I get a third party to manufacture my products to my formulation and under my brand, but he buys the raw material himself. Should I be deducting tax under section 194C?
No, on those facts. The Bombay High Court held the contract was one of sale, not of work, so section 194C was not attracted and the company could not be treated as an assessee in default under section 201(1). What decides it is not the specifications or the trade mark but the material and the passing of property: the manufacturer sourced the raw material himself, worked at his own establishment on a principal to principal basis, and property passed only on delivery. The Court held clause (e) of the Explanation inserted by the Finance Act 2009 to be clarificatory of a position that had held the field for over three decades.
Decided by the High Court (High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction; Dr D.Y. Chandrachud and J.P. Devadhar, JJ (oral judgment by Dr D.Y. Chandrachud, J)) on 2010-03-12, reported as Income Tax Appeal No. 2256 of 2009 (Bombay High Court). It bears on section 194C, section 201(1), section 201(1A) of the Income Tax Act 1961, in TDS Defaults and How Tax Law Is Read matters.
This is the judgment practitioners reach for on outsourced or contract manufacture, and it does two things nothing else does as cleanly. First, it identifies the single operative test after Associated Cement had given work its widest meaning: not who wrote the specification or whose brand goes on the box, but whose material it is and when property passes. Specifications, an exclusivity covenant, a trade mark licence, a duty to surrender licences on termination - the Court held that none of these detracts from a sale, treating them as ordinary incidents of protecting a mark and the quality assurance the public is entitled to expect of a pharmaceutical product. Second, it settles the position for years before 1 October 2009 by holding clause (e) of the Explanation to be clarificatory and therefore retrospective, so that the pre-amendment years are governed by the same rule. It traces that rule through the Board's own circulars from 1972 onwards, which continued to except contracts of sale even after the 1994 circular widened section 194C to every kind of contract.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee manufactures and markets drugs and pharmaceutical products. A survey found it engaged in three kinds of activity: manufacture at its own factory, manufacture by third parties, and manufacture by third parties to the assessee's specifications and standards under the assessee's trade mark. The third category was in issue. Under an agreement of 18 May 2005 with Maxim Pharmaceuticals Pvt Ltd, the assessee disclosed technical information and specifications; the manufacturer produced at its own establishment, was solely responsible for the purchase, procurement and storage of raw materials, obtained its own manufacturing licence and Food and Drug Administration endorsement, and bore its own taxes and duties. The transaction was expressly on a principal to principal basis, the assessee placing orders at an agreed price. Property in the product vested in the assessee on delivery. The manufacturer was to affix the assessee's trade mark, not to supply the products or similar products to third parties, and to surrender the licences on termination; the assessee could inspect the facility and approve the goods. For assessment year 2006-07 the Assessing Officer held the assessee in default under section 201(1) for Rs.51,09,347 of tax not deducted under section 194C, with interest under section 201(1A). The Commissioner (Appeals) confirmed it. The Tribunal, following BDA Ltd, held the contract was one of sale and allowed the appeal. The Revenue appealed under section 260A, the matter being heard with a batch raising the same question.
The appeal was dismissed and the question answered in favour of the assessee. The Revenue was not justified in treating the assessee as an assessee in default. The contract was not one for carrying out any work within section 194C. The Court upheld the Tribunal's conclusion but on its own reasoning, expressly declining to treat as conclusive the Tribunal's reliance on the manufacturer having paid excise duty and sales tax; the decision was rested instead on the dominant nature of the transaction as evidenced by the terms of the contract. On the facts of the agreement, the manufacture was at the manufacturer's own establishment, the material was obtained from a person other than the assessee, property passed on delivery and the goods had an identifiable existence before delivery, so every requirement of a contract of sale was met. The circumstances the Revenue relied on - the assessee's formulation, its trade mark, and the bar on supplying third parties - did not detract from that character. The Court further held that clause (e) of the Explanation to section 194C, inserted by the Finance Act 2009, is clarificatory and therefore reflects the law as it always stood.
