Income Tax Appellate Tribunal - Delhi
Deputy Commissioner Of Income Tax vs Reebok India Company on 18 November, 2005
Equivalent citations: (2006)100TTJ(DELHI)976
ORDER
B.P. Jain, A.M.
1. This appeal arises from the order of learned CIT(A)-XXX, New Delhi, vide his order dt. 21st Sept., 2004 for the asst. yr. 2003-04.
The appellant has raised the following grounds in his appeal :
1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the demand of Rs. 1,30,73,791 as per the order of the AO under Section 201(1)/201(1A) of the IT Act, 1961, by concluding that the transactions between the manufacturers/vendors and the deductor company are the transactions of sale and purchase on a principal to principal basis and not the transactions of contract covered under Section 194C of the IT Act, 1961.
2. On the facts and in the circumstances of the case, the learned CIT(A) erred in not considering the fact that the detector company has full control over the manufacturing activities, raw material supply, patterns, specifications, samples, prices of the products and sale of the products, apart from other elements in regard to whole venture of manufacturing and subsequent alleged sales thereof.
3. Learned CIT(A) also erred in not considering the fact that the commercial value of products thus produced is nil in case the purchaser does not accept the production because of any reason.
4. On the facts and in the circumstances of the case, the learned CIT(A) erred by ignoring the CBDT, Circular No. 715 (Question No. 15) dt. 8th Aug., 1995 [(1995) 127 CTR (St) 13].
5. On the facts and in the circumstances of the case, the order of the Hon'ble Supreme Court in the case of State of Tamil Nadu v. Anandam Viswanathan applied, wherein the issue of contract vis-a-vis sale/purchase has been dwelt with in great detail and, it was held that the transactions of similar nature are the transactions of contract, and not that of sale and purchase.
6. The appellant craves leave to add, alter or amend any of the ground of appeal at the time of hearing.
We have heard the parties. The main issue in the Revenue's appeal in ground Nos. 1 to 5 above is that whether outsourcing the manufacture of goods is a contract or purchase of goods. Learned CIT(A) erred in treating such transactions as transaction of sales and purchase on principle to principle basis and not the transactions of contract under Section 194C of IT Act.
2. The assessee company, M/s Reebok India Company (hereafter referred as Reebok), is engaged in the business of marketing Reebok brand products which mainly consist of sports shoes, sports apparels, sports accessories and sports goods. It has its registered office at 530/1, 3 and 4, Village Bijwasan, New Delhi.
The assessee-company does not have its own manufacturing facilities in India. The products dealt with and marketed by the assessee-company, are partly imported and the balance outsourced from indigenous manufacturers/vendors.
3. The products, which are outsourced from the local manufacturers/vendors, can be classified into 3 categories, namely :
Category 1 Footwear Category 2 Apparels and accessories Category 3 Sports goods
4. In the case of category 1 and category 2 products, the assessee-company has entered into written agreements with the manufacturers/vendors. The agreements for each category of products, namely category 1 and category 2, are identical product-wise. In regard to category 3 there is no written agreement and the goods are sourced on the basis of purchase orders.
5. In the course of verification, in-depth examination was conducted of the transaction to determine its nature, i.e, whether outsourcing the manufacture of goods, is a contract or purchase of goods transaction ?
6. Category-wise agreements have been discussed by the AO in his order from pp, 1 to 10, the salient terms and conditions of the agreement (summarized) and observations of the AO in his order vide paras 5 to 19 are as under :
(i) The goods are manufactured in accordance with the specifications including technical drawings, illustrations, patterns, templates, materials, samples of products, casting moulds, etc., supplied by the assessee-company.
(ii) The manufacturer has to source the raw material as prescribed by the purchaser,
(iii) The quantity to be manufactured is as stipulated in the work order.
(iv) The manufacturer shall not manufacture or supply any product using any confidential information or bearing any of the trademarks of any persons other than the purchaser.
(v) Purchaser has right to inspect, with reference to the material manufactured for the purchaser.
(vi) The goods can't be supplied in the open market.
(vii) If the goods don't meet the quality specifications, the material can't be used by the supplier and should be destroyed under the supervision of M/s Reebok.
(viii) The principal object of the buyer is to get the material manufactured as per the prescribed specifications with his quality control and not, to purchase material as available in the market.
Thus, it is apparent from the terms of agreement/arrangement/contract that the manufacturer/contractor is fully chained and does not have the freedom or autonomy to move even a centimetre without the consent of the purchaser.
In view of the above facts, the assessee was asked to explain how activity of outsourcing of goods is not covered within the ambit of Section 194C ?
The contention of the assessee, through his Authorised Representative in various submissions, has been that goods outsourced are in the nature of purchase of goods and sale of goods, i.e., principal to principal transaction. In support of this, the assessee relied on the following :
(a) The sales-tax and the excise are borne by the manufacturer/vendor.
