Case Law Details

Case Name : Entertainment One India Ltd. Vs. ITO (TDS) (ITAT Mumbai)
Appeal Number : ITA No. 1095 to 1098/Mum/2007
Date of Judgement/Order : 15/06/2009
Related Assessment Year :
Courts : All ITAT (4351) ITAT Mumbai (1445)

ITAT, MUMBAI BENCH `E’, MUMBAI ,

Entertainment One India Ltd. Vs. ITO (TDS),

APPEAL NO: ITA NOS. 1095 to 1098/Mum/2007,

DECIDED ON JUNE 15, 2009

ORDER

In this bunch of four appeals, the assessee has challenged the impugned common order of the Learned CIT(A) for the A.Y. 2003-04 to 2006-07 dated 24.11.2006 and all these four appeals are arising out of the orders passed by the I.T.O.(TDS) – 3(1), Mumbai (in short the A.O.) treating the assessee in deemed default for not deducting the tax at source u/s. 194C and 194J of the Act.

2. The issue arising in all the appeals are common, save the quantum of demand in respect of the payments made by the assessee company to the producers and directors of the films. The assessee has taken the multiple grounds which are identical in all the Assessment Years and hence, the grounds are summarised as under :

Grounds for A.Y. 2003-04

“1) Whether the Ld. CIT(A), Mumbai has erred in confirming the order of the I.T.O (TDS) U/S. 201(1) and 2O1(1A) of the I.T. Act dated 8.2.2006 by holding that the assessee is liable to deduct tax u/s. 194C of the Act in respect of the payments made to the producers for financing the productions of films –

a) Vishesh Entertainment Ltd – Film ‘Inteha’

b) Prakash jha – Film ‘Gangaajal’

2) Whether the CIT(A) erred in upholding the order passed by the A.O U/s. 201(1) of the Act raising the demand against the assessee ?

3) Whether the Ld. CIT(A) erred in upholding the levy of interest u/s.201(1A) of the Act?

Grounds for the A.Y. 2004-05

“1) Whether the Ld. CIT(A), Mumbai has erred in confirming the order of the I.T.O (TDS) U/S. 201(1) and 2O1(1A) of the I.T. Act dated 8.2.2006 by holding that the assessee is liable to deduct tax u/s. 194C of the Act in respect of the payments made to the producers for financing the productions of films –

a) Prakash Jha – Film Gangaajal’

b) Vishesh Entertainment Ltd – Film ‘Inteha’

c) Romesh Film – Film ‘Dil Jo Bhi Kahey’

d) Prakash Jha Production – Film ‘Apaharan’

2) Whether the CIT(A) erred in upholding the order passed by the A.O U/s. 201(1) of the Act raising the demand against the assessee ?

3) Whether the Ld. CIT(A) erred in upholding the levy of interest u/s.201(1A) of the Act ?

Grounds for the A.Y. 2005- 06

“1) Whether the Ld. CIT(A), Mumbai has erred in confirming the order of the I.T.O (TDS) U/S. 201(1) and 201(1A) of the I.T. Act dated 8.2.2006 by holding that the assessee is liable to deduct tax u/s. 194C of the Act in respect of the payments made to the producers for financing the productions of films –

a) Prakash Jha – Film ‘ Gangaajal’

b) Romesh Film – Film ‘Dil Jo Bhi Kahey’

c) Prakash Jha Production – Film ‘Apaharan

d) R.S. Entertainment Pvt. Ltd., – Film ‘Bluff Master’

e) R.G.V. Film Co. Pvt. Ltd., – Film ‘Lets Kill Veerappan’

Grounds for the A.Y. 2006- 07

“1) Whether the Ld. CIT(A), Mumbai has erred in confirming the order of the I.T.O (TDS) U/S. 201(1) and 201(1A) of the I.T. Act dated 8.2.2006 by holding that the assessee is liable to deduct tax u/s. 194C of the Act in respect of the payments made to the producers for financing the productions of films –

a) Romesh Films – Film “Dil Jo Bhi Kahey”

b) Prakash Jha Production – Film “Apaharan”

c) R.S. Entertainment Pvt. Ltd – Film “Bluff Master”

d) RGV Film Company Pvt. Ltd. – Film “Darwaja Band Rakho”

e) RGV Film Company Pvt. Ltd. – RGV 12 films

f) Block Buster Movie Entertainers

g) Eagle Films Pvt. Ltd.

h) Face Entertainment Pvt. Ltd.

i) Bheeshma International

j) Vinay Dhumale

2) Whether the CIT(A) erred in upholding the order passed by the A.O U/s. 201(1) of the Act raising the demand against the assessee ?