The Court started from Associated Cement, where the Supreme Court refused to cut down any work to a works contract and gave the expression its full width. But that expansive meaning has always co-existed with the Revenue's own position that a contract for sale falls outside section 194C. The Court traced that position through the circulars: Circular No. 86 of 29 May 1972 excluded contracts of sale and drew the line at ownership of the material, treating fabrication to the buyer's specification as a sale where the property passed only on delivery; Circular No. 108 of 1973 said the same; and even the circulars issued after Associated Cement, which extended section 194C to transport, service, advertising and material contracts and withdrew the earlier ones, continued to assert that the section does not cover contracts for the sale of goods. Turning to the general law, the Court took the test from the decided cases to be the dominant interest and object of the parties, gathered from the terms of the contract, the circumstances and the custom of the trade, citing Guntur Tobaccos on the three forms a contract for work may take and Associated Hotels of India on the transfer of a chattel as a chattel. Applied to the pharmaceutical industry, the Court distinguished three situations - own manufacture, loan licensing where the company supplies the raw material, and third party manufacture where the manufacturer procures the material - and placed this case in the third. It then rejected the Revenue's covenants one by one: a specification is business expediency, since a mark carries an assurance of quality which matters most in a medicine, and an exclusivity clause protects intellectual property rights and is not inconsistent with a sale. Finally, the Court read the Finance Act 2009 amendment as confirmation rather than change. The Memorandum said clause (e) was introduced to bring clarity to ongoing litigation on outsourcing, and its language makes the source of the material, not the specification, the dispositive fact. Applying Podar Cement, Allied Motors and Alom Extrusions on declaratory amendments, and the statement of principle in Justice G.P. Singh's Interpretation of Statutes, the Court held that an explanation which adopts an understanding already reflected in circulars and judicial decisions operates from the inception.
the circumstance that the requirements or specifications are provided by the purchaser is not regarded by the statute as being dispositive of the question as to whether a contract constitutes a contract of work or sale
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Handle my notice → Ask a CA on WhatsAppNo, on those facts. The Bombay High Court held the contract was one of sale, not of work, so section 194C was not attracted and the company could not be treated as an assessee in default under section 201(1). What decides it is not the specifications or the trade mark but the material and the passing of property: the manufacturer sourced the raw material himself, worked at his own establishment on a principal to principal basis, and property passed only on delivery. The Court held clause (e) of the Explanation inserted by the Finance Act 2009 to be clarificatory of a position that had held the field for over three decades. This was decided by the High Court (High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction; Dr D.Y. Chandrachud and J.P. Devadhar, JJ (oral judgment by Dr D.Y. Chandrachud, J)) and bears on section 194C, section 201(1), section 201(1A) of the Income Tax Act 1961. It is reported as Income Tax Appeal No. 2256 of 2009 (Bombay High Court). This is the judgment practitioners reach for on outsourced or contract manufacture, and it does two things nothing else does as cleanly. First, it identifies the single operative test after Associated Cement had given work its widest meaning: not who wrote the specification or whose brand goes on the box, but whose material it is and when property passes. Specifications, an exclusivity covenant, a trade mark licence, a duty to surrender licences on termination - the Court held that none of these detracts from a sale, treating them as ordinary incidents of protecting a mark and the quality assurance the public is entitled to expect of a pharmaceutical product. Second, it settles the position for years before 1 October 2009 by holding clause (e) of the Explanation to be clarificatory and therefore retrospective, so that the pre-amendment years are governed by the same rule. It traces that rule through the Board's own circulars from 1972 onwards, which continued to except contracts of sale even after the 1994 circular widened section 194C to every kind of contract. If it applies to you, the first step is this: Put the raw material question at the front of your reply: show invoices proving the manufacturer bought the material from someone other than you.
