ORDER

V. Durga Rao, Judicial Member. - This appeal by the assessee is directed against the order of the Commissioner of Income-tax (Appeals)-XXX, Mumbai dated 13-11-2006 for assessment year 2006-07.

2. The grounds raised by the assessee in this appeal are as under:—

(1) The Learned Commissioner of Income-tax (Appeals) has erred in law and in facts in passing the order under section 250 of the Act in gross violations of principles of natural justice.
(2) The learned Commissioner of Income-tax (Appeals) has erred in law and in facts in holding that the provisions of section 194C are applicable to the appellant on expenses of Rs. 22,76,89,290 incurred by the appellant for getting its products manufactured. The Hon'ble Commissioner of Income-tax (Appeals) ought to have appreciated that the transactions entered into by the appellant are in the nature of contract of sale and not a contract for work.
(3) The learned Commissioner of Income-tax (Appeals) has erred in law and in facts in holding that interest under section 201(1A) should be levied on the appellant for non-compliance of provisions of section 201(1) of the Act.
(4) The appellant craves leave to add, alter modify and/or delete any of the above ground of appeal.

2.1 In first ground of appeal not pressed by the AR of the assessee. Therefore, first ground of appeal is dismissed as not pressed.

3. The second ground of appeal is relating to provision of section 194C of the Income-tax Act, 1961. The facts are in brief that the assessee is a public limited company is engaged in the business of manufacturing and marketing drugs and pharmaceutical products. A survey under section 133A of the Act took place at the office premises of the assessee on 23-3-2006. During the course of survey, it was found by the Department that the assessee's company manufactured pharmaceutical products in its own units as well as gets the products manufacturing from other parties termed as Third Party, manufacturers for which the assessee entered into an agreement with the outsiders for manufacturing of its goods as per specification provided by the assessee company.

4. On perusal of the agreements, it appeared to the Assessing Officer that these agreements are in nature of works contract. Hence, the provision of section 194C would be attracted on the payments made to these manufacturers. Therefore, according to the Assessing Officer, the assessee company ought to have deducted tax from payment made to such eligible contractors and since the assessee company failed to deduct tax as required under section 194C, a show-cause notice dated 21-4-2006 was issued to the assessee company, vide which the assessee-company has required to explain/show cause as to why the manufacturing of the pharmaceutical products by the 'third party manufacturers' should not be treated as contract and the payment made for such contractual manufacturing should not be held as liable for tax deduction at source under section 194C of the Income-tax Act.

5. Consequently, the assessee company has filed its written submissions, inter alia, submitted that the 'Third Party Manufacturing' is purchase of goods not works contract, as the same is purchase of goods from outside independent manufacturers and not contract for works. Therefore, the provision of section 194C of the Income-tax Act, 1961 is not attracted.

6. However, the learned Assessing Officer after considering the reply given by the assessee has held that the assessee has entered into contracts under written agreements containing specific clauses of terms and conditions, which were binding on the manufacturers in respect of formulation, know-how, quality control, inspection, logo, trade mark, etc.

7. The Assessing Officer was of the opinion that the transactions involved were more of a 'works contract' and not a contract for 'sale of goods'. The ld. Assessing Officer has treated the agreements entered with third party as a works contract and held that the assessee company ought to deduct tax from payments made to such alleged contractors and since the assessee company not deducted tax on such payments as per section 201(1) of the Act declaring the assessee company as a default. Consequently, TDS liability of Rs. 51,09,347, interest liability of Rs. 2,31,133 determined to be payable under section 201(1) and 201(1A) respectively of the Act.

8. On being aggrieved, the assessee carried the matter in appeal.

9. The learned Counsel for the assessee has submitted before the CIT(A) that the assessee has entered into agreement with third parties who are having their own establishments for the purpose of manufacture of pharmaceutical products. The agreements entered by the assessee reveals that the agreements were only for the purpose of contract of sales not works contract. The assessee was not supplied only raw material to the third parties, the Sales Tax, excise duty paid by third parties only.

10. The ld. CIT(A) after considering the submissions of the ld. AR of the assessee has held that it is an established fact under position of law that there is no conclusive factor under principle which can be universally applied, as to ascertain, the true nature of transaction, whether is a sale of goods or one of the contract. It has to be decided depending on the facts and circumstances of each of the transactions. The distinction between the contractor and the labour, and contract for sale on goods is neither given in the Act nor under the Rules. But the Hon'ble Supreme Court in the case of Sentinel Rolling Shutters & Engg. Co. (P.) Ltd. v. CST AIR 1978 SC 1747 has observed that 'the tests indicated in several decisions of the Supreme Court establishing a contract for sale and contract for work and labour are not exhaustive and do not lay down any rigid inflexible rule applicable alike to all transactions. They do not give any magic formula by the application of which one can say in every case whether a contract is contract of sale or a contract for work and labour. They merely focus on one or the other aspect of transactions and afford some guidance in determining the question, but basically and primarily whether a particular contract is open for sale of goods or for works and labour depends upon the main objects of the parties gathered from the terms of contract, circumstances of transactions the custom of the trade.'

11. The ld. CIT(A) further observed that the assessee is enjoying a predominant position over the manufacturers and exercises exclusive commitments by the manufacturers on the transactions entered in between them. Therefore, the contention of the assessee that it has merely having purchased transactions with these manufacturers has no merit. As per the terms and conditions of the agreement, manufacturers are required to use the formulations provided by the assessee company and also to affix trade mark of the assessee on the finished product. With the various rights and entitlements enjoyed by the assessee company over the manufacturers, in fact, what the manufacturers are doing is merely using their factory building, plant & machinery, and man power employed to manufacture a pharmaceutical product, the formulations and technical know-how, quantity to be produced, quality of the product etc. are strictly are guided, instructed and supervised by the assessee. The assessee is also having control over the rates to be charged by the manufacturers. Therefore, in all respects what the manufacturers are getting in certain charges for the services being rendered to the assessee in manufacturing of certain medicinal products required by the assessee. Therefore, the transactions involved in these agreements with the manufacturers have an item of product required by the appellant cannot be said to be a mere purchase of items based on some specifications.

12. On the contrary, the assessee is getting the medicinal products manufactured from the manufacturers/licensees but it is not a case where the manufacturers are producing an item product merely on the basis of some specification given by the purchaser. Therefore, I am in agreement of the Assessing Officer that "the very object of the agreement was to permit the manufacturers to manufacture the products on behalf of the assessee company. Thus, it is evident that the predominant intention of the assessee company was to meet the overwhelming demand of pharmaceutical products under the brand and trade mark of the assessee company over and above its capacity production, by getting the same manufactured by third party manufacturers, by entering into manufacturing agreements as per the terms and conditions suitable to the assessee company. Thus the purchases made in terms of manufacturing agreement of manufactured pharmaceutical goods from the third party manufacturers cannot be considered and termed merely as purchase of goods with some specifications.

13. The ld. CIT(A) insofar as reliance is placed on the Circular No. 681 is concerned, he has held the above circular no application of the facts of the case. Moreover, the Circular itself vide clause (c) is clarified that in the case of doubt whether a particular contract is a contract for work or labour or for sale, the matter should be decided in the light of the principle laid down by the Supreme Court and the Hon'ble Supreme Court has held that mere passing of the property in an article or commodity during the course of the performance of transaction does not render it as a sale transaction. For, even in contract purely of work or service, it is possible that the articles may have to be used by the person executing the work and the property in such articles or materials may pass to the other party. That would not necessarily convert the contract into one of sale of those materials. In every case the court would have to find that what was the primary object of the transaction and intention of the parties while entering a contract.

14. The ld. CIT(A) further considered that the manufacturers having paid their excise duty and sales tax on the products the transaction therefore are contract for sale of goods not for work is having no force in view of the decision of the Hon'ble ITAT, Pune, ITO v. Narmada Cement Co. Ltd. [2003] 81 TTJ (Pune) 955 wherein it has been held that the supply printed material i.e., PP woven sacks, the packing material for cement, as per specification supplied by the supplier is not a sale but a contract involving work but merely because excise duty or sales tax was charged on supply of material could not lead to conclusion that it was purely purchase of goods because the said levies had their own identity and nothing to do with income-tax.

