TMI Blog2010 (3) TMI 289X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, the provisions of Section 194C are not attracted – Held that: - Revenue was not justified in treating the assessee, as an assessee in default - The contract entered into by the assessee is not a contract for carrying on any work within the meaning of Section 194C. – decided in favor of assessee - 2256 OF 2009 - - - Dated:- 12-3-2010 - DR. D.Y.CHANDRACHUD AND J.P.DEVADHAR, JJ. Mr. Suresh Kumar for appellant Mr.Atul K. Jasani with P.C. Tripathi for respondent ORAL JUDGMENT (PER DR. D.Y.CHANDRACHUD, J.) 1) The appeal by the Revenue is under Section 260A of the Income Tax Act, 1961. This Court has to interpret the ambit of the expression 'any work' for the purpose of Section 194C of the Act. The assessee has an agreement with a third party for the manufacture of certain pharmaceutical products. The assessee provides the formulations and specifications. The manufacturer affixes the trademark of the assessee on the articles produced. The raw materials are purchased by the manufacturer. Property in the goods passes to the assessee only on delivery. This agreement is on a principal to principal basis. The assessee contends that the contract is a contract of sale. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with the specifications of the assessee, the manufacturer carried out the process of manufacturing at his own establishment, engaged his own labour force, purchased the raw materials and paid excise duty and sales tax. The property in the goods passed to the assessee only upon the delivery of the product. The Tribunal followed the decision of this Court in BDA India Ltd. V/s. ITO {[2006] 281 ITR 99 (Bom)} and came to the conclusion that the agreements which were entered into by the assessee with manufacturers were not contracts for work within the meaning of Section 194C. Consequently, the assessee could not be treated as being in default under Section 201(1) nor could it be subject to the levy of interest under Section 201 (1A) for failure to deduct tax at source. 5) This appeal has been placed for hearing with a batch of matters involving the same question. We have heard arguments on behalf of the assessees and the Revenue by Counsel appearing in the present appeal and in the companion appeals. Submissions: 6) On behalf of the Revenue, the submission of counsel is that from the agreement entered into between the assessee and the third party manufacturer, the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt effected by the Finance Act of 2009 is clarificatory. The assessee is not in default for not deducting tax at source. Section 194C: the judgment in Associated Cement 8) Section 194C, as it stood at the material time, provided that any person responsible for paying any sum to any resident 'for carrying out any work' including the supply of labour for carrying any work in pursuance of a contract between the contractor and a Company (or with any of the other entities referred to therein) shall at the time of the credit of such sum to the account of the contractor or at the time of payment thereof in cash or at the time of payment thereafter; deduct an amount stipulated in the provision as income tax on income comprised therein. The crucial words in Section 194C upon which the balance in the case lies, are "carrying out any work". The words as they stands have a broad connotation. 9) The Supreme Court had occasion to interpret the expression "any work" in the judgment in Associated Cement Co. Ltd. V/s. Commissioner of Income-Tax [1993] 201 I.T.R. 435. The contract there involved loading of cement bags into wagons or trucks. The contention of the assessee was that (i) The q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to 'works contracts' and 'labour contracts' and will not cover contracts for sale of goods. Since contracts for the construction of buildings or dams or laying of roads and air-fields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labour, income-tax will have to be deducted from payments made in respect of such contracts. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of the new section. The same position will obtain in respect of contracts for fabrication of sea and river crafts where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor. Where, however, the contractor undertakes to supply any sea or river crafts fabricated according to the specifications given by Government or any other specified person and the property in such sea and river crafts passes to the Government or such person only after such crafts are delivered, the contract will be a contract for sale an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racts as well as works contracts. By a circular issued on 8 March, 1994 the Central Board of Direct Taxes withdrew circular No.86 of 29 May, 1972 and paragraph 11 of Circular No.108 dated 29 March, 1973 and provided that Section 194C would apply to all types of contracts for carrying out any work including transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labour contracts, material contracts and works contracts. Despite that, the circular however continue to assert that "the provisions of this Section will not cover contracts for sale of goods". The circular continued to reiterate that a contract for fabrication of articles or things where materials were supplied by the Government or by a specified person and the fabrication work is done by a contractor would fall within the purview of Section 194. On the other hand, where a contractor undertook to supply an article or thing fabricated according to the specifications given by Government or by any other specified person and the property in such article or thing would pass only upon delivery, the contract would be a contract for sale and would lie outside the purview of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecution of the contract is voluntary or gratuitous. In the last class there is no sale because though property passes it does not pass for a price. Whether a contract is of the first or the second class must depend upon the circumstances: if it is of the first; it is a composite contract for work and sale of goods: where it is of the second category, it is a contract for execution of work not involving sale of goods." 16) In a subsequent decision in the State of Himachal Pradesh and others V/s. M/s. Associated Hotels of India Ltd. {A.I.R. 1972 Supreme Court 1131}, the Supreme Court held that a contract for sale is one whose main object is the transfer of property in, and the delivery of the possession of, a chattel as a chattel to the buyer. Where the principal object of the work undertaken by the payee of the price is not the transfer of a chattel, the contract is one of work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of material, nor the value of the skill and labour as compared with the value of the material, is conclusive, though these circumstances may be taken into c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the procession of work on fusion to the movable property of the customer? If it is the former, it is a "sale"; if it is the latter, it is a "works contract". Therefore, in judging whether the contract is for "sale" or for "work and labour", the essence of the contract or the reality of the transaction as a whole has to be taken into consideration. The predominant object of the contract, the circumstances of the case and the custom of the trade provide a guide in deciding whether transaction is a "sale" or a "works contract". Essentially, the question is of interpretation of the "contract". It is settled law that the substance and not the form of the contract is material in determining the nature of transaction." 17) In Hindustan Shipyard Ltd. V/s. State of Andhra Pradesh {[2000]119 STC 533 (S.C.)}, the Supreme Court enunciated certain principles which were deduced from the decided cases on the distinction between the two concepts. The second, third and fourth principles laid down in the judgment of the Supreme Court, read thus:- "(2) Transfer of property of goods for a price is the linchpin of the definition of "sale". Whether a particular contract is one of sale of goods or f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er upon the payment of a price. If the article has an identifiable existence prior to its delivery to the purchaser, and when the title to the property vests with the purchaser only upon delivery, that is an important indicator to suggest that the contract is a contract for sale and not a contract for work. In India, the distinction between the two categories is elucidated by the Sale of Goods Act, 1930. Sub-section (1) of Section 4 provides that a contract of the sale of goods is a contract, whereby a seller transfers or agrees to transfer the property in goods to the buyer for a price. Where under a contract of sale, the property in goods is transferred from the seller to the buyer, the contract is that of sale, but where transfer of property in the goods is to take place at a future time, or subject to some condition thereafter to be fulfilled, the contract is not a sale but is an agreement to sell. A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of the offer. Under Section 5(1) the contract may provide for immediate delivery of the goods or immediate payment of the price or postponement of delivery or payment of the price by instalment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involving carriage of goods would fall within the ambit of Section 194C was not decided in Associated Cement. The Supreme Court noted that the decisions of the High Courts of Bombay, Calcutta, Karnataka, Gujarat, Madras, Orissa and Delhi were to the effect that the expression 'carrying any work' would not include carriage of goods. The Supreme Court accepted the submission that the word 'work' must be understood in the limited sense as a product or result. Two interpretations of Section 194C were, according to the Supreme Court, reasonably possible, on the question as to whether a contract for carriage of goods would fall within the purview of the provision. Since the view taken by several High Courts had held the field for a long period, the Supreme Court held that this view should not be disturbed. Consequently, the Supreme Court held that Explanation III which was inserted in Section 194C with effect from 1 July, 1995 would not be applicable to transport contracts which involved contracts for carriage of goods prior to the date of its insertion. The Supreme Court declined to disturb the understanding which had held the field for over two decades, particularly in view of the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under the terms of the agreement to obtain a licence to manufacture and to obtain the endorsement of the Food Drug Administration on the licence. The agreement envisages that the transaction between the parties is on a principal to principal basis. The assessee is required from time to time to place orders for the supply of the product in such quantities and at the agreed price, which the manufacturer has to supply. The agreement specifically stipulates that the manufacturer will be solely and exclusively responsible for the purchase, procurement and storage of raw materials required for the manufacture of the product. All approvals, licences, permits, permissions and sanctions are to be obtained by the manufacturer and to be kept valid during the term of the contract. The agreement envisages that the manufacturer is an independent contractor and is solely responsible for payment of taxes, duties and other impositions, under the agreement. The property in the product is to vest in the assessee on delivery of the product. The manufacturer has undertaken not to sell or supply the products which are to be manufactured for the assessee