Works contract characterization of IMFL manufacturing under customer control excludes sale treatment for tax purposes.

An arrangement for IMFL manufacture was treated as a works contract, not a sale, where the distillery blended, bottled, reduced strength, stored and delivered the product under the assessee's supervision and specifications. The assessee supplied the essence, retained the brand property, and the distillery was bound to act for and on behalf of the assessee without any right to deal with the finished product independently. Because the processed goods were appropriated exclusively to the assessee and the manufacturing activity was carried on on its behalf, the transaction did not amount to a true sale for tax purposes, and the second-sale treatment was rejected.

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Issues: Whether the agreement between the distillery and the assessee amounted to a sale of IMFL by the distillery to the assessee or only a works contract, so that the transactions were not liable to tax as sales.

Analysis: The agreement showed that the distillery manufactured spirit and carried out further stages of blending, bottling, reduction of strength, storage, and delivery under the assessee's supervision and according to the assessee's specifications. The assessee supplied the essence and the brand property remained with it, while the distillery was bound to manufacture for and on behalf of the assessee and could not deal with the blended product for any other purpose. The decisive feature was that the product, once processed under the contractual arrangement, was appropriated exclusively for the assessee and the manufacturing activity was carried on on its behalf rather than as an independent sale by the distillery.

Conclusion: The transaction was not a true sale of IMFL by the distillery to the assessee, and the Tribunal's view treating it as second sales was erroneous.

Final Conclusion: The revision petitions succeeded, the Tribunal's order was set aside, and the first appellate authority's order was restored.

Ratio Decidendi: Where the contractual arrangement shows that manufacture and processing are undertaken for and on behalf of the customer under its control and specifications, with the product appropriated exclusively to that customer, the transaction is not a sale but a works arrangement for tax purposes.

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