15. After observing the above, the ld. CIT(A) came to conclusion that the old transaction between assessee company under manufacturers were not of sale or purchase of transactions but works contract within the meaning of section 194C of the Income-tax Act. Accordingly, the action of the Assessing Officer treating the assessee in default under section 201(1) of the Income-tax Act, 1961 reads section 194C is upheld and order of the CIT(A) is confirmed. Consequently, the charging interest under section 201(1A) is also confirmed.

16. On being aggrieved, the assessee carried the matter in appeal before the Tribunal. Before us the ld. Counsel for the assessee contented that the ld. CIT(A) was not justified in holding that the provisions of section 194C were attracted. He referred to the copies of manufacturing and supplying agreements and pointed out that the third party (manufacturer) have their own licences, authorizations, and permission as per law and they manufacture the medicines on behalf of the assessee as per the specifications given by him. He further referred to supply agreements dated 18-5-2005 clauses 1.1, 1.2, 1.6 (page No. 91 of the Paper Book), clause 2.2 (page 92 of the Paper Book), clause 3.6 (Page 93 of the Paper Book) clause 6.2 (Paper Book page No. 96) clause 9.2 (Paper Book Page No. 98). As per the clauses pointed out by the assessee's Counsel, the manufacturer shall manufacture the said products under the trade mark of the company and or such other trade marks as may be specified by the company from time to time yet its undertaking or elsewhere as approved by the company in such quantity from time to time as the company may specify in this behalf. The said products as specified in Schedule I shall be manufactured by the manufacturer as per the Good Manufacturing Practice (GMP) approved by Food & Drugs Authorities hereunder and strictly as per the technical information and data, standard specifications intimated by the company time to time (clause 1.1). The manufacturer shall sell to the company and the company shall purchase from the manufacturer the entire quantity of the said products so manufactured at the price to be mutually agreed upon between the parties (1.2). The agreement herein is entered into between the parties on a principle to principle basis and in the normal course of wholesale trade, the manufacturer shall not be construed as agent/partner of the company. The company shall from time to time place the orders with the manufacturer for the purpose of the said products in such quantities and at the agreed price, the manufacturer will supply the said products to the company within the time stipulated in such orders. The manufacturer shall ensure that it shall supply the said products to the company as per the delivery schedule agreed to by the company. The manufacturer will be solely and exclusively responsible for the purchase, procurement of storage of raw material required for the manufacture of the said products. Subject to the compliance of all the obligations by the manufacturer and the warranties pursuant to this agreement, on delivery of the said products, the property in the said products shall rest in the company and the company shall pay therefore in terms of the price agreed upon from time to time as aforesaid. All the price shall be payable only upon the acceptance of the delivery of the said products after the same shall have been found to be of specified standard approved by quality control in respect of actual content of the said products. It is clearly understood that the manufacturer shall not construed as the agent of the company and the relationship between the parties shall be that of in relationship between parties shall be that of principle to principle. The Ld. Counsel for the assessee further relied on the Circular No. 681 of the CBDT, dated 8-3-1994. He further relied on the following cases :—

(1) Bda Ltd. v. Income-Tax Officer (Tds)) [2006] 281 ITR 99 (Bom.).
(2) Commissioner Of Income-Tax v. Reebok India Co. [2008] 306 ITR 124 (Delhi).
(3) Dy. Commissioner Of Income-Tax v. Reebok India Co. [2006] 100 TTJ (Delhi) 976 .
(4) Whirlpool of India Ltd. v. Jt. CIT [2007] 16 SOT 435 (Delhi).

17. On the other hand the ld. DR strongly relied on the impugned order and contented that the work done by the manufacturers was in the nature of works contracts and the tax ought to have been deducted by the assessee from the payments made to such manufacturers. His further submissions were the reiteration of the reasoning recorded by the lower authorities in not accepting the assessee's claim. He referred to various parts of the impugned order in support of his arguments.

18. We have heard both the sides and perused the materials on records and orders of the lower authorities below. Section 194C provides that "any person responsible for paying any sum to any resident (hereinafter in this section referred to as 'the contractor') for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and . . . .(d) any company . . . .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.. . . .of such sum as income-tax on income comprised therein. A bare perusal of this section reveals that the liability has been cast on any person who is paying any sum to any resident "for carrying out any work". Thus it is clear that the obligation to deduct tax at source under this section arises when a payment is made for carrying out any work. The expression "work" has been defined in Explanation III to this section in an inclusive manner to include advertising; broadcasting and telecasting including production of programmes; carriage of goods and passengers and catering. The list given in this Explanation is not exhaustive but inclusive. It has been done so with a view to include any payment within the purview of this section which is for carrying out any work. The natural corollary which follows is that if the payment is not for carrying out any work, then such payment will go out of the purview of section 194C. One of the exceptions may include payment towards purchase of goods. Where any goods are purchased and the payment is made that cannot fall within the scope of section 194C. The main contention of the revenue is that the assessee had made the payments for a works contract, on the other hand the assessee is asserting that it had made purchases simplicitor, which does not involve the making of payment towards any work contract.

19. There is no dispute about the nature of the transactions entered into by the assessee with the manufacturers who have their independent establishments for the manufacture of medicines. The assessee is continuously placing orders with such manufacturers for manufacturing of the medicines in accordance to his own specifications. Manufacturer cannot deviate from the specifications given by the assessee. Further, there is no dispute with regard to the goods manufactured by these parties are subjected to the control and supervision of the assessee from time to time. These products carry the trade mark of the assessee and the manufacturers are not entitled to use the same for any other purpose. There is no dispute that the raw materials are purchased by the manufacturers by their own and incur labour cost, other overheads, pay excise duty, sales tax when the goods are manufactured and sold to the assessee. It is only after the manufacture of medicines the assessee is billed with the total cost incurred by the manufacturers along with the profit.

20. Under these circumstances, we have to decide whether the work done by the manufacturer can be said to be sale of goods to the assessee or carrying out any works in pursuance of contract. Circular No. 681, dated 8-3-1997 was issued by the Board to throw light of the applicability of section 194C to service contracts. Para 7 of the circular states that the service contract would be covered by the provisions of the section since service means doing any work as explained above clause 6 of para 7, which is relevant our purpose reads as under:—

"(vi )The provisions of this section will not cover contracts for sale of goods—

(a) Since contracts for the construction, repair, renovation or alteration of buildings or dams or laying of roads or airfields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labour, Income-tax will have to be deducted from payments made in respect of such contracts. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.
(b) Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by 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 outsider the purview of this section.
(c) In State of Himachal Pradesh v. Associated Hostels of India Ltd. [1972] 29 STC 474, 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 and in anything that can properly become the subject of sale neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials I 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 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."

21. 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 section 194C. 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 to 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 all 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 are only contract for sale of goods and not works contracts.

22. The Hon'ble Bombay Court in case of BDA Ltd. ( supra). In this case BDA Ltd. (supra ) had distillery 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 deduction of tax at source under section 194C of the Act. The Hon'ble High Court observed that M/s. Mudranika was an independent establishment in the business of supplying printed packing material to various establishments and the assessee had issued a purchase order in favour of M/s. Mudranika for supply of printed labels as per the specifications 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 Reebok India Co.'s case (supra) which now stands approved by Hon'ble Delhi High Court in Reebok India Co.'s case (supra). In another case Whirlpool of India Ltd. (supra) 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.

23. Coming to instant case we find that there is a complete identity of facts with those considered by Hon'ble Jurisdictional High Court inasmuch 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 are 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 are of the considered opinion that the agreements of the assessee with the manufacturers cannot be termed as 'works contract'. The impugned order is therefore set aside and the application of section 194C is ruled out. That being the position there cannot be any question of treating the assessee as in default under section 201(1) or charging any interest under section 201(1A).

24. In the result, appeal filed by the assessee is allowed.