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TMI Blog2023 (7) TMI 1075X X X X Extracts X X X X X X X X Extracts X X X X ..... as manufactured, (iii) the material required in the manufacture of the article or thing was obtained by the manufacturer from a person other than the assessee, (iv) the property in the articles passed upon the delivery of the product manufactured, and (v) until delivery, the assessee had no title to the goods. Thus the provisions of Section 194C were not applicable, and more particularly the agreement did not fall within the definition of works contract as laid down in Explanation to Section 194C of the Act. As in the present case, the assessee is not accustomed to providing specifications or designs to the suppliers. It is also not a case that the suppliers are manufacturing the goods at the instance of the assessee. Further, the goods supplied are not under the brand/name of the assessee and instead bear the brand/mark/name of the respective supplier/original manufacturer. No reason to interfere with the order of the Ld. CIT(A) in 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 - Decided in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii. Dream beams iv. Shakti sales corporation vi. Prime marketing vii. P G enterprise pvt ltd vii, Keshvi Fashion. Etc. (emphasis supplied) 4. In response to the above, it is noted that the assessee submitted that, it did not have any agreement or contract for manufacture with any of these parties and that this averment was incorrect. It was explained that the assessee had purchased goods from these parties under their Sales or Return model in terms of which the goods were sold by the vendor under their respective brand names and upon issuance of tax invoices. It was also submitted that the risk title in the goods stood transferred to the assessee upon delivery of goods. In support of their contention, the assessee furnished sample copy of Sale or Return arrangement with a vendor along with details of purchases whose value was in excess of Rs. 5 lacs. The relevant portion of the submission of the assessee is set out below, for the sake of convenience. At the outset, it is submitted that Shoppers Stop has not entered into any agreement with any parties for manufacturing of specific designer dresses . Shoppers Stop is in business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms clause 4 to Annexure C of agreement Vendor shall be responsible to supply of goods to SSL on the basis of purchase orders . This clearly make an obligatory criteria by the Shoppers stop to its vendors on the basis of purchase orders and due to this Vendor has to manufacture the goods as per the terms of agreement. Just making lucid words in the context of selling the products in the agreements it does not change the inherited jobs of manufacturing and supplying f) As per terms clause 5 to Annexure C of Agreement it is expressly agreed and understood by and between Vendor and SSL to sale the goods It is mutually agreed between the parties vendors will manufacture and supply to SSL who in turn will sale their products at their counters. (Retail as well as online sales) g) As per terms clause 9 to Annexure C of Agreement, SSL shall maintain records of stocks, receipts/invoices and shall make such records available for inspection to the authorised officer of Vendor with prior written notice of at least fifteen days to be provided by the Vendor to enable verification of Goods supplied by Vendor. The assessee's contention that the vendor took all risk till the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the nature of works contract. The AO, accordingly, held the assessee to be an assessee-in-default u/s 201(1) of the Act for failure to deduct tax at source u/s 194C of the Act and worked out the default amount at Rs. 36,99,46,688/-. The AO further levied interest on the same u/s 201(1A) of the Act. Aggrieved by such action of the AO, the assessee preferred an appeal before the Ld. CIT(A). 8. Before the Ld. CIT(A), the assessee explained that the AO had misunderstood the facts of the case and since little time (4 days) was allowed to them to respond to the show cause, the assessee was unable to furnish relevant details and confirmations from concerned vendors which would establish that the assessee had purchased goods from these vendors and that there was no works contract. The assessee, accordingly, filed additional evidences which was accompanied with a prayer for admission in terms of Rule 46A of the Income-tax Rules, 1962 [herein after the Rules ]. It is noted that these additional evidences were sent to the AO for his comments vide letter dated 05-02-2019 and the report of the AO was received under letter dated 26-04-2019, which has been extensively reproduced at Page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivity of sales and pay fixed margin as per agreement against the use of said place/premises to shoppers stop therefore it is specially asked to vendors why the provisions of section 194l should not be applicable to these vendors. In this regard they denied the same and confirmed they have supplied the products to shoppers stop as per their placement of orders. The replies of these supplier of the products are kept on record and authenticate that the supply was made on contractual terms. (vi) In the light of the above stated facts the provisions of section 194C are squarely applicable on the said transactions in which the assessee would like to camouflage the same with the purchases. 9. After considering the submissions and the rejoinder put forth by the assessee in light of the AO s order as well his remand report, the Ld. CIT(A) held that, the assessee had purchased goods from these vendors under Sales or Return arrangement and that it was not in the nature of works contract as contemplated u/s 194C of the Act. For this, the Ld. CIT(A) relied upon the decision of the Hon ble Bombay High Court in the case of CIT Vs Glenmark Pharmaceuticals Ltd (324 ITR 199). The Ld. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and the vendor a contract for sale/ return in spite of the fact that the payment against the delivery of the goods was not made on the basis of delivery of the goods but the payments were made only of the goods which were sold out at the outlet of the assessee. 7. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in holding that the agreement between the assessee and the vendor a contract for sale/ return in spite of the fact that the sale prices of the goods to the customers were fixed mutually which is not as such as in the case of normal sale/ return. 