My printer supplies labels made to my design but out of his own paper and ink at his own premises. Must I deduct tax under section 194C?
No, on these facts. The Bombay High Court held that the supply of printed labels was a contract of sale and not a works contract, so section 194C did not apply, and it quashed the orders of the Tribunal, the Commissioner (Appeals) and the Income Tax Officer (TDS). The printer was an independent establishment supplying similar labels to other customers, it worked in its own premises with its own machinery, labour and raw material, and the assessee supplied nothing. That the labels were made to the assessee's specifications and could not be sold elsewhere did not convert the transaction, since the quantity was limited to the purchase order.
Decided by the High Court (Bombay High Court - B.H. Marlapalle and M.G. Gaikwad, JJ; judgment by B.H. Marlapalle, J) on 2004-03-08, reported as [2006] 281 ITR 99 (Bom); (2006) 201 CTR (Bom) 413. It bears on section 194C, section 201(1), section 201(1A), section 252(3) of the Income Tax Act 1961, in TDS Defaults and How Tax Law Is Read matters.
This is a much-cited decision on the sale versus works contract line in the withholding context, and it is useful for the way it marshals the sales tax learning. Associated Hotels of India supplies the principle that a contract of sale is one whose main object is the transfer of property in a chattel as a chattel, that neither ownership of the materials nor the relative value of skill and labour is conclusive, and that the court must find the primary object of the transaction and the intention of the parties. Anandam Viswanathan, on printed question papers, is distinguished on its facts. The Court also observes that section 194C and State sales tax work conversely - a contract outside sales tax is within section 194C, and vice versa - and it corrects the Tribunal's premise that labels made to a customer's specification are inherently unmarketable. Two procedural holdings are worth noting too: a Tribunal registry must notify deficiencies rather than let a statutory appeal fail on court fees, and single member jurisdiction is governed by the statute rather than by what the appellant filled in on the form.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee, a public limited company, ran a distillery at Aurangabad and bought printing and packing material for bottling and marketing Indian made foreign liquor. M/s Mudranika supplied it printed labels to be wrapped on the bottles. The Income Tax Officer (TDS) surveyed the assessee's premises under section 133A and summoned its books relating to tax deducted at source for financial years 1995-96 and 1996-97, in particular the payments to Mudranika. The assessee produced its records and denied liability under section 194C, contending that the transaction was a contract for sale. By order of 16 January 1998 the officer raised demands of Rs 40,481 and Rs 79,134 for the two years with interest of Rs 11,132 and Rs 9,892, Rs 1,40,639 in all. The Commissioner (Appeals) dismissed a composite appeal for both years on 4 April 2000. The assessee filed a single appeal to the Tribunal, which the registry accepted without objection, but a single member decided only the year 1995-96, on the ground that separate sets and separate fees had not been filed, and dismissed it on 31 May 2002. A miscellaneous application raising for the first time the single member's want of jurisdiction, the assessed income for that year being Rs 2,13,33,830, was rejected on 27 May 2003.
The appeals were allowed. The orders of the Tribunal dated 31 May 2002 and 27 May 2003, the order of the Commissioner (Appeals) dated 4 April 2000 and the order of the Income Tax Officer (TDS) dated 16 January 1998 were quashed and set aside, with a direction that any tax already remitted be set off in future returns. On the merits, the supply of printed labels by Mudranika was a contract of sale and not a works contract, and the single member fell into gross error in holding otherwise. On the second question, the jurisdiction of a single member is governed by section 252(2) and (3), and unless the assessed income was less than five lakh rupees the single member could not derive jurisdiction; the registry ought to have notified the objection so that the President could allot the appeal correctly, and the Tribunal's reasons for rejecting the review application did not impress the Court, although it also agreed that a party who has submitted to jurisdiction cannot object afterwards. On the third question, the Tribunal's approach was too technical: a statutory remedy of appeal cannot be defeated by procedural deficiencies such as court fees unless the litigant is negligent or adamant, and the Tribunal ought to have decided the second year on merits; no remand was needed since the main issue had been decided.
The Court traced section 194C from its introduction by the Finance Act 1972, the circular of 29 May 1972 saying it applied to work and labour contracts and not to contracts for sale of goods, the circular of 26 September 1972 excluding transport contracts, and Explanation III inserted from 1 July 1995 bringing carriage of goods and passengers within work. Associated Cement, which gave any work a wide meaning and held payments to labourers loading cement bags to be covered, was explained by Birla Cement Works as concerned with work carried out through a contractor including supply of labour. For the sale and works contract distinction the Court took the Constitution Bench in Associated Hotels of India: a contract of sale is one whose main object is transfer of property in and delivery of a chattel as a chattel, and where the principal object of the work is not the transfer of a chattel as a chattel the contract is one of work and labour; neither ownership of materials nor the relative value of skill and labour is conclusive; and the court must find in each case the primary object of the transaction and the intention of the parties. Anandam Viswanathan, on printed question papers supplied to universities, was held to be a different kind of case. Applying these, Mudranika was an independent supplier working in its own premises with its own materials to a purchase order, and the Tribunal's finding that the labels were unmarketable rested on the fallacious premise that Mudranika printed an unlimited number; nothing showed the assessee supplied labels, ink, paper or screens. The Tribunal's own Division Bench decision in Wadilal Dairy International, holding the supply of printed packing material to be a sale, was applied.
