Commissioner of Income Tax vs Spice Telecommunications (P.) Ltd.

Dilip B. Bhosale, J.—We dispose of these six Income Tax Appeals filed by the revenue by this common judgment, since the substantial questions of law raised for our consideration are common and even the nature of business of the respondent-assessees is similar. The assessees are in the business of providing communication facilities and for that purpose they place order for supply of SIM/scratch cards according to their requirement and specifications. Admittedly, the assessees do not supply any material whatsoever to the manufacturers/suppliers of the cards. It is against this backdrop the revenue has raised the following substantial questions of law for our consideration:

"i Whether the Appellate Authorities were right in holding that the payment made for obtaining SIM card & scratch card used in the business of the assessee''s mobile service from suppliers/contractors, as per their requirement and specifications, does not constitute a "works contract" and the provisions of Section 194C of the Act are not applicable and no tax at source be deducted?

ii. Whether the Appellate Authorities were right in not taking into consideration the provision of Section 194C of the Act which contemplate that payments for carrying out any "work" in pursuance of a contract, including the supply of SIM/scratch cards as per the assessee''s specifications would attract the provision of Section 194C of the Act and consequently the order u/s. 201(1) and u/s. 201(1A) of the Act was justified?"

These appeals are directed against the order passed by the Income Tax Appellate Tribunal (for short ''the Tribunal'') whereby the Tribunal refused to interfere with the order passed by the First Appellate Authority. The First Appellate Authority reversed the order passed by the Assessing Officer whereby it was held that the order to supply SIM/scratch cards along with printing of the assessees'' name and other particulars would amount to "work" since it requires specific job to be done by the specialised companies having such plant and machinery. The Assessing Officer further held that the work order placed by the assessees to the manufacturer/supplier is covered by the provisions contained in Section 194C of the Income Tax Act, 1961 (for short ''the Act'') and TDS is required to be made by the assessees while making payment to the suppliers.

Section 194C of the Act came to be substituted by the Finance (No. 2) Act, 2009 w.e.f. 01.10.2009. By this amendment, for the first time Sub-Clause (e) of Clause (iv) in the Explanation appended to Section 194C of the Act was inserted. Sub-Clause (e) of Clause (iv) reads thus:

"(iv) "work" shall include--

(e) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer, but does 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."

Thus, the word "work" as occur in sub-section (1) of Section 194C has been explained to include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer.

Similar situation fell for the consideration of the Supreme Court in CIT v. Silver Oak Laboratories (P.) Ltd. in Special Leave Appeal (Civil) No. 18012/2009, decided on 17-8-2010. The Supreme Court considered Section 194C of the Act before amendment/substitution and after the amendment/substitution by the Finance (No. 2) Act, 2009 and disposed of the SLP by the following order:

"On examining the terms and conditions and also on examination of the invoices, purchase orders as well as the challans indicating payment of excise duty, we are of the view that there is no material on record to indicate that the transaction in question is a "contract for carrying out works". Hence, Section 194C of the Income Tax Act, 1961, [''Act'' for short] is not attracted. Our attention, in fact, is invited to the amendment in Section 194C of the Act vide Finance (No. 2) Act, 2009, with effect from 1st October, 2009, which defines "work" to include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer. In fact, 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. However, this amendment came into force only with effect from 1st October, 2009, which will not apply to the period in question in the present case(s).

For the aforestated reasons, we find no reasons to interfere with the impugned judgments of the High Court. The special leave petitions are, accordingly, dismissed."

In the present cases, admittedly, the assessees did not supply any material whatsoever to the manufacturer/supplier for the supply of SIM/scratch cards as per their requirement or specification and therefore, the transaction cannot be treated as a contract for carrying out works within the meaning of the word "work" used in sub-section (1) of Section 194C of the Act, before its amendment. After the amendment, it is clarified that the definition of the word "work" will not include the 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. If we apply this provision, the case of the assessees would stand strengthen further. In other words, even if the first part of the amendment i.e., sub-clause (e) of Clause (iv) of Section 194C is applied, the case of the assessees would not be covered by the said clause since the assessees did not supply any material to the manufacturers. However, we need not take recourse to the amendment. These appeals, in view of the aforesaid order of the Supreme Court, can be disposed of holding that placing of orders by the assessees, in these cases, to the manufacturers/suppliers to supply SIM/scratch cards as per their requirements cannot be treated as contract for carrying out works within the meaning of sub-section (1) of Section 194C of the Act as it existed prior to its amendment. Hence, we answer both the substantial questions of law against the revenue and in favour of the assessees and dispose of these appeals. No costs.