10. At the time of hearing, Shri. Rakesh Ranjan, the Ld. DR, heavily relied upon the observations made by the AO in the impugned order and also the findings recorded in the remand report. He submitted that the Ld. CIT(A) had failed to correctly appreciate the finer nuances brought out by the AO from the various clauses of the Sales or Return ( SOR ) agreements with vendors which showed that it was not a simple contract of purchase of goods but it was a composite contract involving supply of goods and services as well and therefore the AO had rightly invoked the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting; (c) carriage of goods or passengers by any mode of transport other than by railways; (d) catering; (e) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer , but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer. (emphasis supplied) 13. From reading of the above provision, it is noted that the term work has been defined in an inclusive manner 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. It is noted that, the AO does not contemplate holding that the case of the assessee falls within the ambit of items mentioned at sub-clauses (a), (b), (c) or (d) of clause (iv) of the Explanation. The relevant sub-clause in question is sub-clause (e) of clause (iv) of the Explanation to section 194C of the Act, which relates to manufacturing or supplying a product according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Finance (No.2) Bill, 2009, which read as follows: c. Clarifications regarding 'work' under section 194C. There is ongoing litigation as to whether TDS is deductible under section 194C on outsourcing contracts and whether outsourcing constitutes work or not. To bring clarity on this issue, it is proposed to provide that 'work' shall not include manufacturing or supplying a product according to the requirement or specification of a customer by using raw material purchased from a person other than such customer as such a contract is contract for 'sale. This will however not apply to a contract which does not entail manufacture or supply or an article or thing (e.g, a construction contract). It is also proposed to include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer, within the definition of 'work'. It is further proposed to provide that in such a case TDS shall be deducted on the invoice value excluding the value of material purchased from such customer if such value is mentioned separately in the invoice. Where the material component has not bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r issues credit notes to the assessee. Hence, some vendors also depute their personnel to assist in the sales at the retail outlets of the assessee to increase the visibility and sale-ability of these products. In case of any defect found in these products, the vendors also provide after sales support. Further these arrangements are noted to have provision for joint inventory taking for better management and the payments are made by the assessee on a monthly basis, in respect of the products which have been sold at its outlets. The agreements also specify the margins which the assessee can retain on the sales made. 18. The case of the Revenue is that, these SOR arrangements are not in the nature of contract for sale but in the nature of works contract . According to the AO, these SOR arrangements are composite in nature, involving supply of both material labour, but wherein the predominant supply is labour efforts by the vendors. The AO is noted to have discussed the features of the SOR arrangements, as understood by him, which led him to infer that these are in the nature of works contract amenable to Section 194C of the Act. The Ld. AR showed us that each of these obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , raising of invoice and delivery of goods to the Similar assessee and that such sale was on principal to principal basis Page No) (VIP) confirmation is noted to have been given by Cravatex Brands Ltd of PB 107) We note that, the AO had also examined the and others as well s 131 of the Act and each of them /personnel of these vendors on oath u/managers confirmations/had also affirmed the terms enlisted in the agreements 20. From the above enquiries, it is thus noted that, not all vendors are manufacturers as alleged by the AO,. But several of them are suppliers/traders as Each of these vendors have confirmed that they had sold goods to the well The assessee neither provided assessee on principal to principal basis specifications or designs nor did the assessee provide raw materials in relation to They have also confirmed that the title, risk and property in goods these goods passed to the assessee upon sale, issuance of invoice and delivery of goods at their These vendors do not supply their products to the assessee alone but they outlets or also sell these products /also sell the same products to different retailers and On these facts, we therefore franchise exclusive showrooms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oval and not manufacture the same. It is noted that the Ld. CIT(A) had taken specific note of this aspect and after examining the facts in detail, he had agreed with this explanation put forth by the assessee. The relevant findings, as noted by us, is as under: 5.21 The inference drawn by the Assessing Officer that 'production' of products before SSL for approval means 'manufacturing of the product and then its production before SSL' is clearly not borne out of the facts available. The vendors in this case are vendors owning brands with a very high market value and mostly the products under those brands already available in their inventory. The 'production' of sample of each item before SSL logically means 'making available of such items to SSL for examination' from the inventory available with the vendor. Selection of items out of such samples means selection of some items out of the total models available with the vendor which would have more likelihood of sale at the SSL outlets. It is noted that such production of items before SSL cannot mean production of such items manufacturing facilities of the vendors. None of the evidences collected / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, who are noted to have international repute, is not directly dependent on the orders placed by the assessee. These suppliers are noted to manufacture and supply their products to several retailers and that the assessee is only one of them which procures their products. The assessee does not provide any specifications for manufacture of these products but it only selects from the wide array of the