DCIT (OSD) (TDS) -2 (2) , MUMBAI vs. SHOPPPERS STOP LTD, MUMBAI

Brief facts as noted by the AO were that, the assessee is a company which runs retail stores, having 83 stores in 38 cities across India, and that it deals in clothing, accessories, footwear, jewelry, fragrances, cosmetics, health and beauty products, home furnishing and décor products. A survey action u/s 133A of the Act was carried out upon the assessee on 01-08-2018 and during the post survey analysis it was revealed that the assessee was not deducting taxes on payments at appropriate rates. In the course of the proceedings conducted u/s 201(1) of the Act, the AO noted that the assessee had agreements with various vendors in terms of which the assessee would sell apparels/goods/cloths/footwear/various items through its retail outlets as well as its online marketplace, and that such items were being manufactured by these vendors as per the designs approved by the assessee. The AO, accordingly, issued the following show cause to the assessee:

The AO, having regard to the above facts (supra) as noted by him, went on to analyze the same in light of the provisions of Section 194C of the Act. The AO noted that the contract specified the material and work along with the estimated cost of supply and labour. It was further observed by the AO that, it was only when the completed product, free of any defect, was handed over by the vendors and which was to the satisfaction of the assessee, that the assessee would make the payments to the vendors in relation thereto. It was also noted by the AO that the vendors were also rendering ancillary services such as distribution at store, removing defects, return of sales, after sales services, etc. which were also 5

Referring to the definitions of works contract set out in different dictionaries, the AO inferred that, whether a particular contract is one of sale of goods or work depends upon the main object of the parties which can be examined from the terms of the contract, customs of the trade and circumstances of the transaction. According to the AO, if the primary object is bestowal of labour and services and the supply of material is merely incidental, then it is a works contract. The AO noted that, the assessee approved the goods manufactured before it was put up for sale at its retail outlets, clients would avail after sale services from the vendors and not the assessee, that the vendors modified the defects and the vendors assisted in maintenance of stock, sale, distribution, etc. as well. The AO thus held that such contractual agreement was a works contract which was squarely covered under the provisions of Section 194C of the Act and therefore the assessee was under the legal obligation to deduct tax at source on the payments made to these vendors. The assessee, however, had not deducted any tax at source as it was their contention that the transactions with the vendors were for purchase of goods and not 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).

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 Pages 9 to 20 of the impugned order. It is noted that the AO had made enquiries both u/s 133(6) & 131 of the Act from the vendors, all of whom had complied with the same. The AO has set out his remarks/observations in a tabulated format (which shall be discussed in detail in the later paragraphs). Having regard to the same, the AO summarized the points/issues gathered in the remand proceedings as follows:

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(A) accordingly held that the assessee did not have any liability to deduct tax at source u/s 194C of the Act and thus deleted the demand raised by the AO u/s 201(1)/(1A) of the Act. Aggrieved by the said order of the Ld. CIT(A), the Revenue is now in appeal before us on the following grounds:

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

On the other hand, the Ld. AR Shri Vijay Mehta supported the order of the Ld. CIT(A). He took us through the relevant findings and showed us that the Ld. CIT(A) had dealt with each of the observations made by the AO (which will be discussed infra) and thereafter concluded that the SOR arrangements were in the nature of contract for supply of goods and not works contract. The Ld. AR accordingly prayed that the order of the Ld. CIT(A) should not be interfered with.

We have heard both the parties and also carefully perused the relevant material and documents placed before us. The issue for our consideration is whether, the arrangement between the assessee and the vendors for supply of products was in the nature of ‘works contract’ as defined in Section 194C of the Act or not; and hence, whether the assessee is required to withhold tax on the same. Before we proceed to examine the facts of the present case, it would first be relevant to take note of the relevant provisions of Section 194C of the Act and also the meaning of the term ‘works contract’. The relevant provisions contained in Section 194C of the Act reads as follows:

In view of the above, the legal position which emerges is that, in a case where no raw material is supplied by the assessee to the manufacturer for production of the goods, then irrespective of the fact that, the manufacturer has produced the goods in accordance with the specifications or directions of the assessee, it cannot be considered to be 'work' within the definition provided in the sub-clause (e) to clause (iv) to the Explanation of Section 194C of the Act.

