TaxTMI 
TaxTMI 
2023 (7) TMI 1075
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....l stores, having 83 stores in 38 cities across India, and that it deals in clothing, accessories, footwear, jewelry, fragrances, cosmetics, health and beauty products, home furnishing and décor products. A survey action u/s 133A of the Act was carried out upon the assessee on 01-08-2018 and during the post survey analysis it was revealed that the assessee was not deducting taxes on payments at appropriate rates. In the course of the proceedings conducted u/s 201(1) of the Act, the AO noted that the assessee had agreements with various vendors in terms of which the assessee would sell apparels/goods/cloths/footwear/various items through its retail outlets as well as its online marketplace, and that such items were being manufactured by these vendors as per the designs approved by the assessee. The AO, accordingly, issued the following show cause to the assessee: "On perusal of the agreement with regard to the purchases with the parties enlisted below it is seen you have entered into agreement to manufacture the specific designer dresses which is specifically covered under the contract manufacturing hence the provisions of section 194C is squarely applicable on the said expe....
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....e was no agreement to manufacture According to the AO, there were specific agreements with the with the vendors vendors vendors for the manufacture of products as specified and approved by the In terms of the agreements, the vendors would send sample products, assessee which if approved by the assessee, would be manufactured by the vendor and then put up for sale in the assessee' model of 'The AO noted that the term's outlets model was 'Sales or Return' being used by the assessee for their 'business misleading and was an attempt to evade the rigors of Section 194C of the Act According to the AO, the following terms of the agreements showed that, they were in nature of 'works contract: "c) As per clause 28 to Annexure C of Agreement, Vendor shall at its own expense/cost employ engage its employees in each of SSL stores to assist the sales activity. This is an additional services offered in addition to manufacturing of products/goods and after sale services. d) As per the clause 29 to Annexure C of the Agreement," Vendor may take measures for the marketing of goods at SSL with prior approval of SSL." This enunciates the marketing activity of the products is being carried out with....
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....ts of supply'. 7. Referring to the definitions of works contract set out in different dictionaries, the AO inferred that, whether a particular contract is one of sale of goods or work depends upon the main object of the parties which can be examined from the terms of the contract, customs of the trade and circumstances of the transaction. According to the AO, if the primary object is bestowal of labour and services and the supply of material is merely incidental, then it is a works contract. The AO noted that, the assessee approved the goods manufactured before it was put up for sale at its retail outlets, clients would avail after sale services from the vendors and not the assessee, that the vendors modified the defects and the vendors assisted in maintenance of stock, sale, distribution, etc. as well. The AO thus held that such contractual agreement was a works contract which was squarely covered under the provisions of Section 194C of the Act and therefore the assessee was under the legal obligation to deduct tax at source on the payments made to these vendors. The assessee, however, had not deducted any tax at source as it was their contention that the transactions with the ve....
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.... the Shoppers stop. The supply of specific style no. and code no. of the products evident that the manufacturing of the goods/products was done on the basis of the specific orders as per the terms of agreement. (iii) To sale the products the vendors also deputed its own employees/staff at the premises of the Shoppers stop and in the statement recorded u/s 131, these vendors confirmed the deployment of employees and incurring of employee cost on these employees. It is clearly evident that the vendor/contractor also supply the labour at the premises of Shoppers stop. (iv) With regard to marketing of goods i.e. scheme and discounts on the products, the vendors only can float schemes or discounts for the customers and benefits pass on to the customers. Shoppers stop does not involved in any schemes or discount as per terms of agreement with vendors and all expense related to events of marketing, schemes etc shall have to be borne by Vendors only. However, the Shoppers stop obtain its margin i.e. profit on the sale of the products as decided in agreement on the sale of the products through their showrooms. v) The Shoppers stop only provide the place/premises to the vendors and ven....
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.... in the order of the AO which clearly establishes that it was a composite contract for goods and services and not a normal sale return agreement. 4. Whether in the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in holding that the agreement between the assessee and the vendor a contract for sale return ignoring the fact that in spite of the delivery of the goods, in the case of Pilfirage /Shrinkage/ Shortage/Damage or loss of goods, it was to be shared equally by the vendor and the assessee at Vendor invoice value, which clearly shows that the property in the goods were not totally transferred as in the case of normal sale return. 5. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in holding that the agreement between the assessee and the vendor a contract for sale /return ignoring the fact that the vendor was allowed to take the inventory at regular interval of the goods delivered which is not as such as in the case of normal sale return 6. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in holding that the agreement between the assessee and....
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....levant provisions contained in Section 194C of the Act 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 (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to- (i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family; (ii) two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, of such sum as income-tax on income comprised therein. ... Explanation.-For the purposes of this section,:- ... (iii) "contract" shall include sub-contract; (iv) "work" shall include- (a) advertising; (b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting; (c) carriage of goods or passengers by any m....
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....anation (III) to section 194C of the Act, the term 'work' was defined to include advertising, broadcasting and telecasting including production of programmes for such broadcasting or telecasting, carriage of goods or passengers by any mode of transport other than by railways; catering, and manufacturing or supplying a product according to the requirement or specification of customer by using material purchased from such customer. It was noted by the Legislature that there was an ongoing dispute as to whether TDS is deductible under section 194C on 'outsourcing contracts' and whether 'outsourcing' constitutes 'work' or not. Hence , to bring clarity on this issue, the definition of 'work' was consciously amended by the Finance (No.2) Act, 2009 wherein it was specifically provided that 'work' shall not include manufacturing or supplying a product according to the requirement or specification of a customer by using raw material sourced from a person other than such customer, as such a contract is contract for 'sale'. In this context, we may gainfully refer to the Memorandum explaining the Finance (No.2) Bill, 2009, which read as follows: "c. Clarifications regarding '....
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....under the SOR model. From the details of these suppliers placed before us, it is noted that each of these suppliers are noted to be independent suppliers having their own existence, irrespective of the arrangement with assessee. Most of these vendors are well-known and the goods supplied by them are their standard products which are supplied by them to any or all retailers or even sold through their own exclusive showrooms, located anywhere in the world. The assessee has entered into an SOR arrangement with these vendors, in terms of which the assessee first inspects the samples before placing the purchase orders. Once the products are identified and selected, the assessee places the purchase orders with the vendors who commit to supply to it. The key features of an SOR arrangement (sample agreement dated 15.06.2016 with M/s Fossil India Pvt. Ltd is found placed at Page 1 to 18 of paper book) as noted by us are that, if these products remain unsold at the stores of the assessee, then the assessee may choose to return these goods back to the vendors, and against which the latter issues credit notes to the assessee. Hence, some vendors also depute their personnel to assist in the sal....
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....etail outlets and that similar products were also being sold through other retailers and their own, Similarly exclusive showrooms M/S Intercraft Trading Pvt. Ltd (Page no. 106 of the PB) had confirmed that they were distributor (not manufacturer) of the goods supplied to the assessee and that none of the materials were supplied by the assessee. They also confirmed that these goods were sold on sale or return basis. Like the earlier vendor, they also confirmed that they had sold their goods to the assessee for sale through their retail outlets and that similar products were also It is further being sold through other retailers and their own exclusive showrooms of PB 109, Page No) (Blackberry) Mohan Clothing Co Pvt Ltd/ noted that, M) has submitted that the goods manufactured by them were as per their own specifications and based on the inputs of their own designing team and not the The vendor also confirmed that none of the raw materials to manufacture assessee It further stated that the title and property in the were provided by the assessee goods was transferred upon sale, raising of invoice and delivery of goods to the Similar assessee and that such sale was on principal to princ....
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.... We thus agree with the Ld. CIT(A) that this observation of the AO is factually erroneous. As noted earlier, these products are procured from internationally reputed brands who are independent manufacturers or vendors themselves. These products purchased by the assessee bear the brand names of these suppliers and not the assessee which further supports the case of the assessee that these products were not being manufactured at their behest. It is noted from the terms of the agreement that, the assessee does not enjoy any right to place orders for manufacture of any new product but instead only exercises the right to choose from various product offerings from the array of products manufactured by these suppliers. Such supply, being independent of raw material sourcing, cannot be categorized as 'works contract' as contemplated in Explanation to Section 194C of the Act. 22. It was brought to our notice by the Ld. AR that, the AO got swayed by the use of the phrase 'produce sample' in the agreement. According to him, 'produce sample' meant to present the sample for approval and not manufacture the same. It is noted that the Ld. CIT(A) had taken specific note of this aspect and after e....
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....ts based on SSL specifications. It is also noted that the products are supplied to SSL within a day and supplied within 3 to 4 days of placement of such order. It cannot be the case of the AO that the vendor, within a period of one day, is able to source the material from SSL and produce such goods for appellant's consumption." 23. It was further rightly noted by the Ld. CIT(A) that, even if it be the case that the assessee had provided specifications in relation to supply of these products (although that is not the case), still it could not qualify as 'works contract' in light of the specific exception set out in clause (iv)(e) of Explanation to Section 194C of the Act, as discussed earlier. It is not the case that, the assessee provided or supplied materials to any of these vendors/suppliers. It is noted that, each of these vendors manufactures or procures the products in their own independent capacity and under their respective brand names in as much as that the assessee does not have any say in the same. In fact, the goods manufactured by these vendors, who are noted to have international repute, is not directly dependent on the orders placed by the assessee. These supplie....
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....ices provided by the suppliers viz., deputation of personnel at the retail stores, provision of after sales support to remove defects, joint inspection of inventories, etc., to allege that the predominant intent of these SOR arrangements was the supply of labour and not material. According to us, each of these averments made by the AO were totally misplaced on the given facts of the case. As we have already noted above, these SOR arrangements are in the nature of contract for supply of goods. One of the key features of such an arrangement is that, the goods purchased by the assessee may be returned if it remains unsold in their outlets. Further, the assessee sells these goods through its retail outlets which houses multiple brands of similar apparels/ cloths/ fashion etc. Moreover, the Ld. AR explained that, with these products getting more complex and expensive and with the changing fashion, they require specialized handlers to explain the same to the customers to introduce them to the new features or the new fashion in vogue. It is therefore, commonly known that the trained sales staff are placed by these suppliers at the retail outlets to educate or assist the customers who visi....
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....pplied by the vendors were being released by the assessee either after the goods were found to be complete without any defect by the assessee, or after the complete goods were found to be to the satisfaction of the assessee, or after the goods were sold at their retail outlets, which according to him, suggested that the vendors were the contractors of the assessee. It was rightly pointed out by the Ld. AR that, the terms of payments towards purchase of goods cannot be said to indicate that the contract is that of 'works contract' with the vendors. He showed us that, even the Sale of Goods Act 1930, permits contract for payment during delivery of goods or before or after or by installments. In our considered view therefore, this observation of the AO is of no relevance and is not decisive to ascertain the nature of the SOR agreement. 29. Based on our above findings and observations, the salient features of the SOR agreements with the vendors can be summed up as follows: a) The assessee first selects the vendors based on its stand in the market and the quality of their products and thereafter enters into SOR agreements with them. These agreements are in the nature of Memorandum of....
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....pection of inventory etc. is provided in the SOR agreements. These functions do not alter or change the primary character of the transaction between the vendors and the assessee, which is that of supply of goods. h) The vendors have also confirmed the above facts and understanding in the course of enquiries made from them u/s 133(6)/131 of the Act. They have affirmed that they have supplied goods to the assessee on principal to principal basis for sale through the assessee's retail outlets. 30. In view of the above, we note that the Ld. CIT(A) had rightly placed reliance on the decision of the Hon'ble Bombay High Court in the case CIT vs. Glenmark Pharmaceuticals Ltd (supra) which is found to be relevant and applicable in the present case. In this decided case, the assessee is noted to have been engaged in the manufacture and marketing of drugs and pharmaceutical products. In the course of the TDS survey, it was noted by the Department that, or purchasing drugs from other/apart from manufacturing drugs on their own and suppliers on an outright basis, the assessee also had agreements in place with certain third parties who although would source raw materials on their own but they....
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....manufacturing or supplying a product, according to the requirement or specification of a customer by using material purchased from such a customer. Clause (e) has placed the position beyond doubt by incorporating language to the effect that the expression 'work' shall not include manufacture or supply of a product according to the requirement or specification of a customer by using material which is purchased from a person other than such customer. In other words, the circumstances that the requirements or specifications are provided by the purchasers is not regarded by the statute as being dispositive of the question as to whether a contract constitutes a contract of work or sale. What is of significance is whether material has been purchased from the customer, who orders the product. When the material is purchased from the customer who orders the product, it constitutes a contract of work while on the other hand, where the manufacturer has sourced the material from a person other than the customer, it would constitute a sale. What is significant is that in using the words which clause (e) uses in the Explanation, Parliament has taken note of the position that was reflecte....
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....e product, which he intends to sell under his brand name, or trademark, manufactured from a third party would be interested in ensuring the quality of the product. The trade-mark has associated with it an assurance of the quality of the goods which are marketed traceable to the origin of the goods. Associated with the trade-mark is the goodwill and reputation which is associated with the at This is particularly so in the case of a pharmaceutical product where the ultimate consumer is legitimately entitled to ensure that her health is not prejudiced by the consumption of a product not meeting prescribed standards. The owner of a mark, therefore, introduces specifications to ensure that the product meets the standards justifiable associated with the reputation in the mark. The specification ensures the observance of standards. Similarly, a clause relating to exclusivity is not inconsistent with a transaction of a sale. Here again, much depends upon the nature of the product Restrictive covenants of this kind are intended to protect the intellectual and other property rights of a party which markets its goods by requiring a manufacturer to observe norms of specification and exclusivit....