TMI Blog2017 (7) TMI 1199X X X X Extracts X X X X X X X X Extracts X X X X ..... sivity is not inconsistent with a transaction of sale. Here again, much depends upon the nature of the product. Restrictive covenants of this kind are intended to protect the intellectual and other property rights of a party which markets its goods by requiring a manufacturer to observe norms of specification and exclusivity. The law is, therefore, consistent with the transaction being regarded as a transaction of sale, provided that the requirements of a contract of sale are met. They are in this case. The contract entered into by the assessee is not a contract for carrying on any work within the meaning of Section 194C. Revenue was not justified in treating the assessee, as an assessee in default. Addition on account of interest free loans to relatives - Held that:- There is nothing on record that the money advanced by the appellant to its sister company had been used as a measure of commercial expediency, was not justified. The appellant furnished all the documents in this regard. The appellant expressly stated that the amounts had been utilized for commercial activity. This assertion was never denied. The appellant was not required to do anything further to establish its ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we concur with the contention of the learned A/R that without conducting independent enquiry in the matter particularly when complete details of students and refund of fees to them maintained by the assessee were made available to the AO, the AO was not justified in disallowing the claimed refund to the extent that it was paid in cash which was only ₹ 3,65,249/- out of the total of the refund of ₹ 22,40,095/-. We thus while setting aside orders of the lower authorities on the issue, direct the AO to delete the addition of ₹ 3,65,249/-. Ground no.2 is accordingly allowed. 5. Counsel for the respondent contended that the refund amount which has been given to the students in view of the condition and it was given each of the individual pursuant to the dishouring of the catching clause after deducting the requisite basic fees which was required to be submitted and the same was part of their books of accounts. Considering the same, the view taken by the tribunal is just and proper and first issue is required to be answered in favour of the assessee. 7. On the second issue, counsel for the appellant contended that the tribunal while considering this issue wrongly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the requirement of the customer does not mean or imply that any work was carried out on behalf of that customer. 3. Commissioner of Income Tax vs. Girnar Food and Beverage P. Ltd. (2008) 306 ITR 23 (Gujarat) As can be seen from the impugned order of the Tribunal, the facts are not in dispute. The assessee placed order for supply of printed materials, but the stand of the Revenue is that as the printing was carried out by the supplier as per specifications of the assessee the arrangement would amount to works contract . The case of the assessee is that it had entered into a contract of purchase/supply simpliciter and the entire product is supplied as such; that the suppliers are not exclusively supplying such goods to the assessee. That the assessee does not give any printing contract and there is outright purchase, either by oral or written orders. The Tribunal while passing the impugned order has placed reliance on the Central Board of Direct Taxes Circular No. 715 wherein it is stated by the Board that in a case of sale no deduction under Section 194C of the Act is required. 4. The Commissioner of Income Tax-TDS vs. Glenmark Pharmaceuticals Ltd. (2010) 324 ITR 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the raw materials are supplied by the pharmaceutical company to the licensee manufacturer who in turn manufactures a pharmaceutical product on behalf of the Company. The third situation is one where by an agreement between a pharmaceutical company and a manufacturer, it is the manufacturer who procures the raw materials and manufactures the product under the specifications of the company and sells the end product to the Company. In the third situation, the manufacturer may also affix the trade mark or brand name of the Company, which in turn markets the product. The present case relates to the third category where admittedly, the entire process of manufacturing is carried out by a third party with whom the assessee has a contract. The work of manufacture is carried out at the establishment of the third party manufacturer. The raw materials are purchased by the third party manufacturer. The contract envisages that the trade-mark of the assessee is to be affixed to the goods manufactured by the third party. The agreement envisages that the assessee has developed certain pharmaceutical formulations which it intends to market under specified brand names. The assessee agreed to disclose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even by the Revenue to be a circumstance which should lead to the inference that the contract is not a contract of sale. Firstly, the circulars issued by the Central Board of Direct Taxes right since 29 May, 1972 consistently took the position that furnishing of specifications to the manufacturer of goods by the purchaser would not detract from a contract being regarded as a contract for sale so long as the property in the goods passes upon