TaxTMI 
TaxTMI 
2005 (11) TMI 202
X X X X Extracts X X X X
X X X X Extracts X X X X
....t the deductor company has full control over the manufacturing activities, raw material supply, patterns, specifications, samples, prices of the products and sale of the products, apart from other elements in regard to whole venture of manufacturing and subsequent alleged sales thereof. 3. Learned CIT(A) also erred in not considering the fact that the commercial value of products thus produced is nil in case the purchaser does not accept the production because of any reason. 4. On the facts and in the circumstances of the case, the learned CIT(A) erred by ignoring the CBDT, Circular No. 715 (Question No. 15) dt. 8th Aug., 1995 [(1995) 127 CTR (St) 13]. 5. On the facts and in the circumstances of the case, the order of the Hon'ble Supreme Court in the case of State of Tamil Nadu vs. Anandam Viswanathan (1989) 73 STC 1 (SC) : (1989) 1 SCC 613 applied, wherein the issue of contract vis-a-vis sale/purchase has been dwelt with in great detail and, it was held that the transactions of similar nature are the transactions of contract and not that of sale and purchase. 6. The appellant craves leave to add, alter or amend any of the ground of appeal at....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iv) The manufacturer shall not manufacture or supply any product using any confidential information or bearing any of the trademarks of any persons other than the purchaser. (v) Purchaser has right to inspect with reference to the material manufactured for the purchaser. (vi) The goods can't be supplied in the open market. (vii) If the goods don't meet the quality specifications, the material can't be used by the supplier and should be destroyed under the supervision of M/s Reebok. (viii) The principal object of the buyer is to get the material manufactured as per the prescribed specifications with his quality control and not to purchase material as available in the market. Thus, it is apparent from the terms of agreement/arrangement/contract that the manufacturer/contractor is fully chained and does not have the freedom or autonomy to move even a centimetre without the consent of the purchaser. In view of the above facts, the assessee was asked to explain how activity of outsourcing of goods is not covered within the ambit of s. 194C? The contention of the assessee, through his Authorised Representative in various submission....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Government or such person only after such article or thing is delivered, the contract will be a contract for sale and, as such, outside the purview of this section.' 9. The wording of the above clearly suggests that while formulating the above, the framers had in mind, the transaction with the manufacturer who manufactures goods of the nature to be utilized by different parties in their transactions and not of the prescribed specification and confidentiality clause and restrictions on the sale of such goods to other parties. The contents of Circular No. 681, sub-cl. (b) of cl. (vi) of para 7 would not be applicable in transactions wherein the goods were manufactured on "Prescribed specifications" of the purchaser. It was in this background that various queries received were examined and clarified through Circular No. 715, dt. 8th Aug., 1995. This circular at the outset states: 'The Finance Act, 1995 has enlarged the scope of income-tax deduction at source by making various amendments. In regard to the changes introduced through the Finance Act, 1995, a number of queries have been received from the various associations and professional bodies on the scope of T....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the case of assessee, the applicability of s. 194C would depend on determining the fact whether the agreement/arrangement of the assessee with various vendors to manufacture goods on its behalf, as per its prescribed specifications, is a purchase/sale of goods or a job/work contract. 15. I have considered the submissions of the assessee and the judicial decisions relied upon by the assessee and other decisions relevant to the issue, filed by the assessee. A transaction may appear to be sale or purchase of goods but one has to analyze the real character of the whole transaction. Salient contents of such agreements of the assessee, are analyzed in para 3, supra. 16. The provisions of s. 194C are, applicable to every "work" which are in the nature of "contract". What is a contract? Sec. 194C reads as follows: 'Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work ..... in pursuance of a contract between the contractor and (a) Any company; shall, at the time of credit of sum to the account of the contractor or at the time of payment ......, whichever....
