TDS-Work contract, Job work, Sale of goods - Goods manufactured as per customers specifications

Whirlpool of India Ltd. vs. JCIT ITA No. 992/Del/2007; Asst. yr. 2004-05 D.K. Tyagi, J.M and Pramod Kumar, A.M 13 July 2007 Ajay Vohra and Vishal Kalra, for the Appellant Indira Iyer, for the Respondent ORDER Pramod Kumar, A.M: The short issue that we are required to adjudicate in this appeal is whether or not the CIT(A) was justified in holding that the assessee was required to deduct tax at source, under s, 194C of the IT Act, in respect of purchases of products, which are made to the specifications of the assessee by the Original Equipment Manufacturers (OEMs). The assessment year involved is 2004-05 and the impugned order of the CIT(A) is passed in the matter of order under ss. 201(1) and 201(1A) r/w s. 194C of the Act. 2. Briefly, the material facts. The assessee is a well known name in the consumer electronic goods and home appliances etc. in the sense its brand 'whirlpool' has a certain brand image and recognition. The assessee is engaged in the business of manufacturing and trading of consumer electronics and home appliances, such as air conditioners, washing machines and refrigerators. In the relevant previous year, the assessee did not manufacture any of these products on its own and completely outsourced the manufacturing to various outside concerns, which are referred as OEMs. The goods purchased from these OEMs were made to the specifications of the assessee and are subject to strict quality control of the assessee. It is only when the assessee is fully satisfied about the product that the assessee's brand name is fixed on those products. A survey was conducted on the premises of the assessee company and it was found that the assessee is not deducting tax at source from payments made to these OEMs towards purchase of products manufactured for the assessee. The assessee's contention was that it was a purchase on principal to principal basis, and that it was not in the nature of a works contract which could be covered by the scope of s. 194C. It was also pointed out that OEMs are permitted to affix the assessee's trademark only on the goods approved for purchases and the OEMs are restrained from affixing the trademark on goods not purchased by the assessee. It was also pointed out that the sales-tax and excise duty, wherever applicable, are borne by the vendor. The assessee's stand was that in case it was indeed a works contract, the assessee would have only paid the job charges. It was contended that the transaction being in the nature of purchase simplicitor, the provisions of s. 194C were not attracted. These submissions, however, did not impress the AO (TDS). The AO was of the view that the OEMs cannot sell these products to anyone else and, therefore, the products not purchased by the assessee have no commercial value for the OEMs. According to the AO, "the main motivating intention was to get the job works done which is of the character of work contract and not of contract of sales" and, therefore, the amounts paid or credited to the OEMs attracting tax withholding liability of the assessee. As the assessee had failed to discharge this liability, the AO held the assessee to be an assessee-in-default in respect of the non-deduction of tax at source from payments or credits to OEMs. A demand was accordingly raised under s. 201(1) r/w s. 194C. The AO also raised a consequential demand for delay in payment of TDS under s. 201(1A) r/w s. 194C. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The CIT(A) was also of the view that entire outsourcing is controlled by the assessee, and in essence it is a works contract. The assessee is not satisfied and is in appeal before us." 3. Shri Vohra, learned counsel for the assessee, contends that the issue in appeal is squarely covered by the decision of a co-ordinate Bench,in the case of ITO vs. Willmar Schwabe India (P) Ltd. (2005) 95 TTJ (Del) 53, which has been since confirmed by the Hon'ble Delhi High Court, by dismissing Revenue's appeal against the said order. It is submitted that as long as the sales is on principal to principal basis, the sale will be outside the purview of the s. 194C. It is pointed out that merely because the goods are as per the specifications of the buyer, the nature of transaction will not change. Our attention is also invited to the decision of the Tribunal in the case of Dy. CIT vs. Allied Domeeq Spirits and Wine India (P) Ltd. (Delhi 'H' Bench order dt. 22nd Dec., 2006) wherein it is concluded that where a manufacturer purchases material on his own and manufactures a product as per requirement of a customer, it is a case of sale of goods and not works contract. Learned counsel submits that the decision of the Pune Bench in the case of Wadilal Dairy International Ltd. vs. Asstt. CIT (2001) 70 TTJ (Pune) 77 wherein it is held that merely because packing material supplied by a vendor has made to order, and special printing of markings, the nature of sale transactions would not change. Our attention is also invited to the judgment of Hon'ble jurisdictional High Court in the case of CIT vs. Dabur India Ltd. (2005) 198 CTR (Del) 375 : (2006) 283 ITR 197 (Del) and of Hon'ble Bombay High Court in the case of BDA Ltd. vs. ITO (2006) 201 CTR (Bom) 413: (2006) 281 ITR 99 (Bom). It is submitted that when predominant object is sale of goods, only because it requires some