Sale of contract NOT covered u/s 194C

Contract for sale of goods will not be covered within ambit of section 194C of IT Act

Simply because the assessee monitors the manufacturing process it does not change the character of the transaction.


ITAT, MUMBAI BENCHES `G' MUMBAI

Glenmark Pharmaceuticals Ltd. v. ITO (TDS)

ITA NO. 935/Mum./2007

March 5, 2009

RELEVANT EXTRACTS:

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23. After careful consideration of the above circular it is clear that the contract for the sale of goods will not be covered within the ambit of sec. 194 C. In the present case we find that the assessee placed orders with the manufacturers for manufacturing of the medicines strictly according to its specifications but the property in such goods passed to the assessee only after these were delivered to him. When the manufacturers were purchasing the raw material at their own cost under incurring other expenses subsequently the product is delivered to the assessee. If it is manufactured according lo the specifications made by the assessee and delivered to it that property in goods can be set to have passed to the assessee. In the present case the assessee has simply placed the orders for the manufacture of medicines according to its own specifications and nil other relevant decisions for the manufacturing have been left to the wisdom of the manufacturer. The assessee only interested in the output coming of to its standard. How that output is achieved is the job of the manufacturer. Simply because the assessee monitor the manufacturing process it does not change the character-of the transaction.; When the manufacturers have their own establishment and their labour force, the raw material purchased by themselves, even the excise duty is also paid by them directly. Further when such manufacturers make the sale of such goods to the assessee the sales tax is also paid by them. Ultimately the manufacturers manufacturing the product by their own subjected to assessee's specifications supervision , control and later on sold such goods to the assessee. The property in goods passes over to the assessee only when such goods are manufactured and delivered to it. Hence, these arc only contract for sale of goods and not works contracts.

24. The Hon'ble Bombay court in case of BDA Ltd. Vs ITO [2006 ]281 ITR 99 (BOM). In this case M/s BDA Ltd. had distillary at Aurangabad and it purchased materials required for bottling and marketing the foreign made Indian liquor including the printing and packing material. M/s.Mudranika, another establishment was supplying the printed labels to be rapped on the bottles to the assessee. The ITO has held that the payment made to M/s.Mudranika. the supplier of the printed material from whom the printed labels were purchased, executed the contract liable for of tax at source u/s 194 C of the Act. The Hon'ble High Court observes M/s.Mudranika was an independent establishment in the business of supplying packing material to various establishments and the assessee had issued a order in favour of M/s.Mudranika for supply of printed labels as per the specification; provided by it but the raw material was not supplied by the assessee. It was noted that when the printing work was being carried in the premises of M/s. Mudranika though as per the specifications of the assessee the supply was limited to the quantity specified in the purchase order. There was nothing on record to show that all other ancillary cost were not incurred by M/s. Mudranika. In this background of the facts of the case, the Hon'ble Bombay High Court has held that the supply of printed labels by M/s. Mudranika to the assessee was "contract for sale" it could not be deemed as "works contract". Similar view has been taken by Delhi Bench of the Tribunal in DCIT Vs. Reebok India Company [2006] 100 TTJ 976(Del) which now stands approved by Hon'ble Delhi High Court in CIT Vs. Reebok India Company [2009] 221 CTR 508(Del). In another case Whirl Pool India Ltd Vs JCIT 16 SOT 435 Delhi Tribunal has held that where vendor purchases raw material on his own manufactured goods as per specifications of the assessee and the property in the goods passes to the assessee at the point of time goods are sold, it is a case of sale of goods not a job work.

25. Coining to instant case we find that there is a complete identity of facts with those considered by Hon'ble Jurisdictional High Court in as much as that the goods were manufactured by the manufacturers in their own establishments in accordance with the specifications given by the assessee. The raw material cost and other expenses incurred by their own. Even the excise duty was paid by them when the goods arc sold the sales tax also paid by the manufacturers. When the goods are sold to the assessee the property in them passed over to the assessee. Under these circumstances, we arc of the considered opinion that the agreements of the assessee with the manufacturers can not be termed as 'works contract'. "Die impugned order is therefore set aside and the application of section 194 C is ruled out. That being the position there can not be any question of treating the assessee as in default u/s 201(1) or charging any interest u/s 201(1A).
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