Applicability of Sec 194C in case of "Sale of Goods"

ITAT, MUMBAI BENCHES ‘A’: MUMBAI

Novartis HealthCare Pvt. Ltd.

v.

ITO
ITA Nos. 310 to 312/Mum/2006

February 25, 2009

RELEVANT EXTRACTS:

There is no dispute about the nature of transactions entered into by the. assessee with the manufacturers who have their independent establishments for the manufacture of medicines. The assessee is continuously placing orders with such manufacturers for manufacturing of medicines strictly according to its own specifications. The manufacturers cannot deviate from the specifications given. If any lot is found lacking the desired specifications, the assessee has nail right to reject such lot. Further there is no dispute with the goods manufactured by these panics are subject to the control and supervision of the assessee from time to time and from stage to stage. These products carry the trademark of the assessee and the manufacturers are not entitled to use the assessee's trademark for any purpose other than the manufacture of medicines ordered by the assessee. There is further no quarrel on the fact that all the input costs for manufacturing of the medicines are incurred by such manufacturers who purchase the raw material at their own, incur the labour costs and other overheads, pay excise duty and sales tax when the goods are manufactured and sold to the assessee. It is only after the manufacture of medicines that the assessee is billed with the total costs incurred by the manufacturers along with their profit mark up.

Under these circumstances we have to decide whether the work done by the manufacturers can be said to be sale of goods to the assessee or carrying out any work in pursuance of contract. Circular No.681 dated 8.3.1994 was issued by the Board to throw light on the applicability of section 194C to service contracts. Para 7 of the Circular states that the service contracts would be covered by the provisions of this section since service means doing any work as explained above. Clause (vi) of para 7, which is relevant for our purpose, reads as under:-
“(vi) The provisions of this section will not cover contracts for sale of goods -
(a) Since contracts for the construction, repair, renovation or alteration of buildings or dams or laying of roads or airfields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labour, income-tax will have to be deducted from payments made in respect of such contracts. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.
(b) (b) 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 outsider the purview of this section.
(c) (c) In State of Himachal Pradesh vs. Associated Hostels of India Ltd. 119721 29 STC 474, the Supreme Court observed that where the principal objective of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, contract is of work and labour. The test is whether or not the work and labour bestowed and in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials in conclusive although such matters may be taken into consideration in determining in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land where the intention plainly is not to sell the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour. In case of doubt whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the above mentioned case."

On going through the above portion of the Circular it is abundantly clear that the contracts for the sale of goods will not be covered within the ambit of section 194C but the contracts granted for processing of goods supplied by the Government or any other specified person where the ownership of such goods remains at all times with the Government or such person, will also fall within the scope of this section. The same position will prevail in respect of the contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified persons and the fabrication work is done by the contractor. Thus where the goods are supplied by the Government or any other specific person for doing of a particular job on such goods it will be considered as covered within the meaning of "work". Clause (b), which is significant for our purpose, makes the position more clear when it states that where 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 other person only after such article or thing is delivered the contract will be a contract for sale and hence outside the scope of this section. Adverting to the facts of the instant case we find that the assessee placed orders with the manufacturers for manufacturing the medicines strictly according to its specifications but the property in such goods passed to the assessee only after these were delivered to it When the manufacturers were making the purchases at their own and incurring other input costs, the product so manufactured was their own till it was delivered to the assessee. Suppose during the course of manufacture some wrong raw material is used or due to any other reason the finished product does not come up to the specifications of the assessee, such was the loss of the manufacturer. It is only when the medicine is manufactured according to the assessee's specifications and delivered to it that the property in goods can be said to have passed to the assessee. Here is a case in which the assessee had simply placed the orders for the manufacture of medicines according to its own specification and all other relevant decisions for the manufacturing have been left to the wisdom of the manufacturer. The assessee is only interested in the output coming up to its standard and how that output is achieved is the job of the manufacturer. The checks provided by the assessee cannot alter the real character of the transaction. Simply because the assessee monitors the manufacturing from time to time to ensure that the medicines manufactured by the parties are as per it§ specifications, that will not put the assessee into the shoes of manufacturer more so when the establishments are of the third parties and they have their own labour force with all the infrastructure. Not only die cost of raw material has to be incurred by the manufacturers but even the excise duty is also paid by them directly. Further when such manufactures make the sale of such goods to the assessee the sales tax is also paid by them. It is not as if the manufacturers had done some process or added the value to the material supplied by the assessee. On the contrary it is a case where the manufacturer has produced the goods at its own, though subject to the assessee's specifications, supervision and control and later on sold such goods to the assessee. The property in goods passes over to the assessee only when such goods were manufactured and delivered to it.