3) Whether the Ld. CIT(A) erred in upholding the levy of interest u/s.201(1A) of the Act ?

3. The facts pertaining to the controversy which reveal from the record are as under. The assessee company is originally incorporated in the year 1996 with the name ‘Adlab Films Laboratories Pvt. Ltd. The present name of the assessee was changed on 23rd July 2003. As per Memorandum of the Association, the objects of the assessee company are mentioned as, to carry on the business of Film Laboratory, Printing, Developing, Processing, Aiding and Growing Up Cinematographic Films and to carry on the business of, Producers, Exporters, Importers, Hirers, Dealers, Distributors and Exhibition of raw films etc. Also, in the objects the assessee Company’s business is mentioned as production of the Feature films, T.V. Serials, Video Films and Films on Documentary Films etc., etc. There was a survey action u/s. 133A of the Act against the assessee on 16.1.2006. During the course of the survey action, the statement of the Accountant of the assessee company namely Shri Amol Gorey was recorded. It was noticed by the A.O that the assessee company had made payments to the various film and T. V. serial Producers and Directors under the different agreements which included some famous film personalities, who were the producers and directors in the Film Industry. The agreements entered into between the assessee and different producers and directors of the films were examined and it was noticed that the assessee has incurred an expenditure for production of the films as a whole and after the film is produced, it acquires the entire right of the film concerned, including the intellectual property right as well as complete ownership of rights in respect of the distribution and exhibition of the films and serials. It was seen that as per the terms of the agreement, the assessee make the advances to the producers and directors for the production of films as per the payment schedules i.e. in instalments. The A.O was of the opinion that the advances made by the assessee company to the producers and directors are covered under the provisions of Section 194C and 194J of the I.T. Act. It was noticed that except in one or two cases, no TDS was made by the assessee company from the payments made to the producers of the different films or T.V. serials and hence, the A.O issued the notice u/s. 201 of the Act treating assessee as an assessee in default.

4. (a) The assessee resisted the action of the A.O. by taking the stand that in respect of the advances made to the producers and directors of the films under the agreements are not liable for the TDS u/s. 194 C and 194J of the I.T. Act. It was stated before the A.O. that the producers and directors of the film with whom the assessee has entered into the agreements and to whom the advances are given in terms of the agreement are not the contractors or sub-contractors and hence, the provisions of Section 194C are not attracted. It was further explained to the A.O that though the object of the assessee company is of production of the films, but the assessee company has not produced any feature film nor it has got any film produced from others and the assessee made advances to the different producers for making the film in the capacity of financier and accordingly, entered into the agreement. The assessee also explained that the stories and scripts of the films are finalised by the producers and directors and they only signed the suitable lead artists for the film. Moreover, the entire project of a film is finalised by the producer of the film and the producers of the film approach the assessee company for financial assistance and if the assessee company considers it fit to finance, after considering the risk factor, it is agreed to finance a film which the producers propose to make. It was further contended that in some cases, entire finance is not given but the partial finance is given and in some cases, full finance is given for the making of the films. In certain cases, where a producer is undertaking optional function such as writing, directions etc., then, certain amount is agreed in the budget of the film for the said functions, but the Company does not pay the said amount attributable to the functions of the producers and directors but the producer himself appropriate such agreed amounts of the object of the film. Hence, there is no substance to say that the assessee company has made the payments of the provisional fees per se to the producers.

