16 February 2015
I HAVE ONE CLIENT HIS VENDOR HAS ISSUE TAX INVOICE FOR ENVELOPE & BROCHURE PRINTING AND VENDOR HAS MENTION IN DESCRIPTION (AS PER YOUR PRESCRIPTION) AND THEY HAD CHARGE 5% VAT.
I WANTED TO KNOW SHOULD WE LIABLE TO DEDUCT TDS (UNDER CONTRACT)
Your question regarding deduction of TDS under contact where material was not supplied by purchaser but procured by the seller & later on modified as per the instruction of client is still Debatable.
There are different views & case studies on the same take a read of them:
1. Issue for consideration :
1.1 U/s.194C, a person is required to deduct tax at source, at the time of making payment to a resident for carrying out any work, including supply of labour for carrying out any work. The tax is required to be deducted at the rate and the time specified by S. 194C and the tax so deducted is required to be deposited within the time provided by Rule 30 of the Income-tax Rules.
1.2 The expression ‘carrying out any work’ has been a subject matter of judicial controversy, for long. The Section does not define the said expression nor does it provide any guidelines for enabling a payer to determine whether a payment made by him was for carrying out any work or was for the purchase of material.
1.3 Ordinarily, a payment is made either for getting work done in respect of material supplied by the payer or is made for purchase of material. In the first case, the tax is required to be deducted at source, and in the latter case, no tax is required to be deducted. This simplicity achieves a complexity where a person makes payment for purchase of material as well as for working on such material. Further, difficulties arise in cases of a supplier-manufacturer of general merchandise, where he produces the same product as per the specifications of the payer and also carries out some labour work in the process of such manufacturing. In cases of composite payments for composite contracts to the same person, for supply of material as also for supply of labour, it is difficult for a person to determine his liability to deduct tax u/s.194C. A dilemma is faced by such a person regarding the true nature of such payments. Whether the payment was made for supply of any article or for the supply of labour, or both, is a question a payer has to address. For example, a person purchasing packing material like corrugated boxes or bags or wrappers on which the supplier undertakes to carry out printing as per the specifications of the payers or purchasing the customer-specific bus-body from a manufacturer, who supplies the material as well.
1.4 The Supreme Court in the case of Associated Cement Co. Ltd., 201 ITR 435, considered this contentious issue in detail and laid down the guidelines for deciding whether the payment was made for carrying out any work or was made for purchase of any material.
1.5 Subsequent to the decision of the Supreme Court, the Section was amended by inserting Explanation III to define the term ‘work’. However, the issue of the liability to deduct tax at source in cases of composite contracts continues to be debatable.
1.6 Different views are available on the subject, which require consideration.
2. Wadilal Dairy International Ltd.’s case :
2.1 The Pune Tribunal, in the case of Wadilal Dairy International Ltd. v. ACIT, 81 ITD 238, had an occasion to address the issue under consideration. In that case, the assessee company was engaged in the manufacture of dairy products. The company purchased packing material such as big cartons, small bags, plastic bags, wrapping material, etc. from various manufacturers by placing orders with desired specifications. The suppliers were also required to print the company’s name, monogram, nature of product, quantity of product and such other details. The suppliers of packing material were required to pay excise duty and sales-tax on the selling price of such packing material, which included the cost of printing on such material.
2.2 The Assessing Officer, in the context of the liability of the company to deduct tax at source, held that the assessee was required to deduct tax at source u/s.194C from the payments made to the suppliers, since the said payments were made for such purchases which were supplies as per the desired specifications, which rendered such purchases as contracts liable to deduction u/s.194C. He also held that the printing on the material was not incidental but was a part of the contract and the payment therefor was liable for deduction of tax at source. The CIT(A) upheld the action of the Assessing Officer.
2.3 In the appeal by the company before the ITAT, it was contended that :
(a) the payment was made for purchase of goods and was not for contract of work and labour;
(b) the items purchased by the company were subjected to levy of excise duty and sales-tax which were charged by the supplier and were paid by the company;
(c) the suppliers had purchased the required raw material for manufacturing the packing articles on their own account and that neither raw material nor any part of such articles were supplied to the company;
(d) the fact that the packing articles were manufactured as per the specifications of the company, was not a determining factor; and
(e) the suppliers had paid income-tax in their own cases.