(b) The goods remain property of the manufacturer till the delivery of goods to the assessee.
(c) The assessee has drawn support from Circular No. 681 of CBDT dt. 8th March, 1994 [(1994) 117 CTR (St) 229].
(d) Assessee has referred the decision in the case of State of HP v. Associated Hotels of India (1972) 29 STC 474. First of all this case is of the time when provisions of Section 194C were not in existence. Further, it is not out of place to mention that this case was also discussed by Tribunal, Pune Bench in their recent decision in BDA Ltd. v. ITO (2003) 78 TTJ (Pune) 925 : (2003) 84 ITD 442 (Pune) decided on 31st May, 2002, and the Hon'ble Tribunal has found that the ratio of this case does not apply in the case of .BDA Ltd. (supra). The case of BDA Ltd (supra) is similar to assessee's case.
(e) The assessee has also made reliance on the judgment in the case of Hindustan Ship Yard v. State of AP (2000) 119 STC 533.
(f) To strengthen its viewpoint gave the example of the tailoring shop where the customer has placed order for stitching on cloth supplied by the customer according to his specification and the case is considered under the work contract and on the contrary the purchase made from the tailor together with the cost of material supplied by the tailor to customer is considered as contract for sale.
The two decisions relied upon by the assessee do not apply in this case as the same are under the Sales-tax Act.
After considering the reply and provisions of the law, it was pointed out and explained to the Authorised Representative of the assessee that while relying on CBDT Circular No. 681, dt. 8th March, 1994, subsequent Circular No. 715 of CBDT dt. 8th Aug., 1995 has either not been considered by the assessee or it has chosen to overlook.
Sub-clause (b) of Clause (vi) of para 7 of Circular No. 681 states :
Where, however, the contractor undertakes to supply any article or tiling 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.
The wording of the above clearly suggests that while formulating the above, the framers had in mind, the transaction with the manufacturer who manufactures goods of the nature to be utilized by different parties in their transactions and not of the prescribed specification and confidentiality clause and restrictions on the sale of such goods to other parties. The contents of Circular No. 681, Sub-clause (b) of Clause (vi) of para 7 would not be applicable in transactions wherein the goods were manufactured on "Prescribed specifications" of the purchaser. It was in this background that various queries received were examined and clarified through Circular No. 715, dt. 8th Aug., 1995. This circular at the outset states :
The Finance Act, 1995 has enlarged the scope of income-tax deduction at source by making various amendments. In regard to the changes introduced through the Finance Act, 1995, a number of queries have been received from the various associations and professional bodies on, the scope of TDS. It would be desirable to clarify the doubts by issuing a public circular in the form of question answers.
The relevant Question No. 15 of the circular reads :
Order No. 15 : Whether Section 194C would apply in respect of supply of the printed material as per prescribed provisions ?
Ans. Yes.
The content and extent of "implied scope" of each question and answer needs to be critically analyzed. The key phrases in question No. 15, supra, are "supply of printed material" and. "as per prescribed specification". This clearly implies that when the said material is printed as per prescribed specification and the said material cannot be used by any person or entity other than the assesses because :
(a) The paper used for printing cannot be again utilized for printing of any other material.
(b) Printing had not been done at the instances of printer, but as per prescribed specification given by the principal.
(c) Printer cannot sell the same printed material to anyone else, if rejected or not accepted, as its use is specific to a particular user or entity only. This material has to be destroyed if not consequently accepted.
The plea of the assessee could be that the clarification issued by the Board is only regarding "printed material". It needs to be mentioned in this context, that any statute or explanation or proviso or clarification issued is only intended to be illustrative of the scope of the provisions and the intent of the law makers. If the Government was to clarify on each issue or each type of activity, which may be covered in a particular provision, then for each provision, a separate volume would be needed, which would make the entire process or the Act cumbersome, time consuming, etc. Consequently, while considering such matters, one has to see the scope, intent and thereafter, appreciate and. understand its legal implications and. application of law.
As per the Concise Oxford Dictionary, the word "outsourcing" is explained as "obtained by contract from outside suppliers"--contract (workout). The word "contract" means "written or spoken agreement intended to be forceable by law." Further, "contract, something out" means "arrange for work to be done by another organization". Contractor (noun) means "a person who undertakes contract to provide materials or labour for job".
In the case of assessee, the applicability of Section 194C would depend on determining the fact whether the agreement/arrangement of the assessee with various vendors to manufacture goods on its behalf, as per its prescribed specifications, is a purchase/sale of goods or a job/work contract.
I have considered the submissions of the assessee and the judicial decisions relied upon by the assessee and other decisions relevant to the issue, filed by the assessee. A transaction may appear to be sale or purchase of goods but one has to analyze the real character of the whole transaction. Salient contents of such agreements of the assessee, are analyzed in para 3, supra.
The provisions of Section 194C are, applicable to every "work" which are in the nature of "contract". What is a contract ?