(b) It was further stated that the producer cannot be considered as contractor or sub-contractor of the company as regards the film making. He is actually the author of the film who is fully in command of making the film. The Assessee company has not hired his services for making the film and he is in process of making the film on his own. When Assessee company smells the business opportunity of giving financial assistance to such reputed producer, agreement for financial assistance is made with him. The Assessee company generally takes control of the negative rights of the completed film as assurance of realisation of the money from the producer. The Assessee also take control of the distribution of the film, on behalf of the producer so that best price available can be recovered from the distribution of the film. Generally, the distribution money is directly recovered by the company from the distributors and appropriated as per the agreement with the producer. The agreements with the distributors are made by Assessee company with consent of the producers only as security for money advanced. The company has only given an assistance to produce films and it has not given any contracts for production of films. The company has only assisted the producers to produce of the films by giving finance to the extent of actual cost of the films subject to agreed amount. The money is utilised by the producer as per his wish for production of the film and is subject to appropriation by the producer towards his services if agreed. The amount of appropriation is specified in the agreements, wherever applicable, for the purpose of working the surplus of the film.

(c) In short the Assessee has only acquired rights in the film for which it has given financial assistance. It is a negative rights holder as per the agreements with the respective producers, which secures its money advanced for the film as well as its income model from the film. All the distribution agreements contracted by the company were on behalf of the respective producers of the films and therefore the cost as well as realisation from any film is not accounted by the company in its profit and loss account. The company is entitled to is part of the share of revenue as per the agreement, which could be considered as its revenue stream. It was further stated that as per an agreement with the producers or directors the Assessee is entitled to recover the money advanced by it from the distribution of the film and such could not have been the case if the company was hiring the services of the producer or director as a contractor for making the film.”

(d) The sum and substance of the contention of the assessee was that even as per the terms of the agreement entered into with different producers and directors of the films as well as T.V. Serials, the assessee’s roll is as financier to finance the project for making all the films and T.V. Serials. The assessee has put his lien on the negatives of the films and to get the better return with the risk of losses in case the film fails, by sharing the surplus with the producers on the screening of the film. There is no relationship of a Principal and a Contractor between the assessee company and the film producers & directors and at the most, it is a contract between the principal to principal or a contract as a sale and purchase.

5. The A.O was not satisfied with the explanation of the assessee. The A.O treated the assessee as an assessee in default within the meaning of Section 201(1) of the IT. Act and held that the assessee company has committed the default by not deducting the tax at source u/s. 194C and 194J of the Act in respect of the advances and payments made to the different producers and directors for making the films. The A.O., therefore, raised the following demands against the assessee by passing the orders u/s. 201(1) and 201(1)(1A) of the IT. Act :

Asst. Year Tax Demanded u/s.201(1)/201(1A) Interest Total
2003-04 Rs.2889204 Rs. 114434 Rs. 4033230
2004-05 Rs.2227283 Rs.792815 Rs. 3020098
2005-06 Rs.3652323 Rs.497944 Rs. 4150267
2006-07 Rs.9555342 Rs.434118 Rs. 9989460

The assessee challenged the respective orders raising the demands against the assessee before the Learned CIT(A),

6. The Ld. CIT(A) disposed of the appeals filed by the assessee by common order dated 24.11.2006 giving part relief to the assessee. The assessee filed the detailed submission which has been reproduced by the Learned CIT(A) in the Order from page No. 4 to 26. The Ld, CIT(A) after considering the submissions made by the assessee in respect of some of the agreements held that the provisions of Section 194C has no application as the assessee company has not entirely financed or advanced the film making. The Ld. CIT(A) held in the following cases that as there is no relationship of the principal and contractor and hence, the assessee company was not under legal obligation to deduct the tax u/s. 194C.

Sr. No. Name of the Producer Title of the Film
1. M/s. Varma Corporations Ltd. Mein Madhuri Dixit Banana Chahati Hum
2. M/s. Maya Movies Pvt. Ltd The Rising
3. M/s.Vidhu Vinod Chopra Production Munnabhai M.B.B.S.
4. M/s. Marigold Productions Ltd. Marigold
5. M/s. Below the Line Production Pvt. Ltd. Mumbai Central
6. M/s. Pravin Nischole Productions & Mahesh Gupta New Film Project

7. In respect of the T.V. Serial Shobhana Desai Productions Pvt. Ltd., the assessee moved the application u/s. 154 before the A.O and the A.O accepted that in respect of the finance given or advance made to the said Company, the provisions of the TDS are not applicable but in respect of the other advances to the T.V. Serials, more specifically, (1) Bheesma International (Mr. Mukesh Khanna), (2) M/s. Cine Vision India (Mr. Siddharth Kak), (3) M/s. Eagle Films Pvt. Ltd. and (4) M/s. Face Entertainment Pvt. Ltd., it was held that the provisions of Section 194 C are applicable.

