WHIRLPOOL OF INDIA LTD. v. JOINT COMMISSIONER OF INCOME TAX
[Citation -2007-LL-0713-1]

Citation 2007-LL-0713-1
Appellant Name WHIRLPOOL OF INDIA LTD.
Respondent Name JOINT COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 13/07/2007
Assessment Year 2004-05
Judgment View Judgment
Keyword Tags non-deduction of tax • deduct tax at source • predominant object • sale transaction • delay in payment • electronic goods • packing material • quality control • interest charge • issue in appeal • works contract • outright sale • work contract • raw material • excise duty • brand name • sales-tax
Bot Summary: Pramod Kumar, A.M.: The short issue that we are required to adjudicate in this appeal is whether or not the CIT(A) was justified in holding that the assessee was required to deduct tax at source, under s. 194C of the IT Act, in respect of purchases of products, which are made to the specifications of the assessee by the Original Equipment Manufacturers. In the relevant previous year, the assessee did not manufacture any of these products on its own and completely outsourced the manufacturing to various outside concerns, which are referred as OEMs. The goods purchased from these OEMs were made to the specifications of the assessee and are subject to strict quality control of the assessee. The assessee s contention was that it was a purchase on principal to principal basis, and that it was not in the nature of a works contract which could be covered by the scope of s. 194C. It was also pointed out that OEMs are permitted to affix the assessee s trademark only on the goods approved for purchases and the OEMs are restrained from affixing the trademark on goods not purchased by the assessee. The assessee s stand was that in case it was indeed a works contract, the assessee would have only paid the job charges. These submissions did not impress the AO. The AO was of the view that the OEMs cannot sell these products to anyone else and the products not purchased by the assessee have no commercial value for the OEMs. According to the AO, the main motivating intention was to get the job works done which is of the character of work contract and not of contract of sales and the amounts paid or credited to the OEMs attracting tax withholding liability of the assessee. As the assessee had failed to discharge this liability, the AO held the assessee to be an assessee-in-default in respect of the non-deduction of tax at source from payments or credits to OEMs. A demand was accordingly raised under s. 201(1) r/w s. 194C. The AO also raised a consequential demand for delay in payment of TDS under s. 201(1A) r/w s. 194C. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The trademark can only be affixed in the case where the goods are purchased by the assessee, and rightly so, because t h e trademark belongs to the assessee and is to be used for his business purposes.


Pramod Kumar, A.M.: short issue that we are required to adjudicate in this appeal is whether or not CIT(A) was justified in holding that assessee was required to deduct tax at source, under s. 194C of IT Act, in respect of purchases of products, which are made to specifications of assessee by Original Equipment Manufacturers (OEMs). assessment year involved is 2004-05 and impugned order of CIT(A) is passed in matter of order under ss. 201(1) and 201(1A) r/w s. 194C of Act. Briefly, material facts. assessee is well known name in consumer electronic goods and home appliances etc. in sense its brand whirlpool has certain brand image and recognition. assessee is engaged in business of manufacturing and trading of consumer electronics and home appliances, such as air conditioners, washing machines and refrigerators. In relevant previous year, assessee did not manufacture any of these products on its own and completely outsourced manufacturing to various outside concerns, which are referred as OEMs. goods purchased from these OEMs were made to specifications of assessee and are subject to strict quality control of assessee. It is only when assessee is fully satisfied about product that assessee s brand name is fixed on those products. survey was conducted on premises of assessee company and it was found that assessee is not deducting tax at source from payments made to these OEMs towards purchase of products manufactured for assessee. assessee s contention was that it was purchase on principal to principal basis, and that it was not in nature of works contract which could be covered by scope of s. 194C. It was also pointed out that OEMs are permitted to affix assessee s trademark only on goods approved for purchases and OEMs are restrained from affixing trademark on goods not purchased by assessee. It was also pointed out that sales-tax and excise duty, wherever applicable, are borne by vendor. assessee s stand was that in case it was indeed works contract, assessee would have only paid job charges. It was contended that transaction being in nature of purchase simplicitor, provisions of s. 194C were not attracted. These submissions, however, did not impress AO (TDS). AO was of view that OEMs cannot sell these products to anyone else and, therefore, products not purchased by assessee have no commercial value for OEMs. According to AO, "the main motivating intention was to get job works done which is of character of work contract and not of contract of sales" and, therefore, amounts paid or credited to OEMs attracting tax withholding liability of assessee. As assessee had failed to discharge this liability, AO held assessee to be assessee-in-default in respect of non-deduction of tax at source from payments or credits to OEMs. demand was accordingly raised under s. 201(1) r/w s. 194C. AO also raised consequential demand for delay in payment of TDS under s. 201(1A) r/w s. 194C. Aggrieved, assessee carried matter in appeal before CIT(A) but without any success. CIT(A) was also of view that entire outsourcing is controlled by assessee, and in essence it is works contract. assessee is not satisfied and is in appeal before us. Shri Vohra, learned counsel for assessee, contends that issue in appeal is squarely covered by decision of co-ordinate Bench in case of ITO vs. Willmar Schwabe India (P) Ltd. (2005) 95 TTJ (Del) 53, which has been since confirmed by Hon ble Delhi High Court, by dismissing Revenue s appeal against said order. It