Applicability of section 194C of IT Act qua film financing arrangement containing provision of recovery of advances/loans with interest
SUMMARY OF CASE LAW
Provisions of section 194C do not apply to the film financing arrangement of the kind in question.
CASE LAW DETAILS
Decided by: ITAT, `B’ BENCH: MUMABI, In The case of: Muktha Arts v.ACIT (TDS), Appeal No. : ITA Nos. 755 to 757/Mum/2007, Decided on: April 17, 2009
10. Section 194C relating to `payment to contractors and sub-contractors’ and relevant provisions read as under:-
“194C(1)Any person responsibility for paying any sum to any resident (hereinafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and –
(d) any company;
shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to –
(i) one per cent in the case of adverting,
(ii) in any other case two per cent, of such sum as income-tax on income comprised therein.”
b. The Finance Act, 1995 has inserted an Explanation III providing the extended definition to the expression ‘work’ with effect from 1.7.1995 and the reads as under.
“Explanation III for the purposes of this section, the expression “work” shall also include -
(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
(c) carriage of goods and passengers by any mode of transport other
than by railways;
11. The language used in the above provisions is plain. The portions relevant for the resolving the present dispute are the phrases such as “paying the sum”, “for carrying out any work”, “in pursuance of a contract” used in subsection (1) and “production of programmes” used in clause (c) of the Explanation III. The following is the analysis of the phrases, (a) Regarding the words “paying the sum”, it is necessary to note that the said paying does not involve the refunding/returning of the sum with interest from the contractor; (b) With reference to the words “for carrying out”, the contractee pays the amount for carry out the work in pursuance of the contract between him and his contractor and the contractor is under the contractual obligation to carry out the work contract. These components are readable in the instant agreement with the arrangement, (c) With reference to the words ‘any work’ it is noticed there is huge lot of controversy on the topic. Briefly stated, the words “any work” undisputedly has wider connotation and ‘any work’ shall not only include work contracts but also other types of contracts and however, it shall not include contracts of sale of goods as explained by the Supreme Court in the case of Associated Hotels of India Ltd (29 STC 474)(SC). In the light of the apex court judgment in the case of Associated Cement Co Ltd (201 ITR 435, 440)(5C) that provisions of section 194C would apply all types of contracts including transport contracts, labour contracts, service contracts. As per the fresh guidelines issued by the Board, the provisions of section 194C shall apply to transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labour contracts, material contracts and work contracts we from 1.7.95 consequent to the amendments to the section 194C by the Finance Act, 1995. However, they shall not cover the payments made for contracts of hiring or renting of equipments and contracts for sale of goods. Further, the Supreme Court has held in the case of Associated Cement Co Ltd (supra) that though the ‘any work’ mentioned in section 194(1),-
“means any work including the supply of the labour to carry out the work and it is not intended to be confined to or restricted to work contracts and therefore, a person who credits to the account of or to the credit of the contractor any sum payable on behalf of the organizations specified in 194C(1) for carrying out any work is liable to TVS as required under the sub-section. “
Thus, the words ‘any work’ has wider imports and however, it is not
unqualifyingly wide to cover ‘each and every work7 as held (in para 21 of the order) by the jurisdictional High Court in the case of the East India Hotels Ltd. vs CBDT in the Writ Petition No 2104 of 1994 vide the order dated 6.3.2009.
21. If the contention of the revenue that the word ‘any work’in section 194Cis very wide enough to include all types of work is accepted, then it would mean that even the hair cutting work done by a barber would be a fworkf covered under section 194C and the person making payment to the barber would be covered under section 194C Such a wider interpretation is uncalled for, especiaiiy when the revenue itself had considered since inception that section 194C is restricted to the works done by contractors / sub-contractors.
From the above details, for applying of section 194C, there has to be first a contract in existence involving a contractor and a contractee as specified above and the contract must be for carrying out of ‘any work’. Further, there must be payment of amounts to the contractor by the contractee and such amounts must not be advances, either to be adjusted against the future payments as held in the case of Sri Kamrej Vibhag Sahakari Khand Udyog Mandli Ltd (supra) or to be refundable to the contractee under any agreement. To simply the same, film financing oriented agreements or the arrangement since involves the return of the advance with interest either in cash or in kind and equalant, disqualify to clear the above tests. Further, with regard to whether the words ‘any work’ include the production of film, it is necessary to discuss the meaning of *any work’ in general and the provisions of clause, (b) of Explanation III to section 194C in particular. Clause (b) provides that the “any work’ includes *broadcasting and telecasting including production of programmes for such broadcasting or telecasting’ . There is no provision for inclusion of either film financing or the production of films or the composite activities in the said clause. In the absence of specific provisions in this regard, the present issue needs to be decided under general meaning of ‘any work’, (d) With reference to the words 7#i pursuance of a contract’, it is a settled law that the contract may be written or oral and the contractor is under obligation to follow the terms and conditions of the said contract in matters of carrying out the work, (e) Generally, the contract envisages that the contractee pays the amounts to the contractor- the payee for carrying out work as per the contract and usually the contractor does not have to repay the same. In other words, the is issue of recovery of the paid advances from the contractee, as the amounts paid are towards the work contract, service contract etc as the case may be. It does not happen that the contractor shall carry out the work as well as refund the amounts with interest taken from the contractee. Thus, the components of refund of the amounts or recovery of the amounts given by the assessee assume great significance in deciding the disputes relating to definition of any work out side the clauses (a) to (d) of Explanation III of section 194C.
