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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: SHRI ABY T VARKEY, HONBLE & SHRI S. RIFAUR RAHMAN, HONBLE
Date of Conclusion of Hearing : 29.02.2024 Date of Pronouncement : 06.03.2024 O R D E R PER S. RIFAUR RAHMAN (AM)
This appeal is filed by the revenue against order of Learned Commissioner of Income-Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter in short “Ld. CIT(A)”] dated 30.05.2023 for the A.Y.2012-13.
(A.Y. 2012-13) The Bombay Dyeing and Manufacturing Company Limited 2. Brief facts of the case are, Assessee is engaged in the business of manufacture of PSF, Retail of textile and real estate. A verification under section 133B(2) of Income-tax Act, 1961 (in short “Act”) was conducted in the premises of the assessee on 31.01.2019 for the purpose of verification of compliance of the provisions of the Chapter XVII B of the Act. During the course of survey action, the officers observed certain discrepancies regarding deduction of tax at source by the assessee. A show-cause notice dated 18.01.2019 was issued to the assessee and an opportunity to explain was granted to the assessee why the assessee should not be treated as an assessee in default within the meaning of section 201(1)/201(1A) of the Act. The relevant show-cause notice was reproduced in the order under section 201(1) of the Act. In response, Authorised Representative of the assessee attended and submitted the relevant information as called for. Assessee has filed the detailed reply dated 27.12.2019 regarding the details of purchase for the current assessment year 2012-13 to assessment year 2019-20. After considering the detailed submissions, Assessing Officer rejected the same and summarized the reasons for such rejections are as under:-
“I. Assessee has stated that the model of business is only purchase and sale, but if the business model is only purchase and sale then how it could be possible of without getting into any contract of agreement for a company to allow any vendor to Page No. 2 (A.Y. 2012-13) The Bombay Dyeing and Manufacturing Company Limited emboss or to attach its patented logo on the finished products which the assessee company is stating that it is purchasing it from the vendors. II. The above said purchases described by the assessee are the supplying a product as per the specifications or requirements of the assessee company which clearly indicate that it is not only a work accomplished by a vendor on purchase order but it will be a contract work order given by a assessee company to provide the products as per the specifications and transactions of this type will be taxable under the 194C of the IT Act. III. I have gone through the submission made by the assessee company and came to conclusion that the company has not purchased any product directly from the open market. In the books of accounts of the company it is shown as purchase, however, it is clear contract since, after issuing PO order as per specification given by the company, the vendor company has start to produce the product as required and as asked by the assessee company with quantity as required. Vendor company at their own do not manufacture their product for sale in open market, as and when any order received from the assessee company then only they manufacture the product. The assessee company has not only ask for specify size only but whatever raw material to be used for the product with their logo to final product with the assessee companies brand name. Hence it is clear that this is not a contract for of sale but the work contract given by the assessee company, The vendor company do not have any power to sale any product under logo Bombay Dyeing in open market or any other parties. The assessee does not supervise but inspected the goods whether it is manufactured as per specification given in the PO order. It is clear that the PO order is the contract deed between contract vendor and the assessee company with specification, size, quantity and another terms and conditions. There are several PO orders issued by the company to the different vendors along with standard terms and conditions, hence it is clear that this a work contract. IV. The case laws and CBDT Circulars given in para 2(ii) to 2(iv) are not squarely applicable in this case because this is not a contract of sale this is totally work contract. However the company for their sake of convenience show in its books of accounts as sale and purchase. The company has not purchased any processed raw material from the vendor but finished product of Bombay dyeing. The vendor company have not any right to sale this products in open market, only assessee's company who have right to sale this product in open market. However after issue of PO order as per specification the vendor company start to produce the product /
Page No. 3 (A.Y. 2012-13) The Bombay Dyeing and Manufacturing Company Limited items they do not keep ready this type of product and does not immediately supply as and when the company ask. The vendor manufacture these products in their factory but not for themselves but for assessee company. The vendor company uses their own infrastructure but not for the product of their own goods but assessee's companies goods. The vendor company purchases raw material directly by receiving the PO order from the assessee. The assessee company purchases goods from vendor from time to time which is regular activities of work contract and payments are done between assessee company and vendor of the company. The assessee does not superwise but inspect the goods whether it is manufactured as per specification given in PO order. It is clear that the PO order is the contract deed between vendor and assessee company with specification, size, Quantity and other terms and conditions, There several PO orders issued by the company to different vendors hence it is clear that there are several contracts. The PO order is a full amount whether the vendor have purchased the raw material or use their own raw material or whether the vendor uses their own machinery or it is on rent whatever they have done it is not looked by the assessee company hence total amount paid is contract amount and TDS have to be deducted on the total amount. v. The assesse vide letter dated 07.02.2019 filed in response to query raised in statement on oath during the spot verification regarding logo of Bombay dyeing and the relevant portion is reproduced below “Procedure for use of logo In order to fulfil the sale order company approach to the designated vendors for manufacturing of product as per the desired specification. Company also supplies the packing material with logo of The Bombay Dyeing & Mfg. Co Ltd to the vendor.' As the assessee is supplying the packing material with logo to the vendors makes it clear that this is a work contract and hence it should be considered under the purview of the section u/ s 194C and TDS should be deducted as per provisions of IT Act.”
