Provisions of section 194C applies to work and not for purchase of material

Bharatpur Dugdha Utpadak Sahkari Sangh Ltd. Vs ITO (ITAT Jaipur)

ITAT Jaipur held that the provision of section 194C of the Income Tax Act is applicable to work and not for purchase made which are liable for VAT. Hence, TDS u/s. 194C is not leviable as payments were made for purchase of material and not for any work contract.

Facts- A TDS survey u/s. 133A(2A) of the Income-tax Act 1961 was conducted at the business premises of the assessee. During the course of the survey, it was found that the assessee/deductor M/s Bharatpur Dugdh Utpadak Sahakari Sangh Ltd. Bharatpur, has made the contract through the government to supply the packing material and payment made for purchase of packing material, but TDS not deducted under the head contractor payment as per Section 194C of the I.T. Act and TDS required to be deducted @1%/2% as applicable as per section 194C amounts to Rs. 63,700/-.

In this regard the show cause was issued to the assessee and the assessee filed the reply which was considered but AO held the assessee in default for short/non-deduction of TDS of Rs. 63,700/- u/s. 194C of the Act. The interest u/s. 201(1A) was also worked out at Rs. 36,309/-. As the assessee did not find any favour from the order of the ld. CIT(A) the assessee has preferred the present appeal.

Conclusion- Held that the provision of section 194C of the Act is applicable to work and not for purchase made which are liable for VAT. Based on the evidences so produced and argument advanced before us we are of the considered view that all are purchases of material with some specifications supported by the levy of the value added tax on material and therefore, the same is no for any work contract. Since, the assessee has discharged the burden that all these payments made by the assessee is not for any work contract the provision of section 194C of the Act is wrongly invoked by the lower authorities and therefore, the levy TDS made by the ld. AO is queshed for an amount of Rs. 63,700/- and therefore the appeal filed by the assessee in ITA NO. 321/JPR/2023 stands allowed.

FULL TEXT OF THE ORDER OF ITAT JAIPUR

These five appeals are filed by the assessee aggrieved from the order of the National Faceless Appeal Centre (NFAC), Delhi [ Here in after referred as “NFAC/ld.CIT(A)” ] for the assessment years 2015-16 to 2019-20 dated 09.03.2023 which in turn arises from the order of the ITO, TDS, Alwar passed under Section 201(1)/201(1A) & 206C of the Income tax Act, 1961 (in short ‘the Act’) dated 28.06.2019.

2. Since the issues involved in the assessee’s appeal for different years are almost identical and are almost common, except the difference in figure of demand raised and disputed. Therefore, these appeals were heard together with the agreement of both the parties and are being disposed off by this consolidated

3. At the outset of the hearing the ld. AR submitted that the matter pertaining to Bharatpur Dugdha Utpadak Sahkari Sangh Limited in ITA no. 321/JPR/2023 may be taken as a lead case for discussions as the issues involved in the lead case are common and inextricably interlinked or in fact interwoven and the facts and circumstances of other cases are identical except the difference in the amount in other assessment year. The ld. DR did not raise any specific objection against taking that case as a lead case. Therefore, for the purpose of the present discussions, the case of ITA No. 321/JPR/2023 is taken as a lead case.

3.1 Based on the above arguments we have also seen that for these appeals are on similar facts, similar arguments were raised and grounds of appeal are also similar. Therefore, were heard together these five appeals and are disposed by taking lead case facts, grounds and arguments from the folder in ITA No. 321!JPR!2023 for the assessment year 2015-16 and the order there in passed shall mutatis mutandis apply to the ITA Nos. 322 to 325!J PR!2023.

4. Before we move to the merits of the case the bench noted that as per the report of the registry these appeals are filed with a delay of 11 days. On this issue the ld. AR of the issue pointed out the appeal is filed online as well as offline in physical. The online appeal is filed on 03.05.2023 as per the acknowledgment filed before us and the physical! hard copy is filed on 19.05.2023. Since the appeal filed online is in time the same is treated as valid and thus we are deciding on the merits.

