ITO, New Delhi V. M/s. Ahaar Consumer Products Pvt. Ltd., New Delhi

ITA 3923/DEL/2011

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 7077 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 27-10-2011
• Assessment Year: 2008-2009
• Appeal Filed On: 25-08-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS ANUSHA KHURANA
• Assessee Lawyers: S K GUPTA
• Keywords: Non-deduction of tax
• Section: 194C; 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : A : NEW DELHI BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI K.D. RANJAN, ACCOUNTANT MEMBER ITA NO.3923/DEL/2011 ASSESSMENT YEAR : 2008-09 INCOME TAX OFFICER, WARD 1 (2), NEW DELHI. VS. M/S AHAAR CONSUMER PRODUCTS PVT. LTD., G-37, LAWRENCE ROAD INDUSTRIAL AREA, NEW DELHI. PAN : AAACF8541N (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI S.K. GUPTA, CA REVENUE BY : MRS. ANUSHA KHURANA, SR.DR ORDER PER I.P. BANSAL, JUDICIAL MEMBER THIS IS AN APPEAL FILED BY THE REVENUE. IT IS DIRECT ED AGAINST THE ORDER PASSED BY THE CIT (A) DATED 8 TH JULY, 2011 FOR ASSESSMENT YEAR 2008-09. THE GROUNDS OF APPEAL READ AS UNDER:- 1. THE LEARNED CIT (A) HAS ERRED ON THE FACTS AND IN LAW IN DELETING ADDITION OF RS.1,22,71,807/- MADE BY THE A.O. U/S 40(A)(IA) OF THE IT ACT ON ACCOUNT OF FAILURE TO DEDUCT TAX AT SOURCE IGNORING THAT IRRESPECTIVE OF THE FACT THAT EXPENDI TURE IS PAID OR PAYABLE, SINCE THE LIABILITY TO DEDUCT TAX AT SOU RCE ALWAYS REMAINS. HENCE SECTION 40(A)(IA) APPLIES. 2. THE APPELLANT CRAVES LEAVE FOR RESERVING THE RIGHT TO AMEND, MODIFY, ALTER, ADD OR FOREGO ANY GROUND (S) OF APPEA L AT ANY TIME BEFORE OR DURING THE HEARING OF THIS APPEAL. 2. REFERRING TO SIMILAR ADDITION MADE IN RESPECT OF A SSESSMENT YEAR 2006-07 AND 2007-08, THE ASSESSING OFFICER HAD ADDED A SUM OF ` 1,22,71,807/- TO THE INCOME OF THE ASSESSEE U/S 40 (A) (IA) OF THE ITA NO.3923/DEL/2011 2 INCOME-TAX ACT, 1961 (THE ACT). LEARNED CIT (A) HA S DELETED SUCH DISALLOWANCE FOLLOWING THE ITAT DECISION DATED 28 TH FEBRUARY, 2011 IN RESPECT OF ASSESSMENT YEARS 2006-07 AND 2007-08 VIDE WHIC H THE SIMILAR ADDITION WAS DELETED. THE DEPARTMENT IS AGGRI EVED, HENCE, IN APPEAL. 3. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. THE AFOREMENTIONED ORDER PASSED BY THE TRIBUNAL DATED 28 TH FEBRUARY, 2011 (FOR ASSESSMENT YEARS 2006-07 AND 2007-08) HAS BEEN PLACED ON OUR RECORD. FOR THE SAKE OF COMPLETENESS THE RELEVANT OBSERVATIONS OF THE TRIBUNAL IN PARAS 12-14, WHICH HAVE BEEN FOLLOWE D BY LEARNED CIT (A), ARE REPRODUCED BELOW:- 12. NOW, WE HAVE TO EXAMINE WHETHER THE ASSESSEE IS O BLIGED