TaxTMI 
TaxTMI 
2019 (7) TMI 1086
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....ed in the business of processing of Hybrid BT cotton seeds/chilli/vegetable seeds. The company sells parent seeds to the organizers, who in turn supply the foundation seeds to farmers for cultivating the Hybrid seeds. The organizers collect the Hybrid seeds and sell the same to the company which is traded in the market. The company deals in production and marketing of hybrid sowing seeds like cotton seed, chilli seed and vegetable seeds. The company made technical collaboration with M/s Mahyco Monsanto Bio- tech (India) Ltd., Mumbai for transfer of BT & BG II gene into Tulasi Cotton Hybrids in the year 2003. The company also made collaboration with M/s CIMMYT, Mexico for development of maize hybrids and with ICRISAT for development of Pearls Millets (Bajra) and Sorghum (Jowar). It has tied up with Monsanto for RRF technology. The said foundation seeds are supplied / sold to the organizers for a consideration. The organizers of specific area have to identify the growers and fields and also provide credit facilities to the growers. The organizer has to distribute parent seeds to the growers and also supervise the crop. The cotton crop will be taken for ginning mills by the organizers....
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....ed and supplied by the organizer; (6) the organizer is duty bound to inform the company about the excess area planted by using the supplied foundation/parent seeds; (7) the organizer should collect the seeds which were left over with the seed growers after completion of sowing and must be returned to the company; (8) in case the organizer is unable to account for any foundation seed given to him, damages of Rs. 4,000/- per acre will be collected from him; (9) the organizer shall protect the parent lines as well as hybrid seed of the company from going into the hands of competitors as the seed is proprietary hybrid of the company; (10) the organizer agrees that multiplication of parent lines shall not be done by him or his growers; (11) the organizer should take steps for stopping any unauthorized multiplications by growers; (12) the organizer undertakes the entire seed produced will be supplied to the company and no grower shall be allowed to retain any quantity; (13) the organizer is duty bound to lodge a complaint with Police or any other law enforcing agency against the seed growers who retains hybrid seeds for their use or sells part of it to some other ....
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....ne by the organizer and also by the staff of the company at two times. If any significant deviation is found, a field visit will be conducted by the company jointly with the organizer; (27) the actual supply of the seed should tally with the yield estimates made by the company's staff, failing which penalty as per the directions of the company shall be levied on the organizer beside initiating any other legal action at the instance of the company; (28) the organizer will collect all raw materials from the seed growers at his own cost and bring the same to the designated ginning and delinting plant; (29) the organizer will get a commission only on fulfilling his responsibility properly as listed in the agreement, in case \ the organizer found lacking in performing his duties, the company at its discretion can reduce or totally deny the payment of any commission and the company's decision in this regard is final; (30) the organizer agrees as per the terms that he is solely responsible to the seed growers and he agrees to take all steps to pass on the instructions given to the growers regularly for rouging etc., for getting quality in seed production; (31) as pe....
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....tion including contract production through farmers, storing, delinting, conditioning, quality control, warehousing and marketing of Hybrid Cotton Planting Seed." The article 2 of the sub-license allows the assessee-company (sub-licensee) use of third party services and the relevant portion is reproduced hereunder: "USE OF THIRD PARTY SERVICES: The sub-license granted to sub-licensee shall include the right to utilize the services of third parties to act on behalf of sublicensee in conducting those activities associated With the Hybrid Cotton Planting Seed Business which are directed towards the production of Genetically Modified Hybrid Cotton Planting Seed for subsequent sale by Sublicensee to farmers in the territory. By way of example, sub-licensee may engage a third party to act on its behalf to multiply Genetically Modified Hybrid Cotton Planting Seed (for subsequent sale by sub-licensee to third parties in the territory) and to carry out all other activities reasonably necessary for the production, ginning, delinting, processing and sale of Genetically Modified Hybrid Cotton Planting Seed by sub-licensee in the territory. Third parties will be required to meet basic perf....