8. The Learned CIT(A) has referred each agreement in respect of the making of the films or the T.V. Serials for coming to the conclusion that the assessee was under the statutory obligation to deduct the tax at source in respect of the advances made to the respective film producers/ T.V Serial makers. The finding of the CIT(A) in respect of each agreement is discuss from para No. 6.21. In respect of some of the agreements, the Ld. CIT(A) principally agreed that the payments made by the assessee to the film Producers/Directors were not in the status of principal to the contractor but it was in the nature of merely giving finance to the film, but, in respect of majority of the agreements, the Ld. CIT(A) has put his stamp of approval upholding the action of the A.O. u/s. 201(1) of the Act. Now being aggrieved by the order/s, the assessee company is before us.

9. The Ld. Counsel for the assessee made the extensive submissions referring to each and every agreements placed in the paper book. The sum and substance of the argument is that there is no relationship between the Assessee and Film Producers/ Directors as a principal and contractors and hence first mandate of sec. 194C is not fulfilled. It is also argued that financing of the film projects does not amount of making any payment for carrying out any work which is contemplated in second limb of sec. 194C but at the most said agreements are for contract of sale. The Ld. Consule reiterated the submissions made before before the Ld. CIT(A) as his arguments. The LD. CIT(A) has already reproduced detail arguments of the Ld. Consule in his order.

The Learned Counsel relied on the following decisions to support his plea :

i) State of Madras v/s. ALS Productions (1974), 33 STC 335 (Mad.)

ii) Wadilal Dairy International Ltd. 81 ITD 238(Pune)

iii) Andhra Pradesh State Road Transport Corp 119 Taxman 73 (Hyd.)

10. Per contra, the Ld. D.R. supported the order of the Ld. CIT(A).

11. We have heard the rival submissions of the parties. We have also considered all the agreements filed by the assessee which are the subject matters of the controversy before us. The core controversy after considering the agreements between the assessee company and the film producers and directors, whether the provisions of Section 194C are attracted in respect of all the payments made by the assessee company as per the terms of the respective agreements. So far as applicability of Section 194J is concerned, no much more importance is given by the A.O as well as the Ld. CIT(A) as the said Section is evoked by the A.O. in respect of the payments made to the leading actor Mr. Amir Khan. So far as Section 194 J is concerned, the Ld. CIT(A) has held that two Sections cannot be applied if it is held that the payment is covered u/s. 194C, then again, the A.O cannot treat the said payment as a payment attracting the provisions of Section 194J also.

12. Section 194C reads as under :

Payments to contractors and sub-contractors,

194C. [(1) Any person responsible 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—

(a) the Central Government or any State Government; or

(b) any local authority; or

(c) any corporation established by or under a Central, State or Provincial Act; or

(d) any company; or

(e) any co-operative society; or

(f) any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both; or

(g) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India; or

(h) any trust; or

(i) any university established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956) ; or

(j) any firm; or

(k) any individual or a Hindu undivided family [or an association of persons or a body of individuals, whether incorporated or not, other than those falling under any of the preceding clauses], whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor,

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 case of advertising,

(ii) in any other case two per cent,

of such sum as income tax on income comprised therein:

Provided that no individual or a Hindu undivided family shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family.]

(2) Any person (being a contractor and not being an individual or a Hindu undivided family) responsible for paying any sum to any resident (hereafter in this section referred to as the sub-contractor) in pursuance of a contract with the sub-contractor for carrying out, or for the supply of labour for carrying out, the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor has undertaken to supply shall, at the time of credit of such sum to the account of the subcontractor 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 one per cent of such sum as income-tax on income comprised therein:

[Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the sub-contractor, shall be liable to deduct income-tax under this sub-section.]