products offered by these vendors which it chooses to sell through its retail outlets. These products sold through the retail outlets are not branded by the assessee but they carry the brand /name of the original suppliers / manufacturers. These material facts remained uncontroverted by the Revenue. We thus agree with the findings of the Ld. CIT(A) that, these SOR arrangements were on principal to principal basis and therefore in the nature of contract for sale of goods and thus, such an arrangement cannot be categorized as works contract as defined in Section 194C of the Act. 24. The AO is further noted to have laid much emphasis on the aspect that, the assessee had long term arrangements with these vendors and therefore it was not in the nature of ordinary purchases as claimed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... known that the trained sales staff are placed by these suppliers at the retail outlets to educate or assist the customers who visit the retail outlets of the assessee to increase their sales. Hence, we agree with the Ld. CIT(A) that, 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 . 26. Further, if any of the customers of the assessee reports any product defects or size issues at the retail outlets, the assessee, in turn, avails the after sales support from the suppliers/ original manufacturers. This after-sales support subsequent to sale of goods is a common feature in any contract for sale. In any line of business, the distributors / wholesalers / retailers avail the after sales support for their customers from the original manufacturer, but that does not mean that their contracts with the manufacturers are not for supply of goods. 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. 27. One of the clauses of the SOR agreement also p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arket and the quality of their products and thereafter enters into SOR agreements with them. These agreements are in the nature of Memorandum of Understanding laying down the terms and conditions of the supply of goods. The vendors present their samples of an array of products for selection. The assessee, after evaluating the samples, places the purchase orders and thereafter the goods are supplied from the vendors from time to time. b) The vendor supplies the goods either out of vendors' existing stock or goods manufactured or purchased or imported by the vendor. It is noted that there is no correlation between the purchase orders placed by the assessee and the goods manufactured or procured by the vendors. The vendors act in their own independent capacity and the goods supplied by them are manufactured from the raw materials sourced by themselves and nothing is provided by the assessee. Even the designs and specifications are decided by the vendors without the involvement of the assessee. Moreover, even the goods supplied by the vendors only carries the brand/ name of the respective vendors and not of the assessee. c) The property in the goods passes onto the assessee u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs on an outright basis, the assessee also had agreements in place with certain third parties who although would source raw materials on their own but they would manufacture the products as per the specifications and standards provided by the assessee and under its trade mark. According to the AO, such an agreement was in the nature of works contract amenable to Section 194C of the Act. Since the assessee had not deducted taxes at source from such payments, it was held to be an assessee-in-default u/s 201 of the Act. Although the Ld. CIT(A) upheld the order of the AO but on further appeal this Tribunal decided the issue in favour of the assessee. It is noted that this Tribunal had held that, though the products were manufactured in accordance with the specifications of the assessee and under its trademarks, but the manufacturer carried out the process of manufacturing at his own establishment, engaged his own labour force, purchased the raw materials on its own and paid excise duty and sales-tax, and the property in the goods passed onto the assessee only upon delivery of the products. Referring to the decision rendered by the Hon ble Bombay High Court in the case of BDA Ltd. v. IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te a sale. What is significant is that in using the words which clause (e) uses in the Explanation, Parliament has taken note of the position that was reflected in the circulars issued by the Central Board of Direct Taxes since May 29, 1972 The judgment of the Supreme Court in Associated Cement gave an expansive definition to the expression work and rejected the attempt of the assessee in that case to restrict the expression work to works contracts Both before and after the judgment of the Supreme Court the expansive definition of the expression work co-existed with the Revenue's understanding that a contract for sale would not be within the purview of section 194C. The Revenue always understood. section 194C to mean that though a product or thing is manufactured to the specifications of a customer, the agreement would constitute a contract for sale, if (i) the property in the article or thing passes to the customer upon delivery; and (ii) the material that was required was not sourced from the customer/purchaser, but was independently obtained by the manufacturer from a person other than the customer. The rationale for this was that where a customer provides the material, what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... protect the intellectual and other property rights of a party which markets its goods by requiring a manufacturer to observe norms of specification and exclusivity. The law is, therefore, consistent with the transaction being regarded as a transaction of sale, provided that the requirements of a contract of sale are met. They are in this case. The contract entered into by the assessee is not a contract for carrying on any work within the meaning of section 194C. 32. In the above binding judgment, the Hon ble Court while examining clause (e) as introduced by the Finance (No.2) Act, 2009, noted that it contains a positive affirmation that the expression 'work' will cover manufacturing or supplying a product, according to the requirement or specification of a customer, by using material purchased from such customer. It has also been noted by the Hon ble High Court that clause (e) has placed the position beyond doubt by incorporating language to the effect that 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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