Payment under inter-linked con-tracts for manufacturing attracts TDS u/s 194C

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CIT Vs. Nova Nordisk Pharma India Ltd (Karnataka High court)

Date of Decision. 05.01.2012, Appeal No. 1262/2006

The assessee, Nova Nordisk Pharma India Ltd, an Indian Company was engaged in marketing of pharmaceutical products. It was a subsidiary company of NOVA Nordisk, Singapore. One of the products (insulin in medically presentable form), was manufactured by M/s. Torrent Pharmaceuticals Limited (Torrent) and supplied to the assessee company. The raw material was supplied by a foreign company NOVA Nordisk, Denmark. Torrent pursuant to the contract, was required to sell entire output only to the assessee company in India.

The assessee company was to pay the manufacturing company (Torrent) 19% of the landing cost of the raw material, consumed into the production of the product. This payment was termed as ‘conversion charges’ as per the agreement between the assessee and the manufacturer. The assessee company and manufacturing company (Torrent) had entered into another agreement for supply of technical know-how, to be used for exclusive manufacture of the product, without any consideration. Further, the assessee company and manufacturing company had entered into a trade mark license agreement, allowing labelling of the products manufactured with the assessee company s brand name.

Based on the agreements the AO con-tended that the contract between the assessee and the manufacturer was not a contract of sale but a contract for manufacturing work and hence the assessee was liable to deduct TDS u/s 194C. The AO excluded the price of the material supplied by the Group company and computed the TDS @ 2% on the quantum of conversion charges. The AO also contended that the assessee was an assessee in default for non deduction of tax u/s1 94C and also levied the interest.

The division bench of Karnataka High court observed that:

- Product was manufactured out of raw materials supplied by a foreign company

- Foreign company had direct interest in the assessee company

- Product was manufactured according to the specification of the assessee company

- Technical know-how for manufacture was supplied by assessee company

- The product was labelled with the brand name of the assessee

- The entire production was to be sup¬plied exclusively to the assessee company and not to anyone else

The HC held that the transaction between the assessee and the manufacturer was not a contract for sale but a contract for manufacture. The High Court observed that “in such a situation one has to really look into the real nature of the transaction that emerges on the conjoint, reading of the three agreements”. Accordingly, HC concluded that the assessee was liable to deduct tax u/s 194C. The High Court also upheld the assessment order levying interest u/s 201 (1A) (simple interest for not deduction of tax).