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....ved that the activity given by the assessee company to the organizers was in the nature of work contract / job which is covered u/s 194C of the Act, attracting disallowance u/s 40(a)(ia) of the Act. Therefore, the AO called for an explanation from the assessee as to why the above job work should not be treated as works contract and the disallowance should not be made u/s 40(a)(ia) of the Act for failure to deduct the tax at source. 2.5. In response to the notice issued by the AO, the assessee filed explanation stating that the assessee has not given any job work to the organizers and it was only the activity of purchase and sale transaction from the farmers and the organizers are only facilitators. The assessee contended that the assessee has supplied the seeds to the farmers through organizers who in turn have grown the seeds which were procured by the assessee company from the farmers. The organizers are only facilitators to identify the farmers for growing the seeds. The advances were given for encouraging the farmers and to make them to be loyal to the assessee company for growing seeds. The assessee argued that since the entire activity is agricultural activity and there is ....
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....nt seed to be called job work/hire work. The parent seeds we give will have lot of technically advanced, scientific qualities and these seeds are extraordinary and to be taken abundant precaution. Since this parent seeds are ultimately distributed by the organizers to hundreds of farmers. It is not possible to control these hundreds of farmers against misuse of the valuable parent seeds. Therefore we have selected these organizers and these are none other than heads of a group of farmers. 1. This head of the group of the farmer (organizer) purchase foundation seed from our company. 2. Sells the product to growers from his group of farmers after the crop we purchase the yield seed from growers. Even though these purchases are recorded in the account of the organizer we indicate the name of the farmer from whom the seeds were purchased along with the details of address, variety, quantity of material purchased, value for the same etc.., In addition we obtain sale confirmation from these farmers along with the receipt for payment which would have been received by him from the organizer. Therefore it is nothing but purchases and sale but not at all a contract. Only thing is instea....
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....ur foundation seed, quality and its importance and our final business of selling lakhs of seed packets depends on getting the qualitative seeds being produced by this group of farmers. Therefore, sometimes we often liberal with these people in the business expediency. Even though it appears that the seed organizer is acting like our agent in supplying seeds to the farmers, in distributing of the amount to the farmers in collection of produce from the farmers etc., In the real sense this organizer is nothing but head of the group of the farmers. As explained to avoid dealing with hundreds of farmers which community is pampered one with lot of sensitive issues. Most of the farmers are very good people but they are under influence of local group heads and politicians. Even for the smallest mistakes group of farmers become violent and may cause lot of disturbances. Under these circumstances, to protect our company and avoid all kinds of confrontations, agitations etc., we prefer to deal with handful of heads of groups of farmers rather than thousands of people. Even though the organizer is given this task, we will not leave total work to organizer. Our employees are always be monito....
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....eals with the company is purchasing only cotton seed and lint used to be returned to the farmer. To separate the cotton seed from the kapas, ginning and delinting has to be made. we are asking the grower and the organizer to do it under our supervision to avoid the misuse. Since we are paying Rs. 280/- per 750 Grms of daunted seed the other expenditure of ginning and delinting has to be borne by them only. Point No.11 deals with several tests to be undertaken by company before purchase of the goods from the organizers and growers. Point No.15 clearly says the ultimate responsibility for the growers payment will be with the organizers only and shall be fully responsible for distribution of payment to the growers. The company shall not entertain any grower. This agreement clearly shows to avoid the possible litigation from the farmers and to avoid negotiating with farmers for different situations and to avoid hundreds of farmers with hundreds of accounts in each account this group head is finally taken. Finally it is nothing but selling of foundation seed and purchase of cotton seed from the farmers through the organizer. Finally the amount that is given by us to the organiz....
