TaxTMI 
TaxTMI 
2023 (7) TMI 1075
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....hat, the assessee is a company which runs retail 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 o....
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....hases." (emphasis supplied) 5. The AO, however, was not agreeable to the above contentions of the assessee and disputed their averment that there 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,....
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.... as the fabrication and supply of the product. This, according to the AO, these facts indicates that the contract between the assessee and vendors were 'contracts of work & labour' not 'contracts 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 leg....
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....y Shoppers Stop. (ii) The Vendors/supplier entered into agreement and supplied the products as per the specification i.e style no. and item code no. of the products as mentioned in the purchase order placed by 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....
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....ors. 3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in restricting the order to the works contracts only totally ignoring the different clauses of the agreement between the assessee and the vendor mentioned 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 allow....
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....of the Act or not; and hence, whether the assessee is required to withhold tax on the same. Before we proceed to examine the facts of the present case, it would first be relevant to take note of the relevant provisions of Section 194C of the Act and also the meaning of the term 'works contract'. The relevant 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 ....
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....nd therefore, we hold that it was not correct on the AO's part to refer to the dictionary meaning of the term 'work'. We thus agree with the Ld. CIT(A)'s finding that, the basic premise on which the AO proceeded to analyze the facts of the case, viz., the definition of 'work', was incorrect. 15. It was further brought to our notice by the Ld. AR that, prior to its amendment by Finance (No. 2) Act, 2009, as per Explanation (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....
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....xamine the facts of the case. It is noted that, the assessee is a multi-brand retailer which sources the products from various reputed brand owner-cum-manufacturers viz., Fossil, Arvind Lifestyle, Titan, etc. The assessee purchases goods/products from these vendors either on outright basis or under Sales or Return ('SOR') basis. The transactions in dispute in the present case relates to the purchases made by the assessee from various vendors 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. ....
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....oing through the same, for instance, it is noted that vendor, M/s Tommy Hilfiger Arvind Fashion Pvt. Ltd (Page no. 105 of PB) had confirmed that the sourced by them from their/goods supplied by them to the assessee were imported Meaning thereby, this vendor itself was a trader in goods and nominated suppliers not a manufacturer as alleged by the AO. This vendor also confirmed that they had sold their goods to the assessee for sale through their retail 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 sub....
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....h the assessee on principal to principal basis. Before us, the assessee has placed on record a sample SOR agreement with a manufacturer-supplier. Having perused the same, it is noted that there is no such manufacturing arrangement in place between the assessee and this vendor based on which one may infer that this supplier is manufacturing at the instance or behest of the assessee and that too as per the specifications/designs provided by the latter. 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 indep....
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....rea and the identification of such saleable products from the total range of the vendor's products is done by them before placing the purchase orders. There is no evidence that specifications have either been developed with respect to any such products nor any specification is given to the vendors. Vendors, being brand owners, have their own way of developing their products based on their research. The orders are placed for identified products and not for products 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 th....
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....r), and therefore the assessee-retailer has to ensure that it is stocked up with the clothing/ apparels/ fashion that is relevant and saleable during the material period/ season for which it places appropriate orders in advance with these suppliers placement of purchase orders by the assessee prior to the supply of goods by these vendors cannot render the arrangement to be held as a 'works contract'. 25. The AO thereafter is noted to have referred to the ancillary services 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....
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....y feedback in terms of the evolving sense of taste & liking of the customers, to accordingly chart out their next line of clothing/ shoes/ bags/ fashion/ apparels, etc. Hence, as rightly held by Ld. CIT(A), this clause/option vested with the vendors is of no relevance and does not in any manner assist the case of the AO nor does it suggest that the SOR arrangement is in nature of 'works contract'. 28. The last observation of the AO was that, the payments towards the goods supplied 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 v....
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....oices are subject to the levy of sales tax, etc., which is applicable on sale of goods and no works contract tax/ service tax is levied on the same which would suggest that it is in the nature of 'works contract'. f) In terms of the SOR agreement, the assessee has a right to return the goods under certain circumstances which is set out in the agreement itself. g) For mutual interests of promoting the business, certain ancillary functions such as deputation of marketing personnel, after sales support, joint inspection 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....
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....are not attracted?" 31. Answering the above question in the negative and against the Revenue the Hon'ble Bombay High Court had held as under: "28. Hence, what has weighed in the introduction of clause (e) to the Explanation was ongoing litigation on the question as to whether TDS was deductible on outsourcing contracts. Clause (e) was introduced to bring clarity on this issue' or, in other words, to remove the ambiguity on the question. Clause (e) as introduced contains a positive affirmation that the expression 'work' will cover 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 ....
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....lective of the law as it has always stood in the past. Where, as in the present case an Explanation is introduced statutorily to adopt an understanding of the law both in the form of the circulars of the Board of Direct Taxes and in judicial decisions. Parliament must be regarded as having intended to affirm that intent. In the present case, the intent has held the field for over three decades... 33. The reason that a specification or requirement is enunciated by the assessee constitutes a matter of business expediency A purchaser who desires to get the 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....