Sale versus works contract: independent manufacture of finished goods outside section 194C, with no TDS obligation.

Payments to independent vendors for finished goods were treated as purchases on a principal-to-principal basis, not as works contracts. The vendors sourced their own raw materials, manufactured goods to the assessee's specifications, and transferred property only on delivery. Mere use of the assessee's logo, packing requirements, or rejection of non-conforming goods did not convert the arrangement into a contract for work. As the assessee did not supply raw materials and the manufacturing activity remained with the vendors, section 194C did not apply. The assessee was therefore not required to deduct tax at source and was not an assessee in default under section 201(1).

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Issues: Whether payments made by the assessee to vendors for finished goods were liable to deduction of tax at source under section 194C of the Income-tax Act, 1961 as works contracts, or whether the transactions were purchases on a principal-to-principal basis outside the scope of section 194C.

Analysis: The dispute turned on the true character of the vendor arrangements. The record showed that the vendors procured raw materials on their own, manufactured goods to the assessee's specifications, and supplied the finished products on terms indicating transfer of property on delivery. The mere fact that the assessee prescribed specifications, used its logo on the goods or packed material, and rejected non-conforming goods did not by itself convert the arrangement into a contract for work. Applying the settled distinction between a contract of sale and a works contract, the decisive factors were that the raw materials were not supplied by the assessee and the manufacturing activity remained with the independent vendors. On that footing, the conditions necessary to attract section 194C were absent.

Conclusion: The payments were held to be for purchases of finished goods and not for works contracts. The assessee was not liable to deduct tax under section 194C and was not an assessee in default under section 201(1).

Ratio Decidendi: Where a manufacturer independently sources raw materials, manufactures goods to the purchaser's specifications, and transfers property only on delivery, the transaction is a contract of sale and not a works contract for the purposes of section 194C of the Income-tax Act, 1961.

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