specialised work done, the fact of transaction being in the nature of sale will take it out of ambit of s. 194C. As an alternate contention, Shri Vohra submits that the provisions of s. 201 are only in the nature of collection mechanism, and since the primary liability of the OEMs is discharged as all the sale proceeds of these goods are included in their taxable receipts, the same amount cannot be collected again. It is contended that once the vendor discharges his tax liability, the vicarious tax withholding liability cannot survive. As for the liability, under s. 201(1A), learned counsel submits that the interest liability can only be till the period till the time tax dues of the OEM are paid. When the due tax is received by the Government, the interest charge cannot continue any further. On the strength of these arguments, learned counsel urges us to reverse the action of the authorities below and quash the impugned orders saddling the assessee with liability for non-deduction of tax at source. Smt. Iyer, on the other hand, laboriously takes us through the orders of the authorities below and vehemently relies upon and justifies the same. She submits that when a product is made to order and as per specifications given by the buyer, it ceases to the sale transaction and takes the character of works contract. It is stated that a sale contract can only cover off the shelf purchases and not goods specifically manufactured to the specifications. Distinction was made out between contract for sale and contract for work. As regards learned counsel's reliance on the judgment of Dabur India Ltd. (supra), Smt. Iyer submits that it was specifically observed by the Hon'ble High Court in the said case that "it is nobody's case before us that printing of labels required any special skill or involved any confidence or secrecy" whereas in the present case special skill was definitely required to make consumer appliances of a certain standard and specifications. Learned Departmental Representative again emphasized that the relevant agreements were not produced before the authorities below. We are urged to confirm the orders of the authorities below. In rejoinder, Shri Vohra takes us through the judicial precedents cited by him and highlights ratio decidendi of these precedents. It is submitted that facts of each case are bound to have some distinction from each other but what is to be really examined is the ratio of these decisions. The point made by the Hon'ble Delhi High Court regarding special skills, secrecy or confidence was, according to Shri Vohra, in the context of their Lordships' observations on Anandam Vishwanathan's case in which printing of examination papers for the universities was considered to be a works contract. It does not mean that wherever there are special skills required in manufacturing an item, it will go out of ambit of sales. As for non-production of agreements pointed out that two agreements which were available were duly produced and the CIT(A) has duly noted the assessee's stand that in the remaining cases, the supplies were made against the purchases orders. The objections of the Revenue are thus devoid of any substance or merits. We are again urged to vacate the TDS demands sustained by the CIT(A). 4. Having given our careful consideration to the rival contentions and the material on record, we are inclined to uphold the well reasoned plea of the learned counsel for the assessee. We find that what is material is the point of time when property in the goods manufactured passes. In case the property passes at the point of time when goods are sold, as is the position in the present case, and the manufacturing activity is carried out at the risk of the vendor, it is a case of simple purchases. As very appropriately observed by the co-ordinate Benches, when a manufacturer purchases raw material on his own and produces the goods as per the specifications of the buyer, it is a case of sale of goods and not job work. The dominant object underlying the arrangement is manufacture and sale by the OEM. Having carefully perused the agreements before us, we also find that the authorities below have proceeded on the erroneous assumption that goods rejected by the assessee cannot be sold by the OEMs. That is factually incorrect. The OEMs are free to dispose of the goods in whatever manner they deem fit but they are forbidden from affixing assessee's trademark on the same. That restriction is quite justified to protect the legitimate business interests of the assessee. The trademark can only be affixed in the case where the goods are purchased by the assessee, and rightly so, because the trademark belongs to the assessee and is to be used for his business purposes. Learned Departmental Representative's argument that only off the shelf goods can be considered to be purchases and made to order goods is to be considered as works contract, is devoid of any merits sustainable in law. In view of these discussions, and respectfully following the co-ordinate Benches, we hold that the supply of outsourced manufactured goods by the OEMs constitutes an outright sale and cannot be treated as a works contract within the scope of s. 194C. The impugned TDS demands raised on the assessee are thus indeed vitiated in law and not warranted by the facts of the case. These demands should, accordingly, be set aside. We order so. 5. In the result, the appeal is allowed.