ARUNACHALAM MANICKAVE,,GUNTUR vs. THE CIT (A),-3,, VISAKHAPATNAM

आदेश / O R D E R

PER Bench:

These appeals filed by the assessee are directed against orders of

the Commissioner of Income Tax (Appeals)-3 {CIT(A)}, Visakhapatnam

vide ITA Nos.1 to 6/2015-16/CIT(A)-3/VSP/2016-17 dated 19.1.2017 for

the assessment years 2005-06 to 2010-11.

ITA Nos.201 to 206 /Vizag/2017 Arunachalam Manickavel, Guntur 2. For the sake of convenience the facts are extracted from the

appeal for the AY 2005-06.The assessee filed the return of income in

this case on 16.6.2010 declaring total income of ` 81,44,010/-. The

assessment was completed u/s 143(3) r.w.s. 153A of the Income Tax

Act, 1961 (hereinafter called as 'the Act') on 27.12.2011 and the total

income was determined at ` 97,74,850/-. Subsequently, the

CIT(Cental), Vijayawada has taken up the case for revision u/s 263 of

the Act as the assessing officer did not examine the issue with regard to

the tax deduction at source on payments made to packing material and

consequent disallowance u/s 40(a)(ia) of the Act, hence, the CIT(C)

passed an order u/s 263 of the Act holding that the assessment orders

passed u/s 143(3) r.w.s. 153A of the Act were erroneous and prejudicial

to the interest of the revenue for the assessment years 2005-06 to

2010-11 and directed the A.O. to cause the enquiries and make the

investigation and redo the assessment as per law.

The Ld. A.O. taken up the case for reassessment to give effect to

the order of the Ld.CIT(C) and called for the explanation of the

assessee, who in turn stated that the entire packing material was

purchased by the assessee with proper bills and vouchers and there was

no contract. Further, the assessee also stated that Central Excise and

VAT also was collected by the vendor and held that there was no 2

ITA Nos.201 to 206 /Vizag/2017 Arunachalam Manickavel, Guntur contract involved in this case and relied on CBDT circular No.681 dated

8.3.1994 and argued that it was a contract for sale but not contract for

work, hence, the provisions of TDS does not attract in its case and

consequent disallowance also does not arise. However, the AO made

sample verification of the bills produced by the assessee and on

verification of invoice bills, the A.O. found that the packing material was

manufactured specifically for packing the assessee’s products. The

packing material has the assessee’s trade name, logo, particulars of

product and other information printed on it, making such products

specific to the assessee and it cannot be sold to any other party. Thus,

it was observed by the AO that certain value of total invoice pertains to

packing material and rest of the invoice value pertains to the amount

charged for printing work, hence, viewed the amount charged for

printing as work contract and estimated the value at 25% of the total

expenditure, which attracts TDS and accordingly disallowed the same

u/s 40(a)(ia) of the Act.

before the CIT(A) and the Ld. CIT(A) observed that material required for

manufacturing & packing material was not supplied by the assessee,

hence, the same can be called as contract for sale and such contract

cannot be called as works contract. However, the Ld. CIT(A) observed 3

ITA Nos.201 to 206 /Vizag/2017 Arunachalam Manickavel, Guntur from model boxes that the assessee retained right to return the goods,

which is not common in trading. In trading commonly used maxim is

goods once sold cannot be taken back, hence, directed the A.O. to

disallow 10% on the total value of the goods purchased instead of 25%.

before us. Appearing for the assessee, the Ld. A.R. argued that in this

case, the assessee has purchased packing material and there was no

supply contract involved for purchase of the packing material. The fact

that the assessee has not supplied any material shows that there is no

works contract but there was only contract for sale and argued that

contract for sale does not attract the provisions of TDS u/s 194C of the

Act. Merely because the supplier has supplied the material with trade

name, logo, particulars of product and other information, the same

cannot be treated as works contract. The supplier has supplied the

material as required by the assessee. Therefore, argued that the

assessee’s case is squarely covered by circular No.681 of CBDT dated

8.3.1994 and also the decision of this Tribunal in the case of ACIT,

Rajahmundry Vs. Chandana Brothers vide ITA No.59/Vizag/2009 dated

21.12.2010 for the assessment year 2006-07. The Ld. A.R. further

relied on the decision of Hon’ble Delhi High court in the case of CIT Vs.

