2007 (7) TMI 349 - AT - Income Tax

Tribunal Rules Transactions as Sales, Not Works Contracts; Assessee Exempt from TDS Under IT Act Section 194C.

Whirlpool Of India Limited. Versus Joint Commissioner Of Income-tax.

Whirlpool Of India Limited. Versus Joint Commissioner Of Income-tax. - TTJ 109, 994, [2007] 16 SOT 435 (DELHI) Issues:Whether the assessee was required to deduct tax at source under section 194C of the IT Act for purchases made to specifications by Original Equipment Manufacturers (OEMs).Analysis:The case involved the question of whether the assessee was liable to deduct tax at source under section 194C of the IT Act for purchases made to specifications by OEMs. The assessee, a well-known name in consumer electronic goods, outsourced manufacturing to OEMs and affixed its brand name only after quality control. The AO held the assessee liable for non-deduction of tax at source, considering the transactions as works contracts. The CIT(A) upheld the AO's decision. The assessee contended that the transactions were on a principal-to-principal basis and not covered by section 194C. The counsel cited precedents emphasizing sale of goods over works contracts. The Tribunal noted that property passed at the time of sale, making it a purchase, not a works contract. It found the restrictions on OEMs justified to protect the assessee's business interests. The Tribunal ruled in favor of the assessee, holding the transactions as outright sales, not works contracts under section 194C.The Tribunal considered the dominant object of the arrangement, the passing of property in goods, and the manufacturing risk borne by the vendor. It rejected the argument that only off-the-shelf goods were purchases, distinguishing between sale contracts and works contracts. The Tribunal emphasized that goods rejected by the assessee could still be sold by OEMs, with restrictions on trademark use. The Tribunal's decision was based on the factual and legal analysis, setting aside the TDS demands against the assessee. The Tribunal concluded that the outsourced manufactured goods by OEMs constituted outright sales, not works contracts under section 194C, and ruled in favor of the assessee.The Tribunal's decision was based on a thorough examination of the agreements, rejecting the erroneous assumption that rejected goods could not be sold by OEMs. The Tribunal upheld the counsel's arguments, emphasizing the sale of goods over works contracts. It found the restrictions on trademark use justified and held that the transactions were not works contracts under section 194C. The Tribunal set aside the TDS demands against the assessee, ruling in favor of the assessee and allowing the appeal.