5. The assessee assailed the appeal in ITA No. 321/JPR/2023 on the following grounds;

“1. That, on the facts and in law, the Ld. Commissioner (Appeals) erred in sustaining the order of the I.T.O., TDS, Alwar whereby he (the I.T.O.).by considering the assessee as assessee in default in regard to non-deduction of TDS u!s 194C of the IT. Act on payment of Rs.31 .85 lacs made for purchase of packing material, held the assessee liable to deduct TDS @ 2% on the payment of Rs. 31.85 lacs u!s 194C of the I.T. Act at Rs. 63,700, which sustenance by the Ld. Commissioner (Appeals) of the order of the I.T.O., TDS, Alwar holding the assessee liable to deduct TDS @ 2% on payment of packing material of Rs. 31.85 lacs u/s 194C at Rs. 63,700 and raising a total demand of Rs. 1,00,009 (Demand u/s 201(1) Rs. 63,700 plus demand u/s 201(1A) Rs.36,309) against the assessee, is most arbitrary, unjust and not maintainable in law and liable to be cancelled.

2. That, the Ld. Commissioner (Appeals) failed to appreciate that the assessee’s case is covered by exclusion provision given in the definition of word “Work” in clause (iv)(e) of explanation to section 194C of the I.T. Act saying, “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”

3. That, the appellant craves leave to add, alter, amend and/or substitute one or more grounds of appeal as and when necessary.”

6. The fact as culled out from the records is that in this case, a TDS survey u/s 133A(2A) of Income-tax Act 1961 was conducted on 28.01.2019 at the business premises of the assessee. During the course of survey it was found that the assessee/deductor M/s Bharatpur Dugdh Utpadak Sahakari Sangh Ltd. Bharatpur, TAN JPRB02179C has made the contract through government to supply the packing material since F.Y. 2014-15 onwards and payment made for purchase of packing material, but TDS not deducted under the head contractor payment as per u/s 194C of the I.T. Act, 1961 and TDS required to be deducted @ 1%/2% as applicable as per u/s 194C amounts to Rs. 63,700/-. Therefore, assessee was asked to furnish the details of TDS/TCS deducted by them on packing material of an amount of Rs. 31.85 lacs. On perusal of the details filed it is noted by the ld. AO that the assessee has made purchase of packing material but the TDS has not been deducted. Thus, assessee failed to deduct TDS under the provisions of section 194C of the Act. In this regard the show cause was issued to the assessee and the assessee filed the reply which was considered but the ld. AO held the assessee in default for short/non deduction of TDS of Rs. 63,700/- u/s. 194C of the Act. The interest u/s. 201(1A) was also worked out at Rs. 36,309/-.

7. Aggrieved from the order of the Assessing Officer, assessee preferred an appeal before the ld. CIT(A)/NFAC. A propose to the grounds so raised the relevant finding of the ld. CIT(A)/NFAC is reiterated here in below:

“I find from the above order passed by assessing officer (AO) u/s 201 (1 )/206C(6)/206C(7) of the I.T. Act that tax was levied as above for non deduction of TDS @ 2% on the payment made for purchase of packing materials based on the findings made by the AO in course of survey operation u/s 1 32A(2A) of I T.Act. As per said order it is also observed that the appellant deductor made the contract through government with the suppliers to supply the packing materials but no TDS was made in contravention of section u/s 194C of I.T Act. Whereas the appellant contended that contracts entered by the assessee are for supply of packing materials and not for carrying out any work and such purchase does not fall in the definition of WORK as specified in clause (iv) of the explanation of section 194C of the Income Tax Act.

After carefully observing both the interpretation I find no merit in the submission of the appellant in as much as the section 194C of the I.T Act has the wider import of the term “Contract” which includes carrying out “any work” under it. In other words the appellant’s interpretation is not treated as acceptable if the letter of approval cum Contract order as submitted by the appellant in course appeal hearing is observed and considered, where it is is clearly established the nature of “Work” assigned to the supplier.

In view of above I find no logic in appellant’s submission of contractual purchase of packing material won’t be qualified as a contract. The assessee­firm since engaged this resident contractors [M/s Shakun Plastics (P) Ltd., M/s Satyam Industries,M/s Radhey Polymerrs etc..] on its own account on principal-to-principal basis, for a services under a valid enforceable contracts and paid them sum of money in terms of such contracts/agreements for the services availed, consequently, held as liable to comply with the provisions of section 194C.

I find that the appellant is unable to submit any cogent, justified reason in support of his claim raised in “grounds”. At the same time the appellant has miserably failed to comply with the provision of section 194 C of the Income Tax Act and therefore the ground taken by the appellant is misconceived, incorrect and not corroborated with supporting evidence as per law.

Considering the entire conspectus of the case and in the light of foregoing findings vis-à-vis discussion, substantial force is found in the order of the AO, passed order u/s 201(1)/201(1A). In the light of above discussion I find that the AO is justified in imposing tax & interest u/s 201 (1 )/201 (1 A) of the Income Tax Act after providing ample opportunity to appellant. Accordingly, the levy of tax with interest stand confirmed.