Accordingly, Assessing Officer observed that various payments of purchase to various vendors of Ready Finished Goods which is nothing but the work contract done from the various vendors which comes under Page No. 4 (A.Y. 2012-13) The Bombay Dyeing and Manufacturing Company Limited the purview of section 194C and TDS should have been deducted while making payments to the above vendors. Accordingly, he invoked provisions of section 201(1) and 201(1A) to make the addition under section 201(1) of the Act at ₹.2,37,17,965/- and interest under section 201(1A) of the Act at ₹.2,25,32,067/-.
Aggrieved with the above order assessee preferred an appeal before the Ld. CIT(A) and filed the detailed submissions and objected to all the observations made by the Assessing Officer in his order under section 201(A) / 201(1A) of the Act. Further, assessee filed a chart explaining the similarity of the facts in the assessee’s case and the case of DCIT v. Reebok India Company [2006] 100 TTJ 976, the same is reproduced at Page No. 13 to 15 of the appellate order.
After considering the detailed submissions of the assessee and the observations of the Assessing Officer, Ld. CIT(A) came to the conclusion that the transaction on account of supply of finished goods to the assessee was principal to principal basis in pursuance of a contract for a sale and not a contract for work as alleged by the Assessing Officer. He came to the conclusion by relying on the following case law: -
Page No. 5 (A.Y. 2012-13) The Bombay Dyeing and Manufacturing Company Limited i. Samsung India Electric Ltd., [ITA No. 3702 (Delhi) of 2005] ii. Times VPL Ltd. v. CIT [421 ITR 170] iii. Punjab Tractors Ltd. v. ITO [2012] 26 tqaxmann.com 73 iv. CIT v. Dabur India Ltd [2006] 283 ITR 197 (Delhi) v. Commissioner of Income-tax v. Bangalore District Cooperative Milk Producers Societies Union Ltd. [2013] 36 taxmann.com 120 (Karnataka) vi. Income-tax Officer, W-50(3), New Delhi v.Kuber Khaini (P.) Ltd. [2011] 13 taxmann.com 210 (Delhi ITAT) vii. ITO v. Dr. Willmar Schwabe India (P.) Ltd. [2005] 95 TTJ 53 (Delhi) viii. Novartis Health Care (P.) Ltd. v. Income-tax Officer, TDS 1(4), Mumbai [2009] 29 SOT 425 (Mumbai ITAT order dated 25.02.2009) ix. ITO v. Milan Dairy Foods (P.) Ltd. [2006] 7 SOT 901 x. ncome-tax Officer (TDS) v. Bata India (P.) Ltd. [2011] 15 taxmann.com 327 (Delhi ITAT Order dated 30.04.2010) xi. Whirlpool of India Ltd. v. Joint Commissioner of Incometax, Circle 51(1), New Delhi [2007] 16 SOT 435 (Delhi ITAT order dated 13.07.2007) xii. BDA Ltd. v. ITO 281 ITR 99,
Finally, he allowed the appeal of the assessee by observing as under: - “16. In the present case, I find that the manufacturing activity of the goods was carried out at the risk of the contract manufacturer or supplier or vendor, the manufacturers purchased required raw material on their own and produces the goods as per specifications of the appellant buyer, the ownership of the goods passes from the manufacturer to the appellant when the goods were supplied or delivered to the appellant, the manufacturer was forbidden for affixing the appellant's trade mark on the goods supplied to the outsider, and the supplier was also liable to pay sales tax and other taxes on the goods supplied by it to the appellant purchaser. The Page No. 6 (A.Y. 2012-13) The Bombay Dyeing and Manufacturing Company Limited combined effect of these conditions would go to show that it is a case of simple purchase of goods and not a contract for works.
