In a recent decision, in the case of Entertainment One India Ltd. Vs. ITO [2010-TIOL-210-ITAT-MUM] (“the assessee”), the Income-tax Appellate Tribunal, Mumbai (“the Tribunal”) has held that there is no liability to withhold tax under sections 194C and 194J of the Income Tax Act, 1961 (“the Act”) on payments made to producers, directors and actors for financing film production.
• The assessee made payments to various film and T.V. serial producers and directors under different agreements for production of films. Further, it acquired the entire rights of the film concerned, including the intellectual property rights as well as complete ownership of rights in respect of distribution and exhibition of films and serials.
• The assessing officer (“the AO”) considered the assessee to be an assessee- in- default within the meaning of section 201(1) of the Act and held that it had committed a default by not withhold tax under sections 194C and 194J of the Act in respect of advances and payments made to different producers and directors for making films.
• The assessee challenged the order of the AO before the Commissioner of Income-tax (Appeals) (“CIT(A)”) who decided partly in favor of the assessee, holding that in respect of some of the agreements, the payments made by the assessee to the film producers / directors was not in the nature of principal to contractor but was in the nature of merely providing finance to film. In respect of other agreements, the CIT(A) approved the action of the AO. The CIT(A) held further, that two sections, namely sections 194C and 194J of the Act cannot be applied for the same payment.
· The assessee disagreed with the order of the CIT(A) and filed an appeal before the Tribunal.
Whether the provisions of sections 194C and 194J of the Act apply in respect of payments made by the assessee under the agreements entered into with the producers for financing the production of films or TV serials.
· The producers and directors of the film with whom the assessee has entered into agreements and to whom the advances are given under the terms of these agreements are not contractors or sub-contractors and hence, the provisions of section 194C of the Act do not apply.
· Financing of film projects does not amount to making any payment for carrying out any work which is contemplated in the second limb of section 194C of the Act but at the most, the said agreements be treated as contracts of sale.
· The Tribunal discussed the provisions of section 194C of the Act at length and observed, “it is pertinent to note that in section 194C of the Act, the legislature, in unambiguous terms has made it clear that the payee or recipient should be ‘contractor’ or ‘sub-contractor’.
· All the Censor Board certificates in respect of the films which the assessee financed are in the name of the producers. If the assessee’s role was as a producer, then the assessee’s name should have been shown as a producer on the Censor Board certificates, which are very important legal documents.
· The Tribunal observed that the AO had admitted that the assessee had not hired the services of the producer and contractor. That removes the producers / directors as a contractor and out of the purview of section 194C of the Act.
· The Tribunal also noted that in majority of the agreements, the film makers and producers have the right to participate in the surplus after repayment of principal amount. Furthermore, the said terms support the case of the assessee that the status of the film makers / producers is also like that of the principal as in normal commercial practices. Once the contract is executed, the contractor is out of project and the entire surplus, whatever that may be, is enjoyed by principal.
· For arriving at the conclusion whether it is the contract of finance or outright finance for making of the film in the capacity of a principal and contractor, the existing prevailing practice in the film industry cannot be discarded. It is not uncommon that the film projects are financed and in consideration thereof, instead of charging the interest, it is preferred to share the surplus after re-payment of the principal.
· If the assessee acquires the right on the negatives of the film and also put a condition that the producers shall not directly or indirectly deliver any print of the movie for screening in any of the territory, that should not be questioned. The negative of any film has much importance as only the positives can be made from the negatives and the best way to secure the finance is to keep a charge on the negatives of the films.
· The relationships of the principal and the contractor can only be determined on the basis of the terms of the agreement or the contract. At the same time, the practices and conventions in the industry and trade are also to be considered before arriving at the final conclusion, in respect of the relationships created in view of the terms of the agreement.
· So far as the film industry is concerned, it is not uncommon that entire film project is financed by a third party, who otherwise is not involved in the execution of the film project. One must consider the unique feature of the film industry that revenue is only collected after screening or exhibition of the film in cinema halls or theaters and mere production of the film cannot be said to be end of film project.
· Considering the totality of the facts, there was no justification in holding that under the terms of the agreement, in respect of film making, the provisions of section 194C of the Act are applicable.
• The Tribunal relied on the decision of the Supreme Court in the case of Associated Cement Co. Ltd. v. CIT  201 ITR 435 (SC) to explain the judicial precedents as regards the term ‘any work’.
• The Tribunal followed the principles laid down in Halsbury’s Laws of England regarding the determination of a contract as that of sale or work / labor. They provide that basically and primarily whether a particular contract is defined as a contract of sale of goods or of work and labor depends upon the main object of the parties, gathered from the terms of the contract, the circumstances of the transactions and the customs of the trade. A contract of sale is one of which the main object is to transfer the property and the delivery of possession of a chattel as a chattel to the buyer. Where the dominant object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one of work and labour.
• The contract of sale is out of scope of section 194C of the Act.
• No relationship of a ‘principal’ and a ‘contractor’ is created between assessee and film producers / contractors, but all agreements are financial agreements with unique features to participate in surplus by also undertaking the risk of the losses. Accordingly, the provisions of section 194C of the Act are not applicable.
• Further, even if the assessee had directly made the payment to any actor or director or any person connected with the film making then it is only out of the composite agreement entered into for financing the film project and it cannot be said that the payment made directly by the assessee attracted the provisions of section 194J of the Act.
Conclusion:- This is a landmark decision for the industry and applicable to most commonly used commercial arrangements. This decision of the Mumbai Tribunal has provided substantial relief to the financers of the film industry in carrying out the TDS compliance and be aware of the various penal consequences in connection with non-compliance. Section 194C of the Act also refers to contract / work in relation to telecasting and broadcasting or production of programs in relation to telecasting and broadcasting. The Tribunal has nowhere referred / discussed this clause / explanation in its order while arriving at the conclusion. Therefore, it is open to debate, where the film is produced under similar arrangement by an assessee for telecasting / broadcasting purposes, whether section 194C of the Act would be applicable or not.