Per Chhibber, Accountant Member - The common grievance projected in the two appeals by the assessee is that the I.T.O. (TDS) as also the CIT(A) are not justified in holding that provisions of section 194C cover supply of packing material having some printing on it.
2. The assessee’s appeals are late by seven days. The assessee has filed an application for condonation of delay in which it has been stated that the Unit has been running into losses for many years and application has been made to BIFR for having it declared as Sick Unit and because of the adverse financial position, the assessee has not been able to offer good salary to the staff and existing staff is somehow working under strained conditions. Many of the employees have left services of the Company and accordingly, there was a delay of seven days in the filing of the appeals.
3. After hearing both the parties and in view of the reasons explained by the representative of the assessee, we condone the delay of seven days and admit the appeals.
4. The assessee Company is having a Unit at Sinnar, Distt. Nashik, where it manufacture Ghee, Cheese, Butter and Milk powder. The assessee purchases packing material, such as big cartons, small bags, plastic bags, wrapping material etc. from various manufacturers. For the purpose of purchase of this material, purchase orders are placed with set specifica-tions of packing material. In packing this material, company’s name, monogram, nature of product, quantity of product is printed in the packing material. Batch numbers and the date of manufacture are only mentioned in blank and batch number and the date of packing is put by the assessee when the various batches are manufactured. The suppliers who manufacture this packing material while selling it to the assessee are liable to pay Excise duty as well as Sales-tax and the same is also recovered as part of the sale-price. The I.T.O. (TDS) Nashik, during the course of his visit to the Factory on 14-2-1996 went through the record and observed that the assessee had incurred expenses on account of printed materials. According to the I.T.O. Tax was required to be deducted at source while making payments to the suppliers. For this purpose, reliance was placed on the Board’s Circular No. 715, dated 8-8-1995 according to which the I.T.O. stated that these transactions were covered under section 194C of the Income-tax Act. The assessee Company was required to submit party-wise details in respect of the packing material and also was required to state why tax was not deducted at source from the payments under section 194C.
5. On behalf of the assessee, following points were raised :
(i)It was a case of simple sale of goods and not contract for work and labour.
(ii)All the items purchased by the assessee were subject to payment of Excise Duty and Sales-tax.
(iii)Goods/raw materials are purchased by supplier and the packing material is manufactured as per the specifications given by the assessee. When the goods are ready, they are delivered by them. No raw material or any part is supplied by the assessee.
(iv)When the purchase order is placed by the purchaser on a supplier of raw material, packing material specifications are given. If the goods are not as per the specifications of the purchaser, they are rejected. It is of no consequence whether the rejected goods are of any value to the supplier or not. In case of orders for plant and machinery, equipment etc. invariably they are supplied as per the specification of the purchasers.
6. The I.T.O. (TDS) considered the objections raised by the assessee. He observed that on each packing material the name of the Company, monogram, ingredients of material, description, date of manufacturing, date of expiry, net weight and prices etc. as per assessee’s directions are printed. For supplying such materials, specialised job was required which could be performed only by specialised companies having such plants because printed materials as required by the assessee Company is not readily available in the open market at any point of time. Samples of orders are to be approved in advance before executing the entire bulk order, that too, for the period of time as per the contracts/purchase order. Thus, packing material required by the assessee is of a specialised nature and the supplier company has to undergo trial product before getting the desired results as per the assessee’s prescribed specifications. According to the Assessing Officer it is not an ordinary purchase of packing material, in that, a particular type of work is involved. Since the sole purchase is with reference to certain specification, it clearly becomes a contract between two parties. He accordingly held that such transaction being of contract is hit by the provisions of section 194C of the Income-tax Act.
