opinion even if the exact percentages mentioned in these certificates may not be fully relied upon it cannot be disputed on facts that there are several by products on grinding of wheat cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciated by the Assessing Officer before arriving at this valuation. The Assessing Officer is, therefore, directed to consider the valuation of the amount retained by M/s AIL by keeping in mind that the total retention includes atta/daliya as well as choker, refraction and wastage. The Assessing Officer is directed to verify the computation made by the appellant after keeping in view the general certificate of the Wholemeal Atta Manufacturers Association, since the output includes the various items and the amounts shown by M/s AIL has not included atta/daliya, estimation needs to be made to include these products also. Considering the difficulty in arriving at an exact figure, the value of the retention products is taken at 40,00,000 instead of 31,93,782. However, this estimation is subject to verification to be made by the Assessing Officer regarding the actual amount of wheat and daliya shown as retained amounts in the books of the appellant as mentioned in the assessment order. In case such amounts have been reflected in the books of account, the valuation done by the Assessing Officer shall override. As a result after careful consideration of the facts of the case and the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cking on the terms and conditions hereinafter set forth. Now this Agreement Witnesseth as Under: 1. Products: 1.1 The products shall be manufactured in accordance with the specifications and descriptions mentioned in annexure A hereunder written as well as the standards of quality as per prevention of Food Adulteration Act, 1954 and rule made thereunder (hereinafter the prescribed specifications). 1.2 In the event of the products supplied by AIL does not conform to the prescribed specifications, the company Ahaar reserves the right to reject such product. 1.3 In the event of AIL fails to deliver the products as per terms and conditions of this agreement or within the delivery time specified, Ahaar shall have the right to outsource the products at the cost and Risk of AIL. In that case AIL agrees to indemnify Ahaar the cost that may have incurred due to the reason of failure of the AIL to carry out his obligations under this agreement. 1.4 Ahaar shall be entitled, at its discretion, to depute and retain a quality control advisor to be located in plant (when manufacturing the product for Ahaaar) in order to monitor the product specification, however, Ahaaar shall not rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isdiction in the event of any legal/jurisdictional proceedings. In witness thereof these presents have been executed on behalf of the parties hereto as of the day and year first above written. For Ahaar Consumer Products Pvt.Ltd. For Ahaar International (I) Ltd. Sd/- Sd/- Director Director" Annexure 'A' and 'B' which are part of the agreement are also reproduced "Quality Standard Annexure A The specification of atta will depend on the market it is servicing. However, the broad specification are as under:- Moisture content 10% (Maximum) Total Ash 1.5% to 1.75% Acid insoluble ash 0.1% Alcoholic Acidity 0.12% Glutein 9% Minimum Water Absorption More than 80% Foreign Matter Nil Grits/Stone Nil Particle Size distribution Will be informed according to market Cleaned wheat specification Should have Nil extraneous matter Quality Standard Annexure B Wheat may contain maximum of following: Foreign Matter/Refraction (a) Mud Bulb/Stone 0.5% (b) Poisonous seed Nil (c) Chaff 1.0% (d) Other seeds of food grains 0.5% (e) Damaged grain 0.5% Dunky (Vevilled) 0.5% Broken and Shrevilled 4.0% Kernal Burnt (Kanta) 0.5% Po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the account of the contractor as payable which requires the assessee to deduct tax and, therefore, the application of the provisions of section 194C as well as the provisions of section 40(a)(ia) of the act is not justified. All the contentions that were taken before the two revenue authorities are reiterated before us including the case laws. 11. Ld. DR, on the other hand, strongly supported the findings of the AO and to the extent the addition is sustained by the CIT(A) to the findings contained therein. The provisions of section 194C which obliges the deduction of tax at source relevant to the AY 2006-07 are reproduced below:- [Payments to contractors and sub-contractors. 194C.[(1) Any person responsible for paying any sum to any resident (hereinafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and- (a) the Central Government or any State Government; or (b) any local authority; or (c) any corporation established by or under a Central, State or Provincial Act; or (d) any company; or (e) any co-operative society; or (f) any au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent of such sum as income-tax on income comprised therein: [Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the sub-contractor, shall be liable to deduct income-tax under this sub-section.] [Explanation I:- For the purposes of sub-section (2), the expression "contractor" shall also include a contractor who is carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the Government of a foreign State or a foreign enterprise or any association or body established outside India.] [Explanation II]:- For the purposes of this section, where any sum referred to in sub-section (1) or sub-section (2) is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative society.] [Explanation:- For the purposes of clause (i), "goods carriage" shall have the same meaning as in the Explanation to sub-section (7) of section 44AE.] (4) [***] (5) [***]] 12. Now, we have to examine whether the assessee is obliged to deduct tax at source on the so-called constructive payment as construed by the AO in terms of the agreement. The assessee, in this case, supplies 100 kg of wheat and takes back 88 Kgs of Atta or 85 Kgs of Dalia after its processing done by the AIL and AIL is required to deliver the end product in this proportion to the assessee who has supplied the raw material. Does the provision of section 194C of the Act create an obligation on the part of assessee to deduct tax at source in respect of any of the transactions it has entered into with the AIL? section 194C of the Act was brought into statute by the Finance Act, 1972. Circular No. 86 dated May 29, 1972 was issued inter alia stating that the provisions of section 194C would apply only in relation to labour contacts and would not cover contracts for sale of goods. If a manufacturer purchases material on his own and manufactures a product as per the requirement of a spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust exchanging the product; in the exchange he is not getting the same product but a different product and not to the same extent but to a different extent. In other words, it is difficult to say that the assessee has made any payment in undertaking this contract on the basis of the agreement that is acted upon by the parties. There is no payment of any sum by the assessee to AIL. Even if one were to say that there is a constructive payment, it is difficult to quantify the same and say that the assessee was under an obligation to deduct tax at source at such construed payments. The assessee has not even credited such construed consideration for supply of labour in the books of account of the assessee. In fact, it has not even claimed any expenditure as deduction. To say that such expenditure has resulted in an outflow without deduction of tax at source is too much and is not borne out from the transaction entered into between the parties. The question of disallowance by applying the provisions of section 40(a)(ia), in our opinion, is not in accordance with law as the assessee is under no obligation to deduct the tax at source in terms of a contract where it does not require any pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch services are claimed as deduction from the profit and gains of business under section 32 to section 38. Only when the claim of the assessee for deduction is under section 32 to section 38, the provisions of section 40(a)(ia) can be pressed into service to disallow such claims for deduction. At the cost of repetition, we may say that to invoke said provision of section 40(a)(ia), first of all, the case should be made out by the department that the assessee is contemplating deduction under sections 32 to 38 on which tax is deductible and the assessee has not deducted tax at source. In our opinion, tax is not deductible and the assessee has not claimed any deduction under section 32 to section 38. This loss, if any, is in the net profit in the trading account which is a computation under sections 28 and 29 and not claims under sections 32 to 38 of the Income-tax Act. Even taking this view of the matter, in our opinion, the assessee is entitled to succeed and there is no question of deduction of tax at source and consequently no question of making any disallowance by invoking the provisions of section 40(a)(ia) of the Act. 14. We must also view the whole transaction under the agre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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