Respectfully following the aforesaid judgments and after carefully perusing the judgments relied upon by the appellant where the issue has been directly considered and decided, I hold that the DCIT (TDS)2(3), Mumbai being the assessing officer in this case, has committed an error in holding that the assessee was liable to deduct tax under section 194C from the payments of Rs.118,58,98,272/- made to the manufacturers/ suppliers/ vendors who supplied the finished products to the appellant and I also hold that the appellant is not ‘an assessee in default’ for the purpose of section 201(1). I direct the AO to vacate the demand of Rs. 2,37,17,965/- and interest demand of Rs. 2,25,32,067/- raised u/s 201(1) and u/s 201(1A) respectively.”
Aggrieved with the above order, revenue is in appeal before us raising following grounds in its appeal:
"1. On the facts and in the circumstances of the case and law, the Ld. CIT(A) has erred in holding that the transaction between the assessee company and Vendors was on principal to principal basis and therefore transaction would not come under ambit of 194C, without appreciating the fact that the assessee provided specification and patent logo/property right of the company to the vender which makes it binding on the vender not to misuse the design or logo on the finished Goods for any other product it ultimately indicates that assessee is in possession of Goods even before Goods are supplied to the Assessee." 2. "On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in holding that the transaction between the assessee company and vendors was on principal to principal basis and therefore transaction would not come under ambit of 194C, without appreciating the fact that the company has not purchased any product directly from the open market. The vendor company at their own do not manufacture their product for sale in open market, as and when any order received from the assessee company then only they manufacture the product." "3. On the facts and circumstances of the case and law, the lad. CIT(A) has erred in holding that the case laws cited by ld. NFAC are squarely applicable in this case without appreciating the fact that the vendor company have not any right to sale this product in open
Page No. 7 (A.Y. 2012-13) The Bombay Dyeing and Manufacturing Company Limited market except assessee. However, for the sake of convenience assessee has shown in its book of account as sale and purchase."
In the above grounds of appeal only issue contested by the revenue are whether the transaction involving payment to various parties toward purchase of finished goods are under contract of purchase or contracts of works contract within the meaning of section 194C of the Act.
9. At the time of hearing, Ld. DR brought to our notice brief facts of the case involving the dispute under consideration and he objected to the conclusions of the Ld. CIT(A) in his order and specifically he pointed out that assessee was supplying the packing material and logo as per the specifications. He brought to our notice the similarities of the facts in the assessee’s case and Reebok India Company (supra) case wherein he brought the distinctions in both the cases. He submitted that the logo was supplied by the Reebok India Company whereas in the present case logo was not supplied.
Further, he brought to our notice treatment of rejected goods which did not meet the specifications. In the case of the assessee, the rejected goods which did not meet the quality specification are Page No. 8 (A.Y. 2012-13) The Bombay Dyeing and Manufacturing Company Limited rejected/discarded and returned to the vendor. Whereas in the case of Reebok India Company (supra) such goods are not allowed to be used by the supplier and is destroyed under the supervision of the Reebok India Company. He said that this clearly shows that the assessee is in control of the manufacturing process and he submitted that as was the facts brought on record by the Assessing Officer the payments made by the assessee falls within the ambit of provisions of section 194C of the Act because the assessee is having the full control of the productions and specifications of the goods supplied by such vendors.
On the other hand, Ld. AR brought to our notice CBDT Circular dated 13/2006 dated 13.12.2006 and Circular No. 681 dated 08.03.1994. Further, he brought to our notice definition of works given under section 194C Explanation (iv)(e) of the Act relating to manufacturing activities. He submitted that the manufacturing or supplying a product according to the specification of a customer by using the material supplied by the customers or its associates falls under the category of work. Whereas in the case of the assessee the specification was supplied by the assessee and all the goods were purchased by the supplier by himself, it does not fall within the category
Page No. 9 (A.Y. 2012-13) The Bombay Dyeing and Manufacturing Company Limited of above definition. Therefore, he submitted that it is not a work contract.
