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2009 (2) TMI 502

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....ods manufactured by the third parties were marketed under the assessee's own brand name. Statement of Shri Manoj Mohan Vinchu (Head Finance and Administration) was recorded under section 133A(3) in which he stated that the purchases of Rs. 21.40 crores debited in the audited trading/profit and loss account for the year ending 31-3-2004 represented purchases of finished goods which were manufactured by third parties on principal to principal basis in terms of the contract. Copies of such contracts (eight in number) were supplied to the survey party. On a specific query he stated that the product formulations and packing material design was provided by the assessee to the manufacturers of such finished goods who were not allowed to sell such goods to any other party. By considering the replies furnished to the survey team by the above official, the Assessing Officer opined that the assessee had entered into contracts with the manufacturers and payments were liable for deduction of tax at source under section 194C of the Act. On show-cause notice, the assessee replied that the third parties carried out manufacture of goods in their own rights, risk and liabilities. It was further stat....

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.... therefore, held that the provisions of section 194C were applicable and in the absence of the assessee having deducted tax at source, it was to be considered as assessee in default under section 201(1). Similarly interest under section 201(1A) was also held to be chargeable. Similar view was taken by him in the remaining two years under consideration as well. 4. In the first appeal the learned CIT(A) principally approved the view taken by the Assessing Officer in holding that the assessee was in default under section 201(1) for not deducting tax at source as per the provisions of section 194C. He, however, observed that the Assessing Officer had not disputed the claim of the assessee that the payees had considered the payments as part of their income and hence the tax stood paid in their respective returns. By considering the Explanation to section 191 introduced with effect from 1-6-2003, the learned CIT(A) held that the demand raised under section 201(1) was invalid. About the chargeability of interest under section 201(1A), he held that such provisions are mandatory. However, a direction was given to the Assessing Officer that the interest under section 201(1A) be restricted t....

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....some cases on the subject, which we will discuss infra, for submitting that no tax was required to be deducted under section 194C under these circumstances. 6. In the opposition the learned D.R. strongly relied on the impugned order and contended that the work done by the manufacturers was in the nature of "works contract" and the tax ought to have been deducted by the assessee from the payments made to such manufacturers. Her further submissions were the reiteration of the reasoning recorded by the lower authorities in not accepting the assessee's claim. She referred to various parts of the impugned order in support of her arguments. 7. We have heard the rival submissions and perused the relevant material on record. Section 194C provides that "any person responsible for paying any sum to any resident (hereinafter 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 contract between the contractor and ... (d) any company ... 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....

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....urred by such manufacturers who purchase the raw material at their own, incur the labour costs and other overheads, pay excise duty and sales tax when the goods are manufactured and sold to the assessee. It is only after the manufacture of medicines that the assessee is billed with the total costs incurred by the manufacturers along with their profit mark up. 9. Under these circumstances we have to decide whether the work done by the manufacturers can be said to be sale of goods to the assessee or carrying out any work in pursuance of contract. Circular No. 681, dated 8-3-1994 was issued by the Board to throw light on the applicability of section 194C to service contracts. Para 7 of the Circular states that the service contracts would be covered by the provisions of this section since service means doing any work as explained above. Clause (vi) of para 7, which is relevant for our purpose, reads as under:- "(vi) The provisions of this section will not cover contracts for sale of goods- (a) Since contracts for the construction, repair, renovation or alteration of buildings or dams or laying of roads or airfields or railway lines or erection or installation of plant and machiner....

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....tracts for the sale of goods will not be covered within the ambit of section 194C but the contracts granted for processing of goods supplied by the 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 scope of this section. The same position will prevail in respect of the contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified persons and the fabrication work is done by the contractor. Thus where the goods are supplied by the Government or any other specific person for doing of a particular job on such goods it will be considered as covered within the meaning of "work". Clause (b), which is significant for our purpose, makes the position more clear when it states that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Government or any other specified person and the property in such article or thing passes to the Government or such other person only after such article or thing is delivered the contract will be a contract for sale and hence outside t....

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....n question No. 15 of Circular No. 715, dated 30-8-1995 in which it has been answered that section 194C would apply in respect of supply of printed material as per prescribed specifications. Drawing strength from this question, specifically referred to in the assessment order, the Assessing Officer came to the conclusion that the goods were manufactured by the manufacturers as per the specification given by the assessee and hence section 194C would apply. It is important to note that the Board in the later Circular No. 13/2006, dated 13-12-2006 has clarified that the exclusive reliance on question/ answer No. 15 of Circular No. 715 without taking into account the principles laid down in the Circular No. 681 is not justified. In para 3 it has been observed that : "It is, therefore, clarified that the provisions of section 194C would apply in respect of a contract for supply of any article or thing as per the prescribed specifications only if it is a contract for work and not a contract for sale as per the principles in this regard laid down in para 7(vi) of Circular No. 681, dated 8-3-1994". In an earlier para we have elaborately dealt with clause (vi) of para 7 of Circular No. 681 a....