The assessee manufactures and markets drugs and pharmaceutical products. A survey found it engaged in three kinds of activity: manufacture at its own factory, manufacture by third parties, and manufacture by third parties to the assessee's specifications and standards under the assessee's trade mark. The third category was in issue. Under an agreement of 18 May 2005 with Maxim Pharmaceuticals Pvt Ltd, the assessee disclosed technical information and specifications; the manufacturer produced at its own establishment, was solely responsible for the purchase, procurement and storage of raw materials, obtained its own manufacturing licence and Food and Drug Administration endorsement, and bore its own taxes and duties. The transaction was expressly on a principal to principal basis, the assessee placing orders at an agreed price. Property in the product vested in the assessee on delivery. The manufacturer was to affix the assessee's trade mark, not to supply the products or similar products to third parties, and to surrender the licences on termination; the assessee could inspect the facility and approve the goods. For assessment year 2006-07 the Assessing Officer held the assessee in default under section 201(1) for Rs.51,09,347 of tax not deducted under section 194C, with interest under section 201(1A). The Commissioner (Appeals) confirmed it. The Tribunal, following BDA Ltd, held the contract was one of sale and allowed the appeal. The Revenue appealed under section 260A, the matter being heard with a batch raising the same question. The matter was decided on 2010-03-12 by the High Court (High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction; Dr D.Y. Chandrachud and J.P. Devadhar, JJ (oral judgment by Dr D.Y. Chandrachud, J)). On those facts the High Court held as follows. The appeal was dismissed and the question answered in favour of the assessee. The Revenue was not justified in treating the assessee as an assessee in default. The contract was not one for carrying out any work within section 194C. The Court upheld the Tribunal's conclusion but on its own reasoning, expressly declining to treat as conclusive the Tribunal's reliance on the manufacturer having paid excise duty and sales tax; the decision was rested instead on the dominant nature of the transaction as evidenced by the terms of the contract. On the facts of the agreement, the manufacture was at the manufacturer's own establishment, the material was obtained from a person other than the assessee, property passed on delivery and the goods had an identifiable existence before delivery, so every requirement of a contract of sale was met. The circumstances the Revenue relied on - the assessee's formulation, its trade mark, and the bar on supplying third parties - did not detract from that character. The Court further held that clause (e) of the Explanation to section 194C, inserted by the Finance Act 2009, is clarificatory and therefore reflects the law as it always stood.
The Court started from Associated Cement, where the Supreme Court refused to cut down any work to a works contract and gave the expression its full width. But that expansive meaning has always co-existed with the Revenue's own position that a contract for sale falls outside section 194C. The Court traced that position through the circulars: Circular No. 86 of 29 May 1972 excluded contracts of sale and drew the line at ownership of the material, treating fabrication to the buyer's specification as a sale where the property passed only on delivery; Circular No. 108 of 1973 said the same; and even the circulars issued after Associated Cement, which extended section 194C to transport, service, advertising and material contracts and withdrew the earlier ones, continued to assert that the section does not cover contracts for the sale of goods. Turning to the general law, the Court took the test from the decided cases to be the dominant interest and object of the parties, gathered from the terms of the contract, the circumstances and the custom of the trade, citing Guntur Tobaccos on the three forms a contract for work may take and Associated Hotels of India on the transfer of a chattel as a chattel. Applied to the pharmaceutical industry, the Court distinguished three situations - own manufacture, loan licensing where the company supplies the raw material, and third party manufacture where the manufacturer procures the material - and placed this case in the third. It then rejected the Revenue's covenants one by one: a specification is business expediency, since a mark carries an assurance of quality which matters most in a medicine, and an exclusivity clause protects intellectual property rights and is not inconsistent with a sale. Finally, the Court read the Finance Act 2009 amendment as confirmation rather than change. The Memorandum said clause (e) was introduced to bring clarity to ongoing litigation on outsourcing, and its language makes the source of the material, not the specification, the dispositive fact. Applying Podar Cement, Allied Motors and Alom Extrusions on declaratory amendments, and the statement of principle in Justice G.P. Singh's Interpretation of Statutes, the Court held that an explanation which adopts an understanding already reflected in circulars and judicial decisions operates from the inception. In the words reproduced by the source cited on this page: "the circumstance that the requirements or specifications are provided by the purchaser is not regarded by the statute as being dispositive of the question as to whether a contract constitutes a contract of work or sale"