TO DEDUCT TAX AT SOURCE ON THE SO-CALLED CONSTRUCTIVE PAYM ENT AS CONSTRUED BY THE AO IN TERMS OF THE AGREEMENT. THE ASSE SSEE, IN THIS CASE, SUPPLIES 100 KG OF WHEAT AND TAKES BACK 88 KGS OF ATTA OR 85 KGS OF DALIA AFTER ITS PROCESSING DONE BY THE AIL AND AIL IS REQUIRED TO DELIVER THE END PRODUCT IN THIS PROP ORTION TO THE ASSESSEE WHO HAS SUPPLIED THE RAW MATERIAL. DOES THE PROVISION OF SECTION 194C OF THE ACT CREATE AN OBLIGATIO N ON THE PART OF ASSESSEE TO DEDUCT TAX AT SOURCE IN RESPECT OF AN Y OF THE TRANSACTIONS IT HAS ENTERED INTO WITH THE AIL? SECTION 194 C OF THE ACT WAS BROUGHT INTO STATUTE BY THE FINANCE ACT, 1972. CIRCULAR NO. 86 DATED MAY 29, 1972 WAS ISSUED INTER A LIA STATING THAT THE PROVISIONS OF SECTION 194C WOULD APPLY ONLY IN RELATION TO LABOUR CONTACTS AND WOULD NOT COVER CONTRACTS FOR SALE OF GOODS. IF A MANUFACTURER PURCHASES MATERIAL ON HIS O WN AND MANUFACTURES A PRODUCT AS PER THE REQUIREMENT OF A SPEC IFIC CUSTOMER, IT WAS A CASE OF SALE AND NOT A CONTRACT FOR C ARRYING OUT ANY WORK. THE FACT THAT THE GOODS MANUFACTURED WERE ACCORDING TO THE REQUIREMENT OF THE CUSTOMER DID NOT MEAN OR IMPLY THAT ANY WORK WAS CARRIED OUT ON BEHALF OF THAT CU STOMER. IN CASE OF ANY ISSUE WHERE THE CONTRACT IS A CONTRACT OF SALE AND NOT A CONTRACT FOR CARRYING OUT ANY WORK, THE MATTER SHOUL D BE DECIDED IN THE LIGHT OF THE PRINCIPLES LAID DOWN BY THE HONBLE SUPREME COURT IN THE AIR 1972 SC 1148. THE BOMBAY HI GH COURT HAS ALSO ANALYZED THE DIFFERENCE BETWEEN THE SALE AND WORKS CONTRACT IN THE CASE OF BDA LTD. VS ITO(TDS) 281 ITR 99. THE ASSESSEE IN THAT CASE HAD A DISTILLERY AT AURANGABA D AND PURCHASED MATERIALS REQUIRED FOR BOTTLING AND MARKETING FOREIGN MADE INDIAN LIQUOR, INCLUDING THE PRINTING AND PACKIN G MATERIAL. M, ANOTHER ESTABLISHMENT SUPPLIED THE PRINTED LABELS TO BE WRAPPED ON THE BOTTLES TO THE ASSESSEE. THE ITO(TDS) DI D NOT ACCEPT THE CONTENTIONS OF THE ASSESSEE THAT THE TRANSACTION W ITH ITA NO.3923/DEL/2011 3 M WAS A CONTRACT FOR SALE AND NOT A WORKS CONTRACT. WH EN THE PRINTING WORK WAS BEING CARRIED OUT IN THE PREMISES OF M, THOUGH AS PER THE SPECIFICATIONS OF THE ASSESSEE, THE SU PPLY 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 C ASE, THE SUPPLY OF PRINTED LABELS BY M TO THE ASSESSEE WAS C ONTRACT OF SALE AND IT COULD NOT BE TERMED A WORKS CONTRACT. HE NCE THE PROVISIONS OF SECTION 194C WERE HELD TO BE NOT APPLICA BLE. 13. THE HIGH COURT WHILE DECIDING THIS CASE HAS REVIE WED A NUMBER OF CASES AND DECIDED THAT THE SALE OF CONTRACT DO ES NOT CONVERT A CONTRACT OF SALE INTO A WORKS