Reliance was placed on the following decisions :
(1) State of Himachal Pradesh v. Associated Hotels, 29 STC 474(SC)
(2) Hindustan Aeronautics Ltd. v. State of Karnataka, 55 STC 314 (SC)
(3) A.P. State Electricity Board v. Collector of Excise, 95 STC 595 (SC)
(4) Chief Electoral Officer v. ITO, 68 ITD 439 (Chd.).
2.4 The Revenue contended that the payments were made for an integrated and indivisible works contract and that it was not possible to segregate a part of the contract which could be regarded as a works contract. It relied on the answer to Question No. 15 of the Board’s Circular No. 751 and relied on the decision in the case of CIT v. Kumudan Publications (P) Ltd., 188 ITR 84 (Mad.). In addition, it placed reliance on the following cases decided under the Sales Tax Law :
(1) State of Madras v. Richardson Cruddas Ltd., 21 STC 245 (SC)
(2) Mather & Platt v. State of Maharashtra, 24 STC 496 (Bom.)
(3) State of Rajasthan v. Man. Indl. Corp. Ltd., 24 STC 349 (SC)
(4) State of Gujarat, CST v. Variety Body Builders, 38 STC 176 (SC)
(6) Sentinel Rolling Shutters & Engg. Co. v. CST, 42 STC 409 (SC)
(7) Uni Abex Alloy Products Ltd. v. State of Maharashtra, 58 STC 37.
2.5 The ITAT observed that :
(a) the Section required that the assessee should have made payment to a contractor for carrying out any work for making him liable for deducting tax at source;
(b) the relevant aspect to be seen was whether the assessee had engaged any contractor for carrying out any work and whether such contractor had carried out such activities;
(c) the term ‘carried out’ suggested on executory contract rather than a case of a mere supply or sale of goods;
(d) if a person engaged the services of another and gave a job of manufacturing goods or articles and for that purpose supplied raw material, such would be a clear case of contract of work and the provisions of S. 194C would undoubtedly be applicable to such a case;
(e) where a manufacturer purchased material on his own account and manufactured the product which is sold, the case would be that of sale of goods and not of a works contract, even where the goods were manufactured as per the specifications of the customer.
2.6 The ITAT relied on the decision of the Supreme Court in the case of State of Himachal Pradesh v. Associated Hotels of India Ltd., 29 STC 474, for guidance in regard to composite contracts, wherein the Court held that the nature in such cases was to be determined with reference to the main object and if the main object was to transfer the property in goods, a chattel as a chattel, then it was a case of a sale. It also relied on Circular No. 681 dated 8-3-1991 of the CBDT and the cases of Hindustan Aeronautics Ltd. and the Chief Electoral Officer, cited by the assessee, to hold that the payment made by the company to the supplier of packing articles was not liable to deduction of tax at source u/s.194C of the Act.
2.7 The ITAT held that the decision of the full bench of the Bombay High Court, in the case of Sarvodaya Printing Press, 93 STC 387, relied upon by the Revenue, did not assist the case of the Revenue. It noted that the facts in that case were distinguishable. The assessee in that case was running a printing press where only job work was done, and the Bombay High Court, having regard to the basic circumstances and the special type of job work done, had held that the supply represented a works contract. The ITAT also observed that the decision of the Madras High Court in the case of Kumudan Publications (supra), did not help the case of the assessee because the Court in that case had held that, from the terms of the agreement, it was seen that the printer in that case had produced the magazines with the help of the materials supplied by the payer. In that case, the assessee was engaged in the business of printing the periodicals.
2.8 The ITAT accordingly held that in the case before them, the main purpose in buying packing material was to obtain goods for the purposes of packing and the fact that incidentally some printing was required to be done by the supplier, was of no consequence. It, therefore, held that no works contract was involved and the provisions of S. 194C were not applicable.
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