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IN THE HIGH COURT OF KARNATAKA DHARWAD BENCH DATED THIS THE 20TH DAY OF NOVEMBER, 2017 PRESENT THE HON’BLE MRS. JUSTICE S.SUJATHA AND THE HON’BLE Dr. JUSTICE H. B. PRABHAKARA SASTRY
INCOME TAX APPEAL NO.100070/2016 C/W INCOME TAX APPEAL NO.100207/2015
IN ITA NO.100070/2016
BETWEEN:
THE PRINCIPAL COMMISSIONER OF INCOME TAX, NAVANAGAR, HUBBALLI.
THE ASST. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE, BELAGAVI. ... APPELLANTS (BY SRI Y V RAVIRAJ, ADVOCATE)
AND
M/S SRI. PRABHULINGESHWAR SUGARS & CHEMICALS LTD., SIDDAPUR, JAMAKHANDI, BAGALKOT DISTRICT PAN:AACCS7864B. ... RESPONDENT (BY SRI M.V.SHESHACHALA, SR.COUNSEL FOR SRI GANGADHAR J.M., ADVOCATE)
2 THIS INCOME TAX APPEAL FILED U/SEC.260A OF THE INCOME-TAX ACT, 1961, PRAYING TO ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, PANAJI BENCH, PANAJI, IN ITA NO.29/PAN/2016 DATED:08.06.2016 AND CONFIRM THE ORDER PASSSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE, BELAGAVI.
IN ITA NO.100207/2015
BETWEEN:
THE PRINCIPAL COMMISIONER OF INCOME TAX, NAVANAGAR, HUBBALLI.
THE JCIT (OSD), CENTRAL CIRCLE-2, BELAGAVI.
THE ACIT, CENTRAL-2 BELAGAVI. ... APPELLANTS
(BY SRI Y V RAVIRAJ, ADVOCATE)
AND
M/S SRI PRABHULINGESHWAR SUGARS & CHEMICALS LTD., 1ST FLOOR, SUKRUT BUILDING, OPP K.C. PARK, MAIN GATE, DHARWAD, PAN:AACCS7864B ... RESPONDENT
(BY SRI M.V.SHESHACHALA, SR.COUNSEL FOR SRI GANGADHAR J.M., ADVOCATE)
3 THIS INCOME TAX APPEAL IS FILED U/S.260A OF THE INCOME-TAX ACT 1961, PRAYING TO ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, PANAJI BENCH, PANAJI, IN ITA NO.157/PNJ/2014, DTD:07.07.2015 AND CONFIRM THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2, BELAGAVI.
THESE APPEALS COMING ON FOR ADMISSION THIS DAY, S.SUJATHA J., DELIVERED THE FOLLOWING:
JUDGMENT
These appeals are preferred by the Revenue challenging the orders passed by the Income Tax Appellate Tribunal (for short, ‘the Tribunal’), Panaji Bench, Panaji in ITA No.29/PAN/2016 dated 08.06.2016 and ITA No.157/PNJ/2014 dated 07.07.2015. The substantial question of law that arises for consideration is as under:- “Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in deleting the addition being the disallowance of Rs.5,76,96,920/- made under Section 40(a)(ia) R/w Section 194C of the Income Tax Act, 1961 and in view of explanatory circular issued by the CBDT
4 vide Circular No.715 of 1995 dated 08.08.1995?”
Since the common question of law arises for consideration in both the matters, the same are heard together and disposed of by this common judgment.
The assessee-respondent is engaged in manufacture of sugars. For the assessment years 2010-11 and 2012-13 assessment came to be concluded under Section 143(3) of the Income Tax Act, 1961 (‘the Act’ for short) by disallowing the claim of the assessee-respondent under Section 40(a)(ia) of the Act towards non-deduction of TDS on packing materials. The assessee preferred an appeal against the said order of assessment before the Commissioner of Income Tax, which came to be dismissed. Aggrieved by the same, the assessee preferred appeal before the Tribunal. The Tribunal allowed the appeal setting aside the addition made by the assessing authority towards non-deduction of TDS on packing materials.
5 4. The learned counsel Sri Y.V.Raviraj appearing for the Revenue submitted that the Tribunal failed to appreciate the factual aspects of the matter that every invoice was accompanied by a purchase order and the purchase order clearly specifies the terms and conditions of supply of packing material, which includes the prices to be paid, quality and quantity of the material to be supplied, the marking and description details to be printed on the gunny bags including name of the assessee under number. There was a clear contractual obligation on the part of the supplier and the transaction of supplying the printed gunny bags pursuant to the purchase order placed by the assessee would come within the ambit of provisions of Section 194C of the Act. Thus, the learned counsel submitted that the transaction partakes the character of works contract and not a sale in order to attract the provisions of Section 194C of the Act.
6 5. Per contra, the learned senior counsel Sri M.V.Sheshachala appearing for Sri Gangadhar J.M., learned counsel for the assessee placing reliance on the Division Bench judgment of this Court in the case of Commissioner of Income Tax and another V/s Bangalore District Co-operative Milk Producers Societies Union Limited reported in (2013) 357 ITR 676 (Kar) would submit that pursuant to the amendment to Section 194C of the Act, phrase, “work” as contemplated shall include manufacturing or supplying a product according to the requirement or specification of customer or supplying a product according to the requirement or specification of customer by using material purchased for 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. It is submitted that this amendment to Section 194C was inserted with effect from 01.10.2009 by the Finance Act No.2 of 2009
7 which is clarificatory in nature and therefore it has to be applied retrospectively. Thus, the learned counsel inviting the attention of this Court to the decision of the Hon’ble Bombay High Court in the case of Commissioner of Income Tax V/s Glenmark Pharmaceuticals Limited reported in (2010) 324 ITR 199, pointed out that for the purpose of Section 194C, ‘work’ will not include manufacture or supply of products according to specification of customer by using material purchased from third person. In such cases, there is no liability to deduct tax at source and as such, provisions of Section 194C of the Act are not applicable. The Tribunal placing reliance on the judgment of the Hon’ble Bombay High Court in the case of Glenmark Pharmaceuticals Limited (supra) has allowed the appeal filed by the assessee setting aside the order of the Commissioner of Income Tax as well as the assessing authority on this point which do not call for any interference by this Court.
8 6. We have heard the learned counsel for the parties and perused the material on record.
To answer the substantial question of law raised by the Revenue, it is apt to refer to Section 194C of the Act, which reads thus: 194C. (1) Any person responsible for paying any sum to any resident (hereinafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to.
Explanation appended to the said Section contemplates that ‘work’ shall include- a. xxxxxxxx b. xxxxxxxx c. xxxxxxxx
9 d. xxxxxxxx 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.
This provision was subjected to judicial scrutiny by this Court in the case of Bangalore District Co-operative Milk Producers Societies Union Limited (supra), the question was whether the Section 194C would apply in supply of printed material as per the prescribed specifications. In answering this question, the Division Bench of this Court has referred to the amendment to Section 194C, wherein the phrase ‘work’ has been inserted in the explanation thereto and placing reliance on the decision of this Court in the case of Commissioner of Income Tax V/s Karnataka Power Transmission Corporation Limited, (2012) 208 TAXMAN 73 held that
10 the Explanation, “works contract” has a definite legal connotation. What is stated in the Section 194C(1) is for “carrying any works” between the contractor and specified person. The work is also defined to exclude the situation where the material is not supplied by the assessee. Considering the specific definition of the work, it was concluded that the definition is clarificatory in nature and Section 194C would apply in respect of supply of printed materials as per the prescribed specification.
In the case of Glenmark Pharmaceuticals Limited (supra), a similar question arose before the Hon’ble Bombay High Court and the substantial question of law that was considered was “whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in holding that the transactions between the assessee and the manufacturer is a contract for sale of goods and is not in the nature of works contract and, therefore, the provisions of Section 194C are not
11 attracted?” The assessee in the said case was engaged in the business of manufacture and marketing of drugs and pharmaceutical products. The assessee had placed orders with manufacturers for manufacturing pharmaceutical products, according to the specifications provided by the assessee, and property in the goods passed to the assessee only after delivery. The manufacturers purchased raw materials at their own cost. Though the products were manufactured in accordance with the specifications of the assessee, the manufacturer carried out the process of manufacturing at his own establishment and paid excise duty and sales tax. In such circumstances, the Hon’ble Bombay High Court considering the question as to whether the contract is a contract of work or a contract of sale held that it is a contract of sale, a chattel as a chattel has been passed on to the assessee.
In the light of the said judgments, the case on hand is analysed.
12 12. The assessee is placing purchase orders on the manufacturers for gunny bags with certain specifications. Though the manufacturer has manufactured the required quality and quantity of the packing material pursuant to the said purchase orders placed by the assessee, no material being supplied by the assessee, the said work would not fall within the ambit of Clause-(iv) of the explanation to Section 194C of the Act as works contract.
Yet another point to be considered is, the assessee has paid CST on the products, which has been purchased by him. In such situation, the said purchase of the packing material/gunny bags, is not a works contract and TDS is not liable to be made as it is a transaction of sale. Thus, the finding of the Tribunal in holding that the transaction of the assessee is not a works contract and the assessee is not liable to deduct tax at source on these transactions is justifiable. Accordingly, we answer the
13 substantial question of law in favour of the assessee and against the Revenue.
In the result, the appeals stand dismissed.
(Sd/-) JUDGE
(Sd/-) JUDGE
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