To sum up, the contract, whether oral or written, must provide for work/other contract details and the contract amounts. The amounts must be for carrying out the work and therefore, the amounts must not be refundable with or without interest and must not be for future adjustment against the future contract liabilities of work contract. The film financing contracts, unique to itself, does not figure either in the list of contracts prescribed by the said guidelines issued by the CBDT or covered by the provisions of the said Explanation III. Further, it is not that each and every work fall in the ambit of ‘any work’ as held by the jurisdictional High Court.
12. Considering the above scope of the provisions of section 194C and the settled positions, it is necessary to examine the facts of the case of the assessee. There is no dispute on (i) the assessee advancing Rs 13.25 crores and also incurring an additional amount of Rs 64,71,855/- on behalf of the KKEPL; (ii) assessee recovering an amount of Rs 10,31,39,599/ – by virtue of exploitation of various rights on the film; and (iii) the existence of the said agreement in question and also the entries in the books of accounts. However, the dispute is restricted to (i) whether the film financing arrangement is a work contract; and (ii) whether the alleged agreement is mutual accommodation document as argued by the Revenue or not. To resolve the same, it is necessary to examine the purposes of the financing and the objectives of the financing.
14. With the refundability of the advances along with the interest @ 21% on the said advances, being undisputed, the revenue’s arguments of ‘work contract’ and the likely outsourcing the KKEPL in matters of the production of the film must also be ruled out. In the presence of an undisputed fact of recovery of the advance to the tune of Rs 10,31,39/599/ -, it is very difficult to accept the proposition that the amounts was given to the KKEPL for the ‘work contract’ with in the meaning of section 194C. To elaborate, if the said arrangement in fact is the ‘work contract’ as argued by the revenue, the KKEPL would not have conferred various rights on the assessee to facilitate transfer of amounts to the assessee on exploitation of the said film and simply, he would have executed the work of producing the film and done away with it after getting his income/profits. But that is not the case here. Further, it is important to note that the in case of’work contract’, the role of the contractor is only to carry out the work for the amounts and in case of ‘service contract’, the role of the contractor is only to carry out the service for some amounts and so on. In the instant case, where the amounts itself are undisputedly refundable either in cash or kind or otherwise, the arrangement do not fall in the category of either work or service contracts or other contracts if any with in the meaning of section 194C. Further it is noticed that the agreement refers to words to production of film’ and in our opinion, it should be understood in the context of dedicated or an exclusive of application of the advances and not in the context of a `work contract’.
17. Therefore, the film financing as in the instant case is unique and comparable to the project specific institutional financing. It has twin objectives i.e financing the film projects with interest rates of 21% and other object, may be auxiliary one, is the ensuring the successful production of the film and it is recovery oriented one. The words ‘paying the sum’ appearing in section 194C(1) does not envisage the return or refund of the same. Since the financing activity is characterised by the refundability of the advances, the same is outside the scope of the said provisions in general and of ‘any work’ or a work contract in particular. While the work contracts results in the carrying out of the work for an amount and service contracts results in rendering of service for the same and thus, they are not characterised by return of the contract amounts. Further, in view of the special bench decision in the case Sri Kamrej Vibhag Sahakari Khand Udyog Mandii Ltd (supra), it is a settled position that the provisions of section 194C have not application to the amounts given in the form of advances to be returned or to be adjusted against the future liability of a work contract. Further, the words *any work’ used in section 194C(1) have wider connotation in view of the Apex Court judgment in the case of the Associated Cement Co Ltd (supra), however, it does not mean that each and every work is covered by the said provisions as held by the jurisdictional High Court in the case of East India Hotels Ltd (supra) more so, the refund based and interest bearing advances or loans, which are given by the assessee linking them to the project of “Badhai Ho Badhai” film. Thus, in our considered opinion, provisions of section 194C do not apply to the film financing arrangement of this kind. Therefore, the impugned orders of the CIT(A) for all the three years under consideration are reversed allowing the claims of the assessee. Accordingly, all the grounds in all the three appeals of the assessee are allowed.