Case Note & Summary
The appeal by the Revenue under Section 260A of the Income Tax Act, 1961 challenged the order of the Income Tax Appellate Tribunal (ITAT) which held that the agreement between the assessee, M/s. Glenmark Pharmaceuticals Ltd., and a third-party manufacturer for the production of pharmaceutical products was a contract for sale and not a works contract. The assessee was engaged in the business of manufacturing and marketing drugs and pharmaceutical products. During a survey, it was found that the assessee had three types of activities: manufacturing at its own factory, getting products manufactured from third parties, and an agreement where third parties manufactured products to the assessee's specifications and under its trademark. The Assessing Officer required the assessee to explain why it had not deducted tax at source under Section 194C and should not be treated as an assessee in default under Section 201(1). The ITAT allowed the assessee's appeal, holding that the transaction was a sale. The Revenue appealed, raising the substantial question of law whether the ITAT was correct in holding that the transaction was a contract for sale and not a works contract. The court analyzed the terms of the agreement: the assessee provided formulations and specifications, the manufacturer affixed the assessee's trademark, the manufacturer purchased raw materials, and property in the goods passed to the assessee only on delivery. The agreement was on a principal-to-principal basis. The court held that the transaction was a contract for sale of goods and not a works contract, and therefore Section 194C was not attracted. The appeal was dismissed.
Headnote
A) Income Tax - Tax Deduction at Source - Section 194C - Contract for Sale vs. Works Contract - The assessee engaged a third party to manufacture pharmaceutical products as per its specifications and under its trademark. The manufacturer purchased raw materials and property passed to the assessee only on delivery. The agreement was on a principal-to-principal basis. The court held that the transaction was a contract for sale of goods and not a works contract, and therefore Section 194C was not attracted. (Paras 1-3)
Issue of Consideration
Whether the agreement between the assessee and the manufacturer for production of pharmaceutical products is a contract for sale of goods or a works contract, and consequently whether Section 194C of the Income Tax Act, 1961 is attracted.
Final Decision
The appeal by the Revenue is dismissed. The ITAT's order holding that the transaction is a contract for sale and not a works contract is upheld.
Law Points
- Interpretation of 'any work' under Section 194C
- distinction between contract for sale and works contract
- principal-to-principal basis
- passing of property
- tax deduction at source
