Can wastage of Gold during jewellery creation be treated as making charges – P.R. Gold and Silver Craft Vs DCIT (ITAT Chennai)
Summary: The Income Tax Appellate Tribunal (ITAT), Chennai, has ruled that gold wastage during the ornament manufacturing process cannot be treated as “making charges” subject to Tax Deducted at Source (TDS) under Section 194C of the Income Tax Act. The case involved P.R. Gold and Silver Craft, a jeweller who outsourced manufacturing to goldsmiths. During the assessment, the Assessing Officer (AO) noted a significant amount of gold was claimed as wastage. The AO argued that this excess wastage was, in reality, gold retained by the goldsmiths as payment for their services, and thus, the jeweller should have deducted TDS on its value. Both the AO and the CIT(A) had confirmed this view. However, the ITAT disagreed, stating that the provisions of Section 194C are only applicable when an assessee has “paid or credited” a sum to a contractor. Since the claim of wastage did not involve any cash payment or credit entry in the books, the tribunal concluded
GOLD WASTAGE DURING CREATION OF ORNAMENTS CAN’T BE TREATED AS ‘MAKING CHARGES’-ITAT (CHENNAI)
The wastage of gold during the creation of ornaments cannot be treated as making charges and the provisions of Section 194C would not be applicable to the assessee for non-deduction of TDS on the amount of such wastage, according to an order of the Income Tax Appellate Tribunal (ITAT), Chennai.
In an interesting order dated August 24, 2022, the ITAT dismissed an order of the Assessing Officer (AO), which had held that TDS under Section 194C would be applicable to the amount of gold treated by a jeweller as wastage and kept by the goldsmith as making charges.
BRIEF FACTS
1.The assessee was engaged in the manufacturing of gold and silver jewellery.
2. During the assessment proceeding, the AO noted that the assessee had purchased old gold from customers and the same was melted through goldsmiths to get pure gold.
3. The assessee had issued 1,46,331.79 gram of gold to goldsmiths for making new jewellery during the assessment year 2013-14 but received back only 1,41,397.61 gram and the balance of 1,294.66 gram was left with the goldsmiths, with the assessee claiming wastage of 5,454.03 gram of gold in the process.
4. Similarly, in the assessment year 2014-15, the assessee claimed wastage of 1286.03 gram of gold during the making process.
5. However, the AO noted that for all other jewellery, the assessee had shown charges ranging between 4.5% to 6% but the wastage would only be in the range of 0.5% to 1% and the excess rate of gold claimed by the assessee was actually the gold retained by the goldsmiths in lieu of making charges.
6. During the recording of the statement of goldsmiths, the AO received contrary statements where some claimed wastage in the range of 5% to 6% while others claimed the wastage was only in the range of 0.5% to 1%.
7. The AO then treated this wastage as payment to goldsmiths without deduction of tax under section 194C of the Income Tax act.
8. The AO rejected the assessee’s contention that tax need not be deducted at source when consideration is not paid in cash or cheque. “Hence, in view of the above findings, the wastage is restricted to 1% of the gold retained by the goldsmith. Wastage in excess of this 1% is treated as gold in lieu of making charges which work out to 4328.08 gm,” the AO said.
9. The assessee challenged the AO’s order before CIT (A) which also confirmed the action of the AO.
10. CIT (A) noted that almost all goldsmiths had admitted before the AO that during the manufacturing process they will retain gold around 5% of the input which is claimed by the assessee as wastage.
11. According to CIT (A), the assessee was liable to deduct TDS on this claim of wastage as per Section 194C of the Income Tax Act.
12. Aggrieved with the CIT (A) order, the assessee appealed before the ITAT.
DECISION OF TRIBUNAL
The Tribunal held that the manufacturing of ornaments involves various processes and the wastage is actual and real. However, the given case didn’t pertain to the eligibility of wastage but pertained to whether such wastage was liable to deduction of tax under section 194C.
The entire process of the assessee was it had outsourced its manufacturing to certain jewellers outside Pondicherry and pathars in Pondicherry. The jewellers had not claimed any wastage as loss as they paid higher job charges which includes the value of wastage suffered. However, the pathars claimed wastage but paid lessor job charges.
The assessee filed party-wise details of the making charges paid to jewellers and pathars and details of tax deducted therefrom.
It should be noted that the provisions of section 194C are applicable when the assessee has paid or credited any charges covered thereunder. In case, no payment is debited or credited to the respective party’s account, then such payment cannot be considered within the ambit of section 194C or any other TDS provisions.
In the given case, the claim of wastage whether it is 1% or 6% neither involves any payment nor credit of such sum by way of cash, issue of cheque or draft nor by any other mode. Thus, the deduction of tax at source under section 194C doesn’t arise.
CONCLUSION: Section 194C of the Income Tax Act deals with the tax deducted at source (TDS) that is to be compulsorily deducted from any payments that have been made to any person who is a resident contractor or a subcontractor. In other words, it encompasses all persons who have paid a resident contractor or subcontractor to carry out any kind of work. As per the provisions of this section, when a payment is made to a contractor, TDS will be required to be deducted by the party or person who has made the payment. From above discussion it is clear that TDS will be deducted from the payment made to contractors/sub-contractors and in this case, there is no payment has been made and hence TDS will not be applicable.
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DISCLAIMER: the case law presented here is only for sharing knowledge and information with readers. In case of necessity do consult with tax professionals.
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