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Section 194C TDS does not apply to contract manufacturing agreements

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CIT vs. Silver Oak Laboratories P. Ltd (Supreme Court)

CLR Editorial Notes: The assessee in this case related to Section 194C, is a manufacturer of pharmaceutical products. The assessee entered into various agreements with multiple manufacturers who manufactured items according to the specifications provided by the assessee. The Assessing Officer held that the transaction between the assessee and the manufacturers was in the nature of a works contract and hence it fell within the purview of section 194C. The assessing  officer also said that the assessee should have deducted TDS thereon on all transactions. The assessee was held to be in default and hence was made liable to pay the tax and interest u/s 201(1) & 201(1A) of the IT Act. The assessee then appealed to the  Tribunal which held that the transaction was one of “sale simplicitor” and hence did not qualify as a work contract and hence the assessee was not liable to deduct TDS as specified under section 194C. The department appealed to the High Court against this order which was summarily dismissed based on the case of Reebok India 306 ITR 124 (Del). On further appeal by the department to the Supreme Court, the Hon’ble SC dismissed the Special leave petition and held:

“On examining the terms and conditions, invoices, purchase orders and challans indicating payment of excise duty, there is no material on record to indicate that the transaction in question is a contract for carrying out works. Hence, s. 194C is not attracted. S. 194C has been amended by the Finance (No.2) Act, 2009, w.e.f. 1.10.2009 to provide that work includes manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer. It is clarified that the definition of the word work will not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person other than such customer.”

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Case File available for download

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Tags: 201(1)201(1A)AppealHigh CourtIndiaManufacturingReebok India 306 ITR 124 (Del)Section 194CSupreme Court

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