SUMMARY OF CASE LAW
The contracts for the sale of goods will not be covered within the ambit of section 194C.
CASE LAW DETAILS
Decided by: ITAT, MUMBAI BENCHES `E’, MUMBAI, In The case of: Shemaroo Video Pvt.Ltd.v.ITO, Appeal No.: ITA NOS. 337 TO 340/MUM/2007 Decided on: MAY 5, 2009
6. We have heard the rival submissions and perused the relevant material on record. Section 194C provides that “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 …….(d) any company ……….. 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 ……….. of such sum as income-tax on income comprised therein”. A bare perusal of thissection reveals that the liability has been cast on any person who is paying any sum to any resident “for carrying out any work”. Thus it is clear that the obligation to deduct tax at source under this section arises when a payment is made for carrying out any work. The expression “work” has been defined in Explanation III to this section in an inclusive manner to include advertising; broadcasting and telecasting including production of programmes; carriage of goods and passengers and catering. The list given in this Explanation is not exhaustive but inclusive. It has been done so with a view to include any payment within the purview of this section which is for carrying out any work. The natural corollary which follows is that if the payment is not for carrying out any work, then such payment will go out of the purview of section 194C. One of the exceptions may include payment towards purchase of goods. Where any goods are purchased and the payment is made that cannot fall within the scope of section 194C. The main contention of the Revenue is that the assessee had made the payments for a works contract, on the other hand the assessee is asserting that it had made purchases simplicitor, which does not involve the making of payment towards any work contract.
7. There is no dispute about the transactions entered into by the assessee with the entrepreneurs who had their independent establishment for the production of VCDs / DVDs etc. carrying the image of the film ordered by the assessee. Here it is pertinent to mention that no distinct treatment has been given by the authorities below qua the payments towards packing and designing expenses. The assessee was continuously placing orders with such entrepreneurs, who, in turn, were required to work strictly as per the specifications given and produce stamper akin to mould or die of a product. It is only with this use of stamper that the additional copies could be produced. The assessee was supplying the master copy of the film to various entrepreneurs who were making stamper and it was the option of the assessee to place order on any of the entrepreneurs. It is an admitted position that the input costs for the production of the VCDs / DVDs was incurred by these entrepreneurs who purchased the requisite material at their own, incurred labour costs and other overhead expenses, paid excise duty and sales tax when the VCDs etc. were manufactured and sold to the assessee. It is only after the production of the VCDs etc. that the assessee was billed with the total costs incurred by the manufacturers along with profit mark up.
9. On going through the above portion of the Circular it is abundantly clear that the contracts for the sale of goods will not be covered within the ambit of section 194C but the contracts granted for processing of goods supplied by the Government or any other specified person where the ownership of such goods remains at all times with the Government or such person, will also fall within the scope of this section. The same position will prevail in respect of the contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified persons and the fabrication work is done by the contractor. Thus where the goods are supplied by the Government or any other specific person for doing of a particular job on such goods it will be considered as covered within the meaning of “work”. Clause (b), which is significant for our purpose, makes the position more clear when it states that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Government or any other specified person and the property in such article or thing passes to the Government or such other person only after such article or thing is delivered the contract will be a contract for sale and hence outside the scope of this section. Adverting to the facts of the instant case we find that the assessee placed orders with the entrepreneurs for the production of VCDs / DVDs of the films for which it had purchased rights, but the property in such DVDs passed to the assessee only after these were delivered to it. When the entrepreneurs were making the purchase at their own and incurring the other input costs, the product so produced was their own till it was delivered to the assessee. Suppose during the course of producing such DVDs some wrong raw material is used or due to any other reason the finished product did not come to the specifications of the assessee, such was the loss of the entrepreneurs. It is only when the DVDs etc. was produced according to the assessee’s specifications carrying right images and delivered to it that the property in goods could be said to have been passed to the assessee. Here is a case in which the assessee had simply placed orders for the production of the DVDs etc. carrying right images and all other relevant decisions for their production were left to the wisdom of the entrepreneurs. The assessee was only interested in right output coming up to its standard and how that output was achieved was the job of the entrepreneurs. Not only these entrepreneurs had their separate and independent establishments, the cost of raw material was also incurred by them and the excise duty also paid by them directly. Further when such entrepreneurs made the sale of such goods to the assessee, the sales-tax was also paid by them. It is not as if the entrepreneurs had done some process or added the value to the material supplied by the assessee. On the contrary it is the case where the entrepreneurs has produced the VCDs / DVDs at their own and later on sold to the assessee. The property in the goods passed over to the assessee only when such VCDs / DVDs were produced and delivered to it.