TMI Blog2008 (12) TMI 247X X X X Extracts X X X X X X X X Extracts X X X X ..... ing loss of Rs. 11,48,852. The case was selected for scrutiny, and the assessment was made under s. 143(3) of the Act on 30th Nov., 2007 determining the total income at Rs. 11,70,59,710 after making certain disallowances. One of the disallowances made by the AO was with regard to the expenditure of Rs. 11 ,22,89,184 under s. 40 (a)(ia) of the Act for the reason that no tax was deducted at source by the assessee under s. 194C of the Act in respect of the aforesaid expenditure incurred by the assessee. In the course of assessment proceedings, the AO noticed that the assessee did not manufacture itself any item during the relevant period though it was claiming manufacturing of the traded items. Therefore, he directed the assessee to explain its real business activities. The assessee furnished its reply on 24th Aug., 2007 stating therein that the assessee company is in the trading and distribution of complete kitchen appliances under the brand name of Inalsa and has in its product portfolio the entire range of kitchen appliances and its innovative food processors, mixer grinders, juicer mixer grinders, cooking ranges, juice extractors, cooktops, microwave ovens, oven toaster grillers, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a wholesale trader under the Central Sales-tax Act and Delhi Sales-tax Act. The assessee was not having any manufacturing facility during the relevant previous year. The assessee entered into contract with various parties to manufacture various kitchen appliances as per the specification provided by the assessee. These manufacturers would not supply these items to any other parties. The contractors marked the trademark Inalsa at the appropriate appliances in the respective items and also displayed the same on the packaging. The trademark could not be used by any other manufacturer. In the warranty clauses extended to its customers the assessee claimed itself to be the manufacturer of the items. The entire manufacturing of the traded items was done on the assessee's behalf by the contract manufacturers using the moulds, dies, jigs provided by the assessee to these contract manufacturers, who were debarred from manufacturing their own items with the help of these dies, moulds and jigs. All these products were handed over to the assessee to the assessee's godown fully completed, duly packed and ready for use in the customers premises. The property as defined in s. 2(11) of the Sales o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , facts of the case and the assessment order, the CIT(A) held that the arrangement between the assessee and the contract suppliers constitute contract for works and, accordingly, it is hit by the provisions of s. 194C of the Act and the assessee was thus under obligation to deduct tax at source from payment made to contract suppliers, and since this was not done, the disallowance under s. 40 (a)(ia) of the Act made by the AO is justified. While holding so, the CIT(A) has observed that the facts of the assessee's case are different to the facts of the decisions relied upon by the assessee. One of the factors taken into account by the CIT(A) in holding that the arrangement between the assessee and the contract supplier constitute contract for work was the fact that the assessee loaned various machineries to the contract suppliers which makes it clear that the manufacturing activity and the supply of goods to the contract supplier were nothing but were extended business activity of the assessee, and the part of the business activity of the assessee was contracted by the assessee to the supplier. 3. Being aggrieved with the order of CIT(A}, the learned counsel for the assessee has pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Transmission Corporation of A.P. Ltd. vs. CIT (1999) 155 CTR (SC) 489 : (1999) 239 ITR 587 (SC). 6. We have considered the rival submissions of both the parties and have carefully gone through the orders of the authorities below. We have carefully perused the various papers placed in the paper book filed by the assessee. The issue involved in these grounds of appeal is whether the payment made by the assessee to the contract supplier is covered by the provisions of s. 194C of the Act for making disallowance under s. 40(a)(ia) of the Act. 6.1 Sec. 194C provides that any person responsible for paying any sum to any respondent for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract, he shall, at the time of credit of such sum to the account of 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 at the specified percentage and shall deposit the same to the Government account. For the purpose of s. 194C, the expression "work" shall also include advertising, broadcasting and telecasting including production of programmes for such b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r inspection and testing of the product quality/performance etc. as and when considered necessary by the purchaser and the supplier would make available the necessary inspection facilities as may be required by the purchaser's personal for this purpose. It is also provided that the ultimate responsibility for the quality and performance of the products delivered by the supplier shall be solely of the supplier for the entire period of warranty as specified in the