[Explanation I.—For the purposes of sub-section (2), the expression “contractor” shall also include a contractor who is carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the Government of a foreign State or a foreign enterprise or any association or body established outside India.]

[Explanation II].—For the purposes of this section, where any sum referred to in sub-section (1) or sub-section (2) is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.]

[Explanation III.—For the purposes of this section, the expression “work” shall also include—

(a) advertising;

(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;

(d) catering.]

(3) No deduction shall be made under sub-section (1) or sub-section (2) from—

[(i) the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor or sub-contractor, if such sum does not exceed twenty thousand rupees;

Provided that where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds fifty thousand rupees, the person responsible for paying such sums referred to in sub-section (1) or, as the case may be, sub-section (2) shall be liable to deduct income-tax [under this section:]

[Provided further that no deduction shall be made under sub- section (2), from the amount of any sum credited or paid or likely to be credited or paid during the previous year to the account of the sub-contractor during the course of business of plying, hiring or leasing goods carriages, on production of a declaration to the person concerned paying or crediting such sum, in the prescribed form and verified in the prescribed manner and within such time as may be prescribed, if such sub-contractor is an individual who has not owned more than two goods carriages at any time during the previous year:

Provided also that the person responsible for paying any sum as aforesaid to the sub-contractor referred to in the second proviso shall furnish to the prescribed income-tax authority or the person authorised by it such particulars as may be prescribed in such form and within such time as may be prescribed; or]

(ii) any sum credited or paid before the 1st day of June, 1972; [or]

[(iii) any sum credited or paid before the 1st day of June, 1973, in pursuance of a contract between the contractor and a co-operative society or in pursuance of a contract between such contractor and the sub-contractor in relation to any work (including supply of labour for carrying out any work) undertaken by the contractor for the co-operative society.]

[Explanation.—For the purposes of clause (i), “goods carriage” shall have the same meaning as in the Explanation to sub-section (7) of section 44AE.]

(4) [***]

(5) [***]]

13. So far as Section 194C is concerned, it is contemplated at first instance relationships between the parties as a ‘Principal’ and a “Contractor and then payment should be for ‘any work or supply of labour’. In respect of the issue before us is concern which is whether the Producers/ Directors to whom money or finance is given can be termed as ‘Contractors’ within the meaning of sec.194C of the Act? So far has second expression ‘any work, is concern same is interpreted by the Honourable Supreme Court in the case of Associated Cement Company V/S CIT (201 ITR 435). There should not be quarrel in respect of well settled legal principles that the relationship as a Principal and Contractor is created under an “Agreement” or a “contract’ between the parties. As per the provisions of Section 194C, if any person makes payment to a contractor, for carrying out any work; including supply of labour for carrying out any work which is popularly known as labour contract, there is a legal obligation on said person i.e. the Principal; to deduct the tax at the specified rate and deposit the same with the Government. It is pertinent to note that in sec.194C the legislature in unambiguous terms has made it clear that the payee or recipient should be ‘Contractor’ or ‘sub-contractor’. In the present case, the assessee company made the finance to different producers and directors for making of the films and T.V. serials. We have gone through all agreements which are placed before us, which, in our opinion are more or less identical in the terms except in some of the cases, the entire film project has been given finance, but in some cases, the rights in respect of the film ‘negatives’ and distributors vary to some extent.

14. The Ld. Counsel for the assessee filed the copies of the certificates issued by the Central Board of Film Certification (in short Censor Board) in respect of the films to which the assessee had made the finance. After perusal of the said copies of the Certificate, it is seen that the application for obtaining the said certificates are made by the respective film producers and nowhere, it is mentioned that the assessee is the film producer of the respective films, for example Apaharan, Bluff Master, Shiva etc., This important aspect has not been considered by both the authorities. The contention of the assessee is that the renowned producers/ contractors approach the assessee with the film project including the story and script and if the assessee company agrees to finance the same, then only the agreement is made in respect of particular film or T.V. serial. It is the further contention of the assessee that till the point of obtaining the Certificate from the Censor Board, the assessee has no role to play. There is no relationship as a principal or contractor between the assessee company and the respective film producers/directors. In some of the cases, additional remuneration is agreed to be paid to the director but that is not a separate one, it is part of budget of film. Though the Ld CIT(A) has discussed the terms of each agreement entered into between the assessee company and the respective film producers/ directors, but again, their distinction is made merely on the basis that in some of the cases, entire budget of the film is financed by the assessee company and the assessee has grabbed the major share in the surplus which will be after re-payment of the principal amount. In our opinion, after examining of the agreements, the terms and conditions are almost identical. We further find that except keeping the control of the payments which will be incurred by the respective film producers/directors, there is no other interference. After giving our anxious consideration to the terms of the agreements, in our opinion, it cannot be said that the assessee company has engaged, the film producers or directors in the capacity as a contractor. Moreover the fact has not been denied by both the authorities that in many of the cases, the film producers are entitled for sharing in the surplus,

