2024 (4) TMI 583 - AT - Income Tax

Purchase of finished goods with specifications doesn't attract TDS under section 194C without raw material supply evidence

DCIT (OSD) (TDS) -2 (3), Mumbai Versus The Bombay Dyeing and Manufacturing Company Limited

The ITAT Mumbai held that payments made by the assessee to vendors for purchase of finished goods constituted contracts of purchase, not works contracts ... TDS u/s 194C - payments of purchase to various vendors - Non deduction of TDS - addition u/s 201(1) and interest u/s 201(1A) - CIT(A) came to the conclusion that the transaction on account of supply of finished goods to the assessee was principal to principal basis in pursuance of a contract for a sale and not a contract for work as alleged by the AO - Whether the transaction involving payment to various parties toward purchase of finished goods are under contract of purchase or contracts of works contract within the meaning of section 194C? - HELD THAT:- We are of the view that as per the definition of works given in section 194C it is only a contract of works only when the assessee supplies the raw materials or directs vendors to purchase from its associate and supplies the finished goods to the assessee then only it will fall under works contract. In the given case it is not brought on record that assessee has supplied the raw materials or directed the vendors to purchase from its associate to complete the manufacturing. As per the information available on record the assessee has given purchase order with the specification of the finished product with a condition that the finished goods should match the specifications and in case it does not match the goods will be returned back to the vendors. This is a standard purchase order given to the vendors to supply the goods as per the specification, without specifications the purchase order is not complete. Here, the payments made by the assessee is towards the contract of purchase or contracts of works is an issue under consideration, as held in the case of CIT v. Glenmark Pharmaceuticals Ltd. [2010 (3) TMI 289 - BOMBAY HIGH COURT], thus the transactions carried on by the assessee is clearly falls within the ambit of contract of purchase. Thus not to disturb the findings of the Ld. CIT(A) to treat the transactions as contract of purchase and not of works contracts. Accordingly, we direct the AO to delete the additions proposed u/s 201(1)/201(1A) - Grounds raised by the revenue are dismissed. Issues Involved:1. Whether the transactions involving payments to various parties for the purchase of finished goods are under a contract of purchase or contracts of works contract within the meaning of section 194C of the Income-tax Act, 1961.Summary:Issue 1: Nature of Transactions - Purchase or Works Contract1. The appeal by the revenue challenges the order of the Learned Commissioner of Income-Tax (Appeals) [Ld. CIT(A)], which held that the transactions between the assessee and vendors were on a principal-to-principal basis and not under the ambit of section 194C of the Income-tax Act, 1961.2. The Assessing Officer (AO) observed discrepancies regarding the deduction of tax at source by the assessee during a survey under section 133B(2). The AO concluded that the transactions were work contracts as per section 194C, and thus, TDS should have been deducted. The AO made additions under sections 201(1) and 201(1A) of the Act, amounting to Rs. 2,37,17,965/- and Rs. 2,25,32,067/- respectively.3. The Ld. CIT(A) concluded that the transactions were on a principal-to-principal basis, relying on various case laws, including Samsung India Electric Ltd., Times VPL Ltd. v. CIT, and CIT v. Dabur India Ltd. The Ld. CIT(A) observed that the manufacturers purchased raw materials on their own, produced goods as per the specifications of the assessee, and the ownership of the goods passed to the assessee upon delivery.4. The revenue appealed, arguing that the transactions should be considered work contracts because the assessee provided specifications and patented logos to the vendors, indicating control over the production process.5. The Tribunal considered the rival submissions and material on record, noting that the AO's observations were based on the fact that the assessee supplied packing material with logos and specifications to the vendors. However, the Ld. CIT(A) found that the transactions were contracts of purchase, not work contracts, as the manufacturers were responsible for purchasing raw materials and producing goods as per the specifications provided by the assessee.6. The Tribunal referred to the definition of 'work' under section 194C and the case of CIT v. Glenmark Pharmaceuticals Ltd., which distinguished between contracts of purchase and work contracts. It concluded that the transactions in question were contracts of purchase since the assessee did not supply raw materials or direct vendors to purchase from its associates.7. The Tribunal upheld the findings of the Ld. CIT(A), directing the AO to delete the additions made under sections 201(1) and 201(1A) of the Act, thereby dismissing the revenue's appeal.8. The appeal filed by the revenue was dismissed, and the order was pronounced in the open court on 06th March, 2024.