It was decided by the High Court on 2010-03-12 and is reported as Income Tax Appeal No. 2256 of 2009 (Bombay High Court). 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), 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 appeal was dismissed and the question answered in favour of the assessee. The Revenue was not justified in treating the assessee as an assessee in default. The contract was not one for carrying out any work within section 194C. The Court upheld the Tribunal's conclusion but on its own reasoning, expressly declining to treat as conclusive the Tribunal's reliance on the manufacturer having paid excise duty and sales tax; the decision was rested instead on the dominant nature of the transaction as evidenced by the terms of the contract. On the facts of the agreement, the manufacture was at the manufacturer's own establishment, the material was obtained from a person other than the assessee, property passed on delivery and the goods had an identifiable existence before delivery, so every requirement of a contract of sale was met. The circumstances the Revenue relied on - the assessee's formulation, its trade mark, and the bar on supplying third parties - did not detract from that character. The Court further held that clause (e) of the Explanation to section 194C, inserted by the Finance Act 2009, is clarificatory and therefore reflects the law as it always stood. It arises in TDS Defaults and How Tax Law Is Read matters, on section 194C, section 201(1), section 201(1A) of the Income Tax Act 1961, and was decided by High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction; Dr D.Y. Chandrachud and J.P. Devadhar, JJ (oral judgment by Dr D.Y. Chandrachud, 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. Point to the clause fixing the passing of property on delivery, and check the agreement actually says so before relying on this judgment. Do not concede on the specification, the brand or the exclusivity clause - the Court held these are matters of business expediency and quality control, not indicators of a works contract. For years before 1 October 2009, take the point that clause (e) of the Explanation is clarificatory and applies to those years too. Where you supply the material yourself - loan licensing - accept that section 194C applies; that is the other side of the same line.
Validity check could not be completed. No later history was checked and it is not known whether this judgment was carried to the Supreme Court. For periods from 1 October 2009 the point is in any event governed by clause (e) of the Explanation to section 194C as substituted by the Finance Act 2009, which the Court sets out; whether that clause has since been further amended was not verified 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 harvested text is clipped: about 10,923 characters from the middle are not reproduced, covering roughly paragraphs 16 to 20. That portion carried the remainder of the Court's survey of the work-or-sale authorities under sales tax law and its discussion of the transport contract cases and of Explanation III inserted from 1 July 1995, which resumes mid-sentence at a point where the Supreme Court had declined to disturb an understanding that had held the field for two decades. The facts, the circulars, the terms of the agreement, the Court's own reasoning from paragraph 21 onwards and the operative conclusions were all read. The source page's title, Hospital Bldg vs M/S. Glenmark Pharmaceuticals Ltd, is a mis-parsing of the appellant Commissioner's address in the cause title; the appeal is by the Commissioner of Income Tax-TDS and the case is the right one. The batch line lists section 40(a)(ia); that provision is nowhere in the judgment, which concerns liability as an assessee in default under section 201(1) and interest under section 201(1A), and it has been dropped. The batch line carried no reporter citations, so the appeal number is used. The judgment does not state the amount or the terms of any of the companion appeals heard with it, and it does not decide what the position would be in a loan licensing arrangement, which it describes but does not rule on. 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 appeal was dismissed and the question answered in favour of the assessee. The Revenue was not justified in treating the assessee as an assessee in default. The contract was not one for carrying out any work within section 194C. The Court upheld the Tribunal's conclusion but on its own reasoning, expressly declining to treat as conclusive the Tribunal's reliance on the manufacturer having paid excise duty and sales tax; the decision was rested instead on the dominant nature of the transaction as evidenced by the terms of the contract. On the facts of the agreement, the manufacture was at the manufacturer's own establishment, the material was obtained from a person other than the assessee, property passed on delivery and the goods had an identifiable existence before delivery, so every requirement of a contract of sale was met. The circumstances the Revenue relied on - the assessee's formulation, its trade mark, and the bar on supplying third parties - did not detract from that character. The Court further held that clause (e) of the Explanation to section 194C, inserted by the Finance Act 2009, is clarificatory and therefore reflects the law as it always stood.
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