Section 194C reads as follows :
Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work...in pursuance of a contract between the contractor and
(a) Any company;
shall, at the time of credit of sum to the account of the contractor or at the time of payment...whichever is earlier, deduct an amount equal to--
(i) one per cent in case of advertising
(ii) in any other case two per cent.
It is an undisputed fact that, the entire manufacturing activity of the vendor is controlled by the assessee starting from, supply of raw materials, intermediaries, to supply of packaging material. The assessee supplies and/or prescribes source of material from, where to purchase, inspects, manufacturing activity, exercises quality control and has right to reject. It is not purchase of goods in normal parlance but much more. It is a contract 'to manufacture under the overall supervision of the assessee. Above all, if the products manufactured are not to the satisfaction due to major defects, i.e., category C as per Clause 6(2)(iv) of the agreement (with M/s Moja Shoes Ltd), the goods have to be destroyed. Consequently, the manufacturer has no right to deal with the products as he desires. The total right and. control of these products lies with assessee. The contention of the assessee that the ownership of goods passes to it on delivery alone is not factually correct as the manufacturer is merely a custodian or/and supervisor on behalf of the assessee. What the manufacturer or vendor gains is predetermined margin of profit determined by the purchaser (Reebok), which primarily includes the interest on his capital investment, charges for labour and supervision. In other words, manufacturer/vendor has no right to determine his margin/profit/gain depending on market conditions.
The fact, that the assessee is within the ambit of Section 194C is further strengthened by the decision of Pune Bench of Tribunal. Learned Tribunal has opined in BDA Ltd. v. ITO (supra) that supply of printed material as per specification supplied by the buyer is not a sale but a work contract. In this case, buyer who was dealing in the liquor placed orders for supply of labels as per specifications and printing as instructed was required to be done on. the labels, whose size, design, and other specifications were supplied by the buyer. It was held that the contract is a. works contract and not a contract for sale because the principal object of the buyer was to get the material printed as per the prescribed specifications and not to purchase printed material as available in the market and in case printing of labels if not done strictly in accordance with the specifications supplied by the buyer, neither that material could be used by the buyer nor the supplier of the label could use the same for any other purposes. Elaborating the reasons for the judgment the Tribunal held that the intention of the parties was most material. It held that such printed labels were not standard goods and were not capable of any use to anyone else and, thus, had no commercial value.
In view of the above, the real test is whether the goods produced as per the specification of the buyer have any market value if for any reason these are not purchased by the buyer. In Clause 6(2)(iv) of the agreement with M/s Moja Shoes Ltd., the terms provide as follows :
C--Grade Products--Non-saleable products with apparent defects to be destroyed at the supplier's expense and without any right of the supplier to the purchase price.
The terms of the agreements of category 1 and category 2 and the arrangement with category 3 suppliers do not leave an iota of doubt to the effect that the goods manufactured by the vendors have no commercial value to the manufacturer unless accepted by the purchaser. The goods rejected and classified as 'B' grade have to be destroyed in the presence of the purchaser, (i.e., Reebok). Consequently, the case of the assessee is squarely covered by the decision, supra, of Tribunal Bench, Pune, Hence, the assessee on facts and on merits comes within the ambit of Section 194C.
Accordingly, I hold that the whole transaction between the company (assessee) and manufacturers is not of sale/purchase transaction but of "works contract" within the meaning of Section 194C of the IT Act. Since, the contract is composite in nature, the whole sum credited/paid under this contract is subject to provisions of TDS under Section 194C.
Annexure 1 lists the party-wise payments to these manufacturers for 2003-04, Total shortfall under Section 201(1) and interest under Section 201(1A) read with Section 194C on this account for this year is calculated month 'Wise, aggregates as under (Annex. 2) :
Amount paid to contractors 59,19,33,158 Short deduction under Section 201(1) read with Section 194C 1,21,34,636 Interest under Section 201(1A) 9,39,155 Total demand payable 1,30,73,791
7. Before the learned CIT(A) it is submitted by the counsel of the assessee vide paras 3 and 3.1 of the learned CIT(A) order, relevant paras (are) reproduced hereunder :
that the AO's arguments are mainly based on the judgment of the Tribunal Pune Bench reported in BDA Ltd. v. ITO (2003) 78 TTJ (Pune) 925 : (2003) 84 ITD 442 (Pune), which was decided on 31st May, 2002.
As against the specific points relied upon by the AO, the appellant has sought to put the facts in the correct perspective as under :
The goods no doubt are manufactured according to the specifications but the assessee does not supply materials. The raw materials are purchased by the manufacturers. As per the terms of the agreements the manufacturer agrees to purchase raw materials and components and the products from the suppliers designated, by Reebok or its designates but the company -- manufacturer shall have sole responsibility for the quality of the products produced. It is under no obligation to designate 'any such suppliers as is clear from para 2.4 of the agreement with Moja Shoes (P) Ltd.
As already submitted in para 1 above the purchaser, i.e., Reebok is under no obligation to designate such suppliers and even if Reebok designates the suppliers the pre-inspection of such raw materials and components is the sole responsibility of the manufacturer. The main features shall have the sole responsibility of the products produced.
The quantity of the goods to be manufactured are stipulated in the work order if the manufacturer produces in excess of the quantities ordered then the purchaser has the right to purchase the excess.
As far as the question of manufacturer not manufacturing or supplying any products using any confidential information or bearing of any of the trademarks other than the purchaser, it is to be clarified that Reebok products have its brand name and the assessee would, therefore, ensure that its brand name is not misused. The manufacturer is free to manufacture goods of other manufacturers and to that extent the assessee duly filed a letter with the AO that Moja Shoes is manufacturing products of other brands also as required by the AO, it is a normal practice that any purchaser will inspect the goods before the goods are delivered to the purchaser. This is to ensure that goods are manufactured as per the specifications of purchaser.
The manufacturer is manufacturing goods carrying Reebok brand name and, therefore, as a prudent business practice the assessee has to ensure that the goods which are manufactured under the brand name of Reebok are not to be sold in the open market with Reebok label/logo except through him or outlets authorized by him.
In order to protect its brand name it is important that if the goods are not according to the specifications of the assessee-company, the goods manufactured bearing the brand name/logo of Reebok be destroyed.
It is the object of the assessee-company to purchase the goods which are manufactured as per its specification. In this respect attention is specifically invited to the circular issued by the CBDT, dt. 8th March, 1994 where it is clearly mentioned that the provisions of Section 194C will not cover contract for sale of goods. In Sub-clause (vi)(b) it is stated as follows :
Where, however, 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.
It is submitted that in the above referred case of BDA Ltd. (supra) the Hon'ble Member came to the conclusion that it was a works contract and not a contract for sale on the basis of the judgment of the Bombay High Court in the case of Sarvodaya Printing Press v. State of Maharashtra (1994) 93 STC 387 (Bom) given under the provisions of the Sales-tax Act. It is sought to be clarified that the latter case involved only job work of printing whereas in the case of the appellant manufacturing is done by the manufacturers who are manufacturing not only for the appellant-company but for other manufacturers also. The goods which are being produced, by these manufacturers are of standard quality and have got commercial value. The fact that the same cannot be sold in the market is on a different footing insofar as the goods which are being manufactured under the trademark of assessee-company and not for any other purposes. These goods have got definite commercial value and they are of standard quality which can. be sold, into the market but cannot be sold as they bear the trademark/logo of the company and under the contract with the assessee-company.
It is asserted that the Board Circular No. 715, dt. 8th Aug., 1995 (supra) is not at all applicable to the appellant-company because no printing contract is involved. On the other hand reliance is placed on Board Circular No. 681, dt. 8th March, 1991 (supra), wherein it is stated that where 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 outside the purview of Section 194C. It is explained that the term "carrying out" in the said section suggests executing the contract rather than a transfer of goods or a mere supply or sale of goods. If a person engages services of another and gives a job to manufacture goods or articles and for the purpose supplies him raw material it could be a case of contract of work. In such cases, the provisions of Section 194C would undoubtedly be applicable. But, if on 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 be customer specific, it is still a case of sale and not carrying out of 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 work contract is very significant particularly under the sales-tax laws.
It is argued that the AO has mentioned that the assessee-company supplies the material (para 14) which is not based on facts or any evidence as already pointed out above. The assessee-company prescribes the source but the assessee-company is not responsible for the quality of such raw materials and components which remain the sole responsibility of the manufacturer for the quality of products produced. The assessee-company is also under no obligation to designate any such supplier as is clear from the agreements with the manufacturers. As mentioned by the AO that the manufacturers gain is predetermined margin of profit determined by Reebok, which primarily includes the interest on its capital investment, charges for labours and supervision. In other words manufacturer has no right to determine his margin, profit, gain depending on market conditions. This statement of the AO is not based on any facts or agreements with the manufacturers. Again, it is pointed out, in para 5.2 (not mentioned by the AO) it is clearly mentioned that the prices for each style of products will be negotiated between Reebok and manufacturer periodically. It is further provided in Clause 5,4 as follows :
The prices charged and each term and condition applied by manufacturer with regard to each of the products shall be no less favourable than the prices charged for equivalent footwear or terms or conditions applied with regard to any other person for whom manufacturer produces footwear.
It is highlighted that the above submissions were duly made before the AO but he has simply mentioned that the facts of those cases are not applicable in view of the fact that the same are under the Sales-tax Act. Reliance is placed on the Supreme Court decision in the case of State of HP v. Associated Hotels of India Ltd. .