to any third party or to undertake the manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purchaser only upon delivery, the contract would be regarded as a contract of sale if the raw material is sourced by manufacturer and is not supplied to him by the purchaser. Secondly, the consistent view which held the field in several High Courts was that contracts where (i) property passes to the purchaser upon the delivery of the goods; and (ii) the raw material was sourced by the manufacturer and was not supplied by the purchaser do not fall within the scope and ambit of Section 194C. In this Court, a Division Bench in BDA Ltd. (supra) dealt with a case where a manufacturer of Indian made foreign liquor entered into an agreement for printing labels which were to be affixed on liquor bottles. The question was whether the agreement for printing and packing material involved a contract of sale or a contract of work. The Division Bench noted that the assessee had supplied specifications to the seller for printing labels but the raw materials were not supplied by the assessee. The printing work was not carried out at the premises of the assessee and the seller was not a captive unit of the assessee. The Division Bench held that the seller could obviously not print beyond the qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered by a hotel to its customers by giving certain facilities and / or amenities did not involve carrying out work within the purview of Section 194C. The Explanation to Section 194C 25) The Explanation to Section 194C inter alia defines the expression "work". The expression work has been defined to include contracts for advertising, broadcasting and telecasting; carriage of goods and passengers by any mode of transport, other than by railways and catering. Initially, Explanation III was included in Section 194C by the Finance Act of 1995 with effect from 1st July, 1995. As inserted, the Explanation read as follows:- "Explanation III. - For the purposes of this section, the expression, "work" shall also include - (a) advertising; (b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting; (c) carriage of goods and passengers by any mode of transport other than by railways; (d) catering." The Amendment of 2009 26) By the Finance Act of 2009, which substituted the provisions of Section 194C, the expression "work" has now been defined in clause (iv) of the substituted explanation. Clauses (a) to (d) are the same as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hased from a person other than such customer. In other words, the circumstance that the requirements or specifications are provided by the purchaser is not regarded by the statute as being dispositive of the question as to whether a contract constitutes a contract of work or sale. What is of significance is whether material has been purchased from the customer, who orders the product. When the material is purchased from the customer who orders the product, it constitutes a contract of work while on the other hand, where the manufacturer has sourced the material from a person other than the customer, it would constitute a sale. What is significant is that in using the words which clause (e) uses in the explanation, Parliament has taken note of the position that was reflected in the circulars issued by the Central Board of Direct Taxes since 29th May, 1972. The judgment of the Supreme Court in Associated Cement gave an expansive definition to the expression work and rejected the attempt of the assessee in that case to restrict the expression work to works contracts. Both before and after the judgment of the Supreme Court the expansive definition of the expression 'work' co-existed wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the Interpretation of Statutes by Justice G.P. Singh. (Tenth Edition, 2006), the position of law has been stated as follows: "(i) Declaratory statutes ... If a new Act is 'to explain' an earlier Act, it would be without object unless construed retrospective. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. The language 'shall be deemed always to have meant' is declaratory, and is in plain terms retrospective. In the absence of clear words indicating that the amending Act is declaratory, it would not be so construed when the pre-amended provision was clear and unambiguous. An amending Act may be purely clarificatory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect..." This extract has been cited with approval by the Supreme Court and the principle which is formulated as aforesaid has been consistently applied. 30) In Commissioner of Income Tax V/s. Podar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le as distinct from a contract of work. The fact that the specifications are provided by the assessee to the manufacturer / supplier would make no difference to the legal position. The agreement in the present case is on a principal to principal basis. The manufacturer has his own establishment where the product is manufactured. The material required in the manufacture of the article or thing is obtained by the manufacturer from a person other than the assessee. The property in the articles passes upon the delivery of the product manufactured. Until delivery, the assessee has no title to the goods. The goods have an identifiable existence prior to delivery. 32) The reason that a specification or requirement is enunciated by the assessee constitutes a matter of business expediency. A purchaser who desires to get the product, which he intends to sell under his brand name, or trademark, manufactured from a third party would be interested in ensuring the quality of the product. The trade-mark has associated with it an assurance of the quality of the goods which are marketed traceable to the origin of the goods. Associated with the trade-mark is the goodwill and reputation which is as ..... 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