Dabur India Limited (283 ITR 0197) and the decision of jurisdictional 4

ITA Nos.201 to 206 /Vizag/2017 Arunachalam Manickavel, Guntur High court in the case of Contintental Wines Limited, Vijayawada in ITTA

No.335/2013 dated 20.8.2013.

customized goods according to the requirements of the assessee with

logo, brand name, trade name, particulars of product and other

information printed on it cannot be called as contract for sale and the

same is works contract. Since the items are specifically printed for the

sake of the assessee and cannot be used by others, the same should be

treated as works contract. There is an element of works contract

involved in the supply of the printed material. Therefore, argued that

the Ld.CIT(A) rightly estimated disallowance u/s 40(a)(ia) @ 10% of

packing material, hence, no interference is called for. The Ld. D.R.

relied on the clarification issued by the Government of India, Income

Tax Department circular No.1119, wherein the CBDT clarified that TDS

would apply in respect of printed material as per prescribed

specifications and supported the orders of the lower authorities.

on record and gone through the orders of the authorities below. In this

case, the CIT(C), Vijayawada has taken up the case for revision u/s 263

of the Act and set aside the orders passed u/s 143(3) r.w.s 153A to the

ITA Nos.201 to 206 /Vizag/2017 Arunachalam Manickavel, Guntur file of the AO to decide the issue of disallowance of expenditure u/s

40(a)(ia). While giving effect to the order of the Ld.CIT(C) the A.O.

observed that the assessee has made the payments for printed material

specifically designed for the assessee, which involved the printing

charges, hence, attracts the provisions of tax deduction at source.

Consequent to the order passed u/s 263 of the Act, the A.O. has taken

up the case for assessment and estimated 25% of the printed material

towards the disallowance u/s 40(a)(ia) of the Act. The CIT(A) scaled

down disallowance at 10% of the printed material. The year-wise

breakup of the total expenditure, disallowance made by the A.O. and

sustained by the CIT(A) is furnished hereunder:

Assessment Total Disallowance by Sustained by expenditure (`) A.O. @ 25% (`) CIT(A) @ 10% (`) year 2005-06 48,00,125 12,00,031 4,80,012 2006-07 48,11,001 12,02,750 4,81,100 2007-08 78,74,868 19,68,717 7,87,487 2008-09 1,95,87,537 48,96,884 19,58,754 2009-10 1,19,64,518 29,91,129 11,96,452 2010-11 1,58,05,283 39,51,321 15,80,528

printing material and there was no element of contract involved.

Department’s case is that though assessee had purchased the printing

ITA Nos.201 to 206 /Vizag/2017 Arunachalam Manickavel, Guntur material and some part of the packing material involved the works

contract, which required to be disallowed u/s 40(a)(ia) of the Act. Both

the CIT(A) and the A.O. made the disallowance by estimation. Neither

the A.O. nor the CIT(A) quantified the expenditure and specified the

element which attracts the provisions of TDS u/s 194C of the Act. As

per the provisions of section 40(a)(ia) of the Act, any sum payable to a

resident on which tax is deductible at source under chapter XVII-B and

such tax has not been deducted or after deduction has not been paid

required to be disallowed u/s 40(a)(ia) of the Act. There is no case for

estimation of such expenditure. It is obligation on the part of the A.O.

to quantify the amount, which attracts the TDS u/s 194C of the Act.

Only such an amount required to be disallowed u/s 40(a)(ia) of the Act.

In the instant case, the assessee argued that the case is covered by

circular No.681 dated 8.3.1994, which reads as under:

“The provisions of section 194C would not cover ‘contracts for sale’ of goods. It has further stated that, where a contractor undertakes to supply and article or thing fabricated according to the specifications given by the 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 would be outside the purview of section 194C.” 8. The CIT(A) in his order given a finding that in the absence of

supply of raw material, the transaction between the printer and the

assessee is contract for sale. However, since the logo, colour, size of

ITA Nos.201 to 206 /Vizag/2017 Arunachalam Manickavel, Guntur the boxes and cost of material purchased by the assessee lends an

element of doubt regarding the supply of packing material and the

maxim used by the supplier that right to return the goods also has given

suspicion to the Ld.CIT(A) and to tend towards the works contract and

directed the A.O. to make the disallowance u/s 40(a)(ia) of the Act @

10% on estimation. However, Hon’ble ITAT in the case of Chandana

Brothers cited (supra) relied up on by the assessee, on similar facts held

that buying the packing material with some specifications does not

attract the provisions u/s 194C of the Act. For ready reference, we

extract relevant part of the ITAT order, which reads as under:

“The learned CIT (A) deleted the addition by holding that the packing material etc., falls in the category of ‘Contract for sales’ and not under “Work contract” and accordingly held that the said payments fall outside purview of Section 194C of the Act. Accordingly he deleted the impugned addition made in all these cases. The learned CIT (A) relied on the decisions of Hon'ble Bombay High Court in the case of BDA Ltd. vs. ITO (TDS) (2006) 281 ITR 99 and the Hon'ble Delhi High Court decision on the case of CIT vs. Dabur India Ltd. (2006) 283 ITR 197.

ITA Nos.201 to 206 /Vizag/2017 Arunachalam Manickavel, Guntur 9. The Hon’ble ITAT relied on the decision of Hon’ble Delhi High

Court in the case of Dabur India Limited cited (supra) where in, it was

held that predominant object of contract for supply of corrugated boxes

with printed labels was for sale of goods and therefore, the contract was

outside the purview of section 194C of the Act. Hon’ble jurisdictional

High court in the case of Continental Wines Ltd. cited (supra) followed

the order of the Hon’ble Delhi High Court in the case of Dabur India

Limited (supra) and held that even if there is some logo of the assessee

printed on it, it would not change the nature of transactions to works

contract. For ready reference, we extract the relevant part of the order

of the jurisdictional High Court as follows:

The Learned Tribunal on fact found that the assessee has incurred advertisement expenditure. The Learned Tribunal further found that the predominant object underlying the transaction of receiving the T-shirts and making the payments is largely for purchase of goods and even if there is some logo of the assessee printed on it, it would not change the nature of the transaction to works contract, so as to attract the provisions of Section 194C of the Income Tax Act. The learned Tribunal has also taken note of the decision of the Delhi High Court in the case of CIT Vs. Dabur India Ltd., (283 ITR 197) and applied the law correctly and as such we do not find any reason to interfere with the same. Thus, we do not want to admit this appeal.”

CBDT referred above, the same is not binding on the courts and it is a

mere clarification but not the binding circular. The said clarification did

ITA Nos.201 to 206 /Vizag/2017 Arunachalam Manickavel, Guntur not contain any details. Whereas circular No.681 of CBDT it is very

clearly specified that contract for sale would not cover the provisions u/s

194C of the Act. Though the Ld. D.R. referred one of the purchase bills

furnished in the paper book and argued that the assessee has not paid

any CST or VAT and the same was in the nature of supply contract, the

amount of the bill was marginal and all the remaining sample bills

enclosed in the paper book proves that the transactions were sale

transactions and the assessee has paid CST and sales tax on all the

purchase bills. The case was scrutinized twice once at the time

assessment u/s 143(3) r.w.s 153A and second time in giving effect to

the Ld.CIT (C) order but no other evidence was brought on record to

show that the same is works contract. Therefore, we hold that there is

no works contract involved in supply of printed material and the

assessee’s case is squarely covered by the decision of Hon’ble ITAT in

the case of Chandana Brothers cited (supra) and the decision of

jurisdictional High court cited (supra) and no disallowance is called for

u/s 40(a)(ia) of the Act. Accordingly, we set aside the orders of the

lower authorities and allow the appeals of the assessee.

ITA Nos.201 to 206 /Vizag/2017 Arunachalam Manickavel, Guntur 11. In the result, the appeals filed by the assessee for the AYs

2005-06 to 2010-11 are allowed.

The above order was pronounced in the open court on 9th May’18.

Sd/- Sd/- ( ड.एस. . . . सु�दर "संह) (वी. दुगा�राव) (D.S. SUNDER SINGH) (V. DURGA RAO) लेखा सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER #वशाखापटणम /Visakhapatnam: 'दनांक /Dated : 09.05.2018 VG/SPS आदेश क� ��त)ल#प अ*े#षत/Copy of the order forwarded to:-