In light of the above legal proposition, we now proceed to examine the facts of the case. It is noted that, the assessee is a multi-brand retailer which sources the products from various reputed brand owner-cum-manufacturers viz., Fossil, Arvind Lifestyle, Titan, etc. The assessee purchases goods/products from these vendors either on outright basis or under Sales or Return (‘SOR’) basis. The transactions in dispute in the present case relates to the purchases made by the assessee from various vendors under the SOR model. From the details of these suppliers placed before us, it is noted that each of these suppliers are noted to be independent suppliers having their own existence, irrespective of the arrangement with assessee. Most of these vendors are well-known and the goods supplied by them are their standard products which are supplied by them to any or all retailers or even sold through their own exclusive showrooms, located anywhere in the world. The assessee has entered into an SOR arrangement with these vendors, in ITA.NO. 1783/MUM/2021 AY. 2017-18 Shoppers Stop Ltd, Mumbai terms of which the assessee first inspects the samples before placing the purchase orders. Once the products are identified and selected, the assessee places the purchase orders with the vendors who commit to supply to it. The key features of an SOR arrangement (sample agreement dated 15.06.2016 with M/sFossil India Pvt. Ltd is found placed at Page 1 to 18 of paper book) as noted by us are that, if these products remain unsold at the stores of the assessee, then the assessee may choose to return these goods back to the vendors, and against which the latter 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.

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 observations made by the AO, which has been relied upon by the Ld. DR, had already been dealt with on facts by the Ld. CIT(A)

It is noted by us that, having regard to the above observations made by the AO and to take the matters to its logical conclusion, the Ld. CIT(A) had remanded the matters back to the AO to make an independent verification from the vendors with regard to the nature of these SOR arrangements. From the remand report and the documents placed before us, it is noted that the AO had made independent enquiries both u/s 133(6) and 131 of the Act from these vendors. The assessee has placed copies of the relevant letters/ confirmations furnished by these vendors before the Ld. AO, which is found placed at Pages 104 to 130 of paper book. Upon going through the same, for instance, it is noted that vendor, M/s Tommy Hilfiger Arvind Fashion Pvt. Ltd (Page no. 105 of PB) had confirmed that the sourced by them from their / goods supplied by them to the assessee were imported Meaning thereby, this vendor itself was a trader in goods and . nominated suppliers not a manufacturer as alleged by the AO . This vendor also confirmed that they had sold their goods to the assessee for sale through their retail outlets and that similar products were also being sold through other retailers and their own , Similarly . exclusive showrooms M/s Intercraft Trading Pvt. Ltd (Page no. 106 of the PB) had confirmed that they were distributor (not manufacturer) of the goods supplied to the assessee and that none of the materials were supplied by the assessee. They also confirmed that these goods were sold on sale or return basis. Like the earlier vendor, they also confirmed that they had sold their goods to the assessee for sale through their retail outlets and that similar products were also It is further . being sold through other retailers a nd their own exclusive showrooms of PB 109 . Page No ) ( Blackberry ) Mohan Clothing Co Pvt Ltd / noted that, M ) has ITA.NO. 1783/MUM/2021 AY. 2017-18 Shoppers Stop Ltd, Mumbai submitted that the goods manufactured by them were as per their own specif ications and based on the inputs of their own designing team and not the The vendor also confirmed that none of the raw materials to manufacture . assessee It further stated that the title and property in the . were provided by the assessee goods was transfe rred upon sale, 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

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 desig ns 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 / through their own had rightly held that the SOR arrangements with these ( A ) CIT . note that the Ld