X X X X Extracts X X X X
X X X X Extracts X X X X
....specifications supplied by the buyer, neither that material could be used by the buyer nor the supplier of the label could use the same for any other purposes. Elaborating the reasons for the judgment the Tribunal held that the intention of the parties was most material. It held that such printed labels were not standard goods and were not capable of any use to anyone else and, thus, had no commercial value. 19. In view of the above, the real test is whether the goods produced as per the specification of the buyer have any market value if for any reason these are not purchased by the buyer. In cl. 6(2)(iv) of the agreement with M/s Moja Shoes Ltd., the terms provide as follows: 'C-Grade Products-Non-saleable products with apparent defects to be destroyed at the supplier's expense and without any right of the supplier to the purchase price.' 20. The terms of the agreements of category 1 and category 2 and the arrangement with category 3 suppliers do not leave an iota of doubt to the effect that the goods manufactured by the vendors have no commercial value to the manufacturer unless accepted by the purchaser. The goods rejected and classified as 'B'....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ility of the manufacturer. The main features shall have the sale responsibility of the products produced. 26. The quantity of the goods to be manufactured are stipulated in the work order if the manufacturer produces in excess of the quantities ordered then the purchaser has the right to purchase the excess. 27. As far as the question of manufacturer not manufacturing or supplying any products using any confidential information or bearing of any of the trademarks other than the purchaser, it is to be clarified that Reebok products have its brand name and the assessee would, therefore, ensure that its brand name is not misused. The manufacturer is free to manufacture goods of other manufacturers and to that extent the assessee duly filed a letter with the AO that Moja Shoes is manufacturing products of other brands also as required by the AO. It is a normal practice that any purchaser will inspect the goods before the goods are delivered to the purchaser. This is to ensure that goods are manufactured as per the specifications of purchaser. The manufacturer is manufacturing goods carrying Reebok brand name and, therefore, as a prudent business practice the assessee has....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t. 8th Aug., 1995 is not at all applicable to the appellant-company because no printing contract is involved. On the other hand reliance is placed on Board Circular No. 681, dt. 8th March, 1991, wherein it is stated that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and as such outside the purview of s. 194C. It is explained that the term "carrying out" in the said section suggests executing the contract rather than a transfer of goods or a mere supply or sale of goods. If a person engages services of another and gives a job to manufacture goods or articles and for the purpose supplies him raw material it could be a case of contract of work. In such cases, the provisions of s. 194C would undoubtedly be applicable. But, if on other hand, a manufacturer, on his own purchases material and manufactures product which he sells to the assessee, and it may be that such product be customer specific, it is still a ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ave considered the matter. On the basis of the foregoing, it is seen that the transactions between the manufacturers and the appellant are in the nature of sales and purchases on a principal to principal basis. Adherence to the appellant's specifications by the manufacturers is a precondition for the appellant to purchase the packaging material. The elements requisite for a transaction to be in the nature of works contract are not applicable with respect to facts of transactions entered into by the appellant. In a recent decision pronounced by the Bombay High Court in the case of BDA Ltd. VS. ITO, the decision of Pune Tribunal in the same case relied upon by the AO has been reversed. The Bombay High Court while holding that s. 194C does not apply to the above transaction has stated as under: It is not disputed that M/s Mudranika is an independent establishment engaged in the business of supplying printed packaging material to various establishment, and it is not a captive unit of the assessee. The assessee had issued a purchase order in favour of M/s Mudranika for supply of printed labels as per the specifications provided by it, and the raw materials required for the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lowing principles to determine true nature of transaction: (a) No rule can be provided to distinguish between a contract for sale and a contract for work and labour. (b) Transfer of property of goods for a price is the linchpin of the definition of "sale". Whether a particular contract is one of sale of goods or for work and labour depends upon the main object of the parties found out from an overview of the terms of the contract, the circumstances of the transactions and the custom of the trade. It is the substance of the contract documents and not merely the form, which has to be looked into. An opinion can be formed that the contract is one whose main object is transfer of property in a chattel as a chattel to the buyer, though some work may be required to be done under the contract as ancillary or incidental to the sale, then it is a sale. If the primary object of the contract is the carrying out of work by bestowal of labour and services and materials are incidentally used in execution of such work then the contract is one for work and labour. (c) If the thing to be delivered has any individual existence before the delivery as the sole property of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and entrusts the same to the tailor for stitching a suit for him as per his measurements. The