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Tax deduction at source on sale of labelled goods

There is some confusion as to the treatment of sale of goods containing the logo or the label of the customer. Such contracts are being treated as works contract, because of the imprint of customer's identity, though they should be mere sale not liable for tax deduction at source as works contracts. Circular No. 13 of 2006 dated December 13, 2006 which reiterates the principle that sale is different from works contract does not really indicate whether the view taken by some of the departmental officers in this regard is correct. Kindly clarify.

The Income-tax Department is prone to treat supply of packing material and goods prepared with labels or logos as works contract and not merely sale of goods. The Tribunal had been taking the view that a sale does not become a works contract merely because a label or logo or any other mark is attached or printed on the basis of the materials furnished by the customer, it does not cease to be a contract for sale.

The Bombay High Court in BDA Ltd. v ITO (TDS) (2006) 281 ITR 89 (Bom) held so, where the assessee supplied wrapper labels for bottles containing liquor sold by the client.

The cost of the labels on the wrapper was borne by the customer. The High Court after considering the precedents under excise and sales tax law concluded that it was a contract of a sale and not a works contract.

A similar view was taken by the Delhi High Court in CIT v Dabur India Ltd. (2006) 283 ITR 197 (Del) in the case of supply of corrugated boxes with labels bearing assessee's logo printed on such boxes. It was held to be a sale and not works contract basing its conclusion on the decision of the Supreme Court in a sales-tax case in State of Himachal Pradesh v Associated Hotels of India Ltd. (1972) 29 STC 474. It distinguished the decision of the Madras High Court in State of Tamil Nadu v Anandam Viswanathan (1989) 73 STC 1, which dealt with a case, where the contract related to printing of university question papers, the consideration for which was more for confidentiality of the work than one of sale on printed question papers.

Answer to Question No. 15 in Circular No. 715 dated August 8, 1995 (1995) 215 ITR (St.) 12 considered that the supply of printed material would be works contract covered by Sec. 194C. It was this clarification, which had caused some confusion. This clarification besides being too general also runs contrary to Circular No. 681 dated March 8, 1994 (1994) 206 ITR (St.) 299 in Paragraph 7(vi), which had taken the view that contract for supply of goods would not be governed by Sec. 194C.

It is with the purported objective of reconciling these Circulars, Circular No. 13 of 2006 dated December 13, 2006 has now been issued. It points out that the inference in Circular No. 715 dated August 8, 1995 has to be considered along with the principles laid down in Circular No. 681 dated March 8. 1994.

It proceeds to state that it would be necessary to examine each contract for an answer to the question, whether it is a contract for work or a contract for sale. Only a contract for supply of any article or a thing as per prescribed specifications would be a contract for work.

This clarification is welcome. It would have been more appropriate if the decisions of the Bombay and Delhi High Courts had been noticed and the reasoning therein accepted, so as to bring about greater clarity. It is apparent that the Circular is intended to guide the assessing officers to accept such reasoning.

S. RAJARATNAM

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