2005 (9) TMI 530 - AT - Income Tax

Non-deduction of tax at source u/s 194C - Purchase of goods with the assessee specification that is Contract for sale of goods or work contract - HELD THAT - In ITO v. Dr. Willmar Schwabe (P.) Ltd. 2005 (3) TMI 398 - ITAT DELHI-D the Delhi Bench of the Tribunal has held inter alia under similar circumstances that even though the packing material was manufactured by the suppliers as per the specifications given by the assessee-company and even some printing was also done as per the assessee s requirement the required raw material for the purpose of manufacturing the said packing material was purchased by the concerned suppliers on their own; that these manufacturers had even paid sales tax and excise duty on the material supplied to the assessee-company wherever applicable; that thus the ownership in the said material was entirely with the concerned manufacturers till its supply to the assessee-company and the contract between the assessee-company and these manufacturers was for supply of material and not for carrying out any particular work as envisaged in section 194C; that it was a clear case of sale of goods by the suppliers to the assessee-company which was evident from the fact that sales tax as well as excise duty was paid by the concerned suppliers on the packing material supplied to the assessee-company wherever applicable; that the CBDT itself in clause 7( b ) of its circular No. 681 dated 8-3-1994 (which circular has been invoked by the present assessee also) has clarified that where the contractor undertakes to supply any article or thing fabricated according to the specifications the property in such article or thing passes to the purchaser only after such article or thing is delivered and the contract itself being for sale of such article or thing would be outside the purview of section 194C. Thus following the aforesaid case laws we hold that section 194C is not applicable to the transaction entered into by the assessee. That being so the assessee was not liable to deduct TDS. Moreover it has not been denied that the taxes have since been paid. This amount as per the learned counsel is refundable. In these facts section 201(1) of the Act is not attracted. Evidently no tax can be collected twice over. All the parties have paid up according to the learned counsel for the assessee. If it is so to that extent the amount is to be refunded. Credit of TDS was not allowed to these parties. The full amount was collected. All in all this matter of refund is not before us. It has to be sorted out in appropriate proceedings. On merits too the very fact that the above discussed decisions have been given on the issue evinces that the matter has been of a debatable nature. In that event obviously no penalty was leviable. We hold accordingly. The grievance of the assessee is hence justified and is accepted. In the result both the appeals of the assessee are allowed.

Summary

Issues:
1. Interpretation of whether the purchase of printed cartons with specific specifications constitutes a works contract or a sale of goods under section 194C.
2. Confirmation of penalty under section 271C for alleged default in deducting tax at source under section 194C.
3. Application of section 194C to the transaction of purchasing printed cartons with specific specifications for packaging products.

Analysis:

1. The primary issue in this appeal was the interpretation of whether the purchase of printed cartons with specific specifications by the assessee constituted a works contract or a sale of goods under section 194C of the Income Tax Act. The Commissioner (Appeals) held that the purchase of corrugated boxes with printed matter, made to the assessee's specific orders, required tax deduction under section 194C. The Commissioner reasoned that the boxes could not be used by any other manufacturer if rejected by the assessee, indicating a specialized nature beyond simple purchase from the open market.

2. Another aspect of the case involved the confirmation of a penalty under section 271C for the alleged default in deducting tax at source under section 194C. The penalty was imposed on the grounds that the purchase of printed cartons with specific specifications was considered a works contract attracting section 194C. However, the assessee contended that the taxes had already been paid, negating the applicability of section 201(1) of the Act.

3. The Tribunal analyzed various precedents and decisions to determine the applicability of section 194C to the transaction in question. References were made to judgments such as Bada Ltd. v. ITO and ITO v. Dr. Willmar Schwabe (P.) Ltd., where similar issues were addressed. The Tribunal noted that the ownership of the material used for manufacturing the packing material remained with the suppliers until supplied to the assessee, indicating a sale of goods rather than a works contract under section 194C.

4. Based on the case laws cited and the absence of contradictory decisions from the Department, the Tribunal held that section 194C was not applicable to the transaction in question. Consequently, the assessee was not liable to deduct TDS, especially since the taxes had already been paid. The Tribunal emphasized that no tax could be collected twice over, and any excess amount collected should be refunded, as per the learned counsel for the assessee.

5. In conclusion, the Tribunal allowed both appeals of the assessee, ruling in favor of the assessee's contentions regarding the nature of the transaction and the non-applicability of penalties. The Tribunal highlighted the debatable nature of the issue, indicating that no penalty was leviable in such circumstances. An application for additional evidence was rejected, and the matter of refund was suggested to be resolved in appropriate proceedings.