With regard to supplying of packing material by the assessee he submitted that the packing material supplied by the assessee is very negligible consisting of plastic sheets required for wrapping of the material with the assessee’s logo. With regard to logo he submitted that logo also supplied by the assessee as per the requirement and the above said cost of packing and logo are very very negligible and further, he submitted that the cost of purchase paid by the assessee does not include the above costs and the contract given by the assessee to the various vendors are part of purchase transactions. He brought to our notice copy of purchase orders which clearly indicates the specifications, purchase price and terms of payments etc., Therefore, he submitted that this cannot fall under the category of works contract. In this regard, he relied on the decision of CIT v. Glenmark Pharmaceuticals Ltd., [2010] 324 ITR 199 (Bombay). He brought to our notice Page No.64 of the decision which is similar to the facts of the present case. He brought to our notice the ratio of the decision. Further, he brought to our notice Page No. 14 of the factual Paper Book which is the invoice of the vendor which includes excise payments and sales tax payments
Page No. 10 (A.Y. 2012-13) The Bombay Dyeing and Manufacturing Company Limited which clearly indicates that these are all purchase transactions and finally he brought to our notice Page No. 35 to 50 of the appellate order and he submitted that he relies on the findings of the Ld. CIT(A).
Considered the rival submissions and material placed on record, we observe from the assessment order that Assessing Officer observed that assessee purchased the finished goods from various vendors and allowed them to emboss and to attach its patented logo on the finished products without any contract of agreement, the assessee supplies specification requirements to various vendors to manufacture the same as per specification, the vendors are producing the goods by sourcing the raw material from the market only upon receipt of purchase order from the assessee, he distinguished the case law and the CBDT circulars brought on record by the assessee by observing that the assessee purchased goods from vendor from time to time which is a regular activities of work contract and regular payments are done between assessee and vendor company. The assessee does not supervise but inspect the goods whether it is manufactured as per the specifications given in the purchase order and finally he observed that the assessee is supplying the packing material with logo to the vendors makes it clear that it is work contract.
Page No. 11 (A.Y. 2012-13) The Bombay Dyeing and Manufacturing Company Limited 14. The Ld. CIT(A) considering the observations of the Assessing Officer and the detailed submissions of the assessee which Ld. CIT(A) has brought on record and observed that the assessee has actually entered contract of purchase and not contract of manufacture or work contract. He observed that the manufacturers purchase raw materials on their own and produces the goods as per specifications supplied by the assessee and the ownership of the goods passes from the manufacturer to the assessee when the goods were supplied and delivered to the assessee. Further, he observed that manufacturer was forbidden for affixing the assessee’s trade mark on the goods supplied to the outsider, and the supplier was also liable to pay sales tax and other taxes on the goods supplied by it to the assessee i.e., purchaser. It shows that it is a case of simple purchase of goods and not a contract for works.
After considering the submissions of both the parties, we are of the view that as per the definition of works given in section 194C it is only a contract of works only when the assessee supplies the raw materials or directs vendors to purchase from its associate and supplies the finished goods to the assessee then only it will fall under works contract. In the given case it is not brought on record that assessee has Page No. 12 (A.Y. 2012-13) The Bombay Dyeing and Manufacturing Company Limited supplied the raw materials or directed the vendors to purchase from its associate to complete the manufacturing. As per the information available on record the assessee has given purchase order with the specification of the finished product with a condition that the finished goods should match the specifications and in case it does not match the goods will be returned back to the vendors. This is a standard purchase order given to the vendors to supply the goods as per the specification, without specifications the purchase order is not complete.