15. We find force in the arguments of the Ld. Counsel that for protecting the finance made to the film producers/ directors the ownership right in respect of the negatives of films are kept with the assessee company. We find that the another reservation of the authorities below for treating this agreements as a contract between the assessee company and the film producers attracting the provisions of Section 194C is that except in one or two cases, the assessee company has not charged any interest. We find force in the argument of the Ld. Counsel that it is assessee to decide by taking the risk how much returns they should get by financing the film. We have taken into considerations for arriving at the conclusion whether it is the contract of the finance or outright finance for making of the film in the capacity as 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. The negative of any film is having very much importance as only the positives can be made from the negatives and best way to secure the finance is to keep a charge on negatives of the films. It is also seen that the assessee has taken the distribution as well as the territorial right for the screening of the respective films from the film producers/ director.

16. In the case of Wadilal Dairy International Ltd. (supra), interpreting the scope of sec. 194C, in context of contract for sale and works contract, the Tribunal held as under:

“11…..The requirement of the section is that in order to attract the provisions, the assessee should have made payment to a contractor for carrying out any work (including supply of labour for carrying out any work). The point to be seen is whether in the present case, whether the assessee has engaged any contractor for carrying out any work. The expression ‘contractor for carrying out any work’ implies that the contractor should have carried out such activities. The term ‘carried out’ suggests an executory contract rather than a case of a mere supply or sale of goods. If a person engages the services of another and gives him a job of manufacturing goods or articles and for the purpose supplies him raw material, it would be a clear case of a contract of work. In such cases, the provisions of section 194C would undoubtedly be applicable. But, if, on the other hand, a manufacturer on his own purchases material and manufactures product which he sells to the assessee and it may be that such product might be customer-specific as per the requirement of the customer, it is still a case of a sale and not for carrying out any work. In such sale which is customer-specific, the fact that the goods manufactured are according to the requirement of the customer does not mean or imply that any work has been carried out on behalf of the contractee. A distinction between a sale and works contract is very significant particularly under the sales-tax laws. Before the introduction of tax on work contract, the sale-tax was levied on sales and it could not be levied on works contract. What is the exact scope of expression ‘works contract’ has been considered by the Hon’ble Supreme Court in a number of cases and by and large distinction between the two also seems to have been adopted for the purpose of Income-tax Act. For this purpose, a reference may be made to the Board’s Circular No. 681, dated 8-3-1991 which was issued by the Board after the pronouncement of the judgement of the Supreme Court in the case of Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435. (The Circular is found reproduced on page 6599 of Chaturvedi & Pithisaria, Vol. 4, 5th Edn.). Reference may be made to para 7(vi) which states that provisions of this section, i.e., 194C, will not cover to contracts for sale of goods.

Clause (vi) of para 7 is to the following effect:

“In State of Himachal Pradesh Vs. Associated Hotels of India Ltd. [1972] 29 STC 474 (SC), the Supreme Court observed that where the principal objective of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, contract is of work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the material nor the value of skill and labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land, where the intention plainly is not to sell the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour. In case of doubt, whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the above mentioned case.”

