TDS Not Deductible on Payments By Shoppers Shop to Vendors on ‘Sales or Return’ (SOR) Agreement’ Supply

Shoppers Stop, a well-known retail chain, has won a legal battle against the Revenue authorities. The Mumbai Income Tax Appellate Tribunal (ITAT) has upheld the decision of the Commissioner of Income Tax (Appeals) (CIT(A)) in a case involving the applicability of Section 194C of the Income Tax Act. The ITAT held that the payments made by Shoppers Stop to various vendors for the procurement of apparels and footwear under the ‘Sales or Return’ (SOR) agreement are not in the nature of a ‘work contract’, and therefore, the provisions of Section 194C are not applicable.

The dispute arose when the Revenue authorities conducted a survey on Shoppers Stop and discovered that the retailer had entered into agreements with various vendors for the resale of apparels, clothing, footwear, and accessories through its retail outlets and online marketplace. The Revenue authorities claimed that these products were manufactured by the vendors as per Shoppers Stop‘s pre-approved designs, and therefore, the contract between the retailer and vendors was a ‘contract of work and labour’ not ‘contract of supply’ and covered within the ambit of ‘works contract‘ under Section 194C. The Revenue authorities held that Shoppers Stop had not deducted tax at source on such payments under Section 194C and was therefore an assessee-in-default for Rs. 36.99 crore, apart from interest under Section 201(1A).

However, the CIT(A) held that Shoppers Stop had purchased goods from these vendors under the ‘Sales or Return’ arrangement and that it was not in the nature of a works contract. Accordingly, the CIT(A) deleted the demand raised under Section 201(1)/(1A). The Revenue authorities challenged this decision before the ITAT.

The ITAT referred to the provisions of Section 194C, which define the term ‘work‘ in an inclusive manner, and noted that only if the ‘work contract’ undertaken by the payee falls within the above definition of ‘work‘, as specifically defined in the section itself, would the provisions of Section 194C become applicable. The ITAT opined that the Revenue authorities had incorrectly observed that ‘work‘ was not defined in the section and relied on other dictionaries. The ITAT also referred to the Memorandum Explaining the Finance (No.2) Bill, 2009, whereby the definition of ‘work’ was amended to specifically exclude manufacturing or supplying a product according to the requirement or specification of a customer by using raw material sourced from a person other than such customer.

The ITAT observed that in the present case, Shoppers Stop sourced products from various reputed brand owners-cum-manufacturers such as Fossil, Arvind Lifestyle, Titan, etc., on an outright or SOR basis. The ITAT noted that the retailer neither provided specifications or designs nor did it provide raw materials in relation to these goods. The title, risk, and property in the goods passed to Shoppers Stop upon sale, issuance of invoice, and delivery of goods at their outlets. The ITAT also pointed out that the vendors not only supplied their products to Shoppers Stop but also to different retailers and franchise showrooms. Therefore, the ITAT upheld the CIT(A)’s finding that the SOR arrangement with these vendors was in the nature of the supply of goods and not a works contract.

The ITAT further pointed out that even the terms of the contract specified that Shoppers Stop did not enjoy any right to place orders for the manufacture of any new product but instead only exercised the right to choose from various product offerings from the array of products manufactured by these suppliers. The ITAT held that “Such supply, being independent of raw material sourcing, cannot be categorized as ‘works contract‘ as contemplated in Explanation to Section 194.

[ACIT v. Shoppers Stop Ltd. [TS-976-ITAT-2022(Mum)] – date of Judgement : 02.12.2022 (ITAT Mumbai)]

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Tax Deducted at Source (TDS) is a type of tax that is deducted by the payer of the income, and deposited with the government on behalf of the payee. The provisions of TDS are governed by the Income Tax Act, and can be complicated for individuals and businesses to understand.

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