CONTRACT ALTHOUGH WE AGREE THAT THESE CASES BY THEMSELVES MAY NOT BE ABLE TO TH ROW ANY LIGHT ON THE PRESENT CONTRACT ENTERED INTO BY THE ASSES SEE. HENCE, THE ASSESSEE IS SUPPLYING WHEAT AND GETTING BACK ATTA OR DALIA AS THE CASE MAY BE, IN AN AGREED PROPORTION. F OR SUCH EXCHANGE, THERE IS ABSOLUTELY NO PAYMENT OF ANY CONSID ERATION. EVEN IF ONE WERE TO TREAT IT AS A WORK CONTRACT AND NOT A CONTRACT OF SALE, IT IS DIFFICULT TO SAY THAT THERE IS A PAYMENT AS A CONSIDERATION FOR THE LABOUR OR THE WORK THAT IS RENDERE D. THE ASSESSEE IS JUST EXCHANGING THE PRODUCT; IN THE EXCHANG E HE IS NOT GETTING THE SAME PRODUCT BUT A DIFFERENT PRODUCT AND NO T TO THE SAME EXTENT BUT TO A DIFFERENT EXTENT. IN OTHER WORDS, IT IS DIFFICULT TO SAY THAT THE ASSESSEE HAS MADE ANY PAYMENT I N UNDERTAKING THIS CONTRACT ON THE BASIS OF THE AGREEMENT THA T IS ACTED UPON BY THE PARTIES. THERE IS NO PAYMENT OF ANY SUM BY THE ASSESSEE TO AIL. EVEN IF ONE WERE TO SAY THAT THERE IS A CONSTRUCTIVE PAYMENT, IT IS DIFFICULT TO QUANTIFY THE SAME AND SAY THAT THE ASSESSEE WAS UNDER AN OBLIGATION TO DEDUCT TAX AT SOURCE AT SUCH CONSTRUED PAYMENTS. THE ASSESSEE HAS N OT EVEN CREDITED SUCH CONSTRUED CONSIDERATION FOR SUPPLY OF LA BOUR IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE. IN FACT, IT HAS NOT EVEN CLAIMED ANY EXPENDITURE AS DEDUCTION. TO SAY THAT SUCH EXPENDITURE HAS RESULTED IN AN OUTFLOW WITHOUT DEDUCTION OF TAX AT SOURCE IS TOO MUCH AND IS NOT BORNE OUT FROM THE TRANS ACTION ENTERED INTO BETWEEN THE PARTIES. THE QUESTION OF DISALL OWANCE BY APPLYING THE PROVISIONS OF SECTION 40(A)(IA), IN O UR OPINION, IS NOT IN ACCORDANCE WITH LAW AS THE ASSESSEE IS UNDER NO OBLIGATION TO DEDUCT THE TAX AT SOURCE IN TERMS OF A CONTRA CT WHERE IT DOES NOT REQUIRE ANY PAYMENT OF ANY SUM EVEN IF THE SUM HERE MEANS THAT THE PAYMENT COULD BE OF SOME KIND B UT IT IS DIFFICULT TO SAY THAT THE ASSESSEE HAS MADE THESE PAYM ENTS TO THE EXTENT OF SHORTFALL IN GETTING THE WHEAT SUPPLIED BACK AND CONSTRUE IT AS THE PAYMENT TO THE OTHER FOR PROCESSING THE WHEAT INTO ATTA OR DALIYA. THE DEPARTMENT MUST HAVE APPRECIATED THE CONTRACT AS A WHOLE WHICH DOES NOT INVOLVE ANY PAYMENT OR GETTING THE PAYMENT FOR SERVICES RENDERED. IT IS A CASE OF BARTER OR EXCHANGE OR ONE GOOD AGAINST THE OTHER. IT IS A TYPE OF SALE CONTRACT IN A VERY CRUDE FORM BUT IT IS CERTAINLY NOT A W ORKS ITA NO.3923/DEL/2011 4 CONTRACT AS UNDERSTOOD BY THE COURTS IN CASES UNDER THE S ALES TAX WHICH WAS DISCUSSED BY THE HONBLE SUPREME COURT I N THE CASE CITED IN AIR 1972 SC 1148 OR IN THE CASE DEALT