In clause (b), it is stated that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and as such outside the purview of this section. This para really answers in a very clinching manner the objection raised by the department in the present case. As per para (b), even in fabrication contracts if the property in the article passes to the Government or other person after its delivery, still it is. a case of contract for sale. The fact that fabrication has been carried out as per specification given by the contractee is not considered to be relevant. The assessee’s case would appear to fall squarely within clause (b) above, because in the assessee’s case the property in the packing material passes only after the same is delivered by supplier to the assessee. Obviously in such cases since these are contracts for sale, sales-tax and excise duty are being levied. Thus the payment of sales-tax and excise duty by supplier, though not conclusive, is clearly indicative of the fact under those laws, the transaction is considered to be that of sale. In view of the Board’s circular, it is also clear that the concepts of work contract and sale as envisaged under the Sales-tax laws have been imported in considering and interpreting section 194C by the department itself.

12. In Associated Hotels of India Ltd.’s case (supra), following passage at page 479 is very material for the purpose of this appeal:

“The difficulty which the courts have often to meet with in construing a contract of work and labour, on the one hand, and a contact for sale, on the other, arises because the distinction between the two is very often a fine one. This is particularly so when the contract is a composite one involving both a contract of work and labour and a contract of sale. Nevertheless, the distinction between the two rests on a clear principle. A contract of sale is one whose main object is the transfer of property in, and the delivery of the possession of, a chattel as a chattel to the buyer. Where the principal 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 test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of materials, nor the value of the skill and labour as compared with the value of the materials is conclusive, although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract is in substance one for work and labour or one for the sale of a chattel.”

The above Authority gives a guidance in regard to composite contracts. In such cases, the Honourable Supreme Court says that one has to see the main object. If the main object is to transfer property in or delivery of the possession of, a chattel as a chattel, then it is a contract of sale. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of materials, nor the value of the skill and labour as compared with the value of the materials, is conclusive, although such matters may be taken into consideration in determining whether the contract is in substance one for work and labour or one for the sale of chattel.”

17. In the case of Andhra Pradesh State Road Transport Corporation (APSRTC) (supra), it is held as under :

“13. Admittedly, it is not an easy task to distinguish between the contracts of sale and the contracts of work because the distinction between the two types of contracts is very thin and the Courts have faced tremendous difficulty at times in constructing the true nature of a contract. This problem gets magnified further when the contract is a composite one involving both a contract of work and labour and a contract of sale. Certain guidelines have been laid down by the apex court in the case of P.S. Company v. State of Andhra Pradesh 56 STC 283 to determine the true construction of a contract so as to determine in turn as to whether transaction covered by that contract is one of sale or of work and labour. Though these guidelines cannot be termed as infallible tests yet they provide valuable help and insights to arrive at correct decision. These guidelines are as under:

(1) The essence of the contract or the reality of the transaction as a whole has to be taken into consideration in judging whether the contract is for a sale or for work and labour.

(2) If the thing to be delivered has any individual existence before the delivery, as the sole property of the party who is to deliver it, then it is a sale.

(3) If the main object of the contract is the transfer from A to B, for a price, of the property in a thing in which B had no previous property, then the contract is a contract of sale.

(4) Where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for work and labour.

(5) If the bulk of the material used in the construction belongs to the manufacturer who sells the end-product for a price that will be a strong pointer to a conclusion that the contract is in substance one for the sale of goods and not one for work and labour.

(6) A contract where not only work is to be done but the execution of such work requires goods to be used, may take one of three forms:

(a) the contract may be for work to be done for remuneration and for supply of materials used in the execution of the work for a price;

(b) it may be a contract for work in which the use of materials is accessory or incidental to the execution of work; or

(c) it may be a contract for supply of goods where some work is required to be done as incidental to the sale;

Where a contract is of the first type, it is a composite contract consisting essentially of two contracts, one for the sale of goods and the other for work and labour.

The second type of work is clearly a contract for work and labour not involving sale of goods. While the third type is contract for sale where the goods are sold as chattels and some work is undoubtedly done, but it is done merely as incidental to the sale.

Similarly, observations of the Honourable Supreme Court in the case of Hindustan Shipyard Ltd. Vs. State of Andhra Pradesh 110 STC 533 are also guideposts in this regard, relevant portion of which is extracted below:

“Transfer of property in goods for a price is the linchpin of the definition of “sale”. Whether a particular contract is one for sale of goods or for work and labour depends upon the main object of the parties found out from an overview of the terms of the contract, the circumstances of the transaction and custom of the trade. It is the substance of the contract document(s), and not merely the form, which has to be looked into. The Court may form an opinion that the contract is one whose main object is transfer of property in a chattel as a chattel to the buyer, though some work may be required to be done under the contract as ancillary or incidental to the sale. If the primary object of the contract is the carrying out of work by bestowal of labour and services and materials are incidentally used in execution of such work then the contract is one for work and labour, [see para 14(2)].

If the thing to be delivered has any individual existence before the delivery as the sole property of the party who is to deliver it, then it is a sale, [see para 14(3)].

If the bulk of material used in construction belongs to the manufacturer who sells the end-product for a price, then it is a strong pointer to the conclusion that the contract is in substance one for the sale of goods and not one for labour. However, the test is not decisive. It is not bulk of the material alone but the relative importance of the material qua the work, skill and labour of the payee which have to be weighed. If the major component of the end product is the material consumed in producing the chattel to be delivered and skill and labour are employed for converting the main components into the end products, the skill and labour are only incidentally used, the delivery of the end product by the seller to the buyer would constitute a sale. On the other hand, if the main object of the contract is to avail the skill and labour of the seller though some material or components may be incidentally used during the process of the end product being brought into existence by the investment of skill and labour of the supplier, the transaction would be a contract for work and labour.”

14. The tests indicated in several decisions of the Supreme Court to distinguish between a contract for sale and a contract for work and labour are not exhaustive and do not lay down a rigid or inflexible rule applicable alike to all transactions. They do not give any major formula by the application of which one can say that in every case whether a contract is a contract for sale or a contract for work and labour. They merely focus one or the other aspect of the transaction and afford some guidance in determining the question. Basically and primarily whether a particular contract is a contract for sale of goods or for work and labour, 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. There can be no gain saying that there is no standard formula by which a contract of sale can be distinguished from a contract for work and labour. There may be many common characteristics in both the contract, some neutral in a particular contract and yet certain clinching terms in a given case may fortify the conclusion one way or the other. All that will depend upon the facts and circumstances of each case. This question to be answered, is not an easy and has perplexed the jurists all over. Nevertheless, the distinction between the two rests on a clear principle. A contract of sale is one whose main object is the transfer of the property in and the delivery of the 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 test is whether or not the work and labour bestowed and in anything that can properly become the subject of sale, neither the ownership of materials is conclusive although such factors may be relevant and be taken into consideration in ascertaining and determining whether the contract in question is in pith and substance a contract for work and labour or one for the sale of chattel. These principles have enunciated and culled out from Halsbury Laws of England, 3rd Edn., Vol. 34, 6-7.”

In our opinion as both the above cases are on interpretation of second limb of sec. 194C i.e. expression ‘any work’ and in that context it is held that contract for sale is out of purview of sec. 194C of the Act

18. After examining the copies of the agreements placed before us , we are of the opinion that no relationship of a ‘Principal’ and a ‘contractor’ is created between the assessee company and film producers/ contractors, but all agreements are finance agreements with unique features to participate in the surplus by taking the risk of the losses also. It is also seen that in majority of the agreements, film makers and producers have right to participate in the surplus after re-payment of the principal amount and the said terms support the case of the assessee that the status of the film makers/producers is also like principal as in the normal commercial practices, once the contract is executed, the contractor is out of the project and the entire surplus whatever may be is enjoyed by the principal. Considering the totality of the facts, in our opinion, there is no justification in holding that as per the terms of the agreement, in respect of the film making which are placed before, show that the provisions of Section 194 C are applicable.

19. As we have already observed that the relationships of the principal and the contractor can only be determined on the basis of the terms of the agreement or contract. At the same time, the practices and conventions in the industry and trade are also to be taken a judicial note or to be considered before arriving at final conclusions, in respect of the relationships created in view of terms of the agreement. So far as the film industry is concerned, it is not uncommon that entire film project is financed by the third party, who otherwise is not involved in the execution of a film project. But, considering the unique feature of the film industry that revenue is only collected after screening or exhibition of the film in cinema halls or theