DY COMMISSIONER OF INCOME TAX, CHANDIGARH vs. M/S DISTRICT MANAGER PUNJAB, SANGRUR

आदेश/Order

Per Sanjay Garg, Judicial Member:

These are bunch of appeals preferred by the Department and assessee for different assessment years against the separate orders of the respective Commissioner of Income Tax (Appeals) [hereinafter referred to as ‘CIT(A)’]

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Since common issues are involved in all these appeals, hence, these were heard together and are being disposed of by this common order. ITA No. 1309/Chd/2016 for assessment year 2012-13 is taken as a lead case.

ITA No. 1309/Chd/2016 2. The Department in this appeal has taken the following grounds of appeal:- (i) In the facts and circumstances of the case, the Ld. CIT (A) is erred in deleting the demand ignoring that the provisions of section 194C are squarely applicable on the work carried out by the millers. (ii) In the facts and circumstances of the case, the Ld. CIT(A) is erred in deleting the demand created on account of non / short deduction of tax u/s 201 (I) / 201(1 A) of the Income-tax Act, 1961 ignoring the fact that the assessee deductor applied provisions of section 194C on the cash part of the payments but not on the payments which were paid in kind and thus not deducted TDS on whole payment.

(iii) In the facts and circumstances of the case, the Ld. CIT(A) is erred in linking the judgment of Hon'ble ITAT, Bench 'A', New Delhi in the case of M/s Ahaar Consumer Products Pvt. Ltd. with the facts of the present case as in the case of M/s Ahaar Consumer Products Pvt. Ltd. there had not involved any payment of consideration for the services rendered whereas in the present case execution of work upon supplied material is in lieu of payments on which TDS has also been deducted by the assessee.

(iv) The appellant craves leave to amend, add, alter or delete any of the aforesaid grounds till the disposal.

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assessee is a Procurement Agency of Punjab Government which procures

paddy on behalf of the Food Corporation of India / Government, get it

milled and supply rice to Food Corporation of India (FCI). The entire cost

in this respect is borne by the FCI / Government of India. The paddy is

given to the millers for milling at the rates as fixed by FCI / Government

of India. The Millers were provided with paddy and they after milling

have to supply rice in the ratio of 67% of the paddy milled to the

Procurement Agencies as per the specification. As per the agreement

between the millers and the Procurement Agencies, the millers get Rs. 15/-

per quintal as ‘milling charges’ as fixed by the FCI / Government of India.

Further, as per the policy of the Government and as per agreement between

the Procurement agencies and the millers, the by-products, if any, arising

from the process is the property of the millers and the procurement

agencies have no right / liability in respect thereof. The assessee deducted

the tax at source (TDS) u/s 194C of the Income-tax Act, 1961 (in short 'the

Act') on the aforesaid amount of Rs. 15/- per quintal given to the millers

on account of milling charges as per the agreement and as per Government

policy. The Assessing officer, however, noted that since as per agreement,

the by-products i.e. remaining 33% part out of the milled / shelled paddy is

retained by the millers and the same has a marketable value which, in fact,

constitute as a part of the consideration paid by the assessee to the millers,

whereon the assessee failed to deduct any TDS. He, therefore, show

caused the assessee as to why the assessee should not be declared to be

assessee in default under the provisions of section 201 / 201A of the Act

for non deduction of TDS as per the provisions of section 194C of the Act.

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The assessee explained that as per the milling policy issued by the

Government of Punjab and as well as agreement entered into with the

millers, the rice millers are paid milling charges for custom milling of the

paddy at the rate as fixed by the Government of India and it has been

agreed that all by-products viz. broken rice, rice kani (rice bran and husk)

shall be property of the miller. The value of the said by- product is not

part of the consideration paid for custom milling of the paddy. The milling

charges are paid as per the rates fixed by the Government of India which is

at the rate of Rs. 15/- per quintal of the paddy milled and TDS has been

deducted on the aforesaid payment as per provisions of law. The Assessing

officer, however, was not satisfied with the above submissions of the

assessee and held that milling cost paid by the assessee were discounted

cost and need to be increased by the cost of by-product for the purpose of

deduction of tax at source. He, therefore, held that the assessee as

assessee in default u/s 201(1) and 201(1A) of the Act for non-compliance

of the provisions of section 194C of the Act on account of short deduction

of TDS.

preferred appeal before the Ld. CIT(A).

of the Tribunal in the case ‘ITO Vs. Aahar Consumer Products Pvt Ltd.,

ITA No. 2910-1939-1654 & 1705/Delhi/2010 for assessment year 2007-

08 dated 28.2.2011 and further relying upon the decision of the Amritsar

Bench of the Tribunal in the case of ‘D.M. Punjab Civil Supply

Corporation Ltd, Hoshiapur in ITA No. 158/Asr/2016 for assessment

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year 2012-13 vide order dated 4.8.2016 held that neither the assessee

was obliged to make any payment more than the milling charges agreed to

in the agreement nor any amount was credited in the accounts of the

millers as payable which required the assessee to deduct tax thereupon.

He, therefore, held that the assessee was not liable to deduct tax u/s 194C

of the Act in respect of the value of the by-products. He, accordingly

allowed the appeal of the assessee and quashed the demand raised by the

Assessing officer on account of short deduction of tax .

has come in appeal before us.

quintal paid by the assessee to the millers is not the actual consideration

paid by the assessee to the millers. That Rs. 15/- is a meager sum paid by

the assessee to the miller, whereas, actual consideration lies in the value

of the by-products which are retained by the millers. That while fixing

the milling charges by the Government, the value of by-product is duly

taken into consideration and thereafter net milling charges payable are

arrived at. That the cost of the by-product is inclusive of the total milling

charges paid by the assessee to the millers and therefore, the assessee was

supposed to deduct TDS on the total consideration paid in lieu of contract

of custom milling of paddy done by the millers. He, in this respect has

relied upon the custom milling policy of the Government as well as the

draft agreement which is entered by the assessee with the millers, to stress

upon the point that out of the total paddy, only 67% rice, which is treated

as out turn ratio, is given back by the millers, however, the remaining 33%

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which constitutes by-products in the shape of broken rice, rice kani, rice

bran and phuk and which has a quite reasonable market value, is retained

by the millers. He has, further submitted that milling charges @ Rs. 15/-

per quintal would be lesser than the milling cost including the

transportation charges borne by the millers. No Miller will be ready to

custom mill the paddy at this rate if, he is not given the right to retain the

by-products. That the real value lies in the by-products, the market value

of which is included in the consideration for milling charges. He,

therefore, has submitted that the Assessing officer rightly held that the

assessee was liable to deduct TDS taking into consideration not only of the

cash amount of Rs. 15/- but also value of the by-products retained by the

miller. He in this respect has further relied upon a letter bearing No.

192(20)2011-FCA/Cs dated 7.11.2012 of the Govt. of India addressed to

the Secretary, Food and Civil Supplies Department, whereby, the

Government of India has approved for payment at the provisional rate of

Rs. 2004.95 for raw rice and Rs. 1976.03 for Par-boiled rice for the custom

milled rice under the price support operation of the Government agencies

during the Kharif Market Season 2011-12. He has further relied upon the

annexure to this letter, whereby, the aforesaid support price of the custom

milled rice has been fixed by the Government of India and by the Food

Corporation of India payable to the State Government Agencies like

assessee, who procure the paddy on behalf of the Government of India /

Food Corporation of India and then get it custom milled from the millers

and thereafter deliver the rice to the Central pool. In the annexure, the

details have been given as to how the price of the Custom Milled Rice is

fixed. While fixing the per quintal price of the rice, the minimum support

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price of the paddy has been taken into consideration and thereafter various

statuary charges, fees and levies, milling charges of Rs. 15/- per quintal

are added. He, thereafter has stressed that out turn ratio as per which,

67% of the rice is supposed to be the finished product (rice) coming out of

the raw product (paddy). Accordingly, a price of one quintal of common

rice is fixed at Rs. 2004.95 and Rs. 2056.10 of Grade ‘A’ raw rice and so

on. The Ld. DR thereafter has relied on a press release issued by the

Ministry of Consumer Affairs, Food & Public Distribution letter dated

8.12.2015, whereby, the Union Food Ministry has clarified that the milling

charges for paddy paid by the Central Government to the State Agencies

are fixed on the rate recommended by the Tariff Commission which takes

into account value of the by-products derived from the paddy while

suggesting net rate of the milling price payable to the rice millers. It has

been further mentioned that as it is not practically feasible for the Food

Corporation of India (FCI) or the state Agencies (SGA) to take over the

by-product derived from the processing of paddy and market them out,

therefore, the basic framework of Traffic Commission formula for milling

charges has been arrived at which is based on the premise that the rice

millers will retain the by-products themselves and the value of these by-

product’s will be taken into account by the Tariff Commission while

calculating and recommending the net milling charges to be paid to the

millers. That the existing rates for milling of paddy was fixed on the basis

of recommendation given by the Tariff Commission in the year 2005,

however, subsequently the demand was raised by the State Government

Agencies for increase in the milling charges. However, it was observed

that with the increase of milling cost, there was likely increase in the

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income of the millers from the appreciation of value of the by-product.

That the Tariff Commission was requested to conduct study in this respect

in the year 2009 and its report was received in the year 2012. That it had

been pointed out that some news reports stated that on count of value of

by-products, the Government was losing every year more than Rs. 1000

crores, however, there was no evidence in this respect. It has been further

pointed out in the said press note that though, such reports talks of

increase in value of the by-product of paddy buy they do not talk about

increase in the expenses of the rice millers. On the other hand, there was

demand from the States for upward revision of the milling charges,

therefore, the Tariff Commission has been asked to conduct a fresh study

and review the normative milling charges in December 2013, itself, and

that the report was expected by December 2015.

The Ld. DR has further relied upon the report of the Comptroller and

Auditor General of India (C&AG) on Procurement and Milling of Paddy for

Central Pool (Report No. 31 of 2015), whereby, the study was conducted

taking into consideration the performance Audit covered from 2009-10 to

2013-14, wherein, it has been recommended that the Government of India

may take up with the State Governments to impress upon the millers to

provide the data about milling and other costs to Tariff Commission for

timely completion of study for re-fixation of milling charges and out-turn

ratio of rice from paddy. The Ld. DR has riled upon the page 2 of the said

report, whereby, a Flow Chart depicting various stages, from the

procurement of paddy to delivery of rice to FCI / State Governments /SGAs

are shown. It has been mentioned that by products cost recovery at the rate

Rs. 33.96 / 37.38 per quintal adjusted while fixing milling charges of Rs.

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15.32 / 25.48 per quintal of Raw rice and Par-boiled rice respectively. The

Ld. DR, thereafter, referred to pages 7 & 8 of the said report, wherein, it

has been mentioned that the milling charges were fixed by government

long back in 2005 on the basis of recommendation of the Tariff

Commission of India and that since then milling charges have not been

revised. However, the rice millers are still carrying outing the work at the

same milling charges without any demand for increase in the milling

charges, even though, the cost of milling is increased significantly. This

is, because the selling price of the by-products i.e rice bran, broken rice

and husk generated in milling process has increased substantially.

Therefore, the Performance Audit in question was conducted to examine

such issues. While referring to Chapter V which deals with the (by-

product out-turn ratio), the Ld. DR has pointed out from the report that a

study was conducted for fixation of milling charges way back in April

2009 and that out of 12 states covered in the study, only four states

responded. The milers were stated to be hesitant to disclose their financial

information and as a result the Tariff Commission had not been able to

suggest the formula for increase in the milling charges. It is also

mentioned that even the sale value by-products ranges from a low of Rs.

10.13 (during 2011-12 in the state of Uttar Pradesh) to a high of Rs.

2226.47 (during 2013-14 in the state of Andhra Pradesh.).

That after considering the excess realization, based on the data given

by the four states, it was recommended that the Government of India

should ascertain the full quantum of excess realization by millers in order

to realistically revise the milling charges and reduce the final subsidy

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burden on the exchequer. Accordingly, the following recommendations

have been made:

“The GoI may take up with the State Governments to impress upon the millers to provide the date about milling and other costs to Tariff Commission for timely completion of study for refixation of the milling charges and out-turn ratio.”

The Ld. DR has further pointed out from the said report of C&AG that it

was also considered to revise out-turn ratio as in certain states like Andhra

Pradesh the out-turn ratio of the rice out of paddy was fixed at 75% for the

seasons covered during the period 2009-10 to 2013-14. Further, as per

certain reports, the out-turn ratio for certain varieties of paddy was in two

districts of Andhra Pradesh reported at 72.08%. It was therefore,

recommend that out-turn ratio of 67% for certain varieties of paddy and in

certain areas / region was required to be reassessed to ensure that he

millers do not reap undue benefit at the cost of Government of India

leading to non-deduction of subsidy on this account. The Ld. DR relying

on the above observation in the Audit report vehemently stressed that the

millers got much more amount for milling purpose in kind, in the shape of

value of by-products retained by them and that the value of these being

part of the consideration of milling charges was required to be considered

for the purpose of deduction of tax at source.

Court of Andhra Pradesh in the case of ‘Kanchanganga Sea Foods Ltd. vs

CIT’ (2004) 265 ITR 644 (A.P.), which has been further confirmed by the

Hon'ble Supreme Court in of ‘Kanchanganga Sea Foods Ltd. vs

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CIT’ (2010) 325 ITR 549 (SC) and submitted that in the aforesaid case

the consideration for hiring vessels was passed on by the assessee in kind

i.e by way of 85% catched fish and it was held that the payment

contemplated u/s 195 not only includes cash payment or payment by

cheques or draft but also a payment even by any other mode and, therefore,

the payment of hire charges made by the assessee by giving 85 per cent of

the fish catch to the non-resident amounts to ‘payment’ as contemplated

under section 195 of the Act. The Ld. DR, therefore, has submitted that

the proposition of law laid down by the Hon'ble High Court in the case of

‘Kanchanganga Sea Foods Ltd. vs CIT’ (supra) can safely be applied in

the case of the present assessee before us. That the present assessee,

apart from making the payment of Rs. 15/- by way of cheques / cash,

has also made the payment ‘in kind’ by way of authorizing the millers

to retain the by-products.

submitted that the issue under consideration is squarely covered by

the various decisions of the different Benches of the Tribunal, the

lead case being in the case of ‘M/s Aahar Consumer Products Pvt.

Ltd.’ in ITA Nos. 2910-1939-1654 & 1705/DEL/2010 dated 28.2.2011 by

the Delhi Bench of the Tribunal. Apart from that, they have also relied

upon the following case laws:- i) The District Manager, Punjab State Civil Supply Corp, Ltd. Vs. ACIT (TDS), Chandigarh, ITA No. 214 & 215/ CHD/2017, dated 07.09.2017. (Chandigarh 1TAT).

16 ITA Nos. 1309 & 1310, 1312-1214,1424 & 1425c-16, 78-C-18, 1241 & 1242/Chd/2016, 669/Chd/2016, 320 to 325/Chd./2018 & 685-686-C-2016-Pb St Warehousing Corpon & Ors

ii) The DOT (TDS), Chandigarh Vs. The Area Manager, Distt Office, FCI, Chandigarh, ITA No. 897/CHD/2017, dated 11.08.2017. (Chandigarh ITAT)

iii) The DOT (TDS), Chandigarh Vs. District Manager, Punjab State Warehousing Corporation, Patiala, ITA No. 1291,1292,1293,1294, 1295,67,68/CHD/2016 dated 13.07.2017. (Chandigarh ITAT)

iv) The ACIT (TDS), Vs. Punjab State Grain Procurements Corporation Ltd., Barnala ITA No. 69,70,71/CHD/2016 dated 11.08.2016. (Chandigarh ITAT)

v) M/s The Punjab State Co-operative Supply & Marketing Federation Ltd. Vs, ITO, Jalandhar, ITA No. 54, 55 & 56/Asr/2016, dated 01.07.2016. (Amritsar ITAT)

vi) ITO vs. Aahar Consumer Products Pvt. Ltd., 1TA No. 2910-1939- 1654 & 1705/DEU/2010, dated 28.02.2011. (Delhi ITAT)

vii) Chief Accounts; Officer Vs. ITO, [2014] 52 Taxmann.com 453 (Bangalore Trib.)

viii) CIT Vs. Chief Accounts Officer, ITA No. 94 & 466 of 2015, dated 29.09.2015, (Karnataka High Court).

ix) Red Chillies Entertainment Pvt. Ltd. Vs. ACTT, ITA No. 5271/Mum/2013 dated 31.05.2016. (Mumbai ITAT)

case of ‘Kanchanganga Sea Foods Ltd. vs CIT’ (supra) was misplaced.

That the Coordinate Bench of the Tribunal in the case of ’DCIT (TDS)

Vs. The Area Manager, Food Corporation of India’ in ITA No.

897/Chd/2017 dated 11.8.2017 has already dealt with the said

decision. The Tribunal, even after considering the said decision, has

decided the issue in favour of the assessee. It has been submitted that

the issue in the case before the Hon'ble Supreme Court in the case of

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‘Kanchanganga Sea Foods Ltd. vs CIT’(supra) was as to whether the

payment of charter fee to the non-resident was chargeable to tax in

India or not. Further, that in the case of ‘Kanchanganga Sea Foods Ltd.

vs CIT’(supra), the percentage of receipt of sale was fixed in monetary

terms and that the mode of payment was also specified. It was under

such circumstances that it was held that the receipt value of 85% catch

fish was in India and further that the sale value of the catch fish was

already determined and the amount was debited as an expenditure by

the assessee company in its account; whereas, in the case of present

cases, no such amount has been debited as an expenditure by the

assessees nor any payment made thereof has been credited to the

account of the millers. That in the case of ‘Kanchanganga Sea Foods

Ltd. vs CIT’ (supra), it was never the question before the Hon'ble

Supreme Court that TDS was deductible on anything paid in kind.

Further, that the said case has already been considered by the

Banglore Bench of the Tribunal in the case of ‘Chief Account officer

Vs. ITO’ [2014] 52 Taxmann.com 453 (Banglore) and it was held that

the facts in the case of ‘Kanchanganga Sea Foods Ltd. vs CIT’ (supra)

were totally on a different footing and the proposition laid down in

the case of ‘Kanchanganga Sea Foods Ltd. vs CIT’ (supra) could not be

applied, where the value of the CDR was not quantifiable. The

Tribunal further held that provisions of section 194LA of the Act

would apply only when there was monetary payment. Referring to the

decision of the Hon'ble Supreme Court in the case of ‘H.H. Sri Rama

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Verma v CIT’ [1991] 187 ITR 308 / 57 Taxman 149, wherein, the

expression ‘sum’ was also held to be referred to payment of money

and not of donations ‘in kind’ in context of the provisions of section

80G of the Act. The Hon'ble Supreme Court held that on the plain

reading of the section 80G of the Act , it was apparent that the

assessee was entitled to claim deduction on the amount of money paid

by him as donation as per the relevant provisions. That the use of

expression ‘any sum paid’ contemplates payment of an amount of

money and does not contemplate donation in kind. Therefore, the

Tribunal held that even in section 194LA of the Act, the expression

‘any sum’ has been used and, therefore, the CDR which was in the

form of ‘in kind’ was not liable for deduction of tax at source. It was

further held by the Tribunal that the expression in Sec. 194LA, "at the

time of payment of such sum in cash or by issue of a cheque or draft

or by any other mode," means that payment can be in the mode of

giving cash, or by issuing cheque or draft or any other mode like

telegraphic transfer or mail transfer, via money order or postal order,

bill of exchange, promissory note, electronic transfer like RTGS,

NEFT etc. That CDR cannot be brought within the meaning of the

expression "by any other mode" used in Sec. 194LA of the Act. That

the rule of "Ejusdem Generis" in interpretation of statutes, which lays

down that where general words follow enumeration of persons or

things, by words of a particular and specific meaning, such general

words are not to be construed in their widest extent, but are to be held

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as applying only to persons or things of the same general kind or class

as those specifically mentioned, is fully applicable to the

interpretation of Sec. 194LA of the Act. That it is a canon of statutory

construction, where general words follow the enumeration of

particular classes of things, the general words will be construed as

applying only to things of the same general class as those enumerated.

The Tribunal held that the general word in Sec.194LA of the Act is

"payment of such sum" and the mode of payment qualified is cash,

issue of cheque or draft or by any other mode. The expression ‘any

other mode’ has therefore to be confined only to payment of "any

sum" in a mode other than cash, cheque or draft and not to a case

where CDRs are issued.

decision have submitted that the provisions of section 194C being

identically worded, the same proposition of law will apply and, hence,

even otherwise, the assessees were not liable to deduct TDS even

though it is assumed that the payment in kind in the shape of by-

products of the paddy were paid to the millers. It has been further

submitted that the above said decision of the Banglore Bench (supra)

of the Tribunal has been upheld by the Hon'ble Karnataka High Court

vide order dated 29.9.2015 (supra). Further, the said decision of the

Hon'ble Karnataka High Court (supra) has been followed by the

Mumbai Bench of the Tribunal in the case of ‘Red Chillies

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Entertainment Pvt Ltd.’ (supra) in the context of the provisions of

section 194J of the Act and it was held that since the payment was

made by the assessee was in kind, the provisions of section 194J were

not applicable. Further, objecting to the reliance on the CAG report

(supra) by the Ld. DR, the Ld. Counsel for the assessees have

submitted that the report was not admissible in evidence and further

that the report of the CAG cannot bye pass the statutory provisions of

law. It has, therefore, been contended that firstly there was no

payment in kind by the assessees to the millers as the assessees never

want to retain the by-product of paddy and further, even otherwise, the

provisions of section 194C of the Act in respect of un-quantified and

indeterminable value of the by- products are not attracted.

the millers were liable to return 67% of the paddy in weight as

custom milled rice to the Government, however, there was no evidence

on the file that the by-product retained by the miller constitute 33%. It

has been further submitted that in the process of milling / shelling,

there is a loss of the product which is called “processing loss” and it

cannot be said that the by-products retained with the millers is exact

33% of the paddy. . That the Government is not interested in taking

the by-product and moreover it cannot be quantified in terms of

money, hence, the TDS provisions of section 194C of the Act would

not apply. Further, referring to the para 13 of the decision in the case

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of ‘M/s Aahar Consumer Products Pvt. Ltd.’ in ITA Nos. 2910-1939-1654

& 1705/DEL/2010 dated 28.2.2011, it has been submitted that the

coordinate Delhi Bench of the Tribunal in the case of an assessee who was

supplying wheat and getting back ‘Atta’ or ‘Dalia’, as the case may be, in

an agreed proposition, held that for such an exchange, there was

absolutely no payment of any consideration. That even if it is to be treated

as a ‘work contract’ and not as contract of sale, it was difficult to say that

there was any payment as a consideration for the labour or the work that

was rendered. It was held that it was a case of exchanging of the

product i.e wheat was exchanged with ‘Atta’ or ‘Dalia’ which was

entirely a new product. That there was no payment of any sum by the

assessee to the miller. It was further held that even if one has to say

that there was a constructive payment, it was difficult to quantify the

same and to say that assessee was under an obligation to deduct tax at

source at such construed payment. It was also observed that even the

assessee had not claimed such a payment as expenditure and it had not

claimed any deduction there upon. Further, It was concluded as

under:-

“14. We must also view the whole transaction under the agreement from a different angle. The assessee gives the wheat and accepts Atta and Dalia in return by weight to weight basis and what he got in return are the value added products of lower quantity. The assessee by this method has prevented itself from factors like fall in the prices of either raw material or of the finished products. The market value of the wheat and the end products are totally different and fluctuate in different directions. All

22 ITA Nos. 1309 & 1310, 1312-1214,1424 & 1425c-16, 78-C-18, 1241 & 1242/Chd/2016, 669/Chd/2016, 320 to 325/Chd./2018 & 685-686-C-2016-Pb St Warehousing Corpon & Ors

these fluctuations are warded off by the present agreement, which is just exchange of goods for goods and does not involve any cash outflow. Although services were taken, it is difficult to say that the residuals and the losses left by the assessee in favour of AIL are purely consideration for the job that is done. The market fluctuations in the price structure of the raw material and the end product cannot be just ignored in the whole transaction nor the process loss. The process loss could be either more or less than the percentage agreed to between the parties. But still the parties settle the transactions at an agreed proportion. In other words, the residual that is left by the assessee, apart from covering the labour cost of processing, also includes the protection from market fluctuations as also protection from adverse process loss. To conclude, the entire residual is only for the purpose ITA No.2310/Del/2010 & Othrs 25 of job work is not fair and correct having regard to the totality of the transaction entered into by the parties.

the absence of any machinery provisions to quantity the value of the

by-product, the provisions of section 194C were otherwise not

enforceable. The Ld. Counsel for the assessees have further submitted

that earlier in many cases, some of which have been referred to above,

the issue has been decided by the various Benches of the Tribunal in

favour of the assessee and Department has not challenged the same in

23 ITA Nos. 1309 & 1310, 1312-1214,1424 & 1425c-16, 78-C-18, 1241 & 1242/Chd/2016, 669/Chd/2016, 320 to 325/Chd./2018 & 685-686-C-2016-Pb St Warehousing Corpon & Ors

the High Court and in view of this, the findings arrived at in those

cases have become final against the Department and thus the issue is

squarely covered in favour of the assessee.

decisions, the reliance has been placed on the decision in the case of

the Delhi Bench of the Tribunal in the case of ‘M/s Aahar Consumer

Products Pvt. Ltd.’ (supra) and the facts in the case of Aahar Consumer

Products Pvt. Ltd. (supra) were quite distinguishable of the present

case and further that now the issue is squarely covered by the

decision of the Hon'ble Andhra Pradesh High Court in the case of

‘Kanchanganga Sea Foods Ltd. vs CIT’ (supra), which has been further

affirmed by the Hon'ble Supreme Court. Further, that in the light of

the CAG report (supra) and the clarification by the Government,

milling charges are fixed taking into consideration the value of the by-

product which is a part of the consideration paid by the assessees to

the millers for paddy milling contract.

record and the case laws referred to above. The main contention of the

Department is that by-product retained by the millers have

considerable market value and further that a sum of Rs. 15/- paid as

‘milling charges’ is a nominal cost which is insufficient to meet even

the actual cost of services rendered by the millers including milling

and drying of the paddy, ‘katai’ of the paddy before de-husking, de-

24 ITA Nos. 1309 & 1310, 1312-1214,1424 & 1425c-16, 78-C-18, 1241 & 1242/Chd/2016, 669/Chd/2016, 320 to 325/Chd./2018 & 685-686-C-2016-Pb St Warehousing Corpon & Ors

husking of the paddy, filling up bags of the rice, transportation,

weight check etc., apart from the milling of the paddy. That the real

consideration lies in the value of the by-product retained by the miller,

therefore, the assessees i.e. Procurement Agencies were required to

deduct ‘TDS’ on the value of the by-products paid ‘in kind’ as

consideration for the milling charges.

by-product did not constitute as a payment of consideration for the

work contract of milling of the paddy. That the assessees have not

debited even the value of the by-product as their expenditure in their

books of account and have not claimed any deduction in respect

thereof. Further, that even the provisions of section 194 C of the Act

were applicable in respect of the monetary payment and not for

payment ‘in kind’. That, even otherwise, the issue has now been

squarely covered by the various decisions, not only of the Chandigarh

Bench of the Tribunal, but other Benches also, and mainly by the

decision of the Hon'ble Delhi Bench of Tribunal in the case of ‘M/s

Aahar Consumer Products Pvt. Ltd.’ (supra). That in the absence of any

contrary decision of higher authority directly on the issue, the said

decisions should be followed by this Bench.

consideration, we deem it fit to reproduce here the provisions of

section 194C of the Act.

25 ITA Nos. 1309 & 1310, 1312-1214,1424 & 1425c-16, 78-C-18, 1241 & 1242/Chd/2016, 669/Chd/2016, 320 to 325/Chd./2018 & 685-686-C-2016-Pb St Warehousing Corpon & Ors

“Payments to contractors. 194C. (1) Any person responsible for paying any sum to any resident (hereafter 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— (i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family; (ii) two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, of such sum as income-tax on income comprised therein. (2) Where any sum referred to in sub-section (1) is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. (3) Where any sum is paid or credited for carrying out any work mentioned in sub-clause (e) of clause (iv) of the Explanation, tax shall be deducted at source— (i) on the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or (ii) on the whole of the invoice value, if the value of material is not mentioned separately in the invoice. (4) No individual or Hindu undivided family shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family. (5) No deduction shall be made from the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor, if such sum does not exceed thirty thousand rupees : Provided that where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds 50[one lakh] rupees, the

26 ITA Nos. 1309 & 1310, 1312-1214,1424 & 1425c-16, 78-C-18, 1241 & 1242/Chd/2016, 669/Chd/2016, 320 to 325/Chd./2018 & 685-686-C-2016-Pb St Warehousing Corpon & Ors

person responsible for paying such sums referred to in sub-section (1) shall be liable to deduct income-tax under this section. (6) No deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, where such contractor owns ten or less goods carriages at any time during the previous year and furnishes a declaration to that effect along with his Permanent Account Number, to the person paying or crediting such sum. (7) The person responsible for paying or crediting any sum to the person referred to in sub-section (6) shall furnish, to the prescribed income-tax authority or the person authorised by it, such particulars, in such form and within such time as may be prescribed.”

with the millers, copy of which has been placed by the Department at

page 27 of their paper book, wherein, the following clause (8) is

relevant:-

“8. The by-products viz. Broken rice, rice kani, Phuk (rice husk) etc. obtained during the manufacture of rice shall be the property of the miller and the Government / Procuring Agency shall have no right or responsibility in this regard.”

manufacture of rice shall be property of the miller and the Government

/ Procurement Agencies will have no right or responsibility in this

respect. The Procurement Agency gets the paddy milled or to say gets

the rice manufactured out of the raw material (paddy) on behalf of the

Government of India / FCI. For the said purpose, the procurement

27 ITA Nos. 1309 & 1310, 1312-1214,1424 & 1425c-16, 78-C-18, 1241 & 1242/Chd/2016, 669/Chd/2016, 320 to 325/Chd./2018 & 685-686-C-2016-Pb St Warehousing Corpon & Ors

agency enters into an agreement with the miller. The milling charges

are fixed by the Government of India. It is not in the hands of the

procurement agencies or millers to negotiate on the consideration

payable for ‘milling charges’. Admittedly, for the year under

consideration, milling charges have been fixed @ Rs. 15/- per quintal.

The out-turn ratio has also been fixed, which means that the miller

has to return 67% of the manufactured rice, irrespective of the fact

that the yield of rice manufactured was low or high from the paddy

entrusted to him; which of course, not only depends upon the variety

and quality of paddy but also on the climactic changes. Under the

circumstances, the nature of contract, in our view, is not purely a work

contract rather it is something more than that. In this contract, the

miller has no choice to say that he will return the rice as well as the

by-products as per the outcome of the actual milling of the paddy and

that he will only claim the milling charges. There is no option for the

miller to say that owing to the variety / quality of the paddy or other

circumstances, the yield of manufactured rice was less and that he was

liable to return what he actually got after milling or to say that his

work was only of the milling of the paddy and that he was not liable

for the yield coming out of the paddy, unless and until some

deficiency either in service or otherwise is attributable on his part.

No such choice is available to the millers. Another important factor in

this case is that neither the Government of India / FCI is interested to

receive back / return of the by-product of the paddy nor the Procuring

28 ITA Nos. 1309 & 1310, 1312-1214,1424 & 1425c-16, 78-C-18, 1241 & 1242/Chd/2016, 669/Chd/2016, 320 to 325/Chd./2018 & 685-686-C-2016-Pb St Warehousing Corpon & Ors

Agencies who gets the rice shelling on behalf of the Government of

India. As noted above, it has been mentioned in the specific term

‘that the by-product is the property of the miller’ which means that the

property in the by-product passes immediately to the miller on the

very coming of it into existence. Though, before the milling of the

paddy, the Government / procurement agencies remain the owner of

the paddy, however, the moment the paddy is milled, the Government /

procurement agencies lose their ownership and control over the paddy

and the by-product but have right only on the ‘milled rice’ for which

they pay a stipulated amount of Rs. 15/- as milling charges. The

relevant words in the clause (8) of the Agreement that “the

Government / Procuring Agency shall have no right or responsibility

in this regard” speaks that to retain the by-product cannot always said

to be ‘right’ over a thing but sometimes it becomes a ‘responsibility’

also and the Government / Procurement Agencies are not willing to

own this responsibility. This decision is taken by the agencies perhaps

on the ground that they want to escape the responsibility of

procurement of the by-product, transporting this by-product and even

selling this by-product, when they, themselves, are not sure about the

fetchable market value of this type of by-product. Hence, to get rid of

this responsibility and in their business interest, they do not want to

take back / retain the by-product and, therefore, it is specifically

agreed that the by-product will be the property of the miller. The by-

product is agreed to be kept with the miller as per the policy of the

29 ITA Nos. 1309 & 1310, 1312-1214,1424 & 1425c-16, 78-C-18, 1241 & 1242/Chd/2016, 669/Chd/2016, 320 to 325/Chd./2018 & 685-686-C-2016-Pb St Warehousing Corpon & Ors

Government and there is no option to the miller even to say that it will

not retain the by-product or to demand any sum more than the fixed

rate on account of milling. There is no such option available to the

miller. Under the circumstances, as contended by the Ld. DR also,

though the milling charges are fixed taking into consideration the fact

that the by-product have also some marketable value, however, the

value of the by-product as per the term of the agreement entered into

by the procurement agencies with the millers, cannot said to be a

consideration for the work contract of milling of the paddy. These

cases are of peculiar circumstances, where the assessee / availer of

services is not interested in retaining the by-product. Even as per

agreement, the procurement Agency / assessee never becomes the

owner of the by-product. The very point of coming into existence of

the by-product, the same remains the property of the miller. When as

per the terms of the agreement, the by-product is never involved to be

the property of the procurement agencies, under the circumstances, it

cannot be said that the said by-product has been handed over as

consideration in kind by the procurement agencies to the millers.

When one is not the owner of the product and the property in the

product has never passed on to that person, he, under the

circumstances, cannot pass the same to the others. The property in the

by-product from the very inception remains with the miller and, hence,

the same cannot be said to be as consideration received by the miller.

In the peculiar facts and circumstances of this milling contract, though

30 ITA Nos. 1309 & 1310, 1312-1214,1424 & 1425c-16, 78-C-18, 1241 & 1242/Chd/2016, 669/Chd/2016, 320 to 325/Chd./2018 & 685-686-C-2016-Pb St Warehousing Corpon & Ors

the consideration is fixed taking into consideration other factors, the

likely benefit that the miller will get out of milling process in the form

of by-products, however, such benefits cannot be said to be

consideration for the contract. As observed above, though such benefit

may be of worth value to the miller, but it may prove to be a liability

to the Procurement agencies, hence, taking into consideration the

peculiar circumstances and in the interest of business, a decision has

been arrived at by the Government of India not to take responsibility

of the by-product, thereby, also losing any rights in the said by-

product. As observed above, if the contention of the Revenue is to be

accepted, then under the circumstances, the miller can insist upon to

say to the other party that he is not interested in retaining the by-

product or to negotiate on the milling charges or to claim higher

milling charges, irrespective of the value of the by-product either at a

negotiable rate or at fixed rate. However, as observed above, neither

such an option is available to the miller under the contract nor the

property in the by-product, any time comes into the ownership of the

procurement agency. Hence, in view of this, neither the value of the

by-product can be said to be consideration for the work contract nor

the provisions of section 194C of the Act will be applicable in this

respect. Moreover, as pointed out in the CAG report (supra) and as

discussed above, the value of the by-product is not ascertained to the

Government, though the Government through its agencies such as

Tariff Commission or the office of the CAG has tried to ascertain the

31 ITA Nos. 1309 & 1310, 1312-1214,1424 & 1425c-16, 78-C-18, 1241 & 1242/Chd/2016, 669/Chd/2016, 320 to 325/Chd./2018 & 685-686-C-2016-Pb St Warehousing Corpon & Ors

value of the by-product and thereafter to revise the milling charges

accordingly. However, till date, the Government has failed to

ascertain the same. The milling charges as fixed in the year 2005 are

continued as such. This fact also shows that in the absence of any

ascertained / confirmed data regarding the marketable value of the by-

product, the Government has opted not to claim any ownership over it

and thereby even not any right or responsibility in respect of it. Under

the circumstances, even when the market value of the by-product is

not ascertainable, hence, the procurement agencies will not otherwise

will be in a position to deduct TDS by assuming any value of such by-

product.

‘Kanchanganga Sea Foods Ltd. vs CIT’ (supra), the brief facts of the case

of ‘Kanchanganga Sea Foods Ltd. vs CIT,’ as extracted from the decision

of the Supreme Court, were as under:-

“2. Facts giving rise to the present appeals are that the appellant M/s. Kanchanganga Sea Foods Limited is a company incorporated in India and engaged in sale and export of sea food and for that purpose obtained permit to fish in the exclusive economic zone of India. To exploit the fishing rights, the appellant-company (hereinafter referred to as the "assessee") entered into an agreement dated 7th March, 1990 chartering two fishing vessels i.e., two pairs of Bull Trawlers, with Eastwide Shipping Co. (HK) Ltd. a non-resident company incorporated in Hong Kong. Clause 4 of agreement which is relevant for the purpose reads as follows :-

"4. Deponent Owners to provide:

32 ITA Nos. 1309 & 1310, 1312-1214,1424 & 1425c-16, 78-C-18, 1241 & 1242/Chd/2016, 669/Chd/2016, 320 to 325/Chd./2018 & 685-686-C-2016-Pb St Warehousing Corpon & Ors

The Deponent Owners will provide fishing vessels, as approved by Government of India, for all inclusive charter fee of US $ 600,000.00 per vessel per annum. The charter fee is inclusive of fuel cost, maintenance repairs, wages, food for the crew and any other expenses incurred in connection with the operation of the vessel. They will provide training to the Indian crew in all aspects of fishing techniques, maintenance and running of the engine. In addition:

a) The Deponent Owners should pay the charterers Rs.75,000/- or 15% of the gross value of the catch whichever is more. 1

b) Annual charter fee shall be maximum of US $ 600,000 per vessel per annum payable by way of 85% of gross earning from the fish sales subject to the condition that this will not exceed 85% of the sales value of the catch per vessel per annum on voyage to voyage basis. Minimum 15% of the earning by way of sales value of catch of fish should accrue to the charterer. Payment to the Deponent Owners should not exceed the above charter fee.

c) Export value of catch from the chartered vessels should not be lower than the prevailing international market price at the time of export."

Thus, according to the terms of the agreement the Eastwide Shipping Co.(HK) Ltd., the owner of the fishing Trawlers (hereinafter referred to as the "nonresident company") was to provide fishing Trawlers to the assessee for all inclusive charter fee of US $ 600,000 per vessel per annum. In terms of the agreement the assessee was to receive Rs.75,000/- or 15% of the gross value of catch, whichever is more. The charter fee was payable from earning from the sale of fish and for that purpose 85% of the gross earnings from the sale of fish was to be paid to the non-resident company.”

Foods Ltd. vs CIT’, as per the terms of the agreement, it was agreed

between the assessee and the non-resident company that non-resident

company, who was the owner of the fishing vessels, will provide the

33 ITA Nos. 1309 & 1310, 1312-1214,1424 & 1425c-16, 78-C-18, 1241 & 1242/Chd/2016, 669/Chd/2016, 320 to 325/Chd./2018 & 685-686-C-2016-Pb St Warehousing Corpon & Ors

same to the assessee at the inclusive charter fee of US$ 6,00,000 per

vessel per annum. The hiring charges were thus quantified in terms of

money, which will be payable by him by way of 85% of gross earnings

from the fish sales and subject to the condition that this will not

exceed 85% of the sale value of the catch per vessel per annum on

voyage to voyage basis, which means that though the hiring / usage

charges of the vessel were fixed at US$ 6,00,000 per vessel, the mode

of recovery was through sale price of the 85% of the total catch,

however, if the 85% of the total catch is not enough to realize the

maximum value of US$ 6,00,000, the owner of the vessel will not be

entitled to claim more catch or more price, it has to restrict the hiring

charges to the sale value of 85% of the catch. Further, it had been

agreed that the assessee ‘Kanchanganga Sea Foods Ltd’ (supra) would

receive minimum 15% of the earning by sale value of catch of fish. It

was further agreed that the payment to the owner of the vessel,

however, will not exceed the above said agreed charter fee of US$

6,00,000, which means that the consideration was settled at sale price

of 85% of the catch but maximum to the extent of US$ 6,00,000.

However, if the sale price of 85% of the catch would exceed US$

6,00,000, then the exceeded amount will not be retained by the

assessee and not by the owner of the vessel. Similarly, minimum of

15% of the earring from the sale of fish would be retained by the

assessee, however, it could exceed from that, if the value of the sale

price of the remaining 85% of the catch would exceed US$ 6,00,000.

34 ITA Nos. 1309 & 1310, 1312-1214,1424 & 1425c-16, 78-C-18, 1241 & 1242/Chd/2016, 669/Chd/2016, 320 to 325/Chd./2018 & 685-686-C-2016-Pb St Warehousing Corpon & Ors

In these circumstances, the consideration was settled in monetary

terms and subject to aforesaid exceptions. It was not the case that the

consideration in kind was passed on the non-resident owner

irrespective of the sale value of the catch. The sale value in monetary

terms of the catch was the determining factor for the consideration to

be passed. Hence, under the circumstances it cannot be said that the

consideration was passed in kind, rather, it was passed in terms of the

monetary value of the sale price received from the catch, subject to

the condition that it would not be more than US$ 6,00,000. In the

aforesaid case of ‘Kanchanganga Sea Foods Ltd.’, the assessee,

Kanchanganga Sea Foods Ltd., remained the owner of the catch until its

sale value was realized and had right to retain the realized value that

was more than US$ 6,00,000 and at the same time it was entitled to

retain the sale value of the 15% catch, even though, the sale value of

the remaining 85% of the purchase would fetch less than US$

6,00,000. It was the sale value of the catch which was the determining

factor and till the catch was not sold or its value was not determined,

the property in the catch fish would remain under the ownership of the

assessee ‘Kanchanganga Sea Foods Ltd’. However, in the case in hand,

the neither the Procurement agency becomes the owner of the by-

product nor there is any ascertainable value of the by-product. Even,

the Procurement Agencies have neither any inclination to know the

price of the by-product nor they have right to claim any amount out of

35 ITA Nos. 1309 & 1310, 1312-1214,1424 & 1425c-16, 78-C-18, 1241 & 1242/Chd/2016, 669/Chd/2016, 320 to 325/Chd./2018 & 685-686-C-2016-Pb St Warehousing Corpon & Ors

the value of the by-product on the ground that its sale value has

exceeded the milling charges. In view of the above discussion, the

case law in the case of ‘Kanchanganga Sea Foods Ltd.’ is not applicable

on the facts of the present case.

194C of the Act will be attracted only in case the consideration is

passed to the contractor in cash or in any other identical / similar

mode, such as, by cheques, draft, money order or other electronic

mode but not in respect of consideration paid ‘in kind’ is concerned,

we are of the view, that it cannot be held straight away in all the cases

that provisions will not apply for consideration passed ‘in kind’. It all

depends upon the relevant facts of each case. If the consideration or

the value of the consideration for the ‘work contract’ is settled in

monetary terms, or at a value of money, it will be immaterial if

thereafter the consideration is passed in monetary terms or ‘in kind.’.

Suppose, the consideration in the contract is settled at a certain price

and instead of paying the said price in cash or through banking

channel, such as, by way of cheque / draft / RTGS etc., the availer of

the services / assessee pays / transfer valuable goods of the equal

monetary value to the contractor such as gold or any other precious

metal or anything else having almost equal monetary value at which

the price was settled, to say that the provisions of section 194 will not

be attracted in that case, will be against the spirit, intent and purpose

of section 194C of the Act and such an interpretation will defeat the

36 ITA Nos. 1309 & 1310, 1312-1214,1424 & 1425c-16, 78-C-18, 1241 & 1242/Chd/2016, 669/Chd/2016, 320 to 325/Chd./2018 & 685-686-C-2016-Pb St Warehousing Corpon & Ors

real intent and purpose of the provisions. Another important factor to

be taken into consideration is that the assessee must be the owner /

should have the authority to pass on the consideration ‘in kind’ to the

contractor. As discussed above, in this case, the property in the by-

products comes into ownership of the millers from the very point of

coming of it into existence, hence, in this case the assessees were not

the owners of the by-products. Another factor for consideration is that

the property passed ‘in kind’ should have some ascertainable and

determinable value, which can be taken as part of the consideration

paid for the work done. Further, it is the nature of the contract, term

of the agreement, the intention of the parties and overall facts and

circumstances of the case which are required to be analyzed and

considered for determining whether the provisions of section 194C of

the Act or other similar provisions of the Chapter would be attracted

or not in a particular case. As discussed above in detail, since we

have held that the property in the by-product was not passed on by the

assessee / Procurement Agencies as milling charges, hence, it is held

that TDS provisions of section 194C are not attracted in this case.

This issue is decided in favour of the assessees / Procurement

Agencies.

Delhi Bench of the Tribunal in the case of ‘M/s Aahar Consumer

Products Pvt. Ltd.’ (supra), the issue in the present appeals has already

been decided in favour of the assessee and the Ld. CIT(A) in this case

37 ITA Nos. 1309 & 1310, 1312-1214,1424 & 1425c-16, 78-C-18, 1241 & 1242/Chd/2016, 669/Chd/2016, 320 to 325/Chd./2018 & 685-686-C-2016-Pb St Warehousing Corpon & Ors

has followed the aforesaid decisions of the Tribunal in various cases

and Department, as submitted before us, has not agitated the issue

before higher Judicial authority, and even in the absence of any

contrary decision of the higher Judicial Forum directly on this issue,

the issue is otherwise covered in favour of the assessee by the various

direct decisions of the Coordinate Benches of the Tribunal on this

issue. In view of this, we do not find any infirmity in the order of the

CIT(A) while allowing the appeals of the assessee.

Nos.1309 & 1310/Chd/2016, 1312 to 1314/Chd/2016, 78/Chd/2018,

316 to 325/Chd/2018, 77/Chd/2018, 336/Chd/2018, 1241 &

1242/Chd/2016, 685 & 686/Chd/2018 and 162/Chd/2016, thus,

having no merits are dismissed.

1425/Chd/2017 (A.Y. 11&12 & 13-14) and ITA No. 669/Chd/.2017

(A.Y.2012-13)

ITA Nos. 1424 & 1425/Chd/2017 (A.Y. 11&12 & 13-14) and ITA No. 669/Chd/2017 (A.Y.2012-13) – Assessees appeals

38 ITA Nos. 1309 & 1310, 1312-1214,1424 & 1425c-16, 78-C-18, 1241 & 1242/Chd/2016, 669/Chd/2016, 320 to 325/Chd./2018 & 685-686-C-2016-Pb St Warehousing Corpon & Ors

the CIT(A)s by dismissing the appeals of the Revenue. Therefore, in view of the findings arrived at in the lead case in ITA No. 1309/Chd/2016 in ‘ITO Vs. Distt. Manager, M/s State Warehousing Corporation’ for assessment year 2012-13, all the appeals filed by the assessee stand allowed. In the result, all the captioned appeals of the Revenue are dismissed, whereas, that of the assessees are allowed. Order pronounced in the Open Court on 30.10.2018 Sd/- Sd/-

अ�नपूणा� गु�ता संजय गग� (ANNAPURNA GUPTA) (SANJAY GARG ) �या�यक सद�य/ Judicial Member लेखा सद�य/ Accountant Member Dated : 30.10. 2018 “आर.के.”

आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आयु�त/ CIT 4. आयकर आयु�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File

आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar