Case Note & Summary
The case involves three appeals filed by the Revenue under Section 260-A of the Income Tax Act, 1961, against a common order of the Income Tax Appellate Tribunal, 'B' Bench, Bangalore, dated 7.3.2014. The appeals pertain to Assessment Years 2009-10, 2010-11, and 2011-12. The respondent-assessee, M/s. Allergan India Pvt. Ltd., is engaged in the business of trading ophthalmic products and outsources manufacturing to other companies, including Piramal Health Care Ltd. (PHL). In 1995, the assessee entered into a Contract Manufacturing Agreement with PHL, under which PHL agreed to manufacture and sell certain pharmaceutical and contact lens care products to the assessee on a principal-to-principal basis. Key features of the agreement included: the assessee granting PHL a license to use know-how and specifications; PHL manufacturing products at its facility and selling them to the assessee at cost; the assessee placing purchase orders; property passing upon delivery; and PHL bearing risk of loss. The Revenue contended that the payments made to PHL were 'fees for technical services' under Section 194J of the Act, requiring TDS. The Assessing Officer treated the assessee as an assessee-in-default for non-deduction of TDS. The Commissioner of Income Tax (Appeals) and the Tribunal both ruled in favor of the assessee, holding that the payments were for purchase of goods, not for technical services. The High Court upheld these decisions, finding that the agreement was for manufacture and sale on a principal-to-principal basis, and thus no TDS was deductible under Section 194J. The appeals were dismissed.
Headnote
A) Income Tax - TDS - Section 194J of Income Tax Act, 1961 - Fees for Technical Services - The issue was whether payments made by the assessee to a contract manufacturer under a principal-to-principal agreement for manufacturing ophthalmic products constituted 'fees for technical services' requiring TDS under Section 194J. The court held that the agreement was for manufacture and sale of goods on principal-to-principal basis, not for rendering technical services, and thus no TDS was deductible. (Paras 2-5) B) Income Tax - Contract Manufacturing - Principal-to-Principal Basis - The court examined the features of the contract manufacturing agreement, including transfer of property upon delivery, purchase orders, and risk of loss, and concluded that the transaction was a sale of goods, not a service. Therefore, Section 194J was not attracted. (Paras 3-5)
Issue of Consideration
Whether the payment made by the assessee to Piramal Health Care Ltd. under a contract manufacturing agreement is subject to deduction of tax at source under Section 194J of the Income Tax Act, 1961, as 'fees for technical services'?
Final Decision
The High Court dismissed the appeals, upholding the ITAT order that no TDS was deductible under Section 194J on payments made to Piramal Health Care Ltd. under the contract manufacturing agreement.
Law Points
- TDS under Section 194J of Income Tax Act
- 1961
- applies only to payments for technical services
- not for manufacturing on principal-to-principal basis
- Contract manufacturing agreement does not constitute 'technical services' under Section 194J
- Principal-to-principal transaction not subject to TDS
- No obligation to deduct tax at source on payments for goods manufactured as per specifications