agreement. With regard to the point of time at which the transfer of property would take place, it is provided in the agreement that the transfer of property in the case shall take place as soon as the goods are received in assessee purchaser's godown in sound and good condition. There is also a provision to replace defective supplier parts. The price at which the products will be billed by the supplier to the assessee purchaser would be the basic billing price of products complete with packing will be of FOR supplier's godown basis based on the product cost sheet. and the supplier will charge sales-tax, any other applicable. Statutory duty/taxes extra as per the applicable statutory rates, and in case of any change in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is still a case of sale and not for carrying out any work. Even in case of customer specific sale, the fact that the goods manufactured were according to the requirements of the customer, does not mean that any work has been carried out on behalf of contractee. So, the customization of the packing material supplied in accordance with the specifications laid down by the assessee, would not make the transaction into a transaction of contract. From the sample purchase order, copy of the invoices with respect to purchase of packing material, statement of information collected from the supplier of packing material as placed on record, it could be safety concluded that transaction between the assessee and the manufacturer of packing material was in the nature of sale and purchase and that the same could not be classified to be in the nature of 'outsourcing', i.e., work contract, since manufacturing of packing material was not an activity of the assessee, the same could not be branded as an act of outsourcing, In the assessment order, the AO had observed that goods were manufactured in accordance with the specification including technical drawings, illustrations, patterns, samples of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g material was passed to the assessee only after delivery of goods and prior to that ownership vested with the manufacturer. Mere production of quantity as mentioned in the purchase order issued by the assessee would not alter the character of transaction of sale to that of work contract. Therefore, there was no infirmity in the order of CIT(A) in holding that the transaction between the assessee and manufacturer of packing material was a transaction of sale and purchase on principal-to-principal basis, and that assessee was not liable to deduct tax under s. 194C on the payments so made, therefore, assessee was not in default under ss. 201(1) and 201(1A). In the result, the appeal of the Revenue was dismissed." 7. In the case of Samsung India Electric Ltd., the Tribunal, Delhi Bench 'H', New Delhi has discussed and decided the issue as under: "6. The Revenue is in appeal. We have considered the facts and the rival submissions and also respectfully perused the authorities cited before us. In the course of the business, the assessee has entered into contracts with manufacturers or vendors for supply of the products. It is not disputed that the assessee has to supply the designs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which include the Central sales-tax and local sales-tax but excludes the excise duty. It is the responsibility of the manufacturer to pack the products in the manner suitable for transportation. The loading of the products and the transit insurance prior to dispatch for the assessee shall be the responsibility of the manufacturer. On its part, the assessee shall make payment for the product supplied between the first and fifteen of the month by the fifteenth of the next month. The payment shall be made by cheque payable at Pune. Under cl. 6, it is the responsibility of the assessee to invest in moulds, tools and jigs for the semi-automatic twin tub washing machines which shall be used by the manufacturer for a period of two years. The assessee is also bound to supply the spares related to the moulds, tools and jigs. Clause 7 provides for the product quality and warranty. The warranty shall be given by the manufacturer that the product conforms in all respect to the specifications prescribed by the assessee and is of merchantable quality, free from manufacturing defect in design, material and workmanship, suitable for the purpose for which they are intended. 7. The agreement with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne or refrigerator, does not, mean that it is a works contract. The assessee does not supply the raw material to either Matsushita or Godrej. The agreements show that the assessee places purchase orders for the purchase of the product as such. The products become the property of the assessee only upon delivery to the assessee's god owns or the nominated destinations and the risk, expenses and loss till such delivery remained with the manufacturer or vendor and did not pass to the assessee before delivery. Thus, this is a contract entered into on principal-to-principal basis whereas in the case of a words contract, the person carrying out the work remains a bailee of the goods entrusted to him for carrying out the work, the property in the goods always remaining with the bailer. No such feature emerges out of the agreements, perused by us. The mere fact that the products