tailor by devoting his skill and labour stitches the suit and delivers the same to the customer. In this process the tailor utilizes lining, buttons and threads of his own. The transaction would remain a contract for work and labour. The stitched suit delivered by the tailor to the customer is not a sale. It would not make any difference if the customer would have selected a piece of cloth of his own choice for a price to be paid or paid and having purchased the suit length left it with the tailor for being stitched into a suit. The property in the suit length had passed to the customer and physical possession over the suit length by the tailor thereafter was merely that of a bailee entrusted with the suit length. However, if the tailor promises to stitch and deliver the suit for a price agreed upon, investing his own cloth and stitching materials such as lining, buttons and threads and utilizing his own skill and labour then though the customer might have chosen the piece of cloth as per his own liking as to the texture, colour and quality and given his own instructions in the matter of s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ppellant has made payments for outright purchases. In this view of the matter, the impugned order is cancelled. In passing I would also like to comment on the AO's outright refusal to consider some of the submissions of the appellant on the ground that the cases relied upon related to sales-tax. It must always be remembered that no Court order even though delivered in respect of the provisions of a different statute can be ignored if it has a hearing on the subject-matter under consideration. In fact, one of the most cardinal principles of interpretation of statutes is that if a subject-matter comes under the purview of more than one statute, the authority implementing any of the statutes should so interpret the provisions that all the statutes can be given effect to. This principle, called the doctrine of harmonious construction enables various statutes to stand side by side and yet not come in the way of one another in realising the awoved objective of each such legislation. Viewed thus, there is all the more reason to accept the ratio of the Supreme Court decision mentioned hereinabove. Even though the appellant has advanced the alternative pleas of the tax....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d manufacturer are unable to agree on new prices for any products, the prices previously in existence for such products shall prevail, until otherwise agreed by RIL US in writing. (v) Paper book 23, para 5.4. The prices charged and each term and condition applied by manufacturer with regard to each of the products shall be no less favourable than the prices charged for equivalent footwear or terms or conditions applied with regard to any other person for whom manufacturer produces footwear. 32. The learned counsel further pointed out that the AO has mainly relied upon on the decision of BDA Ltd. vs. ITO (2003) 78 TTJ (Pune) 925 : (2003) 84 ITD 442 (Pune) which has been reversed by the Hon'ble High Court of Bombay vide Appeal Nos. 44 of 2003 and 1 of 2004 and is in favour of assessee. The learned counsel has also pointed out the guidelines given by CBDT vide para 7(b) of Instruction No. 1107 which are clarifications regarding Supreme Court judgment in Associated Cement Co. Ltd. vs. CIT (1993) 111 CTR (SC) 165: (1993) 201 ITR 435 (SC) as under: "Where, however, the contractor undertakes to supply any article or thing fabricated according to the speci....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ous property, then the contract is a contract for sale. Ultimately, the true effect of an accretion made pursuant to a contract has to be judged not by artificial rules but from the intention of the parties to the contract. In a 'contract for sale', the main object is the transfer of property and delivery of possession of the property, whereas the main object in a 'contract for work' is not the transfer of the property but it is one for work and labour. Another test often to be applied to is : when and how the property of the dealer in such a transaction passes to the customer : is it by transfer at the time of delivery of the finished article as a chattel or by accession during the procession of work on fusion to the movable property of the customer? If it is the former, it is a 'sale' : if it is the latter, it is a 'works contract'. These views find support from the significant judgment of three Judges Bench of the Supreme Court in the case of State of A.P. vs. Kone Elevators (India) Ltd. (2005) 140 STC 22 (SC), where the manufacturer has manufactured the lifts as per specification of the assessee and installed at the premises of the assessee as th....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the manufacturers are also independent establishment engaged in business of manufacturing of footwear and other goods and the assessee has issued the purchase order in favour of the manufacturers for supply of footwear and other goods and manufacturers were manufacturing the goods at their premises and they were not captive units of the assessee. The manufacturer as per agreement para 2.4 had the sale responsibility of purchase of raw material regarding quality of the products produced thereunder and the assessee was under no obligation to designate any such supplier. As per para 15.2.1 of the agreement the manufacturer is an independent manufacturer under the agreement and its personnel and other representative shall not act as nor be agents or employees of purchaser and its customer. As an independent the manufacturer will be solely responsible for determining the means and methods for performing the required tasks. As per para 5.4 of the agreement the prices charged and each term and condition applied by manufacturer with regard to each of the products shall be no less favourable than the prices charged for equivalent footwear or terms or conditions applied with regard to any ....