7. The I.T.O. further observed that printing on the materials supplied is not incidental. Specific printing on the packing material has got its own importance and a minor mistake of printing in mentioning the contents of ingredients, date of manufacturing and expiry date and batch number will cause great losses to the Company and affect adversely its goodwill and credibility. Thus, the printing is not at all incidental in this case. The principal object of the assessee was to get materials printed as per the prescribed specifications and not to purchase printed material as available in the market. According to the I.T.O., the charges are composite, though not separately mentioned. Under such contract, the supplier parties cannot retain or use the printed materials and the excess, if any, was to be destroyed. The supplier parties are responsible for protecting the goods and preventing them from falling into the hands of third parties. Its commercial value becomes zero in the case of rejection and it cannot be used even as a scrap. Therefore, the Assessing Officer held that supply of printed material by the supplier was not a sale, but a contract involving work. Merely because sales-tax and Excise duty was charged on the supply of material could not lead to the conclusion that it was purely purchase of goods, because both the taxes have their own identity and nothing to do with Income-tax. The I.T.O. next referred to the Board’s Circular No. 715, dated 8-8-1995 which, according to him, applied only to supply of printed materials with prescribed specifications and not for other purchases like plant and machinery and other equipments etc. The I.T.O. then referred to the Board’s letter dated 29-11-1996 in the case of Glaxo India Ltd. wherein the Board had approved the action of the I.T.O. (TDS), Nashik. So observing, the I.T.O. held that the assessee was liable for deduction of tax at source under section 194C of the Income-tax Act. He computed the total tax deductible at Rs. 2,42,840 and interest under section 201(1A) at Rs. 12,142. Similarly, for the assessment year 1997-98, the tax liability was determined at Rs. 1,43,645 and interest liability under section 201(1A) at Rs. 7,182.
8. The assessee appealed to the learned CIT(A), who dismissed the appeals. The detailed reasons given by the CIT(A) are to be found on pages 5, 6 &7 of the appellate order. The CIT(A) has more or less repeated the findings of the I.T.O. and the same are not repeated here.
9. Shri K.A. Sathe, the learned counsel for the assessee, submitted that the assessee is not liable to deduct tax at source under section 194C and in any case, when the suppliers concerned had paid their taxes on their sales, the order under section 201(1A) could not have been passed without ascer-taining this fact. He drew our attention to the true copies of specimen of purchase orders placed in the paper book, and submitted that it will be seen that these are purchase orders and not work orders for carrying out contracts. Bills of the parties which have been enclosed from pages 16 onwards clearly show that Excise duty as well as Central Sales-tax is being charged. It is these purchases made by the assessee which came in for scrutiny by the TDS section of the Income-tax Department of Nashik. He submitted that both the ITO (TDS) as well as the learned CIT(A) laid stress on the fact that on each packing material, batch number, date of manufacture and date of expiry is printed by the supplier and this is of utmost importance and requires a close contract between the assessee and the supplier spelling out a works contract. The learned counsel emphasised that this was a total mis-understanding of the transaction. When the supplier supplies the packing material where specifics like date and batch number etc. are not printed. This clearly rules out any possibility of close contact between the assessee and the supplier. According to the learned counsel, in the present case, the main purpose in buying packing material was to obtain goods for the purpose of packing and the fact the incidentally some printing was required to be done by the supplier was of no consequence. In support of his contentions, he relied upon the following judgments :
(1)State of Himachal Pradesh v. Associated Hotels of India Ltd. [1972] 29 STC 474 (SC),
(2) Hindustan Aeronautics Ltd. v. State Of Karnataka [1984] 55 STC 314 (SC),
(3)A.P State Electricity Board v. Collector Of Central Excise, Hyderabad [1994] 95 STC 595 (SC),
(4)Decision of the Chandigarh Bench in the case of Chief Electoral Officer v. ITO [1999] 68 ITD 439 .
10. Shri A.P. Srivastava, the learned senior D.R. strongly supported the orders of the authorities below. According to the learned senior D.R., this was a case of an integrated and indivisible works contract ruling out any possibility of spelling out any portion of the contract which could be regarded as works contract. He stated that para 7(vi)( b) of the Board’s Circular, No. 681 relied upon by the assessee had no application. On the other hand, he relied on the answer to question No. 15 in Board’s Circular No. 751. He also relied on the decision of the Madras High Court in CIT v. Kumudam Publications (P.) Ltd. [1991] 188 ITR 841. Apart from the above decision, the learned D.R. relied on the following decisions under the Bombay Sales Act :
(1)State of Madras v. Richardson Cruddas Ltd. [1968] 21 STC 245 (SC),
(2)Mather & Platt Ltd. v. State of Maharashtra [1969] 24 STC 496 (Bom.),
(3)State Of Rajasthan v. Man Industrial Corporation Ltd. [1969] 24 STC 349 (SC),
(4)State of Gujarat, CST v. Variety Body Builders [1976] 38 STC 176 (SC),
(5)CST v. Kamani Engg. Corpn. Ltd. [1976] 38 STC 503 (Bom.),
(6)Sentinel Rolling Shutters & Engg. Co. (P.) Ltd. v. CST [1978] 42 STC 409 (SC),
(7)Uni Abex Alloy Products Ltd. v. The State Of Maharashtra 58 STC 37.