is submitted that as long as sales is on principal to principal basis, sale will be outside purview of s. 194C. It is pointed out that merely because goods are as per specifications of buyer, nature of transaction will not change. Our attention is also invited to decision of Tribunal in case of Dy. CIT vs. Allied Domeeq Spirits & Wine India (P) Ltd. (Delhi H Bench order dt. 22nd Dec., 2006) wherein it is concluded that where manufacturer purchases material on his own and manufactures product as per requirement of customer, it is case of sale of goods and not works contract. Learned counsel submits that decision of Pune Bench in case of Wadilal Dairy International Ltd. vs. Asstt. CIT (2001) 70 TTJ (Pune) 77 wherein it is held that merely because packing material supplied by vendor has made to order, and special printing of markings, nature of sale transactions would not change. Our attention is also invited to judgment of Hon ble jurisdictional High Court in case of CIT vs. Dabur India Ltd. (2005) 198 CTR (Del) 375: (2006) 283 ITR 197 (Del) and of Hon ble Bombay High Court in case of BDA Ltd. vs. ITO (2006) 201 CTR (Bom) 413: (2006) 281 ITR 99 (Bom). It is submitted that when predominant object is sale of goods, only because it requires some specialised work done, fact of transaction being in nature of sale will take it out of ambit of s. 194C. As alternate contention, Shri Vohra submits that provisions of s. 201 are only in nature of collection mechanism, and since primary liability of OEMs is discharged as all sale proceeds of these goods are included in their taxable receipts, same amount cannot be collected again. It is contended that once vendor discharges his tax liability, vicarious tax withholding liability cannot survive. As for liability under s. 201(1A), learned counsel submits that interest liability can only be till period till time tax dues of OEM are paid. When due tax is received by Government, interest charge cannot continue any further. On strength of these arguments, learned counsel urges us to reverse action of authorities below and quash impugned orders saddling assessee with liability for non-deduction of tax at source. Smt. Iyer, on other hand, laboriously takes us through orders of authorities below and vehemently relies upon and justifies same. She submits that when product is made to order and as per specifications given by buyer, it ceases to sale transaction and takes character of works contract. It is stated that sale contract can only cover off shelf purchases and not goods specifically manufactured to specifications. Distinction was made out between contract for sale and contract for work. As regards learned counsel s reliance on judgment of Dabur India Ltd. (supra), Smt. Iyer submits that it was specifically observed by Hon ble High Court in said case that "it is nobody s case before us that printing of labels required any special skill or involved any confidence or secrecy" whereas in present case special skill was definitely required to make consumer appliances of certain standard and specifications. Learned Departmental Representative again emphasized that relevant agreements were not produced before authorities below. We are urged to confirm orders of authorities below. In rejoinder, Shri Vohra takes us through judicial precedents cited by him and highlights ratio decidendi of these precedents. It is submitted that facts of each case are bound to have some distinction from each other but what is to be really examined is ratio of these decisions. point made by Hon ble Delhi High Court regarding special skills, secrecy or confidence was, according to Shri Vohra, in context of their Lordships observations on Anandam Vishwanathan s case in which printing of examination papers for universities was considered to be works contract. It does not mean that wherever there are special skills required in manufacturing item, it will go out of ambit of sales. As for non-production of agreements pointed out that two agreements which were available were duly produced and CIT(A) has duly noted assessee s stand that in remaining cases, supplies were made against purchases orders. objections of Revenue are thus devoid of any substance or merits. We are again urged to vacate TDS demands sustained by CIT(A). Having given our careful consideration to rival contentions and material on record, we are inclined to uphold well reasoned plea of learned counsel for assessee. We find that what is material is point of time when property in goods manufactured passes. In case property passes at point of time when goods are sold, as is position in present case, and manufacturing activity is carried out at risk of vendor, it is case of simple purchases. As very appropriately observed by co-ordinate Benches, when manufacturer purchases raw material on his own and produces goods as per specifications of buyer, it is case of sale of goods and not job work. dominant object underlying arrangement is manufacture and sale by OEM. Having carefully perused agreements before us, we also find that authorities below have proceeded on erroneous assumption that goods rejected by assessee cannot be sold by OEMs. That is factually incorrect. OEMs are free to dispose of goods in whatever manner they deem fit but they are forbidden from affixing assessee s trademark on same. That restriction is quite justified to protect legitimate business interests of assessee. trademark can only be affixed in case where goods are purchased by assessee, and rightly so, because t h e trademark belongs to assessee and is to be used for his business purposes. Learned Departmental Representative s argument that only off shelf goods can be considered to be purchases and made to order goods is to be considered as works contract, is devoid of any merits sustainable in law. In view of these discussions, and respectfully following co-ordinate Benches, we hold that supply of outsourced manufactured goods by OEMs constitutes outright sale and cannot be treated as works contract within scope of s. 194C. impugned TDS demands raised on assessee are thus indeed vitiated in law and not warranted by facts of case. These demands should, accordingly, be set aside. We order so. In result, appeal is allowed. *** WHIRLPOOL OF INDIA LTD. v. JOINT COMMISSIONER OF INCOME TAX
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