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TMI Blog2025 (4) TMI 909X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The AO after examining the TDS returns filed by the assessee and the relevant documents submitted held the assessee as assessee in default under section 201(1) with respect to tax deducted on the following and the AO also levied interest under section 201(1A) accordingly - Particular Amount - Rs. On account of Non deduction of TDS u/s 201(1) on Sokrati Technologies 37,48,172 On account of interest u/s 201(1A) on Sokrati- 2,66,120 On account of Short deduction of TDS u/s 201(1) on payments made to M/s Amazon 2,39,962 On account of interest u/s 201(1A) on short deduction of TDS on payments to Amazon 64,789 On account of Non deduction of TDS on lease rent 6,76,24,435 On account of interest u/s 201(1A) on Non deduction of TDS on payments made towards lease rent 40,57,466 On account of Non deduction u/s 201(1) on contract manufacturing of goods/products as per terms of agreements 39,32,10,123/- On account of Non deduction u/s 201(1) on contract manufacturing of goods/products as per terms of agreements 2,35,92,607/- Total 49,28,03,674/- 3. Aggrieved the assessee preferred further appeal before the CIT(A). The CIT(A) deleted the tax and interest levied by the AO a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions contained in Section 194C of the Act reads as follows: "Any person responsible for paying any sum to any resident (hereafter 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 a specified person 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 mode, whichever is earlier, deduct an amount equal to- (i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family; (ii) two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, of such sum as income-tax on income comprised therein. ... Explanation.-For the purposes of this section,:- ... (iii) "contract" shall include sub-contract; (iv) "work" shall include- (a) advertising; (b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting; (c) carriage of goods or passengers by any mode of transport ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 194C of the Act, the term 'work' was defined to include advertising, broadcasting and telecasting including production of programmes for such broadcasting or telecasting, carriage of goods or passengers by any mode of transport other than by railways; catering, and manufacturing or supplying a product according to the requirement or specification of customer by using material purchased from such customer. It was noted by the Legislature that there was an ongoing dispute as to whether TDS is deductible under section 194C on 'outsourcing contracts' and whether 'outsourcing' constitutes 'work' or not. Hence to bring clarity on this issue, the definition of 'work' was consciously amended by the Finance (No.2) Act, 2009 wherein it was specifically provided that 'work' shall not include manufacturing or supplying a product according to the requirement or specification of a customer by using raw material sourced from a person other than such customer, as such a contract is contract for 'sale'. In this context, we may gainfully refer to the Memorandum explaining the Finance (No.2) Bill, 2009, which read as follows: "c. Clarifications regarding 'work' under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el. From the details of these suppliers placed before us, it is noted that each of these suppliers are noted to be independent suppliers having their own existence, irrespective of the arrangement with assessee. Most of these vendors are well-known and the goods supplied by them are their standard products which are supplied by them to any or all retailers or even sold through their own exclusive showrooms, located anywhere in the world. The assessee has entered into an SOR arrangement with these vendors, in terms of which the assessee first inspects the samples before placing the purchase orders. Once the products are identified and selected, the assessee places the purchase orders with the vendors who commit to supply to it. The key features of an SOR arrangement (sample agreement dated 15.06.2016 with M/sFossil India Pvt. Ltd is found placed at Page 1 to 18 of paper book) as noted by us are that, if these products remain unsold at the stores of the assessee, then the assessee may choose to return these goods back to the vendors, and against which the latter issues credit notes to the assessee. Hence, some vendors also depute their personnel to assist in the sales at the retail o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that similar products were also being sold through other retailers and their own, Similarly. exclusive showrooms M/s Intercraft Trading Pvt. Ltd (Page no. 106 of the PB) had confirmed that they were distributor (not manufacturer) of the goods supplied to the assessee and that none of the materials were supplied by the assessee. They also confirmed that these goods were sold on sale or return basis. Like the earlier vendor, they also confirmed that they had sold their goods to the assessee for sale through their retail outlets and that similar products were also It is further. being sold through other retailers and their own exclusive showrooms of PB 109.Page No) (Blackberry) Mohan Clothing Co Pvt Ltd/noted that, M) has submitted that the goods manufactured by them were as per their own specifications and based on the inputs of their own designing team and not the The vendor also confirmed that none of the raw materials to manufacture. assessee It further stated that the title and property in the. were provided by the assessee goods was transferred upon sale, raising of invoice and delivery of goods to the Similar. assessee and that such sale was on principal to principal basis. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We thus agree with the Ld. CIT(A) that this observation of the AO is factually erroneous. As noted earlier, these products are procured from internationally reputed brands who are independent manufacturers or vendors themselves. These products purchased by the assessee bear the brand names of these suppliers and not the assessee which further supports the case of the assessee that these products were not being manufactured at their behest. It is noted from the terms of the agreement that, the assessee does not enjoy any right to place orders for manufacture of any new product but instead only exercises the right to choose from various product offerings from the array of products manufactured by these suppliers. Such supply, being independent of raw material sourcing, cannot be categorized as 'works contract' as contemplated in Explanation to Section 194C of the Act. 22. It was brought to our notice by the Ld. AR that, the AO got swayed by the use of the phrase 'produce sample' in the agreement. According to him, 'produce sample' meant to present the sample for approval and not manufacture the same. It is noted that the Ld. CIT(A) had taken specific note of this aspect and after e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts based on SSL specifications. It is also noted that the products are supplied to SSL within a day and supplied within 3 to 4 days of placement of such order. It cannot be the case of the AO that the vendor, within a period of one day, is able to source the material from SSL and produce such goods for appellant's consumption." 23. It was further rightly noted by the Ld. CIT(A) that, even if it be the case that the assessee had provided specifications in relation to supply of these products (although that is not the case), still it could not qualify as 'works contract' in light of the specific exception set out in clause (iv)(e) of Explanation to Section 194C of the Act, as discussed earlier. It is not the case that, the assessee provided or supplied materials to any of these vendors/suppliers. It is noted that, each of these vendors manufactures or procures the products in their own independent capacity and under their respective brand names in as much as that the assessee does not have any say in the same. In fact, the goods manufactured by these vendors, who are noted to have international repute, is not directly dependent on the orders placed by the assessee. These suppli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereafter is noted to have referred to the ancillary services provided by the suppliers viz., deputation of personnel at the retail stores, provision of after sales support to remove defects, joint inspection of inventories, etc., to allege that the predominant intent of these SOR arrangements was the supply of labour and not material. According to us, each of these averments made by the AO were totally misplaced on the given facts of the case. As we have already noted above, these SOR arrangements are in the nature of contract for supply of goods. One of the key features of such an arrangement is that, the goods purchased by the assessee may be returned if it remains unsold in their outlets. Further, the assessee sells these goods through its retail outlets which houses multiple brands of similar apparels/ cloths/ fashion etc. Moreover, the Ld. AR explained that, with these products getting more complex and expensive and with the changing fashion, they require specialized handlers to explain the same to the customers to introduce them to the new features or the new fashion in vogue. It is therefore, commonly known that the trained sales staff are placed by these suppliers at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvation of the AO was that, the payments towards the goods supplied by the vendors were being released by the assessee either after the goods were found to be complete without any defect by the assessee, or after the complete goods were found to be to the satisfaction of the assessee, or after the goods were sold at their retail outlets, which according to him, suggested that the vendors were the contractors of the assessee. It was rightly pointed out by the Ld. AR that, the terms of payments towards purchase of goods cannot be said to indicate that the contract is that of 'works contract' with the vendors. He showed us that, even the Sale of Goods Act 1930, permits contract for payment during delivery of goods or before or after or by installments. In our considered view therefore, this observation of the AO is of no relevance and is not decisive to ascertain the nature of the SOR agreement. 29. Based on our above findings and observations, the salient features of the SOR agreements with the vendors can be summed up as follows: a) The assessee first selects the vendors based on its stand in the market and the quality of their products and thereafter enters into SOR agreements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utation of marketing personnel, after sales support, joint inspection of inventory etc. is provided in the SOR agreements. These functions do not alter or change the primary character of the transaction between the vendors and the assessee, which is that of supply of goods. h) The vendors have also confirmed the above facts and understanding in the course of enquiries made from them u/s 133(6)/131 of the Act. They have affirmed that they have supplied goods to the assessee on principal to principal basis for sale through the assessee's retail outlets. 30. In view of the above, we note that the Ld. CIT(A) had rightly placed reliance on the decision of the Hon'ble Bombay High Court in the case CIT vs. Glenmark Pharmaceuticals Ltd (supra) which is found to be relevant and applicable in the present case. In this decided case, the assessee is noted to have been engaged in the manufacture and marketing of drugs and pharmaceutical products. In the course of the TDS survey, it was noted by the Department that, or purchasing drugs from other /apart from manufacturing drugs on their own and suppliers on an outright basis, the assessee also had agreements in place with, certain third part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... affirmation that the expression 'work' will cover manufacturing or supplying a product, according to the requirement or specification of a customer by using material purchased from such a customer. Clause (e) has placed the position beyond doubt by incorporating language to the effect that the expression 'work' shall not include manufacture or supply of a product according to the requirement or specification of a customer by using material which is purchased from a person other than such customer. In other words, the circumstances that the requirements or specifications are provided by the purchasers 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, P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 associated with the at This is particularly so in the case of a pharmaceutical product where the ultimate consumer is legitimately entitled to ensure that her health is not prejudiced by the consumption of a product not meeting prescribed standards. The owner of a mark, therefore, introduces specifications to ensure that the product meets the standards justifiable associated 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 a 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 man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot accustomed to providing specifications or designs to the suppliers. It is also not a case that the suppliers are manufacturing the goods at the instance of the assessee. Further, the goods supplied are not under the brand/name of the assessee and instead bear the brand/mark/name of the respective supplier/original manufacturer. Hence, the ratio laid down in the above judgment, when coupled with the foregoing facts, is held to be applicable with more force in the present case of the assessee. 34. For the reasons set out above therefore, we do not see any reason to interfere with the order of the Ld. CIT(A) in holding that the payments made under the SOR agreements did not fall within the ambit of Section 194C of the Act and therefore the assessee did not have any liability to deduct tax at source on such payments u/s 194C of the Act. Accordingly, all the grounds raised by the Revenue stands dismissed." 6. On perusal of facts for the year under consideration we notice that the facts are similar as compared to AY 2017-18. During the course of hearing the revenue did not bring anything on record to controvert the above findings of the coordinate bench. Accordingly, respectfully f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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