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Issues: Whether the payments made for customised printed packing material were liable to tax deduction at source under section 194C of the Income-tax Act, 1961 so as to justify disallowance under section 40(a)(ia) of the Income-tax Act, 1961.
Analysis: The expenditure related to purchase of packing material manufactured to the assessee's specifications with printed particulars. The authorities below treated a portion of the expenditure as representing printing work and sustained disallowance by estimation. The Tribunal held that section 40(a)(ia) can operate only to the extent a sum is shown to be subject to deduction of tax at source, and that such liability cannot be determined on a blanket estimated percentage without quantifying the portion, if any, that actually attracts section 194C. On the facts, the transactions were found to be sale transactions and not works contracts. The Tribunal relied on the CBDT circular stating that contracts for sale are outside section 194C, as well as the binding judicial view that mere printing of logo, name or product particulars on packing material does not by itself convert the transaction into a works contract.
Conclusion: No TDS liability arose under section 194C on the purchase of printed packing material, and the disallowance under section 40(a)(ia) was not sustainable. The additions made by the lower authorities were set aside and the appeals were allowed.
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