Here, the payments made by the assessee is towards the contract of purchase or contracts of works is an issue under consideration, as held in the case of CIT v. Glenmark Pharmaceuticals Ltd., (supra) the Hon’ble Bombay High Court held as under: - “21. Broadly speaking, three situations are involved in the manufacture of pharmaceutical products. In the first situation, the pharmaceutical company itself manufactures pharmaceutical preparations which are sold under its brand name. The second situation involves loan licensing where the raw materials are supplied by the pharmaceutical company to the licensee manufacturer who in turn manufactures a pharmaceutical product on behalf of the company. The third situation is one where by an agreement between a pharmaceutical company and a manufacturer, it is the manufacturer who procures the raw materials and manufactures the product under the specifications of the company and sells the end-product to the company. In the third situation, the manufacturer may also affix the trademark or brand name of the company, which in turn markets the product. The present case relates to the third category where admittedly, the entire process of manufacturing is carried out by a third party
Page No. 13 (A.Y. 2012-13) The Bombay Dyeing and Manufacturing Company Limited with whom the assessee has a contract. The work of manufacture is carried out at the establishment of the third party manufacturer. The raw materials are purchased by the third party manufacturer. The contract envisages that the trademark of the assessee is to be affixed to the goods manufactured by the third party. The contract in issue in the appeal 22. The salient aspects of the contracts that form the subject- matter of the present appeal have to be considered. The attention of the Court is drawn to an agreement dt. 18th May, 2005 entered into between the assessee, Glenmark Pharmaceuticals and Maxim Pharmaceuticals (P) Ltd. The agreement envisages that the assessee has developed certain pharmaceutical formulations which it intends to market under specified brand names. The assessee agreed to disclose to the manufacturer technical information and data relating to the manufacture of the products in accordance with the specifications and standards laid down by the assessee. The process of manufacturing is to be carried out by the manufacturer at its own establishment. The assessee has to purchase the entire quantity of the product manufactured at a price to be mutually agreed upon between the parties. The manufacturer is obligated under the terms of the agreement to obtain a licence to manufacture and to obtain the endorsement of the Food & Drug Administration on the licence. The agreement envisages that the transaction between the parties is on a principal to principal basis. The assessee is required from time to time to place orders for the supply of the product in such quantities and at the agreed price, which the manufacturer has to supply. The agreement specifically stipulates that the manufacturer will be solely and exclusively responsible for the purchase, procurement and storage of raw materials required for the manufacture of the product. All approvals, licences, permits, permissions and sanctions are to be obtained by the manufacturer and to be kept valid during the term of the contract. The agreement envisages that the manufacturer is an independent contractor and is solely responsible for payment of taxes, duties and other impositions, under the agreement. The property in the product is to vest in the assessee on delivery of the product. The manufacturer has undertaken not to sell or supply the products which are to be manufactured for the assessee to any third party or to undertake the manufacture or sale of similar products to any third party. The assessee is entitled to inspect the facility and to approve the goods manufactured. The manufacturer is required by the terms of the agreement to affix the trademark of the assessee on the products manufactured, subject to the obligation not to use the mark upon the termination of the Page No. 14 (A.Y. 2012-13) The Bombay Dyeing and Manufacturing Company Limited agreement. On the termination of the agreement or cessation the licences have to be surrendered.
Counsel appearing on behalf of the Revenue submitted that the conditions of the agreement under which the manufacturer affixes the mark of the assessee, uses a formulation provided by the assessee, and is obligated not to sell the product to others, detracts from the contract being a contract of a sale. According to counsel, the restrictions which have been imposed on the manufacturer in the present case are : (i) To utilise the formula provided by the assessee; (ii) To affix the trademark of the assessee; and (iii) To deal exclusively with the assessee. These according to counsel must result in an inference that the contract is not a contract of sale.
