Brief of the Case: In the case of DCIT vs. Shalimar Chemical Works Ltd. the Hon’ble Kolkata ITAT held that 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 is not included in the definition of the “Work” as described in the Sub-clause (iv) of the Explanation to Section 194C of the Income Tax Act, 1961.
Facts of the Case: Assessee is a Limited Company and is into the business of manufacturer of coconut oil, spices, mustered oil and grocery items. The assessee-company does its business through a network of distributorship throughout India. During the course of assessment proceedings, the AO found that the assessee has incurred expenses of Rs.4,04,12,991/- on the purchase of packaging material. These packaging materials were made and designed at the instruction of the assessee by the party. The assessee placed the order for the supply of printed materials as per specification like size, labels, colour, design, particular type of paper, specific content etc. with the exclusive right of ownership on such materials. From the available records and information the AO held that this transaction of printing the packaging material is a work within the meaning of the explanation III to section 194C of the Act and there exist a work contract between the parties for the supply of the requisite materials and it is not a case of simple purchase of material because a particular type of work is involved. In support of his claim, the AO has referred the Circular issued by CBDT No. 715 dated 08.08.1995 wherein the question No-15 clearly states that Sec. 194C of the Act would apply in respect of supply of printed material as per prescribed specification. The AO also contended the several case laws in support of his claim.
Accordingly, AO has disallowed the expenses for the violation of Sec. 194C of the Act and added to the income of assessee.
Contention of the Assessee: Before Ld. CIT(A) assessee has submitted that the expenses on the packaging material was for the contract of sale and not for contract of job work. In most of the cases these packaging material were sold by the parties after realizing the excise duty, vat wherever applicable and there is no element of job work. The materials were also not supplied by the company and hence no TDS was deducted. The assessee also submitted the CIT(A) order where such transactions were regarded as contract for sale against the order of DCIT TDS in its own case of the assessee for the F.Y. 1996-97, 1997-98 and 1998-99.
Before the Hon’ble ITAT ld. AR submitted circular No. 681 dated 08.03.1994 in the contest of Sec. 194C of the Act, wherein in terms of clause(b) of sub-clause (6) of clause (7) it is mentioned that where, however, the contractor undertakes to supply any article or thing fabricated according to specification given by the Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and as such outside the purview of Section 194C of the Act.
Contention of the Revenue: The Ld. DR supported the order of AO and cited the case law State of Maharashtra v. Sarvodya Printing Press Fine Art (1999) (9 SCC 65) wherein it was held that supply of printed material was a works contract.
Held by CIT(A): Ld. CIT(A) disregarded the order of the AO by observing that there exist no contract for the job work and it was a simple case of purchase of packaging material. The Ld. CIT(A) relied upon several judgments in support of his decision such as decision of Hon’ble Kolkata ITAT dated 6.8.2010 in the case of ITO vs. S.T. Printing Works, Hon’ble Bombay High Court in the case of BDA Ltd. Vs. ITO(281 ITR 99(Bom) and Hon’ble Delhi High Court in the case of CIT Vs. Dabur India Ltd.(283 ITR 197(Delhi)).
Held by ITAT: The Hon’ble ITAT reproduced the sub-clause (iv) of the Explanation to Section 194C of the Act read as under:-
(iv) “work” shall include-
(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’
(e) manufacturing or supplying a product according to the requirement or specification of a customer by using materials 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.
The Hon’ble ITAT held that definition as defined by the Act clearly shows that the present transaction does not fall in the category of the work because here the material was not supplied by the assessee for the printing of packaging materials.
The Hon’ble ITAT relied on some cases of different tribunals wherein such transactions had been held as contract for sale within the purview of Section 194C such. Some of the cases relied on by the Hon’ble ITAT are :-
Case law of ITO Vs S.T. Printing Presswhere Hon’ble ITAT Bench, Kolkata has held that the materials were not supplied by the assessee, hence there is no contract with reference to any work to attract the provision of section 194C.
Case of BDA Ltd. VsITO (281 ITR 99 (Bom)) wherein the Hon’ble Bombay High Courtheld as under:
“That when the printing work was being carried out in the premises of M, though as per the specifications of the assessee, the supply was limited to the quantity specified in the purchase order, there was nothing on record to show that, all other ancillary costs like the labels, ink, papers, screen-printing, screens, etc., were being supplied by the assessee to M. In the facts of this case, the supply of printed labels by M to the assessee was a ‘contract of sale’ and it could not be termed as “work contract”. Hence, the provisions of section 194C were not applicable.”
Hon.bleDelhi High Court in the case of Dabur India Limited wherein it was held as under:-
“Deduction of Tax At Source – Deduction from payment to contractor – Sale or Works Contract –Agreement for supply of corrugated boxes with labels printed on them – agreement for sale – Section 194C Not Applicable – Income Tax Act, 1961.”
Case of Tuareg Marketing Pvt. Ltd. Vs ACIT(122 TTJ 343) (Delhi) wherein it was held by the Hon’bleITAT has held as under:-
“In the case of Tuareg marketing Pvt. Ltd. Vs. ACIT reported in 122 TTJ 343 (Delhi) it was held by the Hon’ble ITAT, Delhi that where the manufacturing activity was carried out at the risk of contract manufacturer or supplier, the manufacturer purchased required raw material on his own and purchases the goods as per specifications of the assessee buyer, the ownership of the goods passes from the manufacturer to the assessee when the goods were supplied or delivered to the assessee, the manufacturer was forbidden from affixing the assessee’s trade mark on the goods supplied to the outsider, andthe supplier was also liable to Assessment Year sales tax and other taxes on the goods supplied by it to the assessee purchaser. The combined effect of these conditions would go to show that it is a case of simple purchase of goods and not a contract for works. Supply of outsourced manufactured goods by the contract manufactured constitutes an outright sale and cannot be treated as contract of works within the scope of section 194C and, therefore, consequently the assessee was not liable to deduct tax at source from the purchase price of goods paid by the assessee to the contract manufacturers or the suppliers.”
Case of ITO Vs. Ambica Agencies (ITA No. 2055/Kol/2008) dated 12.06.2009 where it was held by the Hon’ble ITAT ‘B’ Bench which reads as under:-
”that provisions of section 194C would apply only in relation to work contacts and labour contracts and would not cover contracts for sale of goods. If a manufacturer purchases material on his own and manufacturer a product as per the requirement of a specific customer, it is a case of sale and not a contract for carrying out any work. The fact that the goods manufactured were according to the requirement of the customer does not mean or imply that any work was carried out on behalf of that customer.”
In the light of the above judicial pronouncements, the Hon’ble ITAT held that it is clear that a work does not include cases where supply of a product according to requirements or specification of a customer by using materials purchased from a person other than the customers. Hence, the provision of Sec. 194C does not attract to the present case. The case cited by the Ld. DR is not applicable as it was decided in the context of the provisions of Bombay Sales Tax Act 1959 and it has no nexus with the provisions of section 194C of the Act and consequently there was no application of provisions of section 40(a)(ia) of the Act. Hence, the Hon’ble ITAT dismissed the Revenue’s Appeal.