Aniruddha Bose, J. - (1.) In the assessment order out of which this appeal arises, the Assessing Officer had disallowed deductions claimed by the assessee as expenses in respect of three heads and it is this dispute which forms subject of controversy in this appeal. The first head related to selling expenses of a sum of Rs.4,19,23,214/- whereas the second was sales promotional expenses of Rs.88,85,919/-. The other head was in respect of packaging material purchases for a sum of Rs.4,04,12,991/-. The assessee is involved in the business of manufacture of coconut oil, spices, mustard oil and other grocery items and these deductions were claimed by it for the assessment year 2008- 09.
(2.) The assessing officer found that the assessee had failed to establish the genuineness of the transactions on the basis of which deduction was claimed for selling expenses and sales promotional expenses. It was also the view of the assessing officer that in any event, since there was no tax deduction at source in respect of these expenses, the entire sum was to be added to income of the assessee and taxed as such. On the question of deduction claimed for purchase of packaging materials, the assessing officer declined to accept the assessee's contention that there was outright sale of such materials. The assessing officer proceeded on the basis that the packaging materials were obtained through an arrangement which constituted works contracts and payment thereof required tax deduction at source under Section 194C of the Income Tax Act, 1961. On that provision not being adhered to, again the entire expenditure was disallowed under Section 40(a)(ia) of the Act.
(3.) The assessing officer had referred to certain features of the arrangement through which the packaging materials were being supplied and came to the conclusion that it was not a principal to principal transaction simpliciter but there was close involvement of the assessee in execution of the contract which transformed the nature and character of such transactions into works contract. The assessee went up in appeal against this assessment order and was successful before the Commissioner of Income Tax (Appeals), being the First Appellate Authority. So far as treating the claim of the assessee that there was outright purchase of the packaging materials, the First Appellate Authority held:- "I have considered the submission of the appellant and perused the assessment order. On perusal of profit and loss account for the year under consideration it is observed that the appellant company has debited sum of Rs.4,04,12,991/- under the head "packing material purchase". The A.O. has disallowed the aforesaid sum by invoking provisions of Sec.40(a)(ia) because he was of the opinion that the appellant company was required to deduct tax u/s.194C of the Act. He made the aforesaid opinion for the reason that the packing material purchased by the appellant company was as per the specifications given by him to its suppliers. The packing material supplied by the suppliers as per the specifications given by the appellant company could only be used by the appellant company and in case of any excess etc., the suppliers cannot sell the material to any other customer. In case of any defect in the material with reference to the specifications provided by the appellant company, the suppliers have to destroy such defective printing material having no value at all. In view of these facts, the A.O. was of the opinion that the purchases made by the appellant company from its suppliers of packing material tantamount to work contracts and not contract for sale. Hence, on the payments made for purchase of packing material, the appellant company was required to deduct the tax u/s.194C of the Act. On the other hand, it was argued by the appellant company that the provisions of section 194C are not applicable on purchase of packing material because there was no work contract and it has simply asked to its suppliers to supply the packing material of specific sizes and specific printing thereon. The appellant company has purchased the packing material from these suppliers on which the Excise Duty and VAT was paid by the Company. The packing material was not supplied by the appellant company but it was purchased by the suppliers and they manufactured the material as per the appellant's specification which was purchased by the appellant company. Hence, it was contract for sale and not contract for work. The appellant company has not given any job work to the suppliers of the packing material and the right of ownership of the packing material was only transferred to the appellant company, once, it was purchased by him from the suppliers. Under the circumstances, there was no obligation under the law to deduct the tax u/s.194C of the Act and consequently there is no application of provisions of section 40(a)(ia).";