It is noted that the foremost observation made by the AO to hold that the SOR arrangements were in the nature of ‘works contract’ was that, there is a manufacturing agreement in place between the assessee and the vendors and that these vendors first manufacture samples, as per the specifications & designs provided by the assessee, and only if the same is approved that the assessee places orders and these vendors manufacture the same at the instance of the assessee. As already noted above, it is not the case that all the SOR arrangements are with manufacturers but there are several distributors as well who deal with the assessee on principal to principal basis. Before us, the assessee has placed on record a sample SOR agreement with a manufacturer-supplier. Having perused the same, it is noted that there is no such manufacturing arrangement in place between the assessee and this vendor based on which one may infer that this supplier is manufacturing at the instance or behest of the assessee and that too as per the specifications/designs provided by the latter. We thus agree with the Ld. CIT(A) that this observation of the AO is factually erroneous. As noted earlier, these products are procured from internationally reputed brands who are independent manufacturers or vendors themselves. These products purchased by the assessee bear the brand names of these suppliers and not the assessee which further supports the case of the assessee that these products were not being manufactured at their behest. It is noted from the terms of the agreement that, the assessee does not enjoy any right to place orders for manufacture of any new product but instead only exercises the right to choose from various product offerings from the array of products manufactured by these suppliers. Such supply, being independent of raw

It was brought to our notice by the Ld. AR that, the AO got swayed by the use of the phrase ‘produce sample’ in the agreement. According to him, ‘produce sample’ meant to present the sample for approval 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:

It was further rightly noted by the Ld. CIT(A) that, even if it be the case that the assessee had provided specifications in relation to supply of these products (although that is not the case), still it could not qualify as ‘works contract’ in light of the specific exception set out in clause (iv)(e) of Explanation to Section 194C of the Act, as discussed earlier. It is not the case that, the assessee provided or supplied materials to any of these vendors/suppliers. It is noted that, each of these vendors manufactures or procures the products in their own independent capacity and under their respective brand names in as much as that the assessee does not have any say in the same. In fact, the goods manufactured by these vendors, 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 21

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 the assessee. Having regard to the facts as already discussed in the foregoing, and also having perused sample agreements, we note that nothing much turns on this issue as observed by the AO. As rightly noted by the Ld. CIT(A), it is a common feature in any business that, suppliers enter into a written agreement/understanding with their major customers to outline the terms and conditions and the respective responsibilities / liabilities to avoid confusion in future. Further, the placement of purchase orders in any line of business ensures that the suppliers can correspondingly schedule their production in an organized fashion to avoid disruptions or delays in deliveries. The Ld. AR pointed out that, the assessee-retailer primarily deals in clothing/ apparels/ fashion etc. which changes with time and also with each season (summer/rainy/winter), and therefore the assessee-retailer has to ensure that it is stocked up with the clothing/ apparels/ fashion that is relevant and saleable during the material period/ season for which it places appropriate orders in advance with these suppliers from amongst the samples presented by them. Hence, the ITA.NO. 1783/MUM/2021 AY. 2017-18 Shoppers Stop Ltd, Mumbai placement of purchase orders by the assessee prior to the supply of goods by these vendors cannot render the arrangement to be held as a ‘works contract’.

The AO thereafter is noted to have referred to the ancillary services provided by the suppliers viz., deputation of personnel at the retail stores, provision of after sales support to remove defects, joint inspection of inventories, etc., to allege that the predominant intent of these SOR arrangements was the supply of labour and not material. According to us, each of these averments made by the AO were totally misplaced on the given facts of the case. As we have already noted above, these SOR arrangements are in the nature of contract for supply of goods. One of the key features of such an arrangement is that, the goods purchased by the assessee may be returned if it remains unsold in their outlets. Further, the assessee sells these goods through its retail outlets which houses multiple brands of similar apparels/ cloths/ fashion etc. Moreover, the Ld. AR explained that, with these products getting more complex and expensive and with the changing fashion, they require specialized handlers to explain the same to the customers to introduce them to the new features or the new fashion in vogue. It is therefore, commonly 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’.

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.