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....t in the case of GE (India) Technology Centre (P) Ltd. Vs. CIT & Anr reported in 193 Taxman 234. From the agreement, the AO found that the organizer acting on behalf of the assessee company for production of modified hybrid cotton seed. The procurement price as per the agreement is meant for the services rendered in organizing the farmers, fields, facilitating, ginning, delinting and growing of seeds and it is not an activity of purchase by the company and sale by the organizer. The AO further observed that it is the organizer who has to arrange for ginning, delinting and grading of seeds but not the farmer and from the agreement, there is no purchase and sale transaction and it is only supply. Therefore, the AO has given a finding that the organizers are rendering the services and in turn the company is making payment and the company is no way connected with the growers. The consideration paid by the assessee company to the organizers include commission for the services rendered, therefore, held that the entire activity carried on by the organizer is in the nature of job contract, hence, attracted the provisions of TDS and the assessee has to deduct the TDS at source. Non deductio....
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....d that the decision of Special Bench in the case of Merilyn Shipping & Transports is no more valid in view of the Hon'ble Supreme Court judgement in the case of Palam Gas Services and argued that even if the entire amount is paid without deducting TDS and not remitted to Government account, the provision of section 40(a)(ia) attracts. Therefore, argued that the CIT(A) wrongly deleted the addition made by the AO on the payments already made which were not outstanding. The Ld.DR further submitted that since, the Ld.CIT(A) has held that nature of payment is contract payment he requested to confirm the entire addition. The Ld.DR relied on the orders of the AO as well as the Ld.CIT(A) and argued that the payment made by the assessee to the organiser is contract payment for works contract, hence section 194C is applicable and the assessee is bound to deduct the tax at source. In brief, the Ld.DR submitted that the facts clearly show that the assessee has engaged the organizers for production and supply of seeds, hence argued that the assessee is required to deduct tax at source. Accordingly, requested to uphold the order of the AO and dismiss the appeals of the assessee. 5. On the othe....
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....ntire business. It is only a contract for procurement of hybrid seed which is by itself the tradable commodity. The assessee maintains books of accounts of the organizers and its accounts are debited for the cost of female seeds supplied to the organizer and advances given to organizers against the supply of hybrid seeds. This account is credited for value of hybrid seeds procured from the organizers. There is no separate consideration whatsoever for the incidental activities monitored by the organizer. In the event of any failure of the cotton crop, the expenses incurred by the farmers have to be borne by them and the assessee is not obliged to compensate the loss either to the organizer or to the farmer. The Ld.AR argued that it is not a job work. In the job work, the contractor would be paid consideration in the form of job work charges. In the case of the assessee, consideration paid is towards value of hybrid seeds procured from the organizers and not at all contractual. The AO relied on the decision of BDA Limited (84 ITD 442). The decision was subsequently reversed by the Hon'ble Bombay High Court (281 ITR 99). Therefore, the Ld.AR argued that there is no job contract or sup....
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....ul for further multiplication and useful only for cotton production. The planting of female seeds, cultivation and production of cotton crop, separation of hybrid seed and kapas, all these activities have to be carried out in accordance with the statutory norms and regulations of the State Government and further utmost secrecy is to be maintained. Since, it is practically difficult for the assessee to deal with large number of farmers involved in the process, the assessee entered into an agreement with some persons who are called the organizers. The organizers in turn enter into agreement with the farmers for cultivation and production of hybrid seeds directly in accordance with the norms stipulated by the assessee company. The organizers have to purchase female seeds from the assessee company for onward supply to the farmers. When hybrid seeds are produced, the organizers buy the same from the farmers for onward supply to the assessee. The organizers have to pay for the female seeds purchased from the assessee company and they will have to be paid for the hybrid seeds sold to the assessee company. The assessee company does not deal with the farmers directly. The amount paid to the....
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.... company is advancing the amounts to farmers to make them loyal to the assessee company. Though the activities of the organizers appears like an agent, the AO has not given any finding for payment of any commission for the services. He is acting like an agent of the company or facilitator of the company, for identifying the farmer, distributing the parent seeds and growing the hybrid seeds and arranging the delinting of cotton kapas from the crop grown by the farmers and supplying the entire separated cotton seeds to the assessee company. The assessee company is ultimately making the payment only for the hybrid cotton seed, purchasing the same at Rs. 280/- per packet of 750 gms. No other payment is made to the organizers. Therefore, it appears to us that it is a simple purchase transaction, but not works contract or supply contract as held by the AO. There is no dispute that the organizer is rendering services to the farmers as well as the assessee, however, from the bills raised by the assessee or from purchases made from the company, there was no separate payment made by the company to the organizers. It appears that the organizers have made the profit out of the seeds procured....