The submission that the contract is not a contract of sale because specifications are provided to the manufacturer by the purchaser cannot be accepted. That has not been the understanding of the law at any point of time. The fact that the purchaser provides specifications to the manufacturer has never been construed even by the Revenue to be a circumstance which should lead to the inference that the contract is not a contract of sale. Firstly, the circulars issued by the CBDT right since 29th May, 1972 consistently took the position that furnishing of specifications to the manufacturer of goods by the purchaser would not detract from a contract being regarded as a contract for sale so long as the property in the goods passes upon delivery. The consideration which was regarded by the Revenue as having relevance was whether the material was supplied to the contractor by the Government, or, as the case may be, by a specified person. Where the material is provided by the purchaser and the work of fabrication or manufacture is carried out by the contractor, the agreement would, it was clarified, constitute a contract for work. On the other hand, where a manufacturer produces goods to the specifications of the purchaser and the property passes to the purchaser only upon delivery, the contract would be regarded as a contract of sale if the raw material is sourced by manufacturer and is not supplied to him by the purchaser. Secondly, the consistent view which held the field in several High Courts was that contracts where (i) property passes to the purchaser upon the delivery of the goods; and (ii) the raw material was sourced by the manufacturer and was not supplied by the purchaser do not fall within the scope and ambit of s. 194C. In this Court, a Division Bench in BDA Ltd. (supra) dealt with a case where a manufacturer of Indian made foreign liquor entered into an agreement for printing labels which were to be affixed on liquor bottles. The question was whether the agreement for printing and packing material involved a contract of Page No. 15 (A.Y. 2012-13) The Bombay Dyeing and Manufacturing Company Limited sale or a contract of work. The Division Bench noted that the assessee had supplied specifications to the seller for printing labels but the raw materials were not supplied by the assessee. The printing work was not carried out at the premises of the assessee and the seller was not a captive unit of the assessee. The Division Bench held that the seller could obviously not print beyond the quantity specified in the purchase order. Hence, the Tribunal had erred in relying upon the circumstance that the seller who was producing the labels could not have supplied the labels to any other establishment in the market. The finding that there was no marketability was also held to be vitiated since it was based on a fallacious premise that the seller was printing an unlimited number of labels. The judgment of the Division Bench of this Court, therefore, clearly reflected the position of law that providing a specification to the manufacturer who produces the article or thing would not detract from the nature of the transaction as a sale so long as the purchaser had not supplied raw material to the seller; and there was nothing to indicate that the seller was a captive unit of the purchaser. Such a contract would be a contract of sale. A similar view was taken in other judgments of the High Court, to which it would be necessary to refer to. The Delhi High Court reiterated the principle in its decisions in CIT vs. Dabur India Ltd. (2005) 198 CTR (Del) 375 : (2006) 283 ITR 197 (Del) and CIT vs. Seagram Manufacturing (P) Ltd. (2009) 221 CTR (Del) 509 : (2009) 17 DTR (Del) 276. Another decision of the Delhi High Court in CIT vs. Reebok India Co. (2009) 221 CTR (Del) 508 : (2009) 17 DTR (Del) 274 : (2008) 306 ITR 124 (Del) involved a case where the assessee had entered into an agreement with a manufacturer who manufactured footwear, apparel accessories and sports goods for the assessee. The Delhi High Court affirmed the judgment of the Tribunal that the provisions of s. 194C were not attracted. The Gujarat High Court had occasion to deal with a contract relating to supply of printing and packing materials in its decision in CIT vs. Girnar Food & Beverage (P) Ltd. (2008) 306 ITR 23 (Guj). The Punjab & Haryana High Court dealt with a contract for the supply of packing material in its decision in CIT vs. Dy. Chief Accounts Officer, Markfed (2008) 217 CTR (P&H) 555 : (2008) 5 DTR (P&H) 326 : (2008) 304 ITR 17 (P&H). Sec. 194C was held not to be attracted. Speaking for a Division Bench of this Court, one of us (Shri Justice J.P. Devadhar) held in The East India Hotels Ltd. vs. CBDT (2009) 223 CTR (Bom) 133 : (2009) 21 DTR (Bom) 244 that the words "carrying out any work" in s. 194C are limited to any work which is carried out to culminate into a product or result. The Court held that the service rendered by a hotel to its customers by giving certain facilities and/or amenities did not involve carrying out work within the purview of s. 194C.”
Page No. 16 (A.Y. 2012-13) The Bombay Dyeing and Manufacturing Company Limited 17. From the above ratio, the transactions carried on by the assessee is clearly falls within the ambit of contract of purchase. Therefore, we are not inclined to disturb the findings of the Ld. CIT(A) to treat the transactions as contract of purchase and not of works contracts. Accordingly, we direct the Assessing Officer to delete the additions proposed under section 201(1) / 201(1A) of the Act. Accordingly, grounds raised by the revenue are dismissed.
In the result, appeal filed by the revenue is dismissed.
Order pronounced in the open court on 06th March, 2024.