One of the clauses of the SOR agreement also provides for the joint inspection of stock at the retail outlets of the assessee, which according to the AO, shows that there are other onuses on the vendor as well and therefore it is not a mere purchase-sale of goods. Before the Ld. CIT(A), it was explained by the assessee that, this clause was set out in the agreement because as per the agreed terms of payment, the vendors are paid weekly/monthly based on the goods sold at the retail outlets. Accordingly, in order to ensure that the payments are being made in a timely fashion, the vendors sought the right to inspect the inventory lying at different retail outlets, if so desired by them. Further, having regard to the nature and line of business, i.e. clothing/shoes/bags/fashion/apparels, etc., the vendors want to take stock of the slow moving items at different locations and thereby get a timely feedback in terms of the evolving sense of taste & liking of the customers, to accordingly chart out their next line of clothing/ shoes/ bags/ fashion/ apparels, etc. Hence, as rightly held by Ld. CIT(A), this clause/option vested with the vendors is of no relevance and does not in any 24

The last observation of the AO was that, the payments towards the goods supplied by the vendors were being released by the assessee either after the goods were found to be complete without any defect by the assessee, or after the complete goods were found to be to the satisfaction of the assessee, or after the goods were sold at their retail outlets, which according to him, suggested that the vendors were the contractors of the assessee. It was rightly pointed out by the Ld. AR that, the terms of payments towards purchase of goods cannot be said to indicate that the contract is that of ‘works contract’ with the vendors. He showed us that, even the Sale of Goods Act 1930, permits contract for payment during delivery of goods or before or after or by installments. In our considered view therefore, this observation of the AO is of no relevance and is not decisive to ascertain the nature of the SOR agreement.

Based on our above findings and observations, the salient features of the SOR agreements with the vendors can be summed up as follows: a) The assessee first selects the vendors based on its stand in the market 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.

In view of the above, we note that the Ld. CIT(A) had rightly placed reliance on the decision of the Hon’ble Bombay High Court in the case CIT vs. Glenmark Pharmaceuticals Ltd (supra) which is found to be relevant and applicable in the present case. In this decided case, the assessee is noted to have been engaged in the manufacture and marketing of drugs and pharmaceutical products. In the course o f the TDS survey, it was noted by the Department that, or purchasing drugs from other / apart from manufacturing drugs on their own and suppliers 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 ITA.NO. 1783/MUM/2021 AY. 2017-18 Shoppers Stop Ltd, Mumbai 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. ITO (TDS) (281 ITR 99), this Tribunal, in the instant case, held that 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. Aggrieved by this order of the Tribunal, the Revenue preferred appeal before the Hon’ble High Court and the following substantial question of law was raised for adjudication :

, A nswering the above question in the negative and against the Revenue the Hon’ble Bombay High Court had held as under:

The reason that a specification or requirement is enunciated by the assessee constitutes a matter of business expediency A purchaser who desires to get the product, which he intends to sell under his brand name, or trademark, manufactured from a third party would be interested in ensuring the quality of the product. The trade-mark has associated with it an assurance of the quality of the goods which are marketed traceable to the origin of the goods. Associated with the trade-mark is the goodwill and reputation which is associated with the at This is particularly so in the case of a pharmaceutical product where the ultimate consumer is legitimately entitled to ensure that her health is not prejudiced by the consumption of a product not meeting prescribed standards. The owner of a mark, therefore, introduces specifications to ensure that the product meets the standards justifiable associated with the reputation in the mark. The specification

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. The Hon’ble Court made it abundantly clear that the fact that specifications were provided by the assessee to the manufacturer / supplier would make no difference to the legal position. It noted that, (i) the agreement in the instant case, was on a principal to principal basis, (ii) the manufacturer had his own establishment where the product was 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. On these principles, the Hon’ble High Court accordingly held that the provisions of Section 194C were not ITA.NO. 1783/MUM/2021 AY. 2017-18 Shoppers Stop Ltd, Mumbai 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.

The Ld. AR Shri Vijay Mehta has rightly pointed out to us that, the case of the assessee is on much better footing than the facts involved in the above cited judgments. It is noted that all the above features (i) to (v) were present in the SOR agreements in question in the present case. Apart from the foregoing, as already noted by us, 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. Hence, the ratio laid down in the above judgment, when coupled with the foregoing facts, is held to be applicable with more force in the present case of the assessee.

For the reasons set out above therefore, we do not see any 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 of the Act. Accordingly, all the grounds raised by the Revenue stands dismissed. Order pronounced in the open court on this 02/12/2022. (AMARJIT SINGH) JUDICIAL MEMBER मुंबई Mumbai; दिनांकDated : 02/12/2022. Shubham Lohar, (PS) 32