WI TH BY THE BOMBAY HIGH COURT IN THE CASE OF BDA LTD. (SUPRA). TH E ASSESSEE HAVING REGARD TO THE CONTRACT WHICH IT HAS ENTER ED ON 2.2.2005, IN OUR OPINION, DOES NOT GIVE RISE TO ANY O BLIGATION FOR IT TO DEDUCT TAX AT SOURCE AS IN OUR OPINION IT IS NOT SIM PLY A WORKS CONTRACT EXECUTED FOR CONSIDERATION IN THE FORM OF SOME PAYMENT FOR WHICH DEDUCTION HAS BEEN CLAIMED UNDER THE ACT. THE ASSESSEE HAS NOWHERE CLAIMED THE PAYMENT AS DEDUC TION. ONLY PURCHASE PRICE OF WHEAT IS WHAT IT HAD PAID ON WH ICH NO DEDUCTION OF TAX IS REQUIRED AND THAT GOT LOST IN EXCHANG E FOR OBTAINING A FINISHED PRODUCT IN THE FORM OF ATTA OR DALI A, NOT INVOLVING THE MEDIUM OF PAYMENT. IT IS A CONTRACT OF BUS INESS WHICH DOES NOT INVOLVE ANY PAYMENT OF CONSIDERATION FO R THE SERVICES RENDERED. WE MUST EXAMINE THE ISSUE FROM AN OTHER ANGLE. HAD THE ASSESSEE OWNED THE PLANT AND GOT THE ATTA AND DALIA MANUFACTURED FROM WHEAT, IT COULD HAVE CLAIMED A PROCESS LOSS AND THAT COULD HAVE BEEN IMPLIEDLY A PART OF BUSI NESS TRANSACTION AND NO QUESTION OF ANY DISALLOWANCE OF SUC H LOSS COULD POSSIBLY HAVE ARISEN. MERELY BECAUSE THE ASSES SEE HAS GOT IT ROUTED THROUGH ANOTHER CONCERN ON A SORT OF OUTSOURCIN G BASIS, IT DOES NOT RESULT IN AN OUTFLOW. IT IS JUST AN EXCHANGE AND BARTER OF ONE COMMODITY AGAINST THE OTHER AND THE WHOLE CONTRACT CANNOT BE TERMED AS WORKS CONTRACT IN THE STRICT SENSE OF THE TERM WHICH IS GENERALLY UNDERSTOOD UNDER THE PROVISION S OF SECTION 194C. IN OUR OPINION, THE AO WENT WRONG IN PR ESUMING THAT THE DIFFERENCE IN THE WHEAT SUPPLY AND THE ATTA OR DAL IA GOT IN RETURN REPRESENTS SUM PAID FOR SERVICES RENDERED A ND PAYMENTS FOR SUCH SERVICES ARE CLAIMED AS DEDUCTION F ROM THE PROFIT AND GAINS OF BUSINESS U/S 32 TO SECTION 38. ON LY WHEN THE CLAIM OF THE ASSESSEE FOR DEDUCTION IS U/S 32 TO SECTIO N 38, THE PROVISIONS OF SECTION 40(A)(IA) CAN BE PRESSED INTO S ERVICE TO DISALLOW SUCH CLAIMS FOR DEDUCTION. AT THE COST OF REP ETITION, WE MAY SAY THAT TO INVOKE SAID PROVISION OF SECTION 40(A)( IA), FIRST OF ALL, THE CASE SHOULD BE MADE OUT BY THE DEPARTMENT THAT THE ASSESSEE IS CONTEMPLATING DEDUCTION U/S 32 TO 38 ON WHI CH TAX IS DEDUCTIBLE AND THE ASSESSEE HAS NOT DEDUCTED TAX AT SOURC E. IN OUR OPINION, TAX IS NOT DEDUCTIBLE AND THE ASSESSEE HAS NOT CLAIMED ANY DEDUCTION U/S 32 TO SECTION 38. THIS LOSS , IF ANY, IS IN THE NET PROFIT IN THE TRADING ACCOUNT WHICH IS A COMP UTATION U/S 28 AND 29 AND NOT CLAIMS U/S 32 TO 38 OF THE INCOM E TAX ACT. EVEN TAKING THIS VIEW OF THE MATTER, IN OUR OPINION, THE ASSESSEE IS ENTITLED TO SUCCEED