delivery. The consideration which was regarded by the Revenue as having relevance was whether the material was supplied to the contractor by the Government, or, as the case may be, by a specified person. Where the material is provided by the purchaser and the work of fabrication or manufacture is carried out by the contractor, the agreement would, it was clarified, constitute a contract for work. On the other hand, where a manufacturer produces goods to the specifications of the purchaser and the property passes to the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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 with the Revenue's understanding that a contract for sale would not be within the purview of Section 194C. The Revenue always understood Section 194C to mean that though a product or thing is manufactured to the specifications of a customer, the agreement would constitute a contract for sale, if (i) The property in the article or thing passes to the customer upon delivery; and (ii) The material that was required was not sourced from the customer / purchaser, but was independently obtained by the manufacturer from a person other than the customer. The rationale for this was that where a customer provides the material, what the manufacturer does is to convert the material into a product desired by the customer and ownership of the material being of the customer, the contract essentially involves work of labour and not a sale. Parliament recognized the distinction which held the field both administratively in the form of circulars of the CBDT and judicially in the judgments of several High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the reputation in the mark. The specification ensures the observance of standards. Similarly, a clause relating to exclusivity is not inconsistent with a transaction of sale. Here again, much depends upon the nature of the product. Restrictive covenants of this kind are intended to protect the intellectual and other property rights of a party which markets its goods by requiring a manufacturer to observe norms of specification and exclusivity. The law is, therefore, consistent with the transaction being regarded as a transaction of sale, provided that the requirements of a contract of sale are met. They are in this case. The contract entered into by the assessee is not a contract for carrying on any work within the meaning of Section 194C. 33. For the reasons aforesaid, we are of the view that the Revenue was not justified in treating the assessee, as an assessee in default. 5. Commissioner of Income Tax vs. Karnataka Power Transmission Corporation Ltd. (2012) 21 Taxmann.com 473 (Karnataka) 21. It is not in dispute that in respect of agreement for supply, which is a distinct contract, no TDS is deductible under Section 194C as it is not a contract for carrying out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent upon specification of a customer by using raw-materials purchased from a person other than such customer, as such a contract is a contract for sale. Further, it is also clarified TDS shall be deducted on the invoice value excluding the value of material purchase from such customer, if such value is mentioned separately in the invoice. It is only in cases where the material component has not been separately mentioned in the invoice, TDS shall be deducted on the whole of the invoice value. Therefore, whatever ambiguity which prevailed earlier is clarified. When in a composite contract, if an invoice is raised, separately mentioning the value of the material supplied, no deduction is permissible under Section 194C. In a case where three separate agreements entered into and one such agreement is agreement for supply of material and because the said agreement is a part of a composite transaction. Section 194C cannot be pressed into service to deduct tax at source. The whole object of introducing the Section is that it should deduct tax in respect of payments made for a works contract. No deduction is permissible in respect of contract for supply of material for carrying out work. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r carrying out works within the meaning of the word work used in sub-section (1) of Section 194C of the Act, before its amendment. After the amendment, it is clarified that the definition of the word work will not include the 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. If we apply this provision, the case of the assessees would stand strengthen further. In other words, even if the first part of the amendment i.e., sub-clause (e) of Clause (iv) of Section 194C is applied, the case of the assessees would not be covered by the said clause since the assessees did not supply any material to the manufacturers. However, we need not take recourse to the amendment. These appeals, in view of the aforesaid order of the Supreme Court, can be disposed of holding that placing of orders by the assessees, in these cases, to the manufacturers/suppliers to supply SIM/scratch cards as per their requirements cannot be treated as contract for carrying out works within the meaning of sub-section (1) of Section 194C of the Act as it existed prior to its amendment. Hence, we answer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons Ltd. , CIT v. Birla Cotton Spinning Weaving Mills Ltd. etc. 2. Hero Cycles (P) Ltd. vs. Commissioner of Income Tax (Central), Ludhiana (2015) 379 ITR 347 13. In the process, the Court also agreed that the view taken by the Delhi High Court in 'CIT v. Dalmia Cement (B.) Ltd. : 2002 (254) ITR 377] wherein the High Court had held that once it is established that there is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the Assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the Assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. 