AI Drafter 
TaxTMI 
TaxTMI 
2025 (4) TMI 909
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....8 to examine the TDS compliance by the assessee. The AO after examining the TDS returns filed by the assessee and the relevant documents submitted held the assessee as assessee in default under section 201(1) with respect to tax deducted on the following and the AO also levied interest under section 201(1A) accordingly - Particular Amount - Rs. On account of Non deduction of TDS u/s 201(1) on Sokrati Technologies 37,48,172 On account of interest u/s 201(1A) on Sokrati- 2,66,120 On account of Short deduction of TDS u/s 201(1) on payments made to M/s Amazon 2,39,962 On account of interest u/s 201(1A) on short deduction of TDS on payments to Amazon 64,789 On account of Non deduction of TDS on lease rent 6,76,24,435 On account of interest u/s 201(1A) on Non deduction of TDS on payments made towards lease rent 40,57,466 On account of Non deduction u/s 201(1) on contract manufacturing of goods/products as per terms of agreements 39,32,10,123/- On account of Non deduction u/s 201(1) on contract manufacturing of goods/products as per terms of agreements 2,35,92,607/- Total 49,28,03,674/- 3. Aggrieved the assessee preferred furt....
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....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 comprised therein. ... Explanation.-For the purposes of this section,:- ... (iii) "contract" shall include sub-contract; (iv) "work" shall include- (a) advertis....
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....alyze 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 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....
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....n, 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. The key features of an SOR arrangement (sample agreement dated 15.06.2016 with M/sFossil India Pvt. Ltd is found placed at Page 1 to 18 of paper book) as noted by us are that, if these products remain ....
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....d 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 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 r....
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....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 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 ....
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....e 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 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 p....
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....ng the material period/ season for which it places appropriate orders in advance with these suppliers from amongst the samples presented by them. Hence, the 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 multiple brands of similar apparels/ cloths/ fashion etc. Moreover, the Ld. AR explai....
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....rs, 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 view therefore, this observation of the AO is of no relevance and is ....
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....licable 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 Pharmaceuticals Ltd (supra) which is found to be releva....
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.... 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 whether a contract constitutes a contract of work or sale.....
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....re, 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 a mark, therefore, introduces specifications to ensure th....
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....of 'works contract' as laid down in Explanation to Section 194C of the Act. 33. The Ld. AR Shri Vijay Mehta has rightly pointed out to us that, the case of the assessee is on much better footing than the facts involved in the above cited judgments. It is noted that all the above features (i) to (v) were present in the SOR agreements in question in the present case. Apart from the foregoing, as already noted by us, in the present case, the assessee is not accustomed to providing specifications or designs to the suppliers. It is also not a case that the suppliers are manufacturing the goods at the instance of the assessee. Further, the goods supplied are not under the brand/name of the assessee and instead bear the brand/mark/name of the respective supplier/original manufacturer. Hence, the ratio laid down in the above judgment, when coupled with the foregoing facts, is held to be applicable with more force in the present case of the assessee. 34. For the reasons set out above therefore, we do not see any reason to interfere with the order of the Ld. CIT(A) in holding that the payments made under the SOR agreements did not fall within the ambit of Section 194C of th....