pri No TDS on payment for goods manufactured as per specification on principal-to-principal basis No TDS on payment for goods manufactured as per specification on principal-to-principal basis

Case Law Details

Case Name : DCIT Vs. P.Z. Cussons India (P) Ltd. (ITAT Mumbai)
Appeal Number : ITA No. 1428, 1429 & 1430/Mum/2016
Date of Judgement/Order : 13/07/2017
Related Assessment Year : 2006-07, 2007-08, 2011-12

DCIT Vs. P.Z. Cussons India (P) Ltd. (ITAT Mumbai)

Seminal features of the contract entered into by the assessee with the three concerns for purchase of goods clearly bring out that the contract for supply of goods is on principal-to-principal basis and is a contract for purchase of goods by the assessee and sale of goods by the respective manufacturers. No doubt, the manufacturers are obliged to manufacture products as per the specifications and standards provided by the assessee but it is a case where the contractual obligations are entered into on a principal-to-principal basis. The manufacturers buy raw material and packing material at their own cost and as per their requirements and it is the obligation of the manufacturers to deliver the products as per specifications provided by the assessee. Accordingly, impugned agreements were purchase and sale contracts simpliciter, which did not require any deduction of tax under section 194C.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

The captioned three appeals relate to the same assessee and involve certain common issues, therefore, they have been clubbed, heard together and a consolidated order is being passed for the sake of convenience and brevity.

2. First, we may take up the appeals in ITA Nos. 1428 & 1429/Mum/2016, pertaining to the assessment years 2006-07 and 2007-08, which are directed against a common order dated 7-12-2015 passed by the Commissioner (Appeals)–22, Mumbai, which in turn arose from two separate orders dated 28-3-2012 passed by the assessing officer under section 271(1)(c) of the Act for assessment year 2006-07 and 2007-08 respectively.

3. In these appeals, the issue relates to the penalty imposed by the assessing officer under section 271(1)(c) of the Act amounting to Rs. 68,69,241 and Rs. 1,02,28,240 for assessment years 2006-07 and 2007-08 respectively. Notably, in the assessments finalized under section 143(3) of the Act the assessing officer made dis allowances by invoking section 40(a)(ia) of the Act in respect of purchase of goods of Rs. 2,04,07,729 and Rs. 3,03,86,928 for assessment years 2006-07 and 2007-08 respectively by holding that agreements for purchases were in the nature of work contracts, which was liable for deduction of tax at source under section 194C of the Act. The claim of the assessee was that such agreements were purchase and sale contracts simpliciter, which did not require any deduction of tax at source under section 194C of the Act. The assessing officer disagreed with the assessee and in the absence of the requisite deduction of tax at source under section 194C of the Act, the amounts were disallowed in terms of section 40(a)(ia) of the Act. Subsequently, vide orders dated 28-3-2012, the assessing officer levied penalty under section 271(1)(c) of the Act for the assessment years of 2006-07 and 2007-08 of Rs. 68,69,241 and Rs. 2,02,28,240 respectively. The Commissioner (Appeals) has deleted the levy of penalty in both the years by noticing that the Tribunal vide its order in ITA Nos. 8267/Mum/2010 & 8265/mum/2010, date 30-9-2015 upheld assessee’s contention that the agreement for purchases were not work contracts so as to be liable for deduction of tax under section 194C of the Act, and the additions made by the assessing officer by invoking section 40(a)(ia) of the Act were deleted. In view of the aforesaid decision of the Tribunal, the Commissioner (Appeals) noted that the very foundation for levy of penalty does not remain and, therefore, the penalties levied under section 271(1)(c) of the Act were cancelled. Against such a decision of the Commissioner (Appeals), Revenue is in appeal before us.

4. At the time of hearing, it was a common point between the parties that the order of the Tribunal, date 30-9-2015 (supra) continues to hold the field as it has not been altered by any higher authority, therefore, in our considered opinion, the Commissioner (Appeals) made no mistake in deleting the penalty made by the assessing officer under section 271(1)(c) of the Act for the assessment years 2006-07 and 2007-08 respectively. Resultantly, the appeals of the Revenue for assessment years 2006-07 and 2007-08 are dismissed.

5. Now, we may take up the appeal of the Revenue in ITA No. 1430/Mum/2016, which is directed against the order passed by the Commissioner (Appeals)-22, Mumbai dated 7-12-2015, which in turn arose from an order passed by the assessing officer under section 143(3) of the Act for assessment year 2011-12.

6. In this appeal, the Revenue has raised the following Grounds of appeal :–

1. ”Whether on the facts and the circumstances of the case and in law , the Ld. Commissioner (Appeals) erred in deleting the dis allowance under section 40(a)(ia) of the Income Tax Act, 1961 made on account on non-deduction of TDS on a works contract.

2. ”Whether on the facts and circumstances of the case and in law, the Commissioner (Appeals) erred in deleting the dis allowance of unabsorbed depreciation pertaining to if assessment year 1996-97 to 2001-02 disallowed in view of Provision of section 32(2) of the Income Tax Act, 1961.

“3. The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal.”

7. In so far as the first Ground is concerned, the relevant facts are that assessee is engaged in the business of providing trading in Soaps, talcum powder, baby products and providing services to other group companies of PZ Cussons group. The assessee company purchases these products from various manufacturers who in turn manufacture the same as per the specifications provided by the assessee and such products are sold by the assessee under its own brand name. In this context, the assessing officer noted that assessee had entered into agreements with three such manufacturers namely, VVF Ltd., Suhan Cosmotech (India) and Jewel Pharma. From the said parties assessee had purchased goods worth Rs. 97,21,778, detailed as under :–

(1) VVF Ltd. Rs. 80,45,660
(2) Suhan Cosmo tech (India) Rs. 6,39,028
(3) Jewel Pharma Rs. 10,37,090
TOTAL : Rs. 97,21,718

8. The relevant discussion in the assessment order reveals that following his earlier stand, the assessing officer concluded that the agreements of purchase with the aforesaid three parties were in the nature of works contract and not agreements for purchase of goods simpliciter. Therefore, he proceeded to hold that in the absence of any deduction of tax at source, under section 194C of the Act in the context of works contract, the expenditure of purchases of Rs. 97,21,778 was liable to be disallowed in terms of section 40(a)(ia) of the Act. This dis allowance has since been deleted by the Commissioner (Appeals) by relying on the decision of the Tribunal in assessee’s own case for Assessment years 2006-07 and 2007-08, date 30-9-2015 (supra). The Commissioner (Appeals) noted that the facts and circumstances in this year were similar to those considered by the Tribunal in assessment years 2006-07 and 2007-08 and, therefore, following the decision of the Tribunal, date 30-9-2015 (supra), he has deleted the addition.

9. Before us, the learned Departmental Representative quite fairly did not contest that the issue is covered by the decision of the Tribunal, date 30-9-2015 (supra), so however, he placed reliance on the order of the assessing officer.

10. After considering the arguments of the learned Departmental Representative, we find no reasons to interfere with the conclusion drawn by the Commissioner (Appeals) as it is based on a subsisting precedent in the assessee’s own case vide order of the Tribunal, date 30-9-2015 (supra). In fact, apart from the precedent in the assessee’s own case, we have also perused the seminal features of the contract entered into by the assessee with the three concerns for purchase of goods. Such features has been elucidated in the Statement of Facts filed before the Commissioner (Appeals), and which clearly bring out that the contract for supply of goods is on principal-to-principal basis and is a contract for purchase of goods by the assessee and sale of goods by the respective manufacturers. No doubt, the manufacturers are obliged to manufacture products as per the specifications and standards provided by the assessee but it is a case where the contractual obligations are entered into on a principal-to-principal basis. The manufacturers buy raw material and packing material at their own cost and as per their requirements and it is the obligation of the manufacturers to deliver the products as per specifications provided by the assessee. Considering the factual matrix, we find no reason to depart from the earlier finding of the Tribunal with regard to similar contracts which have been held not to be in the nature of work contracts. Therefore, in this view of the matter, we hereby affirm the findings of the Commissioner (Appeals) on this issue and accordingly, Revenue fails on this aspect.

11. In so far as Grounds of appeal No. 2 is concerned, the relevant facts can be understood as follows. In the return of income, assessee company claimed set-off of the unabsorbed depreciation pertaining to assessment years 1996-97 to 1999-2000 of Rs. 51,57,371. The assessing officer disallowed the claim because, according to him, section 32(2) of the Act so prevalent during the assessment years 1997-98 to 2001-02, prescribed that unabsorbed depreciation could be carried forward only upto eight years and, therefore, the unabsorbed depreciation pertaining to assessment years 1996-97 to 1999-2000 was not available for set off in the in the instant assessment year, which was beyond a period of eight years. The Commissioner (Appeals) has since disagreed with the assessing officer. The Commissioner (Appeals) noted the plea of the assessee that section 32(2) of the Act referred by the assessing officer was substituted by Finance Act, 2001 effective from assessment year 2002-03. In terms of such amendment, the restriction on carry forward of unabsorbed depreciation for 8 years was done away with and the new section 32(2) of the Act only prescribed that depreciation remaining unabsorbed in an assessment year shall be carried forward to the next assessment year and shall form part of the current depreciation. On the strength of this amendment, assessee canvassed that unabsorbed depreciation remaining at the end of assessment year 2001-02 would form part of the depreciation for assessment year 2002-03 and, therefore, it could be carried forward and set-off without any time limit as per the amended provisions of section 32(2) of the Act. Before the Commissioner (Appeals), assessee also pointed out that the decision of the Special Bench of the Tribunal in the case of DCIT v. Times Guaranty Ltd. (2010) 40 SOT 14 was no longer a good law, inasmuch as, the same was contrary to the judgment of the Gujarat High Court in the case of General Motors India (P) Ltd. v. DCIT, 354 ITR 244(Guj). The Commissioner (Appeals) noticed that the judgment of the Hon’ble Gujarat High Court in the case of General Motors India (P) Ltd. (supra) was clearly supporting the stand of the assessee and, therefore, he allowed the claim of the assessee for set-off of the brought forward unabsorbed depreciation pertaining to assessment years 1996-97 to 1999-2000 to the extent of the income available in the instant assessment year. Against such a decision of the Commissioner (Appeals) revenue is in appeal before us.

12. Apart from reiterating the Ground of appeal raised, the learned Departmental Representative has not pointed out any decision contrary to that of Hon’ble Gujarat High Court in the case of General Motors India (P) Ltd. (supra), which has been followed by the Commissioner (Appeals).

13. On the contrary, the learned Representative for the assessee pointed out that subsequent to the order of the Commissioner (Appeals) the Hon’ble Rajasthan High Court in the case of PCIT v. M/s. Autolite (India) Ltd. in ITA No. 206/2016, date 8-11-2016 has also followed the decision of the Hon’ble Gujarat High Court General Motors India (P) Ltd. (supra) and decided the issue in favor of the assessee’s stand; in this context, he has furnished a copy of the order of the Hon’ble Rajasthan High Court dated 8-11-2016 (supra).

14. In view of the aforesaid, we find no reasons to interfere with the decision of the Commissioner (Appeals), which is in conformity with the judgments of Hon’ble Gujarat High Court in the case of General Motors India (P) Ltd. (supra) & Hon’ble Rajasthan High Court in the case of M/s. Autolite (India) Ltd. (supra). In the result, Revenue fails in this appeal also.

15. Resultantly, captioned appeals of the Revenue are dismissed.

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