2023 (7) TMI 1075 - AT - Income Tax

Payments under Sales or Return agreements not subject to tax deduction under Section 194C

The Tribunal upheld the decision that payments under Sales or Return agreements did not fall under Section 194C for tax deduction at source. The contracts ... TDS u/s 194C - payments to several vendors in relation to its procurements from them, consisting of apparels/ clothes/ footwear/ goods manufactured by these vendors - ‘works contract’ v/s ‘purchase of goods’ - HELD THAT:- While examining clause (e) as introduced by the Finance (No.2) Act, 2009, noted that it contains a positive affirmation that the expression 'work' will cover manufacturing or supplying a product, according to the requirement or specification of a customer, by using material purchased from such customer. Also been noted by the Hon’ble High Court [2004 (3) TMI 11 - BOMBAY HIGH COURT] that clause (e) has placed the position beyond doubt by incorporating language to the effect that the expression ‘work' shall not include manufacture or supply of a product according to the requirement or specification of a customer by using material which is purchased from a person other than such customer. As noted that, (i) the agreement in the instant case, was on a principal to principal basis, (ii) the manufacturer had his own establishment where the product was manufactured, (iii) the material required in the manufacture of the article or thing was obtained by the manufacturer from a person other than the assessee, (iv) the property in the articles passed upon the delivery of the product manufactured, and (v) until delivery, the assessee had no title to the goods. Thus the provisions of Section 194C were not applicable, and more particularly the agreement did not fall within the definition of ‘works contract’ as laid down in Explanation to Section 194C of the Act. As in the present case, the assessee is not accustomed to providing specifications or designs to the suppliers. It is also not a case that the suppliers are manufacturing the goods at the instance of the assessee. Further, the goods supplied are not under the brand/name of the assessee and instead bear the brand/mark/name of the respective supplier/original manufacturer. No reason to interfere with the order of the Ld. CIT(A) in holding that the payments made under the SOR agreements did not fall within the ambit of Section 194C of the Act and therefore the assessee did not have any liability to deduct tax at source on such payments u/s 194C - Decided in favour of assessee. Issues Involved:1. Whether the payments made by the assessee to vendors for procurement of goods fall under 'works contract' or 'purchase of goods'.2. Applicability of Section 194C of the Income-tax Act, 1961 concerning tax deduction at source (TDS) on such payments.3. Nature and interpretation of Sales or Return (SOR) agreements between the assessee and vendors.4. Examination of additional evidence and remand report by the Assessing Officer (AO).5. Analysis of ancillary services provided by vendors and their impact on the nature of the contract.Issue-wise Detailed Analysis:1. Nature of Payments: 'Works Contract' vs. 'Purchase of Goods':The primary contention revolved around whether the payments made by the assessee to various vendors for procurement of goods were in the nature of 'works contract' or 'purchase of goods'. The AO argued that the agreements with vendors were for manufacturing specific designer dresses, thus falling under 'works contract' as per Section 194C. However, the assessee contended that these were purchases under the 'Sales or Return' model, where goods were sold under the vendors' brand names, and the risk and title transferred upon delivery.2. Applicability of Section 194C:The AO held that the contracts were 'contracts of work & labour' and thus required TDS under Section 194C. The AO's analysis included examining whether the primary object of the contracts was the supply of goods or the provision of services. The AO concluded that the contracts were predominantly for labour and services, thus invoking Section 194C. In contrast, the Ld. CIT(A) and the Tribunal found that the contracts did not fall within the ambit of 'works contract' as defined in Section 194C, particularly sub-clause (e) of clause (iv) of the Explanation, which excludes contracts where the material is sourced from a person other than the customer.3. Sales or Return (SOR) Agreements:The Tribunal examined the nature of SOR agreements, noting that these agreements involved the purchase of goods from vendors who were independent suppliers with their own brands. The vendors supplied goods either from existing stock or manufactured independently, with no materials or specifications provided by the assessee. The agreements allowed the return of unsold goods, and vendors provided ancillary services such as sales personnel and after-sales support. The Tribunal concluded that these agreements were for the supply of goods and not 'works contract'.4. Additional Evidence and Remand Report:The Ld. CIT(A) admitted additional evidence under Rule 46A, which included confirmations from vendors that the transactions were sales on a principal-to-principal basis. The AO's remand report, which included enquiries under Sections 133(6) and 131, confirmed that vendors supplied goods independently, without any materials or specifications from the assessee. The Tribunal upheld the Ld. CIT(A)'s findings based on this evidence.5. Ancillary Services:The AO argued that ancillary services such as deputing sales personnel and providing after-sales support indicated a 'works contract'. However, the Tribunal found that these services were common in retail agreements and did not alter the primary nature of the contracts, which were for the supply of goods. The Tribunal emphasized that such services were incidental and did not convert the agreements into 'works contracts'.Conclusion:The Tribunal upheld the Ld. CIT(A)'s decision that the payments made under the SOR agreements did not fall under Section 194C and thus did not require TDS. The contracts were found to be for the purchase of goods, with ancillary services not altering their primary nature. The Tribunal dismissed the Revenue's appeal, affirming that the assessee had no liability to deduct tax at source under Section 194C for these transactions.