In view of above I find no logic in appellant’s submission of contractual purchase of packing material won’t be qualified as a contract. The assessee­firm since engaged this resident contractors [M/s Shakun Plastics (P) Ltd., M/s Satyam Industries, M/s Radhey Polymerrs etc..] on its own account on principal-to-principal basis, for a services under a valid enforceable contracts and paid them sum of money in terms of such contracts/agreements for the services availed, consequently, held as liable to comply with the provisions of section 194C.

I find that the appellant is unable to submit any cogent, justified reason in support of his claim raised in “grounds”. At the same time the appellant has miserably failed to comply with the provision of section 194 C of the Income Tax Act and therefore the ground taken by the appellant is misconceived, incorrect and not corroborated with supporting evidence as per law.

Considering the entire conspectus of the case and in the light of foregoing findings vis-à-vis discussion, substantial force is found in the order of the AO, passed order u/s 201/201(1A). In the light of above discussion I find that the AO is justified in imposing tax & interest u/s 201 (1 )/201 (1 A) of the Income Tax Act after providing ample opportunity to appellant. Accordingly, the levy of tax with interest stand confirmed.

In the result, the appeal of the appellant is dismissed.”

8. As the assessee did not find any favour from the order of the ld. CIT(A) the assessee has preferred the present appeal on the grounds as reiterated here in above. A propose to the grounds so raised the ld. AR appearing on behalf of the assessee has placed their written submission which is extracted in below;

“In the case of the abovementioned appellant in all there are five appeals for five different assessment years, namely, A.Y.201 5-16,2016-17,2017-18,2018- 19, 2019-20. In each appeal there are three grounds of appeal. Grounds of appeal No.1 & 2 are against invoking of provisions of section 194C of the I.T. Act and consequential levy of tax u/s 201 (1) and charging of interest u/s 201 (1A) of the I.T.Act on the payments made by the assessee for purchase of packing material and third Ground of appeal is of general nature. Thus in all the five appeals issue involved is that of non-deduction of TDS u/s 194C of the I.T. Act on payment made for purchase of packing material and disputed total demands involved are as under :-

Further except the difference in figures of payment made for purchase of packing material, tax charged u/s 201(1) and interest charged u/s 201(1A), the other facts and circumstances and issue involved in all the five appeals are identical and common and similar grounds have been raised by the assessee in all the five appeals . Under such state of affairs and to avoid the repetition, the appellant craves leave to make common written submissions . However before making written submissions the appellant craves leave to give in brief the facts of the case which are as under:-

BRIEF FACTS

1. The assessee is engaged in the work of collecting milk from various rural primary co-operative societies and after processing/manufacturing, supplies milk and the milk products, namely, Ghee, Dahi, Chhach etc.

2. Packing material used in supply of milk and milk products are purchased from local dealers. The amount of purchase of packing material and levy of tax u/s 201(1) and charging of interest u/s 201(1A) of the I.T Act and consequencial demands raised in relation to a particular financial year is mentioned in the chart given above in the preamble.

3. The facts giving rise to above mentioned issue of non-deduction of tax at source from the payment made by the assessee in relation to purchase of packing material arose after a TDS survey u/s 1 33A ( 2A) of the IT Act was conducted on 28/01/2019 at the business premises of the assessee. Thereafter a show cause notice u/s 201(1 )/201 (1A) dated 03/06/2019 of the IT Act was issued to the assessee interalia mentioning that during the course of survey it was found that you (i.e. the assessee) have made the payment for purchase of packing material for FY 2014-15 to 2018-19 relevant to assessment years 2015-16 to 2019-20 totaling to Rs.163.34 lacs on which TDS deductable @ 2% calculates to Rs.3,26,680/- but it is gathered that TDS thereon has not been deducted by you u/s 194C of the I.T. Act.

4. In response to this notice the assessee filed reply vide letter dated 27/06/2019 explaining that the total payment of Rs.163.34 lacs during five different financial years, namely, FY 2014-15 to 2018-19 (relevant to AY 201 5-16 to 201 9-20) was made for purchase of packing material and not in regard to a contract for carrying out any work as mentioned in section 194C (1) of the IT Act, 1961 and under such facts and circumstances the assessee was not liable to deduct TDS from payment made for purchase of packing material.