have to be manufactured in accordance with the design and drawings to be supplied by the assessee or that the assessee can inspect the goods for quality does not mean that either Matsushita or Godrej was merely carrying out a work on the goods belonging to the assessee. It is the assessee who knows the market condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee for packing milk manufactured by the assessee, as per specifications given by the assessee and also printed the assessee's name on the packing material, the transaction was one of sale on principal-to-principal basis and, therefore, no deduction of tax at source was to be made under s. 194C. 12. The same view was taken by the Delhi Bench of the Tribunal in Jindal Photo Films Ltd. vs. ITP (2006) 5 SOT 272 (Del). In the case of BDA Ltd. vs. ITO (2006) 201 CTR (Bom) 413 : (2006) 281 ITR 99 (Bom), the Aurangabad Bench of the Bombay High Court has, after a consideration of all the authorities on the point including the authorities cited in the order of the AO in the case before us, held that for the purpose of s. 194C of the Act the difference between a sale contract and a works contract should be kept in mind and where a manufacturer purchases material on his own and manufactures a product as per the requirements of a specific customer, it is a case of sale and not a contract for carrying out any work. The High Court further observed that the fact that the goods were manufactured according to the specifications and requirements of the customers does not mean or imply that any work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and this finding was confirmed by the Tribunal after considering and examining the terms and conditions of the agreement entered into between the assessee and the manufacturers as also Circular No. 681, dt. 8th March, 2004 [(1994) 117 CTR (St) 229] issued by the CBDT. The Tribunal in this case of Dy. CIT vs. Reebok India Company (2006) 100 TTJ (Del) 976 has concluded that outsourcing of manufacture of goods by the assessee to the manufacturer was a transaction of purchase and sale of goods and not a work contract within the meaning of s. 194C as the manufacturer was an independent establishment carrying on manufacturing activity at its own premises by applying its own means and methods for performing the required tasks and the property in the goods was passed on to the assessee only on taking the delivery of the goods. 11. In the case of Dr. Willmar Schwabe India (P) Ltd., the Tribunal, Delhi Bench 'D' held that where supply of packing material was made with assessee's name/logo, and where the raw materials were purchased by the supplier, and the goods were supplied as per assessee's own specification and where the ownership in the material was entirely with the concerned manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough the orders of the authorities below. 17. The AO has disallowed the assessee's claim of depreciation on goodwill merely by saying that the depreciation on goodwill is not allowable within the scheme of the Act. 18. The CIT(A) has decided this issue by observing as under: "5.3 Conclusion and decision: I have gone through the assessment order and the written submissions of the Authorised Representative. In order to claim depreciation the following three conditions are required to be fulfilled namely: (i) Asset in question is capable of diminishing in value. (ii) Asset is owned by the assessee, and (iii) Asset is used for purpose of business. In the case of Bakliwal Corporate Services (P) Ltd. vs. ITO (2007) 112 TTJ (Mumbai) 474 : (2008) 113 ITD 14 (Mumbai) the Hon'ble Tribunal observed as under: 'It is quite clear from the aforesaid observation which have since been affirmed by the Supreme Court that depreciation is admissible only when the asset in question is shown to be capable of diminishing in value on account of any factor mentioned above. Mere existence of a capital asset is not sufficient to claim the allowance for depreciation. Allowance under s. 32 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e asset in terms of s. 32(1)(ii) of the Act was referred to. This decision was held by the SMC Bench of the Tribunal to be not applicable to the case before the Tribunal, Mumbai SMC Bench in the case of Skyline Caterers (P) Ltd., by saying that in that case, the asset did not represent the goodwill but represent the commercial right under the agreement. It is thus clear that the decision that goodwill simpliciter is not covered by the expression intangible asset for the purpose of s. 32(1)(ii) of the Act was not disputed. Now the question arises whether the right acquired by the assessee in the present case are goodwill simpliciter or represents the commercial rights as defined under s. 32(1)(ii) of the Act. The AO as well as the CIT(A) rejected the assessee's claim merely by proceeding on the footing that the assessee claimed depreciation on goodwill. The terms of the purchase agreement along with the valuation report has not been examined and appreciated upon by the AO as well as by the CIT(A). Whether the decision of Tribunal, Mumbai SMC Bench in the case of Skyline Caterers (P) Ltd. is applicable to the present case, it is necessary to first ascertain the nature of the rights a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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