A Division Bench of the Orissa High Court held that, the Deduction of Tax at Source ( TDS ) by Hindustan Unilever Ltd ( HUL ) was not wrong, thereby quashing the challenge by the Works Contractor of ‘Wheel, Surf Excel and Domex’ .
The Petitioner Company, Oriclean Pvt. Ltd. had entered into a Purchasing Agreement with M/s. Hindustan Unilever Ltd., having its registered office at Hindustan Unilever House, B.D. Sawant Marg, Chakala, Andheri (E), Mumbai400099 whose main business is manufacture and sale of detergents, etc.
As per the Purchase Agreement, the Seller Company, i.e. the Petitioner, M/s. Oriclean Pvt. Ltd. would manufacture/ process and package the products in accordance with the specifications and formulations stipulated in the said agreement and using the technology provided by the buyer.
The Petitioner Company shall procure all raw materials and packing materials required for the manufacture of 3 (Three) Detergents, namely ‘Wheel’, ‘Surf Excel’ and ‘Domex’, directly from third party suppliers on Invoices raised on its own name.
The Buyer M/s. Hindustan Unilever Ltd, would purchase such Products manufactured, processed and packaged by the Seller, M/s. Oriclean Pvt. Ltd. for a consideration on certain terms and conditions which was mutually agreed upon.
From the date of entering into the Purchase Agreement, the dealings between the buyer and seller were continuing smoothly until the Buyer, M/s. Hindustan Unilever Ltd. started deducting TDS (Tax Deducted at Source) @ 2% under section 194 (C) of the Income Tax Act, 1961 on all Sale Invoices of the Petitioner Company with effect from May, 2019.
The counsel for the Petitioner submitted in support of his contentions that the case of the Petitioner Company does not fall within the purview of the definition of ‘Work’, as the Petitioner Company procured raw materials along with other packing materials at its own cost from different Suppliers with separate invoices raised on its own name.
It procured only one Raw Material from a Unit of the Buyer Company, M/s. Hindustan Unilever Ltd., through a separate tax invoice for the manufacture of one of the three products that it supplied to the Buyer Company in accordance with the ‘Purchase Agreement’.
It was therefore humbly submitted that the Agreement entered into between the Petitioner Company and M/s. Hindustan Unilever Ltd. is a ‘Contract for Sale’ and not a ‘Works Contract’ as the Scope of work done under the Agreement does not fall within the definition of ‘Work’.
Thus, it was contended that the Petitioner Company was in no manner liable to pay TDS @2% for the Products manufactured and sold to the Buyer as per the specifications mentioned in the Purchase Agreement, as the Petitioner Company manufactured the required products using Raw Materials procured from independent Suppliers in accordance with the terms of the Purchase Agreement and procured just one raw material from a Unit of Hindustan Unilever Ltd., therein treating the said Supplying Unit as a Separate Individual Supplier and getting a Separate Invoice issued in its name for the same.
The Petitioner Company had issued a Letter addressed to the Assistant Commissioner of Income Tax, requesting a revision of the Certificate issued for Deduction of TDS from the Petitioner Company to 0.10% instead of 1.25%, therein stating that though the Estimated Income Tax payable for the Financial Year 2020-21 by the Petitioner Company amounted to a total of Rs. 81,00,000/- (Rupees Eighty One Lakhs) (approx.), by the time the said Letter was filed, a sum of Rs. 70,00,000/-(Rupees Seventy Lakhs) had already been deducted as TDS from the account of the Petitioner Company. Further collection of such TDS would cause unprecedented financial loss to the Petitioner Company.
Even though the Petitioner Company in the said Letter sought a reply from the Income Tax Authority as to the reason for such sudden enhancement in the percentage of TDS it failed to elicit any response.
During such period of pendency of a previous Writ Application before this Court, the Opposite Party No. 4 kept collecting TDS at the rate of 1.25% on all Sales effected by the Petitioner Company, on the basis of the Certificate which clearly stipulated that the said Rate of Collection of Tax @1.25% would remain valid for the period between 07.08.2020 and 31.03.2021.
On the other hand, the Senior Standing Counsel for the Opposite Parties Submitted that, the assessee while applying for the non-deduction under section 197 under Rule 28 & 37G of the Income Tax Rules vide Form no.13, has expressed in writing that its case is covered under “Payment to Contractors” in the Column “Nature of payment” and no where it has been mentioned that it is a transaction of contract for sale. Based on its own facts the assessee had applied for non-deduction under Section 197.