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".
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Handle my notice → Ask a CA on WhatsAppNo, on these facts. The Bombay High Court held that the supply of printed labels was a contract of sale and not a works contract, so section 194C did not apply, and it quashed the orders of the Tribunal, the Commissioner (Appeals) and the Income Tax Officer (TDS). The printer was an independent establishment supplying similar labels to other customers, it worked in its own premises with its own machinery, labour and raw material, and the assessee supplied nothing. That the labels were made to the assessee's specifications and could not be sold elsewhere did not convert the transaction, since the quantity was limited to the purchase order. This was decided by the High Court (Bombay High Court - B.H. Marlapalle and M.G. Gaikwad, JJ; judgment by B.H. Marlapalle, J) and bears on section 194C, section 201(1), section 201(1A), section 252(3) of the Income Tax Act 1961. It is reported as [2006] 281 ITR 99 (Bom); (2006) 201 CTR (Bom) 413. This is a much-cited decision on the sale versus works contract line in the withholding context, and it is useful for the way it marshals the sales tax learning. Associated Hotels of India supplies the principle that a contract of sale is one whose main object is the transfer of property in a chattel as a chattel, that neither ownership of the materials nor the relative value of skill and labour is conclusive, and that the court must find the primary object of the transaction and the intention of the parties. Anandam Viswanathan, on printed question papers, is distinguished on its facts. The Court also observes that section 194C and State sales tax work conversely - a contract outside sales tax is within section 194C, and vice versa - and it corrects the Tribunal's premise that labels made to a customer's specification are inherently unmarketable. Two procedural holdings are worth noting too: a Tribunal registry must notify deficiencies rather than let a statutory appeal fail on court fees, and single member jurisdiction is governed by the statute rather than by what the appellant filled in on the form. If it applies to you, the first step is this: Record in the purchase order that the supplier uses his own materials, machinery, labour and premises, and that you supply nothing; that was decisive here.
The assessee, a public limited company, ran a distillery at Aurangabad and bought printing and packing material for bottling and marketing Indian made foreign liquor. M/s Mudranika supplied it printed labels to be wrapped on the bottles. The Income Tax Officer (TDS) surveyed the assessee's premises under section 133A and summoned its books relating to tax deducted at source for financial years 1995-96 and 1996-97, in particular the payments to Mudranika. The assessee produced its records and denied liability under section 194C, contending that the transaction was a contract for sale. By order of 16 January 1998 the officer raised demands of Rs 40,481 and Rs 79,134 for the two years with interest of Rs 11,132 and Rs 9,892, Rs 1,40,639 in all. The Commissioner (Appeals) dismissed a composite appeal for both years on 4 April 2000. The assessee filed a single appeal to the Tribunal, which the registry accepted without objection, but a single member decided only the year 1995-96, on the ground that separate sets and separate fees had not been filed, and dismissed it on 31 May 2002. A miscellaneous application raising for the first time the single member's want of jurisdiction, the assessed income for that year being Rs 2,13,33,830, was rejected on 27 May 2003. The matter was decided on 2004-03-08 by the High Court (Bombay High Court - B.H. Marlapalle and M.G. Gaikwad, JJ; judgment by B.H. Marlapalle, J). On those facts the High Court held as follows. The appeals were allowed. The orders of the Tribunal dated 31 May 2002 and 27 May 2003, the order of the Commissioner (Appeals) dated 4 April 2000 and the order of the Income Tax Officer (TDS) dated 16 January 1998 were quashed and set aside, with a direction that any tax already remitted be set off in future returns. On the merits, the supply of printed labels by Mudranika was a contract of sale and not a works contract, and the single member fell into gross error in holding otherwise. On the second question, the jurisdiction of a single member is governed by section 252(2) and (3), and unless the assessed income was less than five lakh rupees the single member could not derive jurisdiction; the registry ought to have notified the objection so that the President could allot the appeal correctly, and the Tribunal's reasons for rejecting the review application did not impress the Court, although it also agreed that a party who has submitted to jurisdiction cannot object afterwards. On the third question, the Tribunal's approach was too technical: a statutory remedy of appeal cannot be defeated by procedural deficiencies such as court fees unless the litigant is negligent or adamant, and the Tribunal ought to have decided the second year on merits; no remand was needed since the main issue had been decided.
