2013 (10) TMI 1219 - HC - Income Tax

Court rules supply of customized products as sale, not works contract. No TDS deduction needed.

The court concluded that the contract for the supply of sachets was a sale and not a 'works contract' as defined under section 194C(7)(iv). It was ... Contract for sale v. works contract - TDS liability under section 194C - definition of 'work' excluding manufacture/supply using material purchased from person other than the customer - clarificatory and retrospective effect of statutory amendment to the definition of 'work'Contract for sale v. works contract - TDS liability under section 194C - definition of 'work' excluding manufacture/supply using material purchased from person other than the customer - Supply of printed sachets made by successful tenderers according to the assessee's specifications is a sale and not a 'works contract' attracting TDS under section 194C. - HELD THAT: - The court examined the nature of the transaction and the statutory definition of 'work' in section 194C(7)(iv) (Explanation), which excludes manufacturing or supplying a product according to a customer's specification where the material is purchased from a person other than the customer. Although some features of a works contract may overlap, the decisive test is whether the material was supplied by the customer. Here the tenderers procured the sachets/materials from other sources and merely supplied finished sachets to the assessee as per specifications. On that basis the transaction falls within a contract for sale rather than a contract for carrying out 'work' under section 194C, and therefore TDS under section 194C was not exigible.The transaction is a sale and not a works contract; no TDS under section 194C is payable.Clarificatory and retrospective effect of statutory amendment to the definition of 'work' - Amendment to the definition of 'work' in section 194C is clarificatory and retrospective, and therefore applicable in determining the nature of the contracts for the assessment years in question. - HELD THAT: - Relying on this Court's earlier decision in the Karnataka Power Transmission Corporation Ltd. case, the court held that the legislative insertion clarifying the scope of 'work' was intended to clarify existing law rather than to change it prospectively. Consequently, the clarified exclusion (that manufacture or supply using material purchased from a person other than the customer is not 'work') governs the characterisation of the contracts under dispute, notwithstanding that the explicit Explanation was not in the statute-book for the relevant years.The clarification in the amendment is retrospective and applies; the contracts must be treated as sale in light of that clarification.Final Conclusion: The appeals are dismissed; the contracts for supply of specified sachets are held to be contracts of sale (not works contracts) and TDS under section 194C was not exigible for the assessment years 1999-2000 to 2004-05. Issues:1. Whether the supply of sachets by successful tenderers constitutes a 'works contract' necessitating TDS deduction.2. Interpretation of Circulars issued by the Central Board of Direct Taxes (CBDT) regarding the applicability of TDS under section 194C.3. Analysis of the definition of 'work' under section 194C(7)(iv) of the Income-tax Act.4. Determining whether the contract in question amounts to a 'works contract' or a 'sale' based on legal provisions and precedents.Issue 1:The Assessing Officer contended that the supply of sachets by successful tenderers was a 'works contract' requiring TDS deduction. However, the Appellate Tribunal disagreed, stating that it was not a 'works contract' but a purchase of materials, hence TDS deduction was not necessary. The key argument was whether the customised product supplied by the tenderers, according to the specifications of the assessee, constituted a 'works contract' or a sale.Issue 2:The appellant relied on Circular No. 715, which indicated that TDS should be deducted for the supply of printed material as per prescribed specifications. In contrast, the respondent referred to Circular No. 13 of 2006, emphasizing the need to determine if the contract is a 'contract for work' or a 'contract for sale' before applying TDS under section 194C.Issue 3:The definition of 'work' under section 194C(7)(iv) of the Income-tax Act was analyzed. It was highlighted that TDS is mandatory for payments made for carrying out any works, but the liability is excluded when the work involves manufacturing and supplying goods where materials are not provided by the customer.Issue 4:The court considered the legal implications of the contract in question, focusing on whether it fell under a 'works contract' or a sale. Referring to precedents and statutory provisions, it was concluded that the contract for the purchase of sachets, meeting specific specifications, was a sale and not a 'works contract' as defined under section 194C(7)(iv). The retrospective nature of the amendment to the definition of 'work' was emphasized, leading to the dismissal of the appeals filed by the Revenue.In summary, the judgment addressed the classification of the contract for the supply of sachets as a 'works contract' or a sale, examining relevant legal provisions, circulars, and precedents. The court determined that the contract was a sale and not subject to TDS deduction under section 194C, based on the specific definition of 'work' and the retrospective nature of the clarificatory amendment. The appeals filed by the Revenue were dismissed based on these findings.