2018 (5) TMI 711 - AT - Income Tax

Tribunal rules payments for packing material with logos are sales contracts, not works contracts.

Arunachalam Manickavel Guntur Versus CIT (A) -3, Visakhapatnam

Arunachalam Manickavel Guntur Versus CIT (A) -3, Visakhapatnam - TMI Issues Involved:1. Whether the payments made for packing material with printed logos and specifications constitute a 'contract for sale' or a 'works contract' under Section 194C of the Income Tax Act, 1961.2. The applicability of Tax Deducted at Source (TDS) provisions under Section 194C on such payments.3. The appropriateness of disallowance under Section 40(a)(ia) of the Income Tax Act for non-deduction of TDS.Detailed Analysis:Issue 1: Nature of Contract (Contract for Sale vs. Works Contract)The primary contention revolves around whether the payments made by the assessee for packing material with specific logos and details constitute a 'contract for sale' or a 'works contract.' The assessee argued that the transactions were purely for the purchase of packing material, which should be classified as a 'contract for sale' and hence outside the purview of Section 194C. The AO and CIT(A) considered the customized nature of the packing material, which included the assessee's trade name, logo, and product details, and categorized it as a 'works contract.'Issue 2: Applicability of TDS Provisions under Section 194CThe AO, in his reassessment, observed that the packing material was specifically designed for the assessee, involving printing charges, thus attracting TDS provisions under Section 194C. The CIT(A) partially agreed with the AO but scaled down the disallowance from 25% to 10%, considering the element of doubt regarding the nature of the contract. The assessee relied on CBDT Circular No. 681, which clarifies that contracts for sale do not attract TDS under Section 194C, and cited judicial precedents supporting their stance.Issue 3: Disallowance under Section 40(a)(ia) for Non-Deduction of TDSThe AO initially disallowed 25% of the total expenditure on packing material under Section 40(a)(ia) for non-deduction of TDS, which the CIT(A) reduced to 10%. The Tribunal noted that neither the AO nor the CIT(A) quantified the specific expenditure attracting TDS provisions. The Tribunal emphasized that disallowance under Section 40(a)(ia) should be based on the quantifiable amount attracting TDS, not on estimation.Tribunal's Findings:1. Nature of Contract: The Tribunal referred to CBDT Circular No. 681, which states that contracts for sale are outside the purview of Section 194C. The Tribunal also cited precedents from the Hon'ble Delhi High Court in the case of CIT Vs. Dabur India Limited and the jurisdictional High Court in the case of Continental Wines Limited, which held that contracts for the supply of goods, even with specific logos, do not change the nature of the transaction to a works contract.2. Applicability of TDS Provisions: The Tribunal found that the predominant object of the transactions was the purchase of goods (packing material) and not a works contract. The Tribunal noted that the assessee paid CST and VAT on the transactions, further supporting their nature as contracts for sale.3. Disallowance under Section 40(a)(ia): The Tribunal held that there was no basis for estimating disallowance under Section 40(a)(ia) without quantifying the specific amount attracting TDS. The Tribunal concluded that the transactions were contracts for sale, not works contracts, and hence, no disallowance under Section 40(a)(ia) was warranted.Conclusion:The Tribunal set aside the orders of the lower authorities, ruling in favor of the assessee. It held that the payments for packing material with specific logos and details were contracts for sale and did not attract TDS provisions under Section 194C. Consequently, no disallowance under Section 40(a)(ia) was justified. The appeals filed by the assessee for the assessment years 2005-06 to 2010-11 were allowed.