The Court traced section 194C from its introduction by the Finance Act 1972, the circular of 29 May 1972 saying it applied to work and labour contracts and not to contracts for sale of goods, the circular of 26 September 1972 excluding transport contracts, and Explanation III inserted from 1 July 1995 bringing carriage of goods and passengers within work. Associated Cement, which gave any work a wide meaning and held payments to labourers loading cement bags to be covered, was explained by Birla Cement Works as concerned with work carried out through a contractor including supply of labour. For the sale and works contract distinction the Court took the Constitution Bench in Associated Hotels of India: a contract of sale is one whose main object is transfer of property in and delivery of a chattel as a chattel, and where the principal object of the work is not the transfer of a chattel as a chattel the contract is one of work and labour; neither ownership of materials nor the relative value of skill and labour is conclusive; and the court must find in each case the primary object of the transaction and the intention of the parties. Anandam Viswanathan, on printed question papers supplied to universities, was held to be a different kind of case. Applying these, Mudranika was an independent supplier working in its own premises with its own materials to a purchase order, and the Tribunal's finding that the labels were unmarketable rested on the fallacious premise that Mudranika printed an unlimited number; nothing showed the assessee supplied labels, ink, paper or screens. The Tribunal's own Division Bench decision in Wadilal Dairy International, holding the supply of printed packing material to be a sale, was applied. In the words reproduced by the source cited on this page: "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"."
It was decided by the High Court on 2004-03-08 and is reported as [2006] 281 ITR 99 (Bom); (2006) 201 CTR (Bom) 413. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 194C, section 201(1), section 201(1A), section 252(3), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were allowed. The orders of the Tribunal dated 31 May 2002 and 27 May 2003, the order of the Commissioner (Appeals) dated 4 April 2000 and the order of the Income Tax Officer (TDS) dated 16 January 1998 were quashed and set aside, with a direction that any tax already remitted be set off in future returns. On the merits, the supply of printed labels by Mudranika was a contract of sale and not a works contract, and the single member fell into gross error in holding otherwise. On the second question, the jurisdiction of a single member is governed by section 252(2) and (3), and unless the assessed income was less than five lakh rupees the single member could not derive jurisdiction; the registry ought to have notified the objection so that the President could allot the appeal correctly, and the Tribunal's reasons for rejecting the review application did not impress the Court, although it also agreed that a party who has submitted to jurisdiction cannot object afterwards. On the third question, the Tribunal's approach was too technical: a statutory remedy of appeal cannot be defeated by procedural deficiencies such as court fees unless the litigant is negligent or adamant, and the Tribunal ought to have decided the second year on merits; no remand was needed since the main issue had been decided. It arises in TDS Defaults and How Tax Law Is Read matters, on section 194C, section 201(1), section 201(1A), section 252(3) of the Income Tax Act 1961, and was decided by Bombay High Court - B.H. Marlapalle and M.G. Gaikwad, JJ; judgment by B.H. Marlapalle, J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show that the supplier deals with other customers on the same footing and is not a captive unit. Do not concede that goods made to your specification are unmarketable; the Court held that argument fallacious where quantity is limited to the order. Check the current definition of work in section 194C before applying this case, since the provision has been recast since 2004, and read it with any transfer pricing or indirect tax characterisation you have already adopted.
Validity check could not be completed. Not checked, and the reader must verify the provision for his own year. The decision construes section 194C as it stood for financial years 1995-96 and 1996-97, when work was defined only by Explanation III. Whether the definition of work was later expanded to deal expressly with manufacturing or supplying a product to a customer's requirement, and from when, was not established from the material read. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment's recital of the demand appears to transpose the provisions: it describes the tax demands of Rs 40,481 and Rs 79,134 as being under section 201(1A) and the further sums of Rs 11,132 and Rs 9,892 as interest under section 201(1), whereas section 201(1) carries the demand and section 201(1A) the interest. Both are given in the sections field. The Court does not identify the three departmental circulars of 8 March 1994, 2 August 1995 and 8 August 1995 that the Tribunal relied on, nor does it say anything about their binding character. Several of the decisions cited by counsel are listed in the judgment without citations. The appeal numbers are given only for Tax Appeal No. 44 of 2003, the number of the connected appeal not appearing in the text. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were allowed. The orders of the Tribunal dated 31 May 2002 and 27 May 2003, the order of the Commissioner (Appeals) dated 4 April 2000 and the order of the Income Tax Officer (TDS) dated 16 January 1998 were quashed and set aside, with a direction that any tax already remitted be set off in future returns. On the merits, the supply of printed labels by Mudranika was a contract of sale and not a works contract, and the single member fell into gross error in holding otherwise. On the second question, the jurisdiction of a single member is governed by section 252(2) and (3), and unless the assessed income was less than five lakh rupees the single member could not derive jurisdiction; the registry ought to have notified the objection so that the President could allot the appeal correctly, and the Tribunal's reasons for rejecting the review application did not impress the Court, although it also agreed that a party who has submitted to jurisdiction cannot object afterwards. On the third question, the Tribunal's approach was too technical: a statutory remedy of appeal cannot be defeated by procedural deficiencies such as court fees unless the litigant is negligent or adamant, and the Tribunal ought to have decided the second year on merits; no remand was needed since the main issue had been decided.
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