Income Tax Appellate Tribunal has ruled that supply of packing materials according to requirements or specification of customer where the materials were not supplied by the assessee for the printing of packaging materials is a transaction as contract for sale and not a works contract liable for deduction of tax at source under section 194C of the Income Tax Act, 1961.

Case Details:
ITA No.892/Kol /2011
Assessment Year :2008-09
Dy Commissioner of Income Tax (Appellant) vs Shalimar Chemicals Works Ltd (Respondent)
Date of Order: 28-09-2015

Facts of the Case:
The assessee was a Limited Company and is into the business of manufacturer of coconut oil, spices, mustered oil and grocery items. The assessee-company used to do its business through a network of distributorship throughout India. During the course of assessment proceedings, the AO found that the assessee has incurred expenses of Rs.4,04,12,991/- on the purchase of packaging material. These packaging materials were made and designed at the instruction of the assessee by the party. The assessee placed the order for the supply of printed materials as per specification like size, labels, colour, design, particular type of paper, specific content etc. with the exclusive right of ownership on such materials.

The Assessing Officer held that this transaction of printing the packaging material is a work within the meaning of the explanation-III to section 194C of the Act and there existed a work contract between the parties for the supply of the requisite materials and it was not a case of simple purchase of material because a particular type of work was involved. In support of his claim the AO referred the Circular issued by CBDT No. 715 dated 08.08.1995 wherein the question No-15 clearly states that Sec. 194C of the Act would apply in respect of supply of printed material as per prescribed specification. Accordingly, AO disallowed the expenses for the violation of Sec. 194C of the Act and added to the income of assessee.

Aggrieved, assessee preferred appeal before CIT(A). The assessee submitted that the expenses on the packaging material was for the contract of sale and not for contract of job work. In most of the cases these packaging material were sold by the parties after realizing the excise duty, vat wherever applicable and there is no element of job work. The materials were also not supplied by the company and hence no TDS was deducted. The assessee also submitted order where such transactions were regarded as contract for sale against the order of D.C.I.T. TDS in its own case of the assessee for the F.Y. 1996-97, 1997-98 and 1998-99.

CIT(A) disregarded the order of the AO by observing that there exist no contract for the job work and it was a simple case of purchase of packaging material. The CIT(A) relied upon several judgments in support of his decision such as Hon’ble ITAT “A” Bench, Kolkata dated 6.8.2010 in the case of ITO vs. S.T. Printing Works, BDA Ltd. Vs. ITO reported in 281 ITR 99(Bom) the Hon’ble Bombay High court, CIT Vs. Dabur India Ltd. reported in 283 ITR 197(Delhi) the Hon’ble Delhi High court etc.

Excerpts from the ITAT Order:

So the definition as defined by the Act clearly shows that the present transaction does not fall in the category of the work because here the material was not supplied by the assessee for the printing of packaging materials. In several cases the different tribunals and court has held the such transactions as contract for sale and out of the preview of section 194C of the Act. some of them are enumerated here. In the case law of ITO Vs S.T. Printing Press where Hon’ble ITAT Bench, Kolkata dt. 06-08-2010 has held that the materials were not supplied by the assessee, hence there is no contract with reference to any work to attract the provision of section 194C in the case of BDA Ltd. Vs ITO reported in 281 ITR 99 (Bom), The Hon’ble Bombay High Court, on the issue involved has held as under :

“That when the printing work was being carried out in the premises of M, 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 costs like the labels, ink, papers, screen-printing, screens, etc., were being supplied by the assessee to M. In the facts of this case, the supply of printed labels by M to the assessee was a ‘ contract of sale’ and it could not be termed as “work contract”. Hence, the provisions of section 194C were notapplicable.”

The Similar view was taken by the Hon.ble Delhi High Court in the case of Dabur India Limited (supra) and head note reads as under:-

“Deduction of Tax At Source – Deduction from payment to contractor – Sale or Works Contract – Agreement for supply of corrugated boxes with labels printed on them – agreement for sale – Section 194C Not Applicable – Income Tax Act, 1961.”

In the case of Tuareg Marketing Pvt. Ltd. Vs ACIT reported in 122 TTJ 343 (Delhi) it was held by the Hon’ble ITAT has held as under:-

“In the case of Tuareg marketing Pvt. Ltd. Vs. ACIT reported in 122 TTJ 343 (Delhi) it was held by the Hon'ble ITAT, Delhi that where the manufacturing activity was carried out at the risk of contract manufacturer or supplier, the manufacturer purchased required raw material on his own and purchases the goods as per specifications of the assessee buyer, the ownership of the goods passes from the manufacturer to the assessee when the goods were supplied or delivered to the assessee, the manufacturer was forbidden from affixing the assessee’s trade mark on the goods supplied to the outsider, and the supplier was also liable to Assessment Year sales tax and other taxes on the goods supplied by it to the assessee purchaser. The combined effect of these conditions would go to show that it is a case of simple purchase of goods and not a contract for works. Supply of outsourced manufactured goods by the contract manufactured constitutes an outright sale and cannot be treated as contract of works within the scope of section 194C and, therefore, consequently the assessee was not liable to deduct tax at source from the purchase price of gods paid by the assessee to the contract manufacturers or the suppliers.”

Second in the case of ITO Vs. Ambica Agencies ITA No. 2055/Kol/2008 dated 12.06.2009 where it was held by the Hon'ble ITAT ‘B’ Bench which reads as under:-

”that provisions of section 194C would apply only in relation to work contacts and labour contracts and would not cover contracts for sale of goods. If a manufacturer purchases material on his own and manufacturer a product as per the requirement of a specific customer, it is a case of sale and not a contract for carrying out any work. The fact that the goods manufactured were according to the requirement of the customer does not mean or imply that any work was carried out on behalf of that customer.”

So from the aforesaid judicial pronouncement, it is clear that a work does not include where supply of a product according to requirements or specification of a customer by using materials purchased from a person other than the customers. Hence, the provision of Sec. 194C does not attract to the present case. The case cited by the Ld. DR is not applicable as it was decided in the context of the provisions of Bombay Sales Tax Act 1959 and it has no nexus with the provisions of section 194C of the Act and consequently there was no application of provisions of section 40(a)(ia) of the Act. Hence, this ground of Revenue’s appeal is dismissed.

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