T.Vasudevan, Advocate for the Appellant. G.Chandrababu, Addl.CIT for the Respondent.

1. This appeal filed by the assessee is directed against the order of the learned CIT(A), Puducherry dated 22.11.2017 and pertains to assessment year 2013-14.

2. The assessee has raised the following grounds of appeal:-

"1. The order of the learned CIT(A) dismissing the appeal is contrary to law, erroneous and unsustainable on the facts of the case.

2. The CIT{A erred in confirming the disallowance under sec.40(a)(ia) of Rs. 16465887/-.

3. The CIT(A failed to appreciate that there can be no disallowance u/s. 40(a)(ia), where no payment is made and/ or debited in the books of assessee and hence the disallowance on an assumed amount is unjustified and untenabe in law.

4. The CIT(A) failed to appreciate that the assessee had not incurred the amount as expenditure towards making charges of jewellery for payment to the goldsmiths and also not debited this amount in the books, for the officer to conclude that the assessee has not effected TDS and hence the disallowance u/s.40(a)(ia) is unwarranted and unjustified on the facts of the case.

5. The CIT(A) further failed to appreciate that the assessee had made payments to the goldsmiths for making of jewellery as per the agreed trade norms and was not justified in assuming the wastage in the making at jewellery as making charge and disallowing the amount for not effecting TDS by the Assessee.

6. The CIT(A further failed to appreciate that the goIdsmith returns roughly 94% of the gold as jewellery out o the quantum of gold given for ornament making that the 6% is accepted as wastage in gold making and there was no basis to assume this as the making charge and hence the disallowance merely on surmises and conjectures is wholly unjustified and unsustainable on the facts of the case.

7. The CIT(A) further failed to appreciate that the mere reliance on the statement of two goldsmiths recorded at the back at the assessee cannot be the basis to validate the assumption of the officer that the wastage shown by assessee was the making charges on which TDS was not effected and hence the disallowance u/s.40(a)(ia) is unjustified.

8. The CITA) was not justified in ipso facto adopting the version of the officer without giving due credence to the facts put forth by the assessee that apart from the ornaments returned by the goldsmith or pathar, the assessee considers the balance as wastage, as a matter of business prudence/commercial expediency and hence the assumption of the officer to treat this as making charges is baseless and the disallowance needs to be cancelled.

9. The CIT(A) without appreciating the factual basis was not justified in holding that section 194C is applicable on amounts that have never been paid or debited in the books at making charges and hence the disallowance u/s.40(a)(ia) is untenable in law.

10. The CIT(A), in any view of the matter. ought to have duly considered the contentions of the assessee in the proper perspective and held that the disallowance u/s.40(a)(ia)is not tenable both on facts and in law and thus allowed the appeal."

3. Brief facts of the case are that the assessee company is engaged in the business of manufacture and sale of gold and silver jewellery filed its return of income for the assessment year 2013-14 on 28.09.2013 declaring total income of Rs.3,92,47,030/-. The case was taken up for scrutiny and during the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed wastage of 6755.29 gms of gold, while manufacturing gold jewellery and hence, called upon the assessee to justify claim of huge wastage which works out 6.2%, when normal wastage in the industry is at 1%. In response, the assessee submitted that an average percentage of wastage in the manufacturing of ornaments is 6 to 7% depending upon type of ornaments manufactured and hence, it cannot be said that there is uniform 1% wastage in all gold ornaments. The assessee further submitted that it has separately paid making charges to goldsmith for which applicable TDS has been deducted.

Therefore, question of estimation of making charges by taking wastage in lieu of manufacturingcharges over and above 1% percentage is incorrect. The Assessing Officer, however, was not convinced with the explanation furnished by the assessee and according to him, the assessee has claimed excessive wastage, while manufacturing gold ornaments over and above 1% and accordingly, opined that the assessee has retained gold with goldsmith in lieu of making charges, which is in the nature of labour charges comes under the purview of works contract as defined under section 194C of the Act. The Assessing Officer has taken support from statement of goldsmiths in support of his findings, where they have stated that they will deliver 94 gms of gold out of 100 gms received by them for making ornaments. Accordingly, rejected the arguments of the assessee and treated excessive wastage charges over and above 1% as making charges. Since the assessee has shown wastage of 6755.29 gms of gold, after allowing 1% of wastage, balance 5669.527 gms of gold, has been treated as making charges and after taking prevailing market rate of gold which was 2837.55 gms gold has esimated making charges of Rs. 1,64,65,887/- and disallowed the same u/s. 40(a)(ia) of the Act for non-deduction of TDS u/s.194C of the Act.

4. Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the assessee has reiterated its submissions made before the Assessing Officer and argued that additions made by the Assessing Officer towards estimated making charges on the basis of excessive wastage quantified by him is purely on assumption and suspicion, without there being any material facts to prove that the assessee has paid making charges by retaining gold with goldsmith.

5. The learned CIT(A), after considering the relevant submissions of the assessee and has also taken note of facts brought out by the Assessing Officer held that the assessee has allowed goldsmiths to take making charges in the form of gold by retaining 6 gms gold towards making charges, which is evident from the fact that when 100 gm of gold is given to goldsmith, they had returned 94 gms of gold ornaments. The learned CIT(A) further observed that goldsmiths have clearly stated in their statement that they get 5 to 6% in lieu of wages for making charges. Although, the assessee has filed an affidavit from goldsmiths stating that 6% wastage is normal practice in this line of trade, but affidavit filed by the goldsmiths are stereo typed which means the assessee has obtained affidavit from goldsmiths to support its arguments. He further observed that the Assessing Officer has brought out clear facts to the effect that average wastage in this line of business is 1%, whereas the assessee has claimed wastage of 6.2% which is very higher, when compared to industrial practice. Therefore, he opined that wastage allowed to goldsmiths while making ornaments is nothing but making charges, which was paid in lieu of cash, hence, the same needs to be considered as service charges for manufacturing of jewellery. He further noted that once having considered that wastage allowed by the assessee to goldsmiths is in lieu of making charges, then next question would be under what section said payments to be subjected to tax deduction. The learned CIT(A), after taking note of the provisions of section 194C and Explanation, opined that work shall include 'manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer'. In the case of the assessee work had been carried out by goldsmith as per specification of the assessee and further, material has been purchased and given by the assessee to goldsmith. Therefore, as per section 194C(2) of the Act, TDS has to be deducted, even if a sum is payabe by any other name or accounted under any other head in the books of account. Accordingly, opined that there is no error in the reasons recorded by the Assessing Officer to arrive at the conclusion that excess wastage allowed by the assessee is nothing but making charges, which attracts provisions of section 194C and thus, for non-deduction of TDS, the same needs to be disallowed u/s.40(a)(ia) of the Act.

6. The learned AR for the assessee submitted that the learned CIT(A) has erred in confirming disallowance u/s.40(a)(ia) of the Act, without appreciating the fact that there can be no disallowance, where no payment is made and/or debited into books of account of the assessee. The learned AR for the assessee further submitted that additions made by the Assessing Officer and sustained by the learned CIT(A) is purely a guess work on assumption, without there being any evidence to prove that assessee has paid making charges in the form of gold. The assessee has filed all evidences to prove that making charges in this line of industry is between 5 to 6% and said percentage is depends upon type of ornaments manufactured by the assessee. The assessee has also obtained affidavit from goldsmiths, where they have clarified that normal wastage in manufacturing of gold ornaments is 6 to 7%.

Therefore, there is no merit in the reasons given by the Assessing Officer that assessee has paid making charges in form of gold and such payment attracts TDS provisions u/s.194C of the Act. In this regard, he relied upon decision of ITAT., Mumbai in the case of Interactive Avenues (P) Ltd. Vs. DCIT (2021) 124 taxmann.com 126 and the decision of ITAT., Delhi in the case of Green Valley Tower Pvt.Ltd. Vs. ACIT (2021) (1) TMI 737 - ITAT Delhi.

7. The learned DR, on the other hand, strongly supporting the order of the learned CIT(A), submitted that the Assessing Officer as well as the learned CIT(A) have brought out clear facts to the effect that the assessee has claimed excessive wastage, while manufacturing gold ornaments which is over and above industry average and thus, same needs to be considered as making charges paid to goldsmiths for manufacturing gold ornaments. The DR further submitted that the Assessing Officer has also recorded statement from goldsmiths, where they have stated that they retain 5 to 6 gms. gold for every 100 gms gold for making charges. Therefore, there is no merit in the arguments of the assessee that additions made by the Assessing Officer is on assumption and surmises manner.

8. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The provisions of section 194C is applicable, when the assessee has paid or credited any charges covered thereunder. In case, no payment is debited or credited to respective parties account, then such payment cannot be considered within the ambit of section 194C or any other TDS provisions. In this case, the assessee has neither debited making charges into profit and loss account nor credited any amount to the respective parties account. Therefore, when no payment is made or amount is credited to respective parties account, then question of application of provisions of section 194C does not arise at all. Be that as it may, but fact remains that the Assessing Officer has made additions towards making charges on estimation basis by taking wastage claimed by the assessee in the process of manufacturing gold ornaments. According to the assessing Officer, average wastage in manufacturing gold ornaments is at 1% whereas, the assessee has claimed 6.2% wastage. Therefore, he has computed excessive wastage of 5% and treated the same as making charges paid for manufacturing of gold ornaments. To arrive at such conclusion, he has relied upon statement recorded from goldsmiths, who had involved in manufacturing of gold ornaments. 9. We have given our thoughtful consideration to the arguments advanced by the learned AR for the assessee in light of facts brought out by the Assessing Officer and find that there is no merit in the reasons given by the Assessing Officer to treat excessive wastage as making charges. Further, there is no uniform yardstick to quantify making wastage in any process of manufacturing of goods, including manufacturing of gold ornaments. But, it all depends upon nature of goods manufactured or types of gold ornaments manufactured by the parties. The Assessing Officer has considered 1% wastage and to support his stand taken statement from goldsmiths, where they have stated that they have returned 94 gms of gold out of 100 gms gold received from the assessee. Except this, no other independent evidence was brought on record to support his findings. On the other hand, the assessee has filed affidavit from goldsmiths to support its arguments, where they have clearly stated that normal wastage in manufacturing of gold ornaments is between 6 to 7%. Therefore, we are of the considered view that Assessing Officer as well as learned CIT(A) erred in assuming wastage charges at 1% without any evidence to support their stand, ignoring specific evidences filed by the assessee to prove that normal wastage incurred while manufacturing gold ornaments was at 6 to 7%. In our considered view, the Assessing Officer has quantified excessive wastage purely on arbitrary and suspicious manner, which cannot be justified in the given facts and circumstances of the case. Further, the assesse has also produced necessary evidences to prove that it has separately paid making charges to goldsmith and further, deducted TDS, wherever applicable.

Therefore, we are of the considered view that the Assessing Officer as well as learned CIT(A) were erred in estimating making charges mere relying upon statements of two goldsmiths recorded at the back of the assesse, even though the assessee has demonstrated with evidences that statement given by goldsmiths was incorrect. Further, the learned CIT(A) was also not justified in ipso facto, affirming version of the Assessing Officer without giving due credence to the facts put forth by the assessee. Further, wastage allowed by the assessee to goldsmiths is as a matter of business prudence /commercial expediency and the same cannot be called upon to question by the Assessing Officer unless, he had evidence to prove that the same is excessive.

Further, case laws relied on the assessee in the case of Interactive Avenues (P) Ltd. Vs. DCIT (supra) supports the case of the assessee that unless deduction is claimed for any expenditure, the provisions of section 40(a)(ia) of the Act cannot be pressed into service at all. The ITAT., Delhi in the case of GreenValley Tower Pvt.Ltd. Vs. ACIT (supra) has taken a similar view and held that if assessee has not claimed deduction for any expenditure, then the provisions of section 40(a)(ia) cannot be invoked to disallow such payments.

10. In this view of the matter and considering the facts & circumstances of the case, we are of the considered view that addition made by the Assessing Officer and confirmed by the learned CIT(A) towards estimated making charges by treating wastage claimed by the assessee in process of manufacturing gold ornaments is purely on suspicious and conjecture manner without there being any material evidence and hence, additions made by the Assessing Officer u/s.40(a)(ia) of the Act for non-deduction of TDS u/s.194C of the Act cannot be sustained. Hence, we set aside the order passed by the learned CIT(A) and direct the Assessing Officer to delete addition made u/s.40(a)(ia) of the Act.

11. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on 31 March, 2021

Sd/- Sd/-

(V.Durga Rao) (G.Manjunatha)

Judicial Member Accountant Member