Since a sales or return agreement is not a “works contract,” TDS is not deductible under section 194C

Fact and issue of the case

Brief facts as noted by the AO were that, the assessee is a company which runs retail stores, having 83 stores in 38 cities across India, and that it deals in clothing, accessories, footwear, jewelry, fragrances, cosmetics, health and beauty products, home furnishing and décor products. A survey action u/s 133Aof the Actwas carried out upon the assessee on 01-08-2018 and during the post survey analysis it was revealed that the assessee was not deducting taxes on payments at appropriate rates. In the course of the proceedings conducted u/s 201(1) of the Act, the AO noted that the assessee had agreements with various vendors in terms of which the assessee would sell apparels/goods/cloths/footwear/various items through its retail outlets as well as its online marketplace, and that such items were being manufactured by these vendors as per the designs approved by the assessee.

In response to the above, it is noted that the assessee submitted that, it did not have any agreement or contract for manufacture with any of these parties and that this averment was incorrect. It was explained that the assessee had purchased goods from these parties under their ‘Sales or Return’ model in terms of which the goods were sold by the vendor under their respective brand names and upon issuance of tax invoices. It was also submitted that the risk & title in the goods stood transferred to the assessee upon delivery of goods. In support of their contention, the assessee furnished sample copy of Sale or Return arrangement with a vendor along with details of purchases whose value was in excess of Rs. 5 lacs. The relevant portion of the submission of the assessee is set out below, for the sake of convenience.

The AO, however, was not agreeable to the above contentions of the assessee and disputed their averment that there was no agreement to manufacture According to the AO, there were specific agreements with the .with the vendors vendors for the manufacture of products as specified and approved by the In terms of the agreements, the vendors would send sample products, .assessee which if approved by the assessee, would be manufactured by the vendor and then put up for sale in the assessee’model of ‘ The AO noted that the term .s outlets model was ’Sales or Return‘ being used by the assessee for their ’business .misleading and was an attempt to evade the rigors of Section 194C of the Act According to the AO, the following terms of the agreements showed that, they were in the nature of‘ ’works contract

Observation by the tribunal

The tribunal has heard both the parties and also carefully perused the relevant material and documents placed before us. The issue for our consideration is whether, the arrangement between the assessee and the vendors for supply of products was in the nature of ‘works contract’ as defined in Section 194C of the Act or not; and hence, whether the assessee is required to withhold tax on the same. Before we proceed to examine the facts of the present case, it would first be relevant to take note of the relevant provisions of Section 194C of the Act and also the meaning of the term ‘works contract’.

From reading of the above provision, it is noted that the term ‘work’ has been defined in an inclusive manner and only if the ‘work contract’ undertaken by the payee falls within the above definition of ‘work’, as specifically defined in the section itself, that the provisions of Section 194C would become applicable. It is noted that, the AO does not contemplate holding that the case of the ass essee falls within the ambit of items mentioned at sub–clauses (a), (b), (c) or (d) of clause (iv) of the Explanation. The relevant sub–clause in question is sub–clause (e) of clause (iv) of the Explanation to section 194C of the Act, which relates to manufacturing or supplying a product according to the requirements or specification of a customer by using material purchased from the same customer. It thereafter makes it explicitly clear that, ‘work’ does not include manufacturing or supplying a product, which even if made in accordance with the specific requirements or specifications of the customer, where the material used for the product is purchased from a person other than the customer.

At this juncture, we find it necessary to note that, in the impugned order before us, the AO had incorrectly observed that the relevant section does not define the word ‘work’ and for which he went to take support of the definition laid down in other Dictionaries. This action of the AO is held to be patently erroneous. As noted above, the term ‘work’ has been defined in an inclusive manner for the purposes of Section 194C of the Act in particular, and therefore, we hold that it was not correct on the AO’s part to refer to the dictionary meaning of the term ‘work’. We thus agree with the Ld. CIT(A)’s finding that, the basic premise on which the AO proceeded to analyze the facts of the case, viz., the definition of ‘work’, was incorrect.

For the reasons set out above therefore, we do not see any reason to interfere with the order of the Ld. CIT(A) in holding that the payments made under the SOR agreements did not fall within the ambit of Section 194C of the Act and therefore the assessee did not have any liability to deduct tax at source on such payments u/s 194C of the Act. Accordingly, all the grounds raised by the Revenue stands dismissed. Order pronounced in the open court on this 02/12/2022.

Read the full order from here

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