11. We have considered the rival submissions and perused the facts on record. Section 194C(1) provides that any person responsible for paying any sum to any resident (referred to as 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)the Central Government or any State Government, or
(b)any local authority; or
(c)any corporation established by or under a Central/State or Provincial Act; or
(d)any company; or......
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 2% of such sum as income-tax on income comprised therein. The requirement of the section is that in order to attract the provisions, the assessee should have made payment to a contractor for carrying out any work (including supply of labour for carrying out any work). The point to be seen is whether in the present case, whether the assessee has engaged any contractor for carrying out any work. The expression ‘contractor for carrying out any work’ implies that the contractor should have carried out such activities. The term ‘carried out’ suggests an executory contract rather than a case of a mere supply or sale of goods. If a person engages the services of another and gives him a job of manufacturing goods or articles and for the purpose supplies him raw material, it would be a clear case of a contract of work. In such cases, the provisions of section 194C would undoubtedly be applicable. But, if, on the other hand, a manufacturer on his own purchases material and manufactures product which he sells to the assessee and it may be that such product might be customer-specific as per the requirement of the customer, it is still a case of a sale and not for carrying out any work. In such sale which is customer-specific, the fact that the goods manufactured are according to the requirement of the customer does not mean or imply that any work has been carried out on behalf of the contractee. A distinction between a sale and works contract is very significant particularly under the sales-tax laws. Before the introduction of tax on work contract, the sale-tax was levied on sales and it could not be levied on works contract. What is the exact scope of expression ‘works contract’ has been considered by the Hon’ble Supreme Court in a number of cases and by and large distinction between the two also seems to have been adopted for the purpose of Income-tax Act. For this purpose, a reference may be made to the Board’s Circular No. 681, dated 8-3-1991 which was issued by the Board after the pronouncement of the judgment of the Supreme Court in the case of Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 1. (The Circular is found reproduced on page 6599 of Chaturvedi & Pithisaria, Vol. 4, 5th Edn.). Reference may be made to para 7(vi) which states that provisions of this section, i.e., 194C, will not cover to contracts for sale of goods.
Clause (vi) of para 7 is to the following effect :
"In State of Himachal Pradesh v. Associated Hotels of India Ltd. [1972] 29 STC 474 (SC), the Supreme Court observed that where the principal objective of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, contract is of work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the material nor the value of skill and labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land, where the intention plainly is not to sell the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour. In case of doubt, whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the above mentioned case."
In clause (b), it is stated that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and as such outside the purview of this section. This para really answers in a very clinching manner the objection raised by the department in the present case. As per para (b), even in fabrication contracts if the property in the article passes to the Government or other person after its delivery, still it is a case of contract for sale. The fact that fabrication has been carried out as per specification given by the contractee is not considered to be relevant. The assessee’s case would appear to fall squarely within clause (b) above, because in the assessee’s case the property in the packing material passes only after the same is delivered by supplier to the assessee. Obviously in such cases since these are contracts for sale, sales-tax and excise duty are being levied. Thus the payment of sales-tax and excise duty by supplier, though not conclusive, is clearly indicative of the fact under those laws, the transaction is considered to be that of sale. In view of the Board’s circular, it is also clear that the concepts of work contract and sale as envisaged under the Sales-tax laws have been imported in considering and interpreting section 194C by the department itself.
12. In Associated Hotels of India Ltd.’s case (supra), following passage at page 479 is very material for the purpose of this appeal :
"The difficulty which the courts have often to meet with in construing a contract of work and labour, on the one hand, and a contact for sale, on the other, arises because the distinction between the two is very often a fine one. This is particularly so when the contract is a composite one involving both a contract of work and labour and a contract of sale. Nevertheless, the distinction between the two rests on a clear principle. A contract of sale is one whose main object is the transfer of property in, and the delivery of the possession of, a chattel as a chattel to the buyer. Where the principal object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one of work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of materials, nor the value of the skill and labour as compared with the value of the materials is conclusive, although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract is in substance one for work and labour or one for the sale of a chattel."
The above Authority gives a guidance in regard to composite contracts. In such cases, the Hon’ble Supreme Court says that one has to see the main object. If the main object is to transfer property in or delivery of the possession of, a chattel as a chattel, then it is a contract of sale. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of materials, nor the value of the skill and labour as compared with the value of the materials, is conclusive, although such matters may be taken into consideration in determining whether the contract is in substance one for work and labour or one for the sale of chattel.
13. In Hindustan Aeronautics Ltd.’s case (supra), on page 323, the Apex Court has referred with approval the statement of law in Benjamin’s Treatise on the Law of Sale of Personal Property with reference to the French Code and Civil Law, wherein certain principles have been laid down. These have been stated as under :
"1. A contract whereby a chattel is to be made and affixed by the workman to land or to another chattel before the property therein is to pass, is not a contract of sale, but a contract for work, labour and materials, for the contract does not contemplate the delivery of a chattel as such.
2. When a chattel is to be made and ultimately delivered by a workman to his employer, the question whether the contract is one of sale or of a bailment for work to be done depends upon whether previously to the completion of the chattel the property in its materials was vested in the workman or in his employer. If the intention and result of the contract is to transfer for a price property in which the transferee had no previous property then the contract is a contract of sale.
Where, however, the passing of property is merely ancillary to the contract for the performance of work such a contract does not thereby become a contract of sale.
3. Accordingly,
(i)Where the employer delivers to a workman either all or the principal materials of a chattel on which the workman agrees to do work, there is a bailment by the employer, and a contract for work and labour, or for work, labour and materials (as the case may be), by the workman.
Materials added by the workman, on being affixed to or blended with the employer’s materials, thereupon vest in the employer by accession, and not under any contract of sale.
(ii)Where the workman supplies either all or the principal materials, the contract is a contract for sale of the completed chattel, and any materials supplied by the employer when added to the workman’s materials vest in the workman by accession."
Viewed in the light of above decisions, it can be safely said that the assessee did not enter into work contract with the suppliers of packing material.
14. The case of the assessee also finds support from the decision of the Chandigarh Bench of the Tribunal in Chief Electoral Officer ( supra). In this case, the assessee, Chief Electoral Commissioner, Haryana, did not deduct tax at source at the time of making payments to another Governmental organisation Hartron for preparation and supply of laminated electoral photo identity cards prepared as per specification supplied by the assessee. It was contended before the Assessing Officer that the assessee was not liable to deduct tax at source in view of the CBDT Circular 681, dated 8-3-1994, para 7(vi)( b). According to the assessee, the expression ‘carrying out any work’ as used in section 194C did not cover the activity involved in the instant case and it was merely a contract for sale/supply of goods. However, rejecting the assessee’s contention, the Assessing Officer held that the activity involved fell within the expression ‘carrying out any work’ and it could not be treated as a case of sale of goods. He, therefore, held the assessee in default in deducting tax at source and levied interest also under section 201(1A). On appeal, the CIT(A) affirmed the order of the Assessing Officer. On further appeal, the Tribunal set aside the order of the CIT(A) as, according to the Tribunal, the contract was for sale of goods and not a work contract. Even though in this decision the Hon’ble Members have stated that they do not propose to lay down any precedence, in this case, reference to the above case is useful for the reason that they have analysed the many useful aspects of the question of works contract. As compared to the assessee’s case, the facts in the above case before the Chandigarh Bench were on weaker footing, still it was held that provisions of section 194C would not apply.
15. The reliance placed by the Assessing Officer and CIT(A) and subse-quently by the learned senior D.R. on the ratio of Bombay High Court (FB) in the case of Sarvodaya Printing Press, Nagpur…Applicant; v. State Of Maharashtra…. 93 STC 387 is of no assistance to the Revenue, because the facts in this case are distinguishable from those obtaining in the assessee’s case. In the case before the Bombay High Court, the assessee was running a printing press where only job work was done. It supplied printed materials to Madhya Pradesh Electricity Board in the form of multi-coloured triplicate receipt books, specifically designed, printed and prepared to the specifications of the MPEB. The charges for the supply were of one composite sum for the entire job. The assessee was obliged to destroy any receipt books in excess of the MPEB’s requirements. On the question whether the transaction was a sale or works contract, it was held that having regard to the special type of job work done and other basic circumstances, the supply represented a works contract. The intention of the parties was material and it was obvious. The principal object of the MPEB was to get the material printed and not to purchase printed material [Emphasis supplied]. The charges were composite. The books were specially designed for the MPEB as per the specifications as to size, type, colour, format, background etc. No space was left blank obviously because the books were valuable and upon misuse could cause terrible loss to the MPEB. Under the contract, the applicant could not retain or use the printed books and the excess, if any, had to be destroyed. The passing of property in the goods used to the MPEB was, by the very nature of things, only incidental or ancillary to the contract of printing. No transfer of chattel qua chattel was involved. The work done was composite or indivisible with separate charges for the material [Emphasis supplied]. The assessee was responsible for protecting the goods and preventing them from falling into the hands of third parties. The goods were not standard goods and were not capable of any use to any one else and thus had no commercial value. The material could not be used even as scrap if rejected and had to be destroyed. The Bombay High Court, therefore, held that supply of printed material to the MPEB by the assessee was not a sale but a works contract. On facts, the decision of the Bombay High Court is clearly distinguishable. A receipt book mainly serves a purpose of acknowledging the payment and, therefore, the main purpose of a receipt is not paper on which it is printed, but the factum of acknowledgement printed on it assumes importance. In the nature of things, therefore, in case of a receipt book, more importance is not to the paper on which printing is done particularly printed material itself which is of significance. In the case of the present assessee, a packing material, on the other hand, is of more importance. In fact, in some of the supplies that have been made to the assessee the cost of material is very substantial. For example, aluminium foils which have been used for packing of butter costs Rs. 230 per kg. whereas the value of printing which is made on the said wrapping material is insignificant which may not cost more than a rupee or so. Similarly, when boxes or cartons are supplied, it is used by way of cartons as cartons, i.e., as a packing material which is of primary use. The fact that such cartons bear the name of the company and other printed material is insignificant and if we apply the tests which have been laid down in the case of Associated Hotels of India Ltd. (supra) by considering the main object of the contract, it will be seen that the main purpose in the assessee’s case is to obtain packing material, whereas in the case before the Bombay High Court on which reliance has been placed, the main purpose was to obtain printing. This has been clarified by the Bombay High Court by stating that the object was to get materials printed and not to purchase printed material. Moreover, in the case before the Bombay High Court, it was a clear case of a contractor who was only undertaking job-work. In the case of the assessee, suppliers have not undertaken any job-work on behalf of the assessee. They are independent supplier of materials and their role cannot be compared or equated with that of a job-worker.
16. The ratio laid down by the Hon’ble Madras High Court in the case of Kumudam Publications (P.) Ltd. (supra) relied upon by the learned D.R. also does not apply to the facts of the case before us. In this case, the assessee was publishing certain periodicals and entered into an agreement with another private limited company for printing the periodicals. The charges for printing paid were subjected to tax deduction provisions by the department. On appeal, the AAC held that the agreement between the assessee and the printer was in the nature of service contract for which section 194C did not apply. The Hon’ble High Court held that from the terms of the agreement, it was seen that the printer, with the help of the material supplied by the assessee, produced the magazines and supplied the same to the assessee and hence the intention of the contracting parties under the agreement was to get the printing done by the printer by utilising the materials supplied by the assessee. The agreement in the present case was in the nature of works contract and hence the provisions of section 194C were held to be applicable. But in the case of the present assessee, it was not works contract as explained above. Hence the facts of the case of the assessee are distinguishable from the facts of the case before the Hon’ble Madras High Court. The other decisions cited from Sales-tax Act are mainly in regard to fabrication contract and have gone on the facts of peculiar cases.
17. In the light of above discussion, we hold that in the present case, the main purpose in buying packing material was to obtain goods for the purpose of packing and the fact that incidentally some printing was required to be done by the supplier was of no consequence. There was no works contract involved and accordingly, provisions of section 194C are not applicable. Accordingly, we reverse the findings of the authorities below and allow the appeals of the assessee.
18. In the cross objections, the department has raised following common objections :
"The appeal being against the order under section 201/201(1A) the CIT(A) was not competent to admit the appeals on 23-4-1997 as on this date the above orders were not appealable orders before the CIT(A)."
At the time of hearing, these cross objections were not pressed. The same are accordingly dismissed.
19. In the result, assessee’s appeals are allowed and the cross objections of the Revenue are dismissed.
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