M/s Ahaar Consumer Products Pvt. Ltd., New Delhi v. ITO, New Delhi

ITA NO.2310/DEL/2010 & OTHRS 1 IN THE INCOME TAX APPELLAT E TRIBUNAL DELHI BENCH A NEW DELHI BEFORE SHRI G.E. VEERABHADRAPPA VICE PRESIDENT AND SHRI C.L. SETHI JUDICIAL MEMBER ITA NO.2910/DEL/2010 ASSTT. YEAR: 2007-08 ITA NO.1939/DEL/2010 ASSTT. YEAR: 2006-07 INCOME TAX OFFICER VS AHAAR CON SUMER PRODUCTS PVT. LTD. CO. WARD 1(2) G-3 7 LAWRENCE ROAD INDL. AREA ROOM NO. 398-B NEW DE LHI. C R BUILDING I.P.ESTATE NEW DELHI. ITA NO.1354/DEL/2010 ASSTT. YEAR: 2006-07 ITA NO.1705/DEL/2010 ASSTT. YEAR: 2007-08 AHAAR CONSUMER PRODUCTS PVT. LTD. VS ITO WAR D-1(2) NEW DELHI. NEW DELHI. (PAN NO. AAACF8541N) (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI A.K. MONGA SR.DR RESPONDENT BY: SH. S.K. GUPTA O R D E R PER G.E. VEERABHADRAPPA V.P. THESE CROSS APPEALS ARISE OUT OF THE ORDERS OF CIT (A) DATED 22.2.2010 AND 18.3.2010 FOR ASSTT. YEARS 2006-07AND 2007-08. THESE APPEALS WERE ITA NO.2310/DEL/2010 & OTHRS 2 HEARD TOGETHER AND WE FIND IT CONVENIENT TO DISPOSE OF THE SAME BY THIS CONSOLIDATED ORDER. 2. THE ASSESSEE IS A LIMITED COMPANY. IT HAS ENTER ED INTO THE BUSINESS OF TRADING OF WHEAT ATTA AGARBATTI AND OTHER FOOD GR AIN PRODUCE AND ALSO PROCESSING AND TRADING OF OTHER FOODGRAINS. THE AS SESSING OFFICER EXAMINED THE TRANSACTIONS OF THE ASSESSEE AND FOUND THAT IT PURCHASED WHEAT FROM THE OPEN MARKET AND DELIVERED IT TO M/S AHAAR INTERNATI ONAL LTD. (AIL) FOR MAKING THE BY-PRODUCT SUCH AS ATTA DALIA ETC. IT WAS CLAIMED THAT AS PER THE TERMS OF AGREEMENT WITH M/S AHAAR INTERNATIONAL TH E LATTER SHALL GRIND AND PRODUCE ATTA AND DALIA ON ASSESSEES BEHALF AND THE ASSESSEE WAS REQUIRED TO PROVIDE RAW MATERIAL (WHEAT) AND PACKAGING MATERIAL I.E. HDPE/PP BAGS LDPE PACKETS LINERS AND OTHER CONSUMABLES REQUIRED IN PRODUCTION AND PACKING I.E. CODING INK STAMP STITCHING THREAD ET C. AND M/S AHAAR INTERNATIONAL LTD. (AIL) SHALL GIVE 85% DALIA OR 88% ATTA BY WEIGHT OF THE WHEAT SUPPLIED BY THE ASSESSEE. THE WASTE OR THE R EMAINING QUANTITY OF WHEAT/RESIDUALS IF ANY SHALL BE KEPT BY AIL AS A CONSIDERATION FOR THE SERVICES RENDERED. 3. THE ASSESSING OFFICER (AO) ANALYZED THE DETAILS FURNISHED BY THE ASSESSEE AND HELD THAT M/S AIL HAS CARRIED OUT THE WORK OF GRINDING OF WHEAT AS PER THE AGREEMENT DATED 2.2.2005 AND CONSIDERING THE TOTAL SUPPLY OF THE ITA NO.2310/DEL/2010 & OTHRS 3 WHEAT TO AIL FOR PRODUCTION OF ATTA AND DALIA 10 0 9 041 KGS WERE TREATED AS KEPT BY AIL AS ITS PROCESSING CHARGES. HE WORKED O UT THE SAID QUANTITY IN THE FOLLOWING MANNER:- S.NO. ITEM QUANTITY KEPT RATE AMOUNT EQUIVALENT 1. DALIYA 1 60 996 KG 14.76/KG RS. 23 76 301/- 2. ATTA - 8 48 045 KG 10.35/KG RS. 87 77 566 10 09 041 KG RS. 1 11 53 566 3.1 IT MAY BE STATED THAT AHAAR INTERNATIONAL(I) LT D. VIDE THEIR LETTER DATED 19.10.2009 HAS CERTIFIED THAT IT HAS RECEIVED 81403 50 KGS OF WHEAT FOR WHICH IT HAS DELIVERED THE FOLLOWING FINISHED PRODUCTS:- ATTA 6219011 KG DALIYA 912 298 KG THERE APPEARS TO BE NO DISPUTE THAT THE FINISHED PR ODUCT DELIVERED IS 85% OF DALIYA OR 88% OF ATTA GOT BY QUANTITY. IT IS ALSO CERTIFIED THAT THE BY-PRODUCT THAT IS RETAINED AND SOLD BY AHAAR INTERNATIONAL TH IS YEAR IS AS UNDER:- S.NO. FINISHED MATERIAL QTY IN (KG) RATES P KG(APPR OX) 1. CHOKER/CATTLEFEED 499155 5.60 2. REFRACTION 265676 1.50 3. WASTAGE/PROCESS LOSS 244210 0 TOTAL 1009041 3.2 THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY NO TDS WAS DEDUCTED ON THE PROCESSING CHARGES CALCULATED TO HAVE BEEN GIVE N TO THE COMPANY M/S AIL AND ON THAT BASIS THE AO WAS OF THE VIEW THAT THE TAX WAS TO BE DEDUCTED AT SOURCE ON THE ABOVE SUM AT THE TIME WHE N THE GRINDING AS PER THE ITA NO.2310/DEL/2010 & OTHRS 4 SPECIFICATION WAS COMPLETED BY AIL AND THE SAME HAS NOT BEEN DONE. THE ASSESSEES ACT OF NON-DEDUCTION OF TAX AT SOURCE ON THIS SO-CALLED ALLEGED PAYMENT ACCORDING TO AO ATTRACTED DISALLOWANCE UND ER THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. ACCORDINGLY HE MADE A DISALLOWANCE AT RS.1 11 53 566 WHICH WAS ADDED TO THE DECLARED INCO ME. 4. BEFORE THE CIT(A) IT WAS ARGUED THAT THERE WAS NO POSSIBILITY OF MANUFACTURING 100 KGS OF ATTA OUT OF 100 KGS OF WHE AT OR 100 KGS OF DALIA OUT OF 100 KGS OF WHEAT. THERE WOULD BE PROCESSING LOSS IN THE FORM OF FODDER WASTAGE DUST ETC. THIS ASPECT OF THE MATT ER HAS NOT BEEN APPRECIATED BY THE AO. DURING THE COURSE OF SUBMISSIONS IT WA S ALSO SUBMITTED THAT BY- PRODUCT WHICH INCLUDES CHOKER/CATTLE FEED REFRACTI ON AND OTHER WASTAGE AMOUNTED TO 10 09 041 KGS WHICH COULD BE VALUED AT RS.31 93 782. RELIANCE WAS PLACED ON A CERTIFICATE FROM WHOLEMEAL ATTA MANUFACTURERS ASSOCIATION DELHI WHERE IT WAS MENTIONED THAT THE OUTPUT OF ATTA VARIES FROM 86% TO 92% AND CHOKER AND REFRACTION AMOUNTS TO 7% TO 13% WHILE THE BALANCE IS SHORTAGE ON ACCOUNT OF DUST AND LOSS DUE TO MOISTURE ETC. THE AMOUNT OF RS. 31 93 782/- WHICH WAS WORKED OUT BY T HE ASSESSEE WAS ON THE BASIS OF THE CERTIFICATE OBTAINED FROM WHOLEMEAL AT TA MANUFACTURERS ASSOCIATION DELHI THE DETAILS OF WHICH ARE AS UNDE R:- ITA NO.2310/DEL/2010 & OTHRS 5 ITEM QUANTITY RATE VALUE CHOKER/CATTLE FEED 4 99 155 KGS 5.6/KG 27 95 268/- REFRACTION 2 65 676 KGS 1.5/KG 3 98 514/- WASTAGE/PROCESS LOSS 2 44 210 KGS 0 0 TOTAL 10 09 041 KGS 31 93 782/- 4.1 ACCORDING TO THE ASSESSEE NO PROPER OPPORTUNIT Y HAD BEEN PROVIDED BY THE AO FOR EXPLAINING THE ACTUAL AMOUNT OF RETEN TION MADE BY M/S AIL. THE CONTENTIONS OF THE ASSESSEE INCLUDING CERTIFICA TE OBTAINED FROM THE WHOLEMEAL ATTA MANUFACTURERS ASSOCIATION AS WELL AS THE CERTIFICATE OF M/S AIL WERE FORWARDED TO THE AO FOR HIS COMMENTS. THE AO SUBMITTED A REMAND REPORT DATED 4.2.2010. THE SUBSTANTIVE FIND ING OF THE CIT(A) AFTER CONSIDERING THE SAID REMAND REPORT ON THIS ISSUE IS AS UNDER:- FINDINGS; I HAVE GONE THROUGH THE OBSERVATIONS OF THE ASSESSIN G OFFICER SUBMISSIONS OF THE AR OF THE APPELLANT AS WELL AS THE REMAND REPORT. WITH REGARD TO THE ADMISSION OF ADDITIONAL EVIDENCE THE ASSESSING OFFICER HAS OBJEC TED TO THE ADMISSION OF THE SAME BUT SINCE THE ISSUE REGA RDING THE VALUATION OF THE RETAINED PRODUCTS HAD NOT BEEN CONSIDERED ELABORATELY ON MERITS PART OF THE DOCUM ENTS PROVIDED BY THE AR OF THE APPELLANT ARE BEING ADMIT TED TO APPRECIATE THE GROUNDS OF APPEAL ON MERIT AND TO UP HOLD THE PURPOSE OF PROVIDING A FAIR JUDGMENT. SOME OF T HE ISSUES WHICH NEEDS TO BE CONSIDERED BEFORE DECIDING THE GROUND OF APPEAL ARE AS FOLLOWS: ITA NO.2310/DEL/2010 & OTHRS 6 (A) AFTER CONSIDERING THE NATURE OF ACTIVITY OF THE APP ELLANT IT APPEARS THAT JOB WORK IS BEING GOT DONE BY THE APPE LLANT BY PROVIDING WHEAT TO ANOTHER PARTY M/S AIL AND IN RETURN THE APPELLANT IS BEING PROVIDED THE PRODUCT OF ATTA AND DALIYA. AS PER THE TERMS OF THE AGREEMENT IT IS ALS O CLEAR THAT FOR EVERY 100 KGS OF WHEAT PROVIDED THE OTHER PARTY SHALL PROVIDED 88% ATTA AND 85% DALIYA. THIS IMPLIE S THAT THE PAYMENT IS ASSURED OF 88% OF ATTA AND 85% OF DA LIYA ON THE AMOUNT OF WHEAT SUPPLIED. THE APPELLANT DOES NOT RECEIVE ANY OF THE BY PRODUCTS WHICH INCLUDE CHOKER CATTLE FEED REFRACTION AND OTHER WASTAGE/PROCESS LOSS. AF TER KEEPING IN VIEW THE ARGUMENTS OF THE AR OF THE APPE LLANT AS WELL AS THE CERTIFICATE OF THE WHOLEMEAL ATTA MANUFACTURERS ASSOCIATION IT CERTAINLY NEEDS TO BE APPRECIATED THAT 100 KGS OF WHEAT WOULD NOT RESULT IN 100% OUTPUT OF ATTA OR DALIYA. THE OTHER BY PRODUCT S OF CHOKER REFRACTION AND WASTAGE ARE ALSO THE BY PROD UCTS WHICH ARE BEING RETAINED BY THE PARTY WHICH HAS TAK EN THE JOB WORK OF GRINDING. THEREFORE TO ASSUME THAT THE TOTAL AMOUNT RETAINED BY THE OTHER PARTY WHICH IS TREATE D AS PAYMENT ONLY CONSISTS OF ATTA OR DALIYA DOES NOT AP PEAR TO BE LOGICAL OR SCIENTIFIC. (B) KEEPING IN VIEW THE FACT THAT THE TOTAL AMOUNT OF RETENTION/PAYMENT MADE TO M/S AIL HAS ONLY BEEN TRE ATED AS ATTA AND DALIYA BY THE ASSESSING OFFICER ALSO DO ES NOT APPEAR TO BE FAIR AND JUSTIFIED. FROM THE ASSESSMEN T ORDER ITSELF IT APPEARS THAT THIS ISSUE HAD NOT BEEN ELAB ORATELY CONSIDERED BY THE ASSESSING OFFICER OR FULLY ELABOR ATED BY THE APPELLANT DURING THE ASSESSMENT PROCEEDINGS. ACCORDINGLY OPPORTUNITY WAS PROVIDED TO THE ASSESSI NG OFFICER TO COMMENT UPON THE ISSUE OF VALUATION CONT ENDED BY THE AR OF THE APPELLANT. THE ASSESSING OFFICER H AS NOT COMMENTED UPON THE MERITS OF THE VALUATION AND HAS IGNORED THE CERTIFICATE OF THE WHOLEMEAL ATTA MANUFACTURERS ASSOCIATION AS WELL AS THE CERTIFICAT E OBTAINED FROM M/S AIL. IN MY OPINION EVEN IF THE EX ACT PERCENTAGES MENTIONED IN THESE CERTIFICATES MAY NOT BE FULLY RELIED UPON IT CANNOT BE DISPUTED ON FACTS TH AT THERE ITA NO.2310/DEL/2010 & OTHRS 7 ARE SEVERAL BY PRODUCTS ON GRINDING OF WHEAT CONSIS TING OF CHOKER REFRACTION AND PROCESS LOSS. THIS HAS TO BE KEPT IN MIND WHILE ARRIVING AT THE VALUATION OF THE RETAINE D PRODUCTS BY M/S AIL. THE ASSESSING OFFICER HAS ONLY BASED HIS EVALUATION ON THE AMOUNT OF ATTA AND DALIYA BY ASSUMING THAT THE TOTAL QUANTITY RETAINED BY THE PA RTY ONLY CONSISTED OF THE ATTA AND DALIYA. (C) FROM THE TERMS OF THE AGREEMENT ALSO IT IS OBSERVED THAT AS PER THE PRICE FOR THE GRINDING AND PACKING CHARGES IT HAS BEEN MENTIONED THAT THE REMAINING QUANTITY OF WHEA T AND REFRACTION SHALL BE KEPT BY AIL AS ITS EXPENSES. B Y APPRECIATING THESE TERMS OF THE AGREEMENT IT IS IMP LICIT THAT AFTER SUPPLYING THE AMOUNT OF DALIYA/ATTA ALL THE P RODUCTS RETAINED BY M/S AIL SHALL BE TREATED AS PAYMENT FOR THE WORK DONE. COMING TO THE CERTIFICATE PROVIDED BY TH E WHOLEMEAL ATTA MANUFACTURERS ASSOCIATION IT CAN BE SEEN THAT FOR THE PRODUCTION OF THE ATTA THE ESTIMATION OF OTHER BY PRODUCTS VARIES BETWEEN 8% TO 14% OF THE TOTAL A MOUNT OF WHEAT. THIS CERTIFICATE CAN ONLY BE TAKEN TO AN ESTIMATE AND THEREFORE THE ONLY LOGICAL POINT WHICH NEEDS TO BE ACCEPTED IS THAT THE TOTAL AMOUNT OF BY PRODUCTS RE TAINED BY M/S AIL DOES NOT CONSISTS OF ATTA/DALIYA AND CER TAINLY OF OTHER BY PRODUCTS INCLUDING CHOKER/REFRACTION AND WASTAGE. (D) THE ASSESSING OFFICER THEREFORE HAS TO ARRIVE AT TH E VALUATION FOR THE PRODUCTS RETAINED BY M/S AIL ON T HE BASIS OF SOME ESTIMATE OR ACTUAL VERIFICATION FROM THE BO OKS OF M/S AIL. AS PER THE CERTIFICATE PROVIDED BY M/S AIL THE TOTAL VALUE OF THE PRODUCTS RETAINED ONLY AMOUNTS T O RS 38 19 782/- DETAILS OF WHICH HAVE BEEN CONSIDERED ABOVE. THESE DETAILS OF M/S AIL HOWEVER DID NOT INCLUDE AN Y AMOUNT OF ATTA/DALIYA. KEEPING IN VIEW THE VARIATIO NS IN THE OUTPUT OF THE PRODUCTS IT HAS BEEN MENTIONED EV EN IN THE CERTIFICATE OF THE WHOLEMEAL ATTA MANUFACTURERS ASSOCIATION THAT THE OUTPUTS ARE SUBJECT TO VARIATI ON. THIS IMPLIES THAT THE ESTIMATES MADE BY M/S AIL ARE NOT FULLY RELIABLE AS NO AMOUNT OF ATTA/DALIYA HAS BEEN STATE D. KEEPING IN VIEW THE COMPLEXITY OF THE ISSUE IT MAY NOT BE ITA NO.2310/DEL/2010 & OTHRS 8 POSSIBLE TO ARRIVE AT THE ACTUAL AMOUNT OF ATTA/DAL IYA RETAINED ALONG WITH OTHER BY PRODUCTS. IN THIS CONT EXT THE ASSESSING OFFICER HAS STATED THAT THE VALUATION OF DALIYA/ATTA HAD BEEN MADE ON THE BASIS OF THE SUBMI SSIONS MADE BY THE ASSESSEE DURING THE COURSE OF ASSESSMEN T. HOWEVER IT IS NOT CLEAR WHETHER ALL THE FACTS HAVE BEEN PROPERLY APPRECIATED BY THE ASSESSING OFFICER BEFOR E ARRIVING AT THIS VALUATION. THE ASSESSING OFFICER IS THEREFORE DIRECTED TO CO NSIDER THE VALUATION OF THE AMOUNT RETAINED BY M/S AIL BY KEEP ING IN MIND THAT THE TOTAL RETENTION INCLUDES ATTA/DALIYA AS WELL AS CHOKER REFRACTION AND WASTAGE. THE ASSESSING OFFIC ER IS DIRECTED TO VERIFY THE COMPUTATION MADE BY THE APPE LLANT AFTER KEEPING IN VIEW THE GENERAL CERTIFICATE OF TH E WHOLEMEAL ATTA MANUFACTURERS ASSOCIATION SINCE THE OUTPUT INCLUDES THE VARIOUS ITEMS AND THE AMOUNTS S HOWN BY M/S AIL HAS NOT INCLUDED ATTA/DALIYA ESTIMATION NEEDS TO BE MADE TO INCLUDE THESE PRODUCTS ALSO. CONSIDER ING THE DIFFICULTY IN ARRIVING AT AN EXACT FIGURE THE VALU E OF THE RETENTION PRODUCTS IS TAKEN AT RS 40 00 000/- INSTE AD OF RS 31 93 782/-. HOWEVER THIS ESTIMATION IS SUBJECT TO VERIFICATION TO BE MADE BY THE ASSESSING OFFICER RE GARDING THE ACTUAL AMOUNT OF WHEAT AND DALIYA SHOWN AS RETA INED AMOUNTS IN THE BOOKS OF THE APPELLANT AS MENTIONED IN THE ASSESSMENT ORDER. IN CASE SUCH AMOUNTS HAVE BEEN REFLECTED IN THE BOOKS OF ACCOUNTS THE VALUATION D ONE BY THE ASSESSING OFFICER SHALL OVERRIDE. AS A RESULT A FTER CAREFUL CONSIDERATION OF THE FACTS OF THE CASE AND THE COMPLEXITY OF THE VALUATION I CONSIDER LIT FAIR TO ESTIMATE THE VALUE OF THE PAYMENT MADE TO RS 40 00 000/- INS TEAD OF RS 1 11 53 566/-. THIS GROUND OF THE APPELLANT IS THEREFORE TREATED AS PARTLY ALLOWED SUBJECT TO VER IFICATION BY THE ASSESSING OFFICER. THE APPEAL IS TREATED AS PARTLY ALLOWED. 5. THE ASSESSEE AND THE REVENUE ARE AGGRIEVED BY THE AFORESAID FINDINGS OF THE CIT(A). ACCORDING TO THE ASSESSEE THE ARRA NGEMENT OF PROCURING ATTA ITA NO.2310/DEL/2010 & OTHRS 9 AND DALIA AGAINST THE SUPPLY OF WHEAT TO AIL IS AN ARRANGEMENT OR JOB WORK AND THIS DOES NOT REQUIRE ANY DEDUCTION OF TAX AT S OURCE. WITHOUT PREJUDICE TO THE MAIN CONTENTION THE ACTION OF THE CIT(A) IN QUANTIFYING THE DISALLOWANCE AT RS.40 00 000 AS AGAINST THE DETAILE D WORKING OF RS.31 93 782 IS NOT JUSTIFIED. 6. IN THE REVENUES CROSS APPEAL IT IS CONTENDED THAT THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN ESTIMATING THE VALUE O F RETENTION PRODUCTS AT RS.40 LACS AGAINST RS.111 53 566 MADE BY THE AO. T HE ABOVE DETAILS PERTAIN TO THE AY 2006-07. A SIMILAR EXERCISE WAS MADE FOR THE AY 2007- 08 WHEREIN AS AGAINST THE AOS CALCULATION OF RS.1 39 11 741 THE CIT(A) QUANTIFIED THE DISALLOWANCE AT RS.45 00 000 AS AGAI NST THE CALCULATION OF RS.27 88 252/- MADE BY THE ASSESSEE BEFORE THE CIT( A). 7. WE HAVE HEARD BOTH THE SIDES AND CAREFULLY GONE THROUGH THE RECORDS. THE ASSESSEE WAS ASKED TO PRODUCE THE COPIES OF THE AGREEMENT DATED 2.2.2005 AND ALSO THE COPIES OF THE DELIVERY CHALLA N BY WHICH THE WHEAT WAS SUPPLIED TO AIL LTD. IT IS ALSO ASCERTAINED THAT A HAAR INTERNATIONAL (I) LTD. IS A SISTER CONCERN OF THE ASSESSEE. THE IMPUGNED TRA NSACTIONS HAVE TAKEN PLACE UNDER THE AGREEMENT DATED 2.2.2005 BETWEEN THE PART IES WHICH READS AS UNDER:- ITA NO.2310/DEL/2010 & OTHRS 10 THIS AGREEMENT IS EXECUTED AND SIGNED ON THIS 2 ND DAY FEBRUARY 2005 AT NEW DELHI BETWEEN M/S AHAAR CONSU MER PRODUCTS (P) LTD. A COMPANY INCORPORATED & REGISTE RED UNDER THE COMPANIES ACT 1956 THROUGH ITS DIRECTOR MR. G YAN PRAKASH GUPTA HEREINAFTER CALLED THE COMPANY AHA AR OF THE FIRST PART. AND M/S AHAAR INTERNATIONAL (I) LTD. G-37 LAWRENCE RO AD DELHI A COMPANY INCORPORATED AND REGISTERED UNDER THE COM PANIES ACT 1956 THROUGH ITS DIRECTOR MR. ANKIT TYAGI HER EINAFTER CALLED THE COMPANY AQIL OF THE SECOND PART. WHEREAS AIL HAS AGREED TO GRIND THE WHEAT AND PRODU CE ATTA & DALIYA THE PRODUCTS OF THE WHEAT PROVIDED BY AHAA R AND PACK THEM IN THEIR PACKING ON THE TERMS AND CONDITI ONS HEREINAFTER SET FORTH. NOW THIS AGREEMENT WITNESSETH AS UNDER: 1. PRODUCTS : 1.1 THE PRODUCTS SHALL BE MANUFACTURED IN ACCORDANC E WITH THE SPECIFICATIONS AND DESCRIPTIONS MENTIONED IN AN NEXURE A HEREUNDER WRITTEN AS WELL AS THE STANDARDS OF QUAL ITY AS PER PREVENTION OF FOOD ADULTERATION ACT 1954 AND RULE MADE THEREUNDER (HEREINAFTER THE PRESCRIBED SPECIFICATIO NS). 1.2 IN THE EVENT OF THE PRODUCTS SUPPLIED BY AIL DO ES NOT CONFORM TO THE PRESCRIBED SPECIFICATIONS THE COMPA NY AHAAR RESERVES THE RIGHT TO REJECT SUCH PRODUCT. 1.3 IN THE EVENT OF AIL FAILS TO DELIVER THE PROD UCTS AS PER TERMS & CONDITIONS OF THIS AGREEMENT OR WITHIN THE DELIVERY TIME SPECIFIED AHAAR SHALL HAVE THE RIGHT TO OUTSOURCE THE PRODUCTS AT THE COST & RISK OF AIL. IN THAT CASE AIL AGREES TO INDEMNIFY AHAAR THE COST THAT MAY HAVE INCURRED DUE TO THE RE ASON OF FAILURE OF THE AIL TO CARRY OUT HIS OBLIGATIONS UND ER THIS AGREEMENT. ITA NO.2310/DEL/2010 & OTHRS 11 1.4 AHAAR SHALL BE ENTITLED AT ITS DISCRETION TO DEPUTE AND RETAIN A QUALITY CONTROL ADVISOR TO BE LOCATED IN P LANT (WHEN MANUFACTURING THE PRODUCT FOR AHAAAR) IN ORDER TO M ONITOR THE PRODUCT SPECIFICATION HOWEVER AHAAAR SHALL NOT RE LEASE THE AIL OF ITS OBLIGATION TO MANUFACTURE THE PRODUCT IN ACCORDANCE WITH THE SPECIFICATIONS. 1.5 THE AIL SHALL HAVE FULLY EQUIPPED QUALITY CONTR OL LAB & QUALITY CONTROL OFFICER TO CHECK THE QUALITY OF RAW MATERIAL & FINISHED MATERIAL EVERY HOUR. 1.6 AHAAR SHALL BUY 30 MT OF ATTA/DALIYA PER WORKI NG DAY INITIALLY AND IT COULD BE INCREASED UP TO 100 MT PE R DAY (MAXIMUM CAPACITY OF PLANT) AS PER MARKET DEMAND. 1.7 THE AIL SHALL MAINTAIN THE PLANT INCLUDING CLEA NING SECTION AND MILLING SECTION AT HIS OWN COST. THE PLANT SHA LL BE MAINTAINED AS PER INTERNATIONAL STANDARDS INCLUDING HACCP; FIFO ETC. 1.8 THE PLANT SHALL BE COMPLETELY CLEANED STATING PRO DUCTION. THE WORKERS SHALL WEAR CLEAN UNIFORM; CAP SHOES TOBBA CO CIGARETTES GUTKHA ETC. ARE NOT ALLOWED IN PLANT. 1.9 AHAAR SHALL PROVIDE RAW MATERIAL (WHEAT) AND PACK AGING MATERIAL I.E. HDPE/PP BAGS LDPE PACKETS LINERS AN D OTHER CONSUMABLE REQUIRED IN PRODUCTION AND PACKING I.E. CODING INK STAMP STITCHING THREAD ETC. 2. PRICE : 2.1 AIL SHALL GIVE 85% DALIYA OR 88% ATTA OF THE W HEAT SUPPLIED BY AHAAR. THE REMAINING QUANTITY OF WHEAT /REFRACTION SHALL BE KEPT BY AIL AS ITS EXPENSES. 2.2 AIL HAS TO ARRANGE FROM UNLOADING OF WHEAT TILL FINAL PACKING LOADING OF ATTA/DALIYA. AIL HAS TO ARRANG E LABOUR ELECTRICITY POWER BACKUP ETC. AND WHEAT SHORTAGE. 2.3 WHEAT SHALL BE SUPPLIED IN GROSS WEIGHT. ATTA / DALIYA SHALL BE RECEIVED IN NET WEIGHT. ITA NO.2310/DEL/2010 & OTHRS 12 2.4 THE PRODUCTS MAY BE PACKED IN ANY PACKING FROM 1 KG TO 90 KG AS PER MARKET REQUIREMENT. THE PRODUCTS MAY BE P ACKED IN ANY BRAND. HOWEVER THE PACKING MATERIAL WILL BE SU PPLIED BY AHAAR. 3. TERMS; 3.1 THIS AGREEMENT SHALL COME INTO FORCE W.E.F. THE DATE OF THE EXECUTION HEREOF AND SHALL INITIALLY BE VALID UP TO 31.3.2008 AND THEREAFTER SHALL BE AUTOMATICALLY RENEWED FOR ADDIT IONAL ONE YEAR PERIODS UNLESS EITHER PARTY TERMINATES THIS AG REEMENT BY GIVING THE OTHER PARTY WRITTEN NOTICE 3 MONTHS PRIO R TO THE EXPIRATION OF THE INITIAL TERM OR ANY RENEWAL TERM. 3.2 NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN CONTAINED EITHER PARTY HERETO SHALL BE ENTITLED TO TERMINATE THIS AGREEMENT. 3.3 ANY DISPUTES OR DIFFERENCES WHATSOEVER ARISING BETWEEN THE PARTIES OUT OF OR RELATED TO THIS AGREEMENT OR BREA CH THEREOF SHALL BE SETTLED BY ARBITRATION IN ACCORDANCE WITH THE ARBITRATION & CONCILIATION ACT OF 1996. COURTS IN N EW DELHI WILL HAVE EXCLUSIVE JURISDICTION IN THE EVENT OF ANY LEG AL / JURISDICTIONAL PROCEEDINGS. IN WITNESS THEREOF THESE PRESENTS HAVE BEEN EXECUTE D ON BEHALF OF THE PARTIES HERETO AS OF THE DAY AND YEAR FIRST ABOVE WRITTEN. FOR AHAAR CONSUMER PRODUCTS PVT.LTD. FOR AHAAR INTE RNATIONAL (I) LTD. SD/- SD/- DIRECTOR DIRECTOR ANNEXURE A AND B WHICH ARE PART OF THE AGREEMEN T ARE ALSO REPRODUCED BELOW:- ITA NO.2310/DEL/2010 & OTHRS 13 QUALITY STANDARD ANNEXURE A THE SPECIFICATION OF ATTA WILL DEPEND ON THE MARKET IT IS SERVICING. HOWEVER THE BROAD SPECIFICATION ARE AS UNDER:- MOISTURE CONTENT : 10% (MAXIMUM) TOTAL ASH : 1.5% TO 1.75% ACID INSOLUBLE ASH : 0.1% ALCOHOLIC ACIDITY : 0.12% GLUTEIN : 9% MINIMUM WATER ABSORPTION : MORE THAN 80% FOREIGN MATTER : NIL GRITS/STONE : NIL PARTICLE SIZE DISTRIBUTION : WILL BE INFORMED ACCO RDING TO MARKET CLEANED WHEAT SPECIFICATION : SHOULD HAVE NIL EXTRA NEOUS MATTER QUALITY STANDARD ANNEXURE B WHEAT MAY CONTAIN MAXIMUM OF FOLLOWING: FOREIGN MATTER/REFRACTION : A) MUD BULB/STONE : 0.5% B) POISONOUS SEED : NIL C) CHAFF : 1.0% D) OTHER SEEDS OF FOOD GRAINS : 0.5% E) DAMAGED GRAIN : 0.5% DUNKY (VEVILLED) : 0.5% BROKEN & SHREVILLED : 4.0% KERNAL BURNT (KANTA) : 0.5% POTIA : 6.0% BULK DENSITY : 78 GM/ML (MIN) 8. THERE IS NO DISPUTE THAT THE PARTIES APART FROM ENTERING INTO AGREEMENT HAVE ALSO ACTED UPON THE AGREEMENT AND THE TRANSAC TIONS APPEAR TO BE STRICTLY FALLING WITHIN THE AGREEMENT THAT IS ENTERED INTO B Y THE PARTIES. THAT IS TO SAY THIS AGREEMENT ALTHOUGH BETWEEN THE TWO RELATED CO NCERNS IS ENTERED IN THE ITA NO.2310/DEL/2010 & OTHRS 14 COURSE OF BUSINESS AND IS ACTED UPON BY BOTH THE SI DES. THEREFORE ONE CANNOT IGNORE THE TERMS OF THIS AGREEMENT IN DETERM INING THE NATURE OF THE TRANSACTION THAT HAVE TAKEN PLACE BETWEEN THE PARTI ES AS THERE IS NOTHING IN THE IMPUGNED ORDERS TO DOUBT THE GENUINENESS OF THI S AGREEMENT. 8.1 NOW IT IS FOR THE REVENUE TO UNDERSTAND THIS A GREEMENT AND DETERMINE THE NATURE OF THE ASSESSEES TAX LIABILITY ARISING FROM THE TRANSACTION ENTERED INTO THROUGH THIS AGREEMENT. IN FACT IT IS STATED THAT THE ASSESSEE HAS GIVEN THE WHEAT UNDER A DELIVERY CHALLAN-CUM-INVOICE AND THE VALUE IS PROVIDED ONLY FOR SETTLEMENT OF CLAIMS. ON THE BASIS OF THE QUANTITY OF THE WHEAT SUPPLIED BY THE ASSESSEE TO AIL THE ASSESSEE HAS C OLLECTED THE END PRODUCTS NAMELY ATTA OR DALIA AND IS NOT BOTHERED ABOUT THE OTHER PRODUCTS AND WASTAGE ARISING THEREFROM. IN OTHER WORDS UNDER T HE TERMS OF AGREEMENT BY-PRODUCTS WASTE AND THE RESIDUAL OF THE WHEAT AF TER MANUFACTURE BELONG TO AIL AND NOT TO THE ASSESSEE. NOWHERE IN THE BOOKS OF THE ASSESSEE THE ASSESSEE HAS MADE ANY PAYMENT TOWARDS THE SERVICES RENDERED BY AIL IN PRODUCING THE ATTA AND DALIA FOR AND ON BEHALF OF T HE ASSESSEE IN THE PACKETS AND CONTAINERS PROVIDED BY THE ASSESSEE IN TERMS OF THE AGREEMENT. 9. THE AO HAS INVOKED THE PROVISIONS OF SECTION 194 C AND WAS OF THE OPINION THAT EVEN UNDER THE TERMS OF THE AGREEMENT THE ASSESSEE IS UNDER AN OBLIGATION TO DEDUCT TAX AT SOURCE ON THIS JOB WORK . ACCORDING TO HIM THE ITA NO.2310/DEL/2010 & OTHRS 15 PAYMENTS CONTEMPLATED IN SECTION 194C CAN ALSO BE M ADE IN KIND AND THE ASSESSEE IS UNDER AN OBLIGATION TO DEDUCT TAX AT SO URCE AND SUCH TAXES HAVE NOT BEEN DEDUCTED. THE SO-CALLED PAYMENT CONSTRUC TIVELY DETERMINED ATTRACT THE DISALLOWANCE UNDER THE PROVISIONS OF SE CTION 40(A)(IA) OF THE ACT. 10. THE ASSESSEE RELIED UPON THE AGREEMENTS AND ARG UED THAT THE ASSESSEE HAS NOT PAID ANY SUM FOR CARRYING OUT ANY WORK INCL UDING SUPPLY OF LABOR IN PURSUANCE OF A CONTRACT AND THE ASSESSEE IS NOT OBL IGED TO MAKE ANY PAYMENT NOR THE ASSESSEE HAS CREDITED ANY AMOUNT IN THE ACC OUNT OF THE CONTRACTOR AS PAYABLE WHICH REQUIRES THE ASSESSEE TO DEDUCT TAX A ND THEREFORE THE APPLICATION OF THE PROVISIONS OF SECTION 194C AS WE LL AS THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT IS NOT JUSTIFIED. ALL THE CONTENTIONS THAT WERE TAKEN BEFORE THE TWO REVENUE AUTHORITIES ARE REITER ATED BEFORE US INCLUDING THE CASE LAWS. 11. LD. DR ON THE OTHER HAND STRONGLY SUPPORTED T HE FINDINGS OF THE AO AND TO THE EXTENT THE ADDITION IS SUSTAINED BY THE CIT(A) TO THE FINDINGS CONTAINED THEREIN. THE PROVISIONS OF SECTION 194C WHICH OBLIGES THE DEDUCTION OF TAX AT SOURCE RELEVANT TO THE AY 2006- 07 ARE REPRODUCED BELOW:- [ PAYMENTS TO CONTRACTORS AND SUB-CONTRACTORS. 194C.[ (1) ANY PERSON RESPONSIBLE FOR PAYING ANY SUM TO AN Y RESIDENT (HEREINAFTER IN THIS SECTION REFERRED TO AS THE CON TRACTOR) FOR CARRYING OUT ITA NO.2310/DEL/2010 & OTHRS 16 ANY WORK (INCLUDING SUPPLY OF LABOUR FOR CARRYING O UT ANY WORK) IN PURSUANCE OF A CONTRACT BETWEEN THE CONTRACTOR AND (A) THE CENTRAL GOVERNMENT OR ANY STATE GOVERNMENT ; OR (B) ANY LOCAL AUTHORITY; OR (C) ANY CORPORATION ESTABLISHED BY OR UNDER A CENT RAL STATE OR PROVINCIAL ACT; OR (D) ANY COMPANY; OR (E) ANY CO-OPERATIVE SOCIETY; OR (F) ANY AUTHORITY CONSTITUTED IN INDIA BY OR UNDE R ANY LAW ENGAGED EITHER FOR THE PURPOSE OF DEALING WITH AND SATISFYING THE NEED FOR HOUSING ACCOMMODATION OR FOR THE PURPOSE OF PLANNING DEVEL OPMENT OR IMPROVEMENT OF CITIES TOWNS AND VILLAGES OR FOR B OTH; OR (G) ANY SOCIETY REGISTERED UNDER THE SOCIETIES REG ISTRATION ACT 1860 (21 OF 1860) OR UNDER ANY LAW CORRESPONDING TO THAT ACT IN FORCE IN ANY PART OF INDIA; OR (H) ANY TRUST; OR (I) ANY UNIVERSITY ESTABLISHED OR INCORPORATED BY OR UNDER A CENTRAL STATE OR PROVINCIAL ACT AND AN INSTITUTION DECLARED TO BE A UNIVERSITY UNDER SECTION 3 OF THE UNIVERSITY GRANTS COMMISSION ACT 1956 (3 OF 1956) ; OR (J) ANY FIRM; OR (K) ANY INDIVIDUAL OR A HINDU UNDIVIDED FAMILY WH OSE TOTAL SALES GROSS RECEIPTS OR TURNOVER FROM THE BUSINESS OR PRO FESSION CARRIED ON BY HIM EXCEED THE MONETARY LIMITS SPECIFIED UNDER CLAU SE (A) OR CLAUSE (B) OF SECTION 44AB DURING THE FINANCIAL YEAR IMMEDIATELY PRECEDING TH E FINANCIAL YEAR IN WHICH SUCH SUM IS CREDITED OR PAI D TO THE ACCOUNT OF THE CONTRACTOR SHALL AT THE TIME OF CREDIT OF SUCH SUM TO THE ACC OUNT OF THE CONTRACTOR OR AT THE TIME OF PAYMENT THEREOF IN CASH OR BY ISSUE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE WHICHEVER IS EARLIER DEDUCT AN AMOUNT EQUAL TO (I) ONE PER CENT IN CASE OF ADVERTISING (II) IN ANY OTHER CASE TWO PER CENT OF SUCH SUM AS INCOME-TAX ON INCOME COMPRISED THERE IN: PROVIDED THAT NO INDIVIDUAL OR A HINDU UNDIVIDED FAMILY SHAL L BE LIABLE TO DEDUCT INCOME-TAX ON THE SUM CREDITED OR PAID TO TH E ACCOUNT OF THE CONTRACTOR WHERE SUCH SUM IS CREDITED OR PAID EXCLU SIVELY FOR PERSONAL PURPOSES OF SUCH INDIVIDUAL OR ANY MEMBER OF HINDU UNDIVIDED FAMILY. ] (2) ANY PERSON (BEING A CONTRACTOR AND NOT BEING AN INDIVIDUAL OR A HINDU UNDIVIDED FAMILY) RESPONSIBLE FOR PAYING ANY SUM TO ANY RESIDENT (HEREAFTER IN THIS SECTION REFERRED TO AS THE SUB-C ONTRACTOR) IN PURSUANCE OF A CONTRACT WITH THE SUB-CONTRACTOR FOR CARRYING OUT OR FOR THE SUPPLY OF LABOUR FOR CARRYING OUT THE WHOLE OR ANY PART OF T HE WORK UNDERTAKEN BY THE CONTRACTOR OR FOR SUPPLYING WHETHER WHOLLY OR P ARTLY ANY LABOUR WHICH ITA NO.2310/DEL/2010 & OTHRS 17 THE CONTRACTOR HAS UNDERTAKEN TO SUPPLY SHALL AT T HE TIME OF CREDIT OF SUCH SUM TO THE ACCOUNT OF THE SUB-CONTRACTOR OR AT THE TIME OF PAYMENT THEREOF IN CASH OR BY ISSUE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE WHICHEVER IS EARLIER DEDUCT AN AMOUNT EQUAL TO ONE PER CENT OF SUCH SUM AS INCOME-TAX ON INCOME COMPRISED THEREIN: [ PROVIDED THAT AN INDIVIDUAL OR A HINDU UNDIVIDED FAMILY WHO SE TOTAL SALES GROSS RECEIPTS OR TURNOVER FROM THE BUSINESS OR PROFESSION CARRIED ON BY HIM EXCEED THE MONETARY LIMITS SPECIFIED UNDE R CLAUSE (A) OR CLAUSE (B) OF SECTION 44AB DURING THE FINANCIAL YEAR IMMEDIATELY PRECEDING TH E FINANCIAL YEAR IN WHICH SUCH SUM IS CREDITED OR PAI D TO THE ACCOUNT OF THE SUB-CONTRACTOR SHALL BE LIABLE TO DEDUCT INCOME-TA X UNDER THIS SUB- SECTION.] [EXPLANATION I.FOR THE PURPOSES OF SUB-SECTION (2 ) THE EXPRESSION CONTRACTOR SHALL ALSO INCLUDE A CONTRACTOR WHO IS CARRYING OUT ANY WORK (INCLUDING SUPPLY OF LABOUR FOR CARRYING OUT ANY WO RK) IN PURSUANCE OF A CONTRACT BETWEEN THE CONTRACTOR AND THE GOVERNMENT OF A FOREIGN STATE OR A FOREIGN ENTERPRISE OR ANY ASSOCIATION OR BODY EST ABLISHED OUTSIDE INDIA.] [EXPLANATION II].FOR THE PURPOSES OF THIS SECTION WHERE ANY SUM REFERRED TO IN SUB-SECTION (1) OR SUB-SECTION (2) I S CREDITED TO ANY ACCOUNT WHETHER CALLED SUSPENSE ACCOUNT OR BY ANY OTHER N AME IN THE BOOKS OF ACCOUNT OF THE PERSON LIABLE TO PAY SUCH INCOME SU CH CREDITING SHALL BE DEEMED TO BE CREDIT OF SUCH INCOME TO THE ACCOUNT O F THE PAYEE AND THE PROVISIONS OF THIS SECTION SHALL APPLY ACCORDINGLY. ] [EXPLANATION III.FOR THE PURPOSES OF THIS SECTION THE EXPRESSION WORK SHALL ALSO INCLUDE (A) ADVERTISING; (B) BROADCASTING AND TELECASTING INCLUDING PRODUCT ION OF PROGRAMMES FOR SUCH BROADCASTING OR TELECASTING; (C) CARRIAGE OF GOODS AND PASSENGERS BY ANY MODE O F TRANSPORT OTHER THAN BY RAILWAYS; (D) CATERING.] (3) NO DEDUCTION SHALL BE MADE UNDER SUB-SECTION (1 ) OR SUB-SECTION (2) FROM [(I) THE AMOUNT OF ANY SUM CREDITED OR PAID OR LI KELY TO BE CREDITED OR PAID TO THE ACCOUNT OF OR TO THE CONTRACTOR OR SU B-CONTRACTOR IF SUCH SUM DOES NOT EXCEED TWENTY THOUSAND RUPEES: PROVIDED THAT WHERE THE AGGREGATE OF THE AMOUNTS OF SUCH SU MS CREDITED OR PAID OR LIKELY TO BE CREDITED OR PAID DURING THE FI NANCIAL YEAR EXCEEDS FIFTY THOUSAND RUPEES THE PERSON RESPONSIBLE FOR PAYING SUCH SUMS REFERRED TO IN SUB-SECTION (1) OR AS THE CASE MAY BE SUB-SECTION (2) SHALL BE LIABLE TO DEDUCT INCOME-TAX [UNDER THIS SECTION:] [ PROVIDED FURTHER THAT NO DEDUCTION SHALL BE MADE UNDER SUB- SECTION (2) FROM THE AMOUNT OF ANY SUM CREDITED OR PAID OR LIKE LY TO BE CREDITED OR PAID DURING THE PREVIOUS YEAR TO THE ACCOUNT OF THE SUB-CONTRACTOR DURING ITA NO.2310/DEL/2010 & OTHRS 18 THE COURSE OF BUSINESS OF PLYING HIRING OR LEASING GOODS CARRIAGES ON PRODUCTION OF A DECLARATION TO THE PERSON CONCERNED PAYING OR CREDITING SUCH SUM IN THE PRESCRIBED FORM AND VERIFIED IN TH E PRESCRIBED MANNER AND WITHIN SUCH TIME AS MAY BE PRESCRIBED IF SUCH SUB-CONTRACTOR IS AN INDIVIDUAL WHO HAS NOT OWNED MORE THAN TWO GOODS CA RRIAGES AT ANY TIME DURING THE PREVIOUS YEAR: PROVIDED ALSO THAT THE PERSON RESPONSIBLE FOR PAYING ANY SUM AS AFORESAID TO THE SUB-CONTRACTOR REFERRED TO IN THE SECOND PRO VISO SHALL FURNISH TO THE PRESCRIBED INCOME-TAX AUTHORITY OR THE PERSON AUTHO RISED BY IT SUCH PARTICULARS AS MAY BE PRESCRIBED IN SUCH FORM AND W ITHIN SUCH TIME AS MAY BE PRESCRIBED; OR] (II) ANY SUM CREDITED OR PAID BEFORE THE 1ST DAY O F JUNE 1972; [OR] [(III) ANY SUM CREDITED OR PAID BEFORE THE 1ST DA Y OF JUNE 1973 IN PURSUANCE OF A CONTRACT BETWEEN THE CONTRACTOR AND A CO-OPERATIVE SOCIETY OR IN PURSUANCE OF A CONTRACT BETWEEN SUCH CONTRACT OR AND THE SUB- CONTRACTOR IN RELATION TO ANY WORK (INCLUDING SUPPL Y OF LABOUR FOR CARRYING OUT ANY WORK) UNDERTAKEN BY THE CONTRACTOR FOR THE CO-OPERATIVE SOCIETY.] [EXPLANATION.FOR THE PURPOSES OF CLAUSE (I) GOO DS CARRIAGE SHALL HAVE THE SAME MEANING AS IN THE EXPLANATION TO SUB- SECTION (7) OF SECTION 44AE .] (4) [***] (5) [***]] 12. NOW WE HAVE TO EXAMINE WHETHER THE ASSESSEE IS OBLIGED TO DEDUCT TAX AT SOURCE ON THE SO-CALLED CONSTRUCTIVE PAYMENT AS CONSTRUED BY THE AO IN TERMS OF THE AGREEMENT. THE ASSESSEE IN THIS C ASE SUPPLIES 100 KG OF WHEAT AND TAKES BACK 88 KGS OF ATTA OR 85 KGS OF DA LIA AFTER ITS PROCESSING DONE BY THE AIL AND AIL IS REQUIRED TO DELIVER THE END PRODUCT IN THIS PROPORTION TO THE ASSESSEE WHO HAS SUPPLIED THE RAW MATERIAL. DOES THE PROVISION OF SECTION 194C OF THE ACT CREATE AN OBLI GATION ON THE PART OF ASSESSEE TO DEDUCT TAX AT SOURCE IN RESPECT OF ANY OF THE TRANSACTIONS IT HAS ENTERED INTO WITH THE AIL? SECTION 194C OF THE ACT WAS BROUGHT INTO STATUTE ITA NO.2310/DEL/2010 & OTHRS 19 BY THE FINANCE ACT 1972. CIRCULAR NO. 86 DATED M AY 29 1972 WAS ISSUED INTER ALIA STATING THAT THE PROVISIONS OF SECTION 1 94C WOULD APPLY ONLY IN RELATION TO LABOUR CONTACTS AND WOULD NOT COVER CON TRACTS FOR SALE OF GOODS. IF A MANUFACTURER PURCHASES MATERIAL ON HIS OWN AND MANUFACTURES A PRODUCT AS PER THE REQUIREMENT OF A SPECIFIC CUSTOMER IT W AS A CASE OF SALE AND NOT A CONTRACT FOR CARRYING OUT ANY WORK. THE FACT THAT T HE GOODS MANUFACTURED WERE ACCORDING TO THE REQUIREMENT OF THE CUSTOMER D ID NOT MEAN OR IMPLY THAT ANY WORK WAS CARRIED OUT ON BEHALF OF THAT CUS TOMER. IN CASE OF ANY ISSUE WHERE THE CONTRACT IS A CONTRACT OF SALE AND NOT A CONTRACT FOR CARRYING OUT ANY WORK THE MATTER SHOULD BE DECIDED IN THE L IGHT OF THE PRINCIPLES LAID DOWN BY THE HONBLE SUPREME COURT IN THE AIR 1972 S C 1148. THE BOMBAY HIGH COURT HAS ALSO ANALYZED THE DIFFERENCE BETWEEN THE SALE AND WORKS CONTRACT IN THE CASE OF BDA LTD. VS ITO(TDS) 281 ITR 99. THE ASSESSEE IN THAT CASE HAD A DISTILLERY AT AURANGABA D AND PURCHASED MATERIALS REQUIRED FOR BOTTLING AND MARKETING FOREIGN MADE IN DIAN LIQUOR INCLUDING THE PRINTING AND PACKING MATERIAL. M ANOTHER ESTABLI SHMENT SUPPLIED THE PRINTED LABELS TO BE WRAPPED ON THE BOTTLES TO THE ASSESSEE. THE ITO(TDS) DID NOT ACCEPT THE CONTENTIONS OF THE ASSESSEE THAT THE TRANSACTION WITH M WAS A CONTRACT FOR SALE AND NOT A WORKS CONTRACT. W HEN THE PRINTING WORK WAS BEING CARRIED OUT IN THE PREMISES OF M THOUG H AS PER THE ITA NO.2310/DEL/2010 & OTHRS 20 SPECIFICATIONS OF THE ASSESSEE THE SUPPLY WAS LIMI TED TO THE QUANTITY SPECIFIED IN THE PURCHASE ORDER. THERE WAS NOTHING ON RECORD TO SHOW THAT ALL OTHER ANCILLARY COSTS LIKE THE LABELS INK PAP ERS SCREEN-PRINTING SCREENS ETC. WERE BEING SUPPLIED BY THE ASSESSEE TO M. I N THE FACTS OF THIS CASE THE SUPPLY OF PRINTED LABELS BY M TO THE ASSESSEE WAS CONTRACT OF SALE AND IT COULD NOT BE TERMED A WORKS CONTRACT. HENCE THE PROVISIONS OF SECTION 194C WERE HELD TO BE NOT APPLICABLE. 13. THE HIGH COURT WHILE DECIDING THIS CASE HAS REV IEWED A NUMBER OF CASES AND DECIDED THAT THE SALE OF CONTRACT DOES NO T CONVERT A CONTRACT OF SALE INTO A WORKS CONTRACT ALTHOUGH WE AGREE THAT THESE CASES BY THEMSELVES MAY NOT BE ABLE TO THROW ANY LIGHT ON THE PRESENT CONTR ACT ENTERED INTO BY THE ASSESSEE. HENCE THE ASSESSEE IS SUPPLYING WHEAT A ND GETTING BACK ATTA OR DALIA AS THE CASE MAY BE IN AN AGREED PROPORTION. FOR SUCH EXCHANGE THERE IS ABSOLUTELY NO PAYMENT OF ANY CONSIDERATION. EVE N IF ONE WERE TO TREAT IT AS A WORK CONTRACT AND NOT A CONTRACT OF SALE IT I S DIFFICULT TO SAY THAT THERE IS A PAYMENT AS A CONSIDERATION FOR THE LABOUR OR THE WORK THAT IS RENDERED. THE ASSESSEE IS JUST EXCHANGING THE PRODUCT; IN THE EXC HANGE HE IS NOT GETTING THE SAME PRODUCT BUT A DIFFERENT PRODUCT AND NOT TO THE SAME EXTENT BUT TO A DIFFERENT EXTENT. IN OTHER WORDS IT IS DIFFICULT TO SAY THAT THE ASSESSEE HAS MADE ANY PAYMENT IN UNDERTAKING THIS CONTRACT ON TH E BASIS OF THE AGREEMENT ITA NO.2310/DEL/2010 & OTHRS 21 THAT IS ACTED UPON BY THE PARTIES. THERE IS NO PAY MENT OF ANY SUM BY THE ASSESSEE TO AIL. EVEN IF ONE WERE TO SAY THAT THER E IS A CONSTRUCTIVE PAYMENT IT IS DIFFICULT TO QUANTIFY THE SAME AND S AY THAT THE ASSESSEE WAS UNDER AN OBLIGATION TO DEDUCT TAX AT SOURCE AT SUCH CONSTRUED PAYMENTS. THE ASSESSEE HAS NOT EVEN CREDITED SUCH CONSTRUED CONSI DERATION FOR SUPPLY OF LABOUR IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE. I N FACT IT HAS NOT EVEN CLAIMED ANY EXPENDITURE AS DEDUCTION. TO SAY THAT SUCH EXPENDITURE HAS RESULTED IN AN OUTFLOW WITHOUT DEDUCTION OF TAX AT SOURCE IS TOO MUCH AND IS NOT BORNE OUT FROM THE TRANSACTION ENTERED INTO BET WEEN THE PARTIES. THE QUESTION OF DISALLOWANCE BY APPLYING THE PROVISIONS OF SECTION 40(A)(IA) IN OUR OPINION IS NOT IN ACCORDANCE WITH LAW AS THE A SSESSEE IS UNDER NO OBLIGATION TO DEDUCT THE TAX AT SOURCE IN TERMS OF A CONTRACT WHERE IT DOES NOT REQUIRE ANY PAYMENT OF ANY SUM EVEN IF THE SUM HERE MEANS THAT THE PAYMENT COULD BE OF SOME KIND BUT IT IS DIFFICULT T O SAY THAT THE ASSESSEE HAS MADE THESE PAYMENTS TO THE EXTENT OF SHORTFALL IN G ETTING THE WHEAT SUPPLIED BACK AND CONSTRUE IT AS THE PAYMENT TO THE OTHER FO R PROCESSING THE WHEAT INTO ATTA OR DALIYA. THE DEPARTMENT MUST HAVE APPR ECIATED THE CONTRACT AS A WHOLE WHICH DOES NOT INVOLVE ANY PAYMENT OR GETTING THE PAYMENT FOR SERVICES RENDERED. IT IS A CASE OF BARTER OR EXCHA NGE OR ONE GOOD AGAINST THE OTHER. IT IS A TYPE OF SALE CONTRACT IN A VERY CRU DE FORM BUT IT IS CERTAINLY NOT ITA NO.2310/DEL/2010 & OTHRS 22 A WORKS CONTRACT AS UNDERSTOOD BY THE COURTS IN CAS ES UNDER THE SALES TAX WHICH WAS DISCUSSED BY THE HONBLE SUPREME COURT IN THE CASE CITED IN AIR 1972 SC 1148 OR IN THE CASE DEALT WITH BY THE BOMBA Y HIGH COURT IN THE CASE OF BDA LTD. (SUPRA). THE ASSESSEE HAVING REGA RD TO THE CONTRACT WHICH IT HAS ENTERED ON 2.2.2005 IN OUR OPINION DOES NO T GIVE RISE TO ANY OBLIGATION FOR IT TO DEDUCT TAX AT SOURCE AS IN OUR OPINION IT IS NOT SIMPLY A WORKS CONTRACT EXECUTED FOR CONSIDERATION IN THE FO RM OF SOME PAYMENT FOR WHICH DEDUCTION HAS BEEN CLAIMED UNDER THE ACT. TH E ASSESSEE HAS NOWHERE CLAIMED THE PAYMENT AS DEDUCTION. ONLY PURCHASE PRI CE OF WHEAT IS WHAT IT HAD PAID ON WHICH NO DEDUCTION OF TAX IS REQUIRED A ND THAT GOT LOST IN EXCHANGE FOR OBTAINING A FINISHED PRODUCT IN THE FO RM OF ATTA OR DALIA NOT INVOLVING THE MEDIUM OF PAYMENT. IT IS A CONTRACT O F BUSINESS WHICH DOES NOT INVOLVE ANY PAYMENT OF CONSIDERATION FOR THE SERVIC ES RENDERED. WE MUST EXAMINE THE ISSUE FROM ANOTHER ANGLE. HAD THE ASSE SSEE OWNED THE PLANT AND GOT THE ATTA AND DALIA MANUFACTURED FROM WHEAT IT COULD HAVE CLAIMED A PROCESS LOSS AND THAT COULD HAVE BEEN IMPLIEDLY A P ART OF BUSINESS TRANSACTION AND NO QUESTION OF ANY DISALLOWANCE OF SUCH LOSS COULD POSSIBLY HAVE ARISEN. MERELY BECAUSE THE ASSESSEE HAS GOT IT ROUTED THROUGH ANOTHER CONCERN ON A SORT OF OUTSOURCING BASIS IT DOES NOT RESULT IN AN OUTFLOW. IT IS JUST AN EXCHANGE AND BARTER OF ONE COMMODITY AGAINS T THE OTHER AND THE ITA NO.2310/DEL/2010 & OTHRS 23 WHOLE CONTRACT CANNOT BE TERMED AS WORKS CONTRACT I N THE STRICT SENSE OF THE TERM WHICH IS GENERALLY UNDERSTOOD UNDER THE PROVIS IONS OF SECTION 194C. IN OUR OPINION THE AO WENT WRONG IN PRESUMING THAT TH E DIFFERENCE IN THE WHEAT SUPPLY AND THE ATTA OR DALIA GOT IN RETURN RE PRESENTS SUM PAID FOR SERVICES RENDERED AND PAYMENTS FOR SUCH SERVICES AR E CLAIMED AS DEDUCTION FROM THE PROFIT AND GAINS OF BUSINESS U/S 32 TO SEC TION 38. ONLY WHEN THE CLAIM OF THE ASSESSEE FOR DEDUCTION IS U/S 32 TO SE CTION 38 THE PROVISIONS OF SECTION 40(A)(IA) CAN BE PRESSED INTO SERVICE TO DI SALLOW SUCH CLAIMS FOR DEDUCTION. AT THE COST OF REPETITION WE MAY SAY T HAT TO INVOKE SAID PROVISION OF SECTION 40(A)(IA) FIRST OF ALL THE C ASE SHOULD BE MADE OUT BY THE DEPARTMENT THAT THE ASSESSEE IS CONTEMPLATING DEDUC TION U/S 32 TO 38 ON WHICH TAX IS DEDUCTIBLE AND THE ASSESSEE HAS NOT DE DUCTED TAX AT SOURCE. IN OUR OPINION TAX IS NOT DEDUCTIBLE AND THE ASSESSEE HAS NOT CLAIMED ANY DEDUCTION U/S 32 TO SECTION 38. THIS LOSS IF ANY IS IN THE NET PROFIT IN THE TRADING ACCOUNT WHICH IS A COMPUTATION U/S 28 AND 2 9 AND NOT CLAIMS U/S 32 TO 38 OF THE INCOME TAX ACT. EVEN TAKING THIS VIEW OF THE MATTER IN OUR OPINION THE ASSESSEE IS ENTITLED TO SUCCEED AND TH ERE IS NO QUESTION OF DEDUCTION OF TAX AT SOURCE AND CONSEQUENTLY NO QUES TION OF MAKING ANY DISALLOWANCE BY INVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. ITA NO.2310/DEL/2010 & OTHRS 24 14. WE MUST ALSO VIEW THE WHOLE TRANSACTION UNDER THE AGREEMENT FROM A DIFFERENT ANGLE. THE ASSESSEE GIVES THE WHEAT AND ACCEPTS ATTA AND DALIA IN RETURN BY WEIGHT TO WEIGHT BASIS AND WHAT HE GOT IN RETURN ARE THE VALUE ADDED PRODUCTS OF LOWER QUANTITY. THE ASSESSEE BY THIS METHOD HAS PREVENTED ITSELF FROM FACTORS LIKE FALL IN THE PRIC ES OF EITHER RAW MATERIAL OR OF THE FINISHED PRODUCTS. THE MARKET VALUE OF THE WHEAT AND THE END PRODUCTS ARE TOTALLY DIFFERENT AND FLUCTUATE IN DIF FERENT DIRECTIONS. ALL THESE FLUCTUATIONS ARE WARDED OFF BY THE PRESENT AGREEMEN T WHICH IS JUST EXCHANGE OF GOODS FOR GOODS AND DOES NOT INVOLVE ANY CASH OU TFLOW. ALTHOUGH SERVICES WERE TAKEN IT IS DIFFICULT TO SAY THAT TH E RESIDUALS AND THE LOSSES LEFT BY THE ASSESSEE IN FAVOUR OF AIL ARE PURELY CONSIDE RATION FOR THE JOB THAT IS DONE. THE MARKET FLUCTUATIONS IN THE PRICE STRUCTU RE OF THE RAW MATERIAL AND THE END PRODUCT CANNOT BE JUST IGNORED IN THE WHOLE TRANSACTION NOR THE PROCESS LOSS. THE PROCESS LOSS COULD BE EITHER MOR E OR LESS THAN THE PERCENTAGE AGREED TO BETWEEN THE PARTIES. BUT STIL L THE PARTIES SETTLE THE TRANSACTIONS AT AN AGREED PROPORTION. IN OTHER WOR DS THE RESIDUAL THAT IS LEFT BY THE ASSESSEE APART FROM COVERING THE LABOUR COS T OF PROCESSING ALSO INCLUDES THE PROTECTION FROM MARKET FLUCTUATIONS AS ALSO PROTECTION FROM ADVERSE PROCESS LOSS. TO CONCLUDE THE ENTIRE RESI DUAL IS ONLY FOR THE PURPOSE ITA NO.2310/DEL/2010 & OTHRS 25 OF JOB WORK IS NOT FAIR AND CORRECT HAVING REGARD T O THE TOTALITY OF THE TRANSACTION ENTERED INTO BY THE PARTIES. 15. IN THE LIGHT OF THIS DISCUSSION WE ALLOW THE A SSESSEES APPEAL AND DISMISS THE REVENUES APPEAL ON THIS ISSUE. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH FEBRUARY 2011. SD/- SD/- ( C.L. SETHI ) (G.E. VEERABHADRAPPA) JUDICIAL MEMBER VICE PRESIDENT DT. 28TH FEBRUARY 2011 GS COPY FORWARDED TO: 1. ITO WARD 1(2) NEW DELHI. 2. M/S AHAAR CONSUMER PRODUCTS PVT. LTD. NEW DELHI. 3. CIT(A)-IV NEW DELHI. 4. CIT 5. DR BY ORDER DY. REGISTRAR