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....u/s 201/201(1A) of the Act. The department did not place any material to show that the action was initiated against the assessee for non deduction of tax at source as per the provisions of section 201/201(1A) of the Act. The Ld.AR informed the bench that the department has not taken any action u/s 201/201(1A) to treat the assessee as assessee in default. In case, the department feels that the transaction in question is contract and the assessee failed to deduct tax at source, the department also required to take action against the assessee for its failure to deduct tax at source u/s 194C and treat the assessee as assessee in default for non deduction of tax at source and raise the demand u/s 201/201(1A) of the Act. Having not treated the assessee as assessee in default and not raising the demand u/s 201(1A), we are of the considered view that the contention of the assessee that it was purchase transaction got strengthened and there is no justification to make addition u/s 40(a)(ia) of the Act. 6.4. Similarly, the assessee also contended that the activity of the organizer is agricultural activity and the income of the organizer is exempt. From the agreement though there was a prov....
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.... of the Act, accordingly, we set aside the orders of the lower authorities and delete the addition made by the AO. 7. The appeals of the revenue on this ground are dismissed and the appeal of the assessee is allowed. I.T.A. No.139/Viz/2015, A.Y.2011-12 8. Ground No.1 is related to the addition of Rs. 29,30,860/- relating to purchase of seeds from the growers made u/s 40(A)(3)of the Act. During the assessment proceedings, the AO found that the assessee has made the payments of Rs. 29,30,860/- to organizers exceeding Rs. 20,000/- on each occasion in cash as per the details given below : Sl.No. Name of the organizer Dt. of Payment Amt. (Rs.) 1. K.Penchalaiah, Gadwai 31.03.2011 12,317 19,000 2. K.Ramudu, Ieeja 31.03.2011 19,000 9,488 3. G.Narasimha Reddy, Ieeja 31.03.2011 19,000 18,840 4. N.Chakrapani Reddy 31.03.2011 4,100 19,000 5. Lavu Nagavara Prasad 01.10.2010 50,532 1,00,000 6. Polanati Rama Krishna 01.10.2010 50,366 1,00,000 7. Sai Baba Bobbili 01.10.2010 1,00,000 4,805 31.03.2011 91,560 8. M.Surya Chandra Rao 01.10.2010 99,756 31.03.2011 49,800 9. S.Prasada Rao 31.03.2011 64,733 40,215 1,....
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....on to interfere with the order of the Ld.CIT(A) and the same is upheld. 11. Ground No.2 is related to the confirmation of additions of Rs. 4,11,04,993/- which is related to the amount payable as at the end of 31.03.2011. The Ld.CIT(A) allowed the deduction relying on Special Bench decision of Merylin Shipping & Transports, since we have deleted the entire addition, Ground No.2 becomes in fructuous and dismissed. 12. Ground No.3 is related to the addition of Rs. 51,40,800/- enhancement made by the Ld.CIT(A). During the appeal hearing, the Ld.AR submitted that the Ld.CIT(A) enhanced the addition without giving notice and opportunity to the assessee. As per the Income Tax Act, if the CIT(A) intends to enhance the addition, he is bound to issue notice as per section 251(2) of the Act. The Ld.CIT(A) is not permitted to enhance the addition without issue of notice and giving opportunity to the assessee. During the appeal hearing, the Ld.AR submitted that no notice of enhancement was issued by the Ld.CIT(A). The department did not place any evidence to show that the Ld.CIT(A) has issued notice for enhancement. Therefore, the enhancement made by the Ld.CIT(A) is unsustainable, accordin....