Based on the Departmental analysis the rate of deduction has been derived and accordingly approval has been given by the competent authority. Based on the Estimated Net Profit of the assessee for the F.Y. 2020-21, the rate of deduction has been derived and accordingly approval has been given.
Having perused the document and having heard the parties, the Court observed that Section 194C of the Income Tax Act, 1961 clearly states that any person responsible for paying a sum to any resident for carrying out any work in pursuance of a contract between the Contractor and a Specific Person shall, at the time of credit of such sum to the account of the Contractor or at the time of payment thereof, deduct an amount equal to- 1% of such sum as income-tax on income comprised therein- where the payment is being made or credit is being given to an individual or to a Hindu Undivided Family; and 2% of such sum as income-tax on income comprised therein- where the payment is being made or credit is being given to a person other than an individual or a Hindu Undivided Family.
The term ‘Work’, as used in Section 194C of the Income Tax Act, 1961 has been defined in the Explanation to the said Section and states that the term ‘work’ shall include-
“the explanatory Notes to the Provisions of the Finance (No.2) Act, 2009 as issued in CIRCULAR NO. 05/2010 F. No. 142/13/2010-SO (TPL), Government of India, Ministry of Finance, Department of Revenue (Central Board of Direct Taxes) dated 03.06.2010, provide for a Clarification regarding the term ‘work’, as used under Section 194 C of the Income Tax Act, 1961, stating therein as under- “work” shall not include manufacturing or supplying a product according to the requirement or specification of a customer by using raw material purchased from a person other than such customer as such a contract is a contract for ‘sale’.
This will however not apply to a contract which does not entail manufacture or supply of an article or thing (eg. a construction contract). Manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer is also included, within the definition of ‘work’. It is further provided that in such a case TDS shall be deducted on the invoice value excluding the value of material purchased from such customer if such value is mentioned separately in the invoice. here the material component has not been separately mentioned in the invoice, TDS shall be deducted on the whole of the invoice value.
The onus of proving the transactions between the assessee and the HUL that it does not fall under section 194C completely lies with the assessee. He is required to provide sufficient documents in support of the transaction that it is not a contract under the meaning of Section 194C of the Act, rather it is a contract for sale and falls under Circular no.05/2010 issued by the CBDT.
As per the purchase agreement entered into between the assessee and HUL, whether the materials used in manufacturing the products sold to HUL cannot be assessed and/or judged from the reading/ analysis of the agreement. The views in respect to purchase of materials can be only assessed from the verification of purchase invoices and books of accounts and confirmation from the HUL.
Moreover, in most of the points, it has been expressly noted that the assessee can purchase materials from HUL. In absence of adequate information relating to purchase, it cannot be ascertained whether the entire purchase was made directly from the third party or from HUL.
Based on the Departmental analysis the rate of deduction has been derived and accordingly approval has been given by the competent authority. Based on the Estimated Net Profit of the assessee for the F.Y. 2020-21, the rate of deduction has been derived and accordingly approval has been given.
Petitioner itself submitted application in F.No.13 claiming receivable for the Hindustan I.ever as “contractual receipts”. Further it had not made M/s. Hindustan lever Limited as a party to this case which indicates that it primarily had no objection with M/s. Hindustan Lever Limited treating it’s payment to the applicant as “contractual payment”, the bench noted.
It was observed that, “The Petitioner’s claim that the Hindustan lever had been wrongly deducting tax at source under section 194C, treating the contractual agreement for manufacturing of Hindustan Lever Limited products as “works contract” is not legally tenable since for all purposes the functioning of the applicant in respect of its transaction with Hindustan lever/ comes under the domain of “works contract”.”
Further, it was also noted that the applicant had regularly claimed amount receivable from Hindustan Lever as ‘contractual amount” in F.No.13 filed in earlier Financial Years including Financial Year 2019-20 and even in F. No. 13 filed for the Financial Year 2020-21.
“Furthermore, the Petitioner did not adduce any documents/correspondences disputing the deduction of tax at source under section 194C of the I.T. Act by the Hindustan Lever Ltd”, the bench observed.
Evidently, the Petitioner did not consider such action by Hindustan Lever Limited as “dispute” suitable for agitation with Hindustan Lever Limited, unless the rate of IDS for the Financial Year 2020-21 has been fixed at 1.25%, the Division Bench of Justice Dr.S.K. Panigrahi and Justice G. Satapathy concluded.
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