3. Commissioner of Income Tax vs. Jugal Kishore Dangayach (2014) 265 CTR 215 (Rajasthan) 11. We have considered the argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h credit account in which there was a debit balance. The Assessing Officer found that the assessee had diverted its borrowed funds to a sister concern without charging any interest and that consequently, a proportionate part of the interest relating to that amount, out of the total interest paid by the assessee to the Bank, had to be disallowed. The CIT(A) had observed that out of the total amount advanced by the assessee to its subsidiary, only an amount of ₹ 18 lakhs had a nexus with borrowed funds and he had directed the Assessing Officer accordingly to calculate the disallowance. The Tribunal allowed the appeal by the Revenue and dismissed the appeal of the assessee. The order was confirmed by the High Court. The Supreme Court observed that the Income Tax authorities, the Tribunal as well as the High Court had approached the matter from an erroneous perspective. The Supreme Court held that where the assessee had borrowed funds from a Bank and lent some of them to a subsidiary as an interest free loan, the test to be applied is whether this was a matter of commercial expediency. The expression commercial expediency , held the Supreme Court, is an expression of wide import ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As regards the advance which was made by the assessee to Reliance Industries Ltd. (RIL) the assessee pointed out to the CIT(A) that it was required to import equipment under the EPCG Scheme. The obligations under the EPCG Scheme were required to be backed by bank guarantees which in turn demanded security for the issuance of guarantees. The assessee entered into an arrangement with RIL to which it advanced a sum of ₹ 476 crores against which RIL provided counter guarantees to financial institutions equivalent to three times the amount of the margin kept by the assessee with RIL. Now, having regard to this factual background, both the CIT(A) and the Tribunal held that the investments made in the wholly owned subsidiary and the money advanced to RIL were for furthering the business of the assessee. The findings of both the CIT(A) and of the Tribunal are consistent with the judgment of the Supreme Court in S.A. Builders. Where the assessee, as in the present case, has significant interest in the business of the subsidiary and utilizes even borrowed money for furthering its business connection, there is no reason or justification to make a disallowance in respect of the dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.1 of the share purchase agreement or whether the amount was actually paid to the sister concern and used by it for the purpose of business, is immaterial. Either way the amount was used for the business of the sister concern. It is not even suggested that the advance was used by the sister concern for any purpose other than for the purposes of its business. Nor was such a case raised before us. The doubt, if any, is set at rest by the memorandum of appeal and the written submissions filed by the appellant before the CIT (Appeals). As Mr. Jain rightly pointed out, in the memorandum of appeal, the appellant expressly stated that it had advanced the amount of about ₹ 10.29 crores to its sister concern as a measure of commercial expediency for the purpose of business. In the written submissions, the appellant inter alia stated that the appellant and the sister company were in the hotel business; that the Board of Directors of the two companies was the same; that the appellant purchased the shares of the sister company as an investment and that the investment and advances were made for the purposes of business. From the order of the CIT (Appeals), it is evident that the departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in Phaltan Sugar Works Ltd. (Supra) is of no avail as it has been overruled by the Apex Court in S.A. Builders Ltd. v. CIT (2007) 288 ITR 1/158 Taxman 74 holding that the test of commercial expediency is to be applied. (c) Mr. Suresh Kumar, learned Counsel appearing for the Revenue, states that nothing is available on record to indicate any challenge in appeal by the Revenue to the order of the Tribunal for A.Y. 1985-86. The impugned order merely relies upon its order for Assessment Year 1985-86. (d) In the above view, we proceed on the basis that the Revenue has accepted the Tribunal's order for the Assessment Year 1985-86. Further, no distinguishing features in the subject Assessment Year to that existing in the Assessment Year 1985-86 have been pointed out. Therefore, the question as raised herein does not give rise to any substantial question of law. Thus, not entertained. 11. Considering the evidence on record, we are of the opinion that the view taken by the tribunal in view of clarification issued in 2006 which was part of tribunal judgment in 2009 we are in complete agreement with the view taken by the tribunal. 12. Hence, the issues are answered in ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