8. The learned CIT(A) after considering the contention of the counsel of the assessee was of the view which is reproduced hereunder [paras 4 to 6 of learned CIT(A) order] :
I have considered the matter. On the basis of the foregoing, it is seen that the transactions between the manufacturers and the appellant are in the nature of sales and purchases on a principal to principal basis. Adherence to the appellant's specifications by the manufacturers is a precondition for the appellant to purchase the packaging material. The elements requisite for a transaction to be in the nature of works contract are not applicable with respect to facts of transactions entered into by the appellant. In a recent decision pronounced by the Bombay High Court in the case of BDA Ltd. v. ITO, the decision of Pune Tribunal in the same case relied upon by the AO has been reversed. The Bombay High Court while holding that Section 194C does not apply to the above transaction has stated as under :
It is not disputed that M/s Mudranika is an independent establishment engaged in the business of supplying printed packaging material to various establishment, and it is not a captive unit of the assessee. 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, and the raw materials required for the same were not supplied by the assessee. M/s Mudranika has been supplying such printed labels to other establishments as per their respective specifications.
The priming work was not being carried out in the premises of the assessee. This supply of printed labels cannot be compared and equated with the supply of printed question papers to the universities and educational institutions. M/s Mudramka would not print such labels with the specifications of the assessee beyond the quantity specified in the purchase order, and therefore, it was wrong on the part of the Tribunal to hold that, the printed by M/s Mudranika to supply to the assessee could not be sold to any other establishment in the market. This finding regarding no market ability is based on a fallacious premise that, M/s Mudranika was printing unlimited number of labels, 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 and it would not do such printing beyond the numbers specified in the same. There is 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/s Mudranika. In the fact of this case, the supply of printed labels by M/s Mudranika to the assessee was a 'contract of sale' and it could not be termed as a "works contract". The Tribunal has rightly held in the case of Wadilal Dairy International Ltd., (supra) that, supply of printed packing labels accounted to a "sale contract" and not a "works contract" and the same ratio is applicable in the instant case, as well. The single Bench of the Tribunal thus fell in gross error in holding that subject transaction was a "works contract" and, therefore, TDS was required to be deducted by the assessee under Section 194C of the Act.
In the course of hearing even as the appellant relied upon so many Court decisions holding that the specification as to the manufacturing of goods can be a requisite condition for purchase of material and it is governed by its commercial use. I am, however, mainly guided by the apex Court decision in the case of Hindustan Shipyard Ltd. v. State of AP . The Hon'ble Supreme Court after analyzing the various decisions has laid down the following principles to determine true nature of transaction :
(a) No rule can be provided to distinguish between a contract for sale and a contract for work and labour.
(b) Transfer of property of goods for a price is the linchpin of the definition of "sale". Whether a particular contract is one of sale of goods or for work and labour depends upon the main object of the parties found out from an overview of the terms of the contract, the circumstances of the transactions and the custom of the trade. It is the substance of the contract documents and not merely the form, which has to be looked into. An opinion can be formed that the contract is one whose main object is transfer of property in a chattel as a chattel to the buyer, though some work may be required to be done under the contract as ancillary or incidental to the sale, then it is a sale. If the primary object of the contract is the carrying out of work by bestowal of labour and services and materials are incidentally used in execution of such work then the contract is one for work and labour.
(c) If the thing to be delivered has any individual existence before the delivery as the sole property of the party who is to deliver it, then it is a sale.
(d) The bulk of material used in construction belongs to the manufacturer who sells the end-product for a price, then it is a strong pointer to a conclusion that the contract is in substance one for the sale of goods and not one for work and labour. However, the test is not decisive. It is not the bulk of the material alone but the relative importance of the material qua the work, skill and labour of the payee, which have to be weighed. If the major component of the end-product is the material consumed in producing the chattel to be delivered and the skill and labour are employed for converting the main components into the end-products, the skill and labour are only incidentally used and hence the delivery of the end-product by the seller to the buyer would constitute a sale. On the other hand if the main object of the contact were to avail the skill and labour of the seller though some material of components may be incidentally used during the process of the end product being brought into existence by the investment of skill and labour of the supplier, the transaction would be a contract for work and labour.
The Hon'ble Supreme Court has stated that the contract may be categorized into three types :
(i) The contract may be for work to be done for remuneration and for supply of materials used in the execution of the work for a price.
(ii) It may be a contract for work in which the use of the materials is ancillary or incidental to the execution of the work, and
(iii) It may be a contract for supply of goods where some work is required to be done as incidental to the sale.
The first contract is a composite contract consisting of two contracts, one of which is for the sale of goods and the other is for work and labour. The second is clearly a contract for work and labour, not involving sale of goods. The third is a contract for sale where the goods are sold as chattels and the work done is merely incidental to the sale.
I believe that the following interesting illustrations given by the Hon'ble Supreme Court in the aforesaid case are closest to the present case.
Two sample illustrations may be given to demonstrate applicability of the above said principles. A customer goes to a tailoring shop accompanied by a suit length in his hands and entrusts the same to the tailor for stitching a suit for him as per his measurements. The tailor by devoting his skill arid labour stitches the suit and delivers the same to the customer. In this process the tailor utilizes lining, buttons and threads of his own, The transaction would remain a contract for work and labour. The stitched suit delivered by the tailor to the customer is not a sale. It would not make any difference if the customer would have selected a piece of cloth of his own choice for a price to be paid or paid and having purchased the suit length left it with the tailor for being stitched into a suit. The property in the suit length had passed to the customer and physical possession over the suit length by the tailor thereafter was merely that of a bailee entrusted with the suit length. However, if the tailor promises to stitch and deliver the suit for a price agreed upon, investing his own cloth and stitching materials such as lining, buttons and threads and utilizing his own skill and labour then though the customer might have chosen the piece of cloth as per his own liking as to the texture, colour and quality and given his own instructions in the matter of style, the transaction would remain a contract for sale of goods, that is a stitched suit piece inasmuch as the object of the contract was to-transfer property in the stitched suit piece along with delivery of the suit by the tailor to the customer, all investments, whether of material or of skill and labour having been made by the tailor incidental to the fulfillment of the contract. Yet another illustration is provided by Benjamin (ibid., para 1.046). A doctor or veterinary surgeon who supplies medicines does so as an incident to a contract for professional services, which include diagnosis and advice over and above any work in the making up of the medicine. In contrast, a chemist who makes up a prescription sells it. Since his work and skill goes entirely into the product--it is simply a component reflected in the price of the goods. Benjamin concludes "Where work or skill is involved over and above what goes into the making of the goods delivered, it is possible and often correct to view the contract as 'substantially' one for work or services". In our opinion a reverse case would be one of sale. Benjamin gives yet another illustration, A meal supplied to a customer in a restaurant is a sale of goods, the element of service being subsidiary, but a meal supplied to a lodger or a resident hotel guest is part of a contract for services.
It will thus be seen that while deciding the issue the Supreme Court has effectively held that production of goods as per the specifications prescribed by the buyer is not the conclusive determining factor as to the true nature (of) a transaction. That being so the AO's reliance on the customization of the goods manufactured and supplied to the specifications laid down by the appellant will not make the transaction, ostensibly a purchase, one of contract and, I am sure that such customization would bring within its sweep the minor job of label printing. In fact, if the supplier does not do the printing job itself, it may have to deduct tax at source for getting the printing job done. In any case, the appellant is not liable to effect any deduction on such payments, much less liable to be treated as an assessee in default. Such a tunnel view of the transaction would lead to the inescapably unfair, unwarranted and unintended conclusion of holding the supplier liable to both the sales-tax and the contract tax, even as the appellant has made payments for outright purchases, In this view of the matter, the impugned order is cancelled.
In passing I would also like to comment on the AO's outright refusal to consider some of the submissions of the appellant on the ground that the cases relied upon related to sales-tax. It must always be remembered that no Court order even though delivered in respect of the provisions of a different statute can be ignored if it has a hearing on the subject-matter under consideration. In fact, one of the most cardinal principles of interpretation of statutes is that if a subject-matter comes under the purview of more than one statute, the authority implementing any of the statutes should so interpret the provisions that all the statutes can be given effect to. This principle, called the doctrine of harmonious construction enables various statutes to stand side by side and yet not come in the way of one another in realising the avowed objective of each such legislation. Viewed thus, there is all the more reason to accept the ratio of the Supreme Court decision mentioned hereinabove.
Even though the appellant has advanced the alternative pleas of the tax having been paid by the deductee and invoked the provisions of Section 191 read with CBDT Circular No. 275/201/1995-IT(B), dt. the 29th Jan., 1997 and Circular No. 715 relating to the printing job relied upon by the AO, keeping the aforesaid decision reached by me in view, I do not consider it necessary to advert to these.
9. The learned Counsel for the assessee has pointed out to various clauses of the agreements with manufacturer, i.e., M/s K.D.S. Fashion and Sports Gear (paper book 1 to 17) and with M/s Moja Shoes (P) Ltd. (paper book 18 to 40) as under :
(i) Paper book 4, para 15.2.1 In performing obligations under this agreement, manufacturer is an independent manufacturer and its personnel and other representatives shall not act as nor be agents or employees of purchaser and its customer. As an independent manufacturer, manufacturer will be solely responsible for determining the means and methods for performing the required tasks. Manufacturer shall have complete charge and responsibility for personnel employed by manufacturer; however, purchaser reserves the right to instruct manufacturer to remove from purchaser's premises immediately any of manufacturer's personnel who are in breach of the provisions of this agreement. Such removal shall not relieve manufacturer's obligation to fulfil its obligations under this agreement, manufacturer agrees to furnish all tools and materials necessary to accomplish the same.
(ii) Paper book 12, para 5.1 Delivery point. All shipments shall be made by manufacturer at the designated warehouse of purchaser as mentioned in the purchase order. Title and risk of loss shall pass to purchaser upon manufacturer's tender of delivery at purchaser's designated warehouse.
(iii) Paper book 20, para 2.4 Manufacturer agrees to purchase raw materials and components for inclusion in the products from suppliers designated by Reebok or its designees. Notwithstanding any such designation nor any pre-inspection Reebok or its designees may make of such raw materials and components, manufacturer shall retain sole responsibility for the quality of the products produced hereunder. Reebok shall be under no obligation to designate any such suppliers.
(iv) Paper book 23, para 5.2.
Prices for each .style of product will be negotiated between RIL US and manufacturer periodically. In the event that RIL US and manufacturer are unable to agree on new prices for any products, "the prices previously in existence for such products shall prevail, until otherwise agreed by RIL US in writing.
(v) Paper book 23, para 5.4.
The prices charged and each term and condition applied by manufacturer with regard to each of the products shall be no less favourable than the prices charged for equivalent footwear or terms or conditions applied with regard to any other person for whom manufacturer produces footwear.
10. The learned Counsel further pointed out that the AO has mainly relied upon on the decision of BDA Ltd. v. ITO (2003) 78 TTJ (Pune) 925 : (2003) 84 ITD 442 (Pune) which has been reversed by the Hon'ble High Court of Bombay vide Appeal Nos. 44 of 2003 and 1 of 2004. and is in favour of assessee (paper book 87 to 95). The learned Counsel has also pointed out the guidelines given by GBDT vide para 7(b) of Instruction No. ,1107 which are clarifications regarding Supreme Court judgment in Associated Cement Co. Ltd. v. CIT (1993) 111 CTR (SC) 165 : (1993) 201ITR 435 (SC) as under :
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 outside the purview of this section.
11. We have considered the facts of the case. The AO mainly relied upon the decision in the case of BDA Ltd. v. ITO (supra), where it has been held that supply of printed material as per specification supplied by the buyer is not a sale but a work contract. The said decision has been decided against the Revenue by the Hon'ble Bombay High Court as pointed out by the counsel of the assessee. The AO has relied upon Circular No. 715, dt. 8th Aug., 1995, where the CBDT has given the answer in affirmative to the question whether Section 194C would apply in respect of supply of printed material as per prescribed provisions. The said circular is for printing contract. The counsel for the assessee has also pointed out Circular No. 681, Clause (vi.) Sub-clause (b) where it has been clarified by CBDT in view of judgment in case of Associated Cement Co. Ltd. v. CIT (supra) that where however 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 i.e., Section 194C of IT Act.
12. The AO has relied upon various terms and conditions vide para 5 of his order and the learned Counsel for the assessee has submitted vide para 3.1 of learned CIT(A) order with respect to terms and conditions relied upon by the AO. With the perusal of the said clauses of the agreement, it is difficult to construe a contract of work and labour with material on one hand and contract for sale on the other because the distinction between the two is often a fine one. There is no standard formula by which one can distinguish a "contract for sale" from a "works contract". The question is largely one of fact depending upon the terms of the contract including the nature of the obligations to be discharged thereunder and the surrounding circumstances. If the intention is to transfer for a price a chattel in which the transferee had no previous property, then the contract is a contract for sale. Ultimately, the true effect of an accretion made pursuant to a contract has to be judged not by artificial rules but from the intention of the parties to the contract. In a 'contract for sale', the main object is the transfer of property and delivery of possession of the property, whereas the main object in a 'contract for work' is not the transfer of the property but it is one for work and labour. Another test often to be applied to is : when and how the property of the dealer in such a transaction passes to the customer: is it by transfer at the time of delivery of the finished article as a chattel or by accession during the procession of work on fusion to the movable property of the customer ? If it is the former, it is a 'sale' : if it is the latter, it is a 'works contract'. These views find support from the significant judgment of three Judges Bench of the Supreme Court in the case of State of A.P. v. Kone Elevators (India) Ltd. , where the manufacturer has manufactured the lifts as per specification of the assessee and installed at the premises of the assessee as the same was held to be a transaction of "sale" and not of a 'works contract'. In the present case, the transfer of the property by the manufacturer as a finished article is as a chattel and the ownership passes on to the assessee only on taking the delivery of the goods and before the delivery of the goods the ownership remains with the manufacturer only. Therefore, necessarily following the above judgments in the case of State of AP v. Kone Elevators (India) Ltd. (supra), the contract of the assessee with the manufacturer is that of purchase and sale. As per the said judgment the works contract is one where the ownership passes to the customer by accession during the procession of work i.e., as and when work is in process, the ownership passes on to the customer. Since the theory of manufacturer of goods by specification is almost eliminating, nowadays, therefore, we have to see the intention of the customer and how the goods are supplied whether chattel-qua-chattel and if it is so, then it will be considered a 'sale' instead of 'works contract'.
Also there is no definition of contract or sale in the IT Act which can solve the present issue. Therefore, to solve this issue we have to rely upon various other Acts and the interpretations made by Courts of law vis-a-vis the present case as under :
(i) BDA Ltd. v. ITO (supra) As per para 11 of this decision of Hon'ble Bombay High Court, M/s Mudranika is an independent establishment engaged in the business of supplying printed packaging material to various establishments and it is not a captive business of the assessee. The assesses had issued a purchase order in favour of M/s Mudranika for supply of printed labels as per specifications provided by it. And the raw materials required for the same were not supplied for the assessee. M/s Mudranika has been supplying such printed labels to other establishments as per their respective specifications. The printing work was not been carried out in the premises of the assessee. There is 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/s Mudranika. In the facts of this case, the supply of printed labels by M/s Mudranika to the assessee was a contract for sale and it could not termed as a work contract.
13. In the present case, the manufacturers are also independent establishment engaged in business of manufacturing of footwear and other goods and the assessee has issued the purchase order in favour of the manufacturers for supply of footwear and other goods and manufacturers were manufacturing the goods at their premises and they were not captive units of the assessee. The manufacturer as per agreement para 2.4 (paper book 20) had the sole responsibility of purchase of raw material regarding quality of the products produced thereunder and the assessee was under no obligation to designate any such supplier. As per para 15.2.1 of the agreement (paper book 4) the manufacturer is an independent manufacturer under the agreement and its personnel and other representative shall not act as nor be agents or employees of purchaser and its customer. As an independent the manufacturer will be solely responsible for determining the means and methods for performing the required tasks. As per para 5.4 of the agreement (paper book 23) the prices charged and each term and condition applied by manufacturer with regard to each of the products shall be no less favourable than the prices charged for equivalent footwear or terms or conditions applied with regard to any other person for whom manufacturer produces footwear.
14. In view of above discussions, the present case falls under the category of contract for purchase and sale and not a works contract under Section 194C of the Act. The views taken by the AO are of no assistance to the learned Departmental Representative who has relied upon the order of the AO.
(ii) State of Tamil Nadu v. Anandam Viswanathan (1989) 1 SCC 613 In this case there was a contract comprising primarily the confidential nature of work and incidentally technical skill and material supplied by the contractor and the finished product, i.e., printed question papers were not commercially marketable product and, therefore, such transaction constituted works contract. 15. In the present case, the finished product are commercially marketable products since the assessee was free to sell the footwear or other products after removing the label of the assessee, in case the assessee rescinds the contract.
Since once the contract is rescinded, then, whole contract gets void and it is not that only one clause or few clauses of the agreement gets void in case the assessee, i.e., the buyer refuses to get the delivery of the goods from the manufacturer. As per para 5.4 of the agreement (paper book 23) the prices charged and each terms and conditions with regard to each of the products was no less favourable than the prices charged for equivalent footwear or terms or conditions applied with regard to any person for whom manufacturer produces footwear.
16. In such circumstances, the contract of the assessee with the manufacturer is not a works contract under Section 194C of the Act.
(iii) Hindustan Shipyard Ltd. v. State of AP (supra)
17. In this case the appellant ("the builder"), engaged in the activity of building ships for different ship-owners, entered into contracts agreeing with the owners to build, launch, fit, equip, test and complete in all respects a specified number of vessels at its shipyard and to deliver them. The building of the vessels was to be under the instructions and test of classification surveyors and in accordance with plans and specification. The builder had to furnish all labour, machinery, materials, equipment, spare parts and outfit required for the construction of the vessels to make them completely ready. The price of each vessel was fixed but was to be paid in instalments at different stages, Before the vessel was delivered trial runs had to be made after notice to the owners. The contract provided that after successful trial test the owner shall accept the vessel. It was held by the Hon'ble Supreme Court, affirming the decision of the High Court that contracts in question involve sale of the respective vessels within the meaning of Section 2(n) of the Andhra Pradesh General Sales-tax Act, 1957 and were not merely works contract as defined in Section 2(t).
18. The facts of the present case are almost identical to the above case, in principle. Therefore, this case of the assessee is a case of contract of sale and not that of works contract under Section 194C of the Act.
19. Relying upon the various judgments on interpretation of contract and sale and Circular No. 681, para 7, Clause. (c), Sub-clause (b) of CBDT and facts of the case, we are of considered view that the transaction between the assessee and the manufacturer was of purchase and sale of goods and not of a works contract under Section 194C of the Act and the AO was not justified in treating the same as transaction of works contract under Section 194C of the Act and the assessee cannot be deemed to be an assessee in default in respect of the tax under Section 201(1)/201(1A) of the Act. Therefore, we find no infirmity in the order of learned CIT(A) which is hereby sustained. Thus ground Nos. 1 to 5 of the Revenue are dismissed.
20. Ground No. 6 of the Revenue is general in nature and does not require adjudication.
21. In the result, the appeal of the Revenue is dismissed.