Payments to manufacturer for producing goods without supplied raw materials treated as sale, not "work" under s. 194C; no TDS.

The dominant issue was whether payments by the assessee to a manufacturer for producing goods constituted "work" under s. 194C, attracting TDS, or a sale transaction. The HC held that where the assessee did not supply any raw material to the manufacturer, and any know-how shared was not transferred for consideration by way of licence fee or royalty, the arrangement could not be characterised as contract manufacturing within the Explanation to s. 194C. Relying on analogous reasoning adopted by another HC in a similar fact situation, the HC determined that s. 194C was inapplicable; accordingly, no TDS obligation arose on such payments and the issue was decided in favour of the assessee against the Revenue.

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Issues:
1. Interpretation of Section 194C of the Income Tax Act regarding payments made by the assessee to another company without deducting tax at source.
2. Determination of whether the transaction between the assessee and the other company constitutes a contract for work or a contract for sale.

Analysis:

Issue 1:
The Revenue contended that the assessee failed to deduct tax at source on payments made to another company, resulting in a tax liability under Section 194C of the Income Tax Act. The Assessing Officer imposed tax and interest, which was challenged by the assessee. The Commissioner of Income Tax (Appeals) allowed the appeals, but the Revenue filed further appeals before the Tribunal, which were also dismissed. The key question was whether the payments made by the assessee should have been subject to tax deduction at source under Section 194C.

Issue 2:
The crux of the matter was to determine whether the transaction between the assessee and the other company constituted a contract for work or a contract for sale. The agreement between the parties involved the manufacturer producing and selling products to the assessee based on specifications provided by the assessee. The critical aspect was whether the technical know-how provided by the assessee to the manufacturer could be considered as "material" under Section 194C. The court analyzed the definition of "work" under the Act and the specific provisions related to manufacturing or supplying products according to customer specifications.

Court's Decision:
The court examined the nature of the transaction where no physical raw material was supplied by the assessee to the manufacturer. It was established that the manufacturer utilized specifications provided by the assessee to manufacture and supply products. The court referred to Section 194C of the Act, which defines "work" to include manufacturing or supplying products according to customer specifications using material purchased from the customer. The court emphasized that even if technical know-how was considered as material, there was no purchase of such material by the manufacturer from the assessee. The court cited relevant case law, including the decision in CIT v. Glenmark Pharmaceuticals Ltd., to support its conclusion that in such cases where no raw material is supplied by the assessee to the manufacturer, the transaction does not fall under the definition of "work" as per Section 194C.

In light of the above analysis, the court dismissed the appeals, concluding that no substantial question of law arose for consideration. The judgment highlighted the distinction between a contract for work and a contract for sale, emphasizing the absence of material supplied by the assessee to the manufacturer in the transaction under scrutiny.

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