AND THERE IS NO QUESTION OF DEDUC TION OF TAX AT SOURCE AND CONSEQUENTLY NO QUESTION OF MAKING AN Y DISALLOWANCE BY INVOKING THE PROVISIONS OF SECTION 40 (A)(IA) OF THE ACT. 14. WE MUST ALSO VIEW THE WHOLE TRANSACTION UNDER THE AGREEMENT FROM A DIFFERENT ANGLE. THE ASSESSEE GIVES THE WHEAT AND ACCEPTS ATTA AND DALIA IN RETURN BY WEIGHT TO WE IGHT ITA NO.3923/DEL/2011 5 BASIS AND WHAT HE GOT IN RETURN ARE THE VALUE ADDED PRO DUCTS OF LOWER QUANTITY. THE ASSESSEE BY THIS METHOD HAS PREVEN TED ITSELF FROM FACTORS LIKE FALL IN THE PRICES OF EITHER R AW MATERIAL OR OF THE FINISHED PRODUCTS. THE MARKET VALUE OF THE WHEA T AND THE END PRODUCTS ARE TOTALLY DIFFERENT AND FLUCTUATE IN DIFFE RENT DIRECTIONS. ALL THESE FLUCTUATIONS ARE WARDED OFF BY TH E PRESENT AGREEMENT, WHICH IS JUST EXCHANGE OF GOODS FOR GOODS AND DOES NOT INVOLVE ANY CASH OUTFLOW. ALTHOUGH SERVICES WERE TAKEN, IT IS DIFFICULT TO SAY THAT THE RESIDUALS AND THE LOSSES LEFT BY THE ASSESSEE IN FAVOUR OF AIL ARE PURELY CONSIDERATION F OR THE JOB THAT IS DONE. THE MARKET FLUCTUATIONS IN THE PRICE STRUCTU RE OF THE RAW MATERIAL AND THE END PRODUCT CANNOT BE JUST IGNOR ED IN THE WHOLE TRANSACTION NOR THE PROCESS LOSS. THE PROCES S LOSS COULD BE EITHER MORE OR LESS THAN THE PERCENTAGE AGREED TO BETWEEN THE PARTIES. BUT STILL THE PARTIES SETTLE THE TRANSAC TIONS AT AN AGREED PROPORTION. IN OTHER WORDS, THE RESIDUAL THAT IS LEFT BY THE ASSESSEE, APART FROM COVERING THE LABOUR COST OF PROCESSING, ALSO INCLUDES THE PROTECTION FROM MARKET FL UCTUATIONS AS ALSO PROTECTION FROM ADVERSE PROCESS LOSS. TO CON CLUDE, THE ENTIRE RESIDUAL IS ONLY FOR THE PURPOSE OF JOB WORK I S NOT FAIR AND CORRECT HAVING REGARD TO THE TOTALITY OF THE TRANSACTION ENTE RED INTO BY THE PARTIES. 4. THE TRIBUNAL HAS COME TO THE CONCLUSION THAT THER E WAS NO QUESTION OF DEDUCTION OF TAX AT SOURCE AND CONSEQUENTL Y NO QUESTION OF MAKING ANY DISALLOWANCE BY INVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. RESPECTFULLY FOLLOWING THE AF OREMENTIONED ORDER RENDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR EARLI ER YEARS, WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LEARNED CIT (A), WHO HAS SIMPLY FOLLOWED THE AFOREMENTIONED ORDERS OF THE TRIB UNAL. WE DECLINE TO INTERFERE. 5. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 28.10.20 11. SD/- SD/- [K.D. RANJAN] [I.P. BANSAL] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED, 28.10.2011. DK ITA NO.3923/DEL/2011 6 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT TRUE COPY BY ORDER, DEPUTY REGISTRAR, ITAT, DELHI BENCHES