5. However, videfive separate orders passed u/s 201(1 )/ 201(1 A) and 206C (6)/206 C (7) of the IT Act all dated 28/06/2019 for each assessment year i.e. AY 201 5-16 to 201 9-20 respectively, the ld AO fixed the liability of TDS on the assesseeby mentioning that the assesseedeductor was liable to deduct TDS @2% on the payment made for purchase of packing material. The AO further observed in all the orders u/s 201(1)/201(1A) & 206C (6)/206C (7) of the IT Act for FY 2014-15 to 2018-19 relevant to AY 2015-16 to 201 9-20 that on perusal of the ledger of purchase of packing material in all the five years it reveals that the assesseedeductor has made payments to selling dealers on which TDS is to be deducted @2% as per section 194C, whereas TDS has not being deducted and hence he is in default for short/non deduction of TDS. Against all the five orders the assessee filed appeal before ld CIT(A) who by passing a common order confirmed the levy of tax and interest for all the five years by wrongly describing purchase of packing material from different parties like Shakun Plastic Pvt. Ltd., M/s Satyan Industries totaling to Rs.1 63.34 Lacs as receipts of services.Now against all these orders passed by the ld CIT (Appeal), the assessee is in appeal before the honorable tribunal .

SUBMISSIONS IN SUPPORT OF EACH GROUND OF APPEAL

GROUNDS OF APPEAL NO. 1 & 2

Both these grounds of appeal are against invoking of provisions of section 194C of the I.T. Act and consequential levy of tax u/s 201(1) and charging of interest u/s 201 (1A) of the I.T.Act on the payments made by the assessee for purchase of packing material . In support of both these grounds of appeal it is respectfully submitted as under :-

1. First of all the appellant craves leave to reproduce the relevant provisions of section 194C of the IT ACT 1961 which contain the provisions of tax deduction at source on payment to contractors.

Section 194C (1) which is a charging section reads as under :-

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 contact 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.

194C (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

Besides an explanation is also given at the end of section 194C, which as under :-

Explanation. – For the purposes of this setion,-

(i) “specified person” shall mean ,-

(a) The Central Government or any State Government ; or

(b) any local authority; or

(c) any corporation established by or under a Central, State or Provincial Act; or

(d) any company; or

(e) many co-operative society; or

(f) any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities , towns and village, or for both; or

(g) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India;or

(h) any trust ; or

(i) any university established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956); or

(j) any Government of a foreign State or a Foreign enterprise or any association or body established outside India; or

(k) any firm; or

(l) any person, being an individual or a Hindu undivided family or an association of persons or body of individuals, if such person,-

(A) does not fall under any of the preceding sub-clauses; and

(B) is liable to audit of accounts under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which sum is credited or paid to the account of the contractor;

(ii) “goods carriage” shall have the meaning assigned to it in the Explanation to sub-section (7) of section 44AE;

(iii) “contract” shall include sub-contract;

(iv) “work” shall include –

(a) advertising ;

(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;

(c) carriage of goods or passengers by any mode of transport other than by railways;

(d) catering;

(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.

2. That it is respectfully submitted that from reading together the above given relevant provisions of section 194C (1), 194C (3) and Explanation to section 194C it comes out as under :-

i. Any person responsible for paying any sum to any resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between a specified person and the resident contractor, he is required to deduct tax at source.

ii. Section 194C covers a person carrying out work for another person as a contractor in the ordinary sense and not merely carrying on activites of his own business or profession in the ordinary course of charging fees, remuneration etc.,

iii. Provisions of this section i.e. 194C relating to tax deduction from payment to contractors/sub-contractors are applicable only where contract is either a ”work contract” or a “ contract for supply of labour for work contract” . Meaning thereby , these provisions are not applicable for payments made under contract for sale of goods.

iv. The expression “work” shall include advertising, broadcasting and telecasting—, carriage of goods and passengers —- and catering.

v. As per sub-clause (e) of clause (iv) of the Explanation, “work” shall also include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer and in such cases mechanism of working out of amount of tax deductable at source has been given in sub-section 3 of section 194C.

vi. It is further provided in this sub-clause (e) of clause (iv) of the Explanation itself, that work will 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. In support of this submission the humble appellant craves leave to refer to and rely upon the judgement of hon’ble Karnataka High Court reported in(201 4) 369 ITR 72 (Karn) in the case of CIT v/s Spice Tele communications Pvt. Ltd wherein the hon’ble court by observing that as the assessee did not supply any material to the manufacturers or suppliers for the supply of SIM or scratch cards as per their requirement or specification, such transactions could not be treated as ‘works contracts’ within the meaning of section 194C (1) of the IT Act.

3. It is further submitted that in response to a show cause notice issued on 03/06/2019 by the AO, the assessee vide his letter of reply dated 27/06/2019 ( A copy of it is appearing in each of the order u/s 201(1) /201(1 A) and 206C (6) /206 C(7) dated 28/06/2019 for all the years) interalia explained to the AO that it (assessee) has purchased packing material from the sellers i.e. manufacturers for packing of its products for sale . The assessee also mentioned in the reply that it purchased packing material as per requirement and only colours and design are decided by it. The assessee also submitted before the AO in the above mentioned reply that the provisions of section 194C would apply only in relation to work contracts or labour contracts and would not cover contracts for sale of goods. It further mentioned in this reply letter that as the manufacturer purchased material on his own and manufactured products as per the requirement of a specific customer like him, it is a case of sale and not a contract for carrying out any work and hence provisions of section 194C are not attracted. It further mentioned in the reply that as it purchase packing material on which there is no liability of TDS and as such it has not deducted the TDS on the purchase of packing material in all the five years.

4. That, the humble appellant craves leave to refer to and rely upon the judgement of hon’ble Gujrat High Court in the case of CIT vs Hindustan Lever reported in (2008) 306 ITR 25 wherein the assessee placed order for supply of printed material. According to the assessee it had entered into a contract of purchase or supply simpliciter. The Tribunal held that this was a contract for sale of materials simpliciter relying on circular 715, dated 08/08/1995, wherein it was stated that in a case of sale no deduction u/s 194C is required. The hon’ble Gujrat High Court dismissed the appeal of the department by holding that the Tribunal having based its decision on the explanatory circular issued, there was no infirmity in the order of the Tribunal-. Against the above judgement given by the hon’ble High Court, the department filed Special leave petition (SLP) before the hon’ble Supreme Court which dismissed the SLP. This judgement of hon’ble Supreme Court is reported in (2008)306 ITR (St.) 2 (SC).

5. The appellant also craves leave to refer to and rely upon various judicial Pronouncements given in the Annexure to these written submissions.”

8.1 The ld. AR of the assessee in addition to the written submission submitted that the assessee has not undertaken any job work to whom the payment is made but the assessee has purchased the goods and the same is supported by the invoice and the payment made includes for purchases which are Value Added purchase and not service tax paid and therefore, the invocation of provision of section 194C made by the ld. AO and confirmed by the ld. CIT(A) misconceived of the fact. Apropos to this argument the ld. AR of the assessee has submitted following details :

Considering these aspects of the matter, when the invoice specifically suggests the purchase of goods duly paid for VAT there is no liability to discharge the TDS for any contract and thus, invocation of levy u/s. 194C is misconceived.

9. The ld DR is heard who has relied on the findings of the lower authorities.

10. We have heard the rival contentions and perused the material placed on record. The bench noted that the ld. CIT(A) has confirmed the addition considering the fact that the assessee is having a regular supply contract and therefore, confirmed the levy of TDS. The bench noted from the complete chart for which the assessee held as assessee in default amount on 31,84,532/- are all though regular supply contract but the same is not for any services liable to TDS u/s. 1 4C of the Act. The provision of section 194C of the Act is applicable to work and not for purchase made which are liable for VAT. Based on the evidences so produced and argument advanced before us we are of the considered view that all are purchases of material with some specifications supported by the levy of the valu added tax on material and therefore, the same is no for any work contract. Since, the assessee has discharged the burden that all these payments made by the assessee is not for any work contract the provision of section 194C of the Act is wrongly invoked by the lower authorities and therefore, the levy TDS made by the ld. AO is queshed for an amount of Rs. 63,700/- and therefore the appeal filed by the assessee in ITA NO. 321/JPR/2023 stands allowed.

11. The fact of the case in ITA Nos. 322 to 325/JPR/2023 are similar to the facts of the case in ITA No. 321/JPR/2023 and we have heard both the parties and persuaded the materials available on record. The bench has noticed that the issues raised by the assessee in appeal No. 322 to 325 /JPR/2023 is equally similar on set of facts and grounds. Therefore, it is not imperative to repeat the facts and various grounds raised by the assessee. Hence, the bench feels that the decision taken by us in ITA No. 321/JPR/2023 for the Assessment Year 201 5-16 shall apply mutatis mutandis in ITA Nos. 322 to 325/JPR/2023. Based on these observations the appeal of the assessee in ITA No. 322 to 325/JPR/2023 stands allowed.

In the result, the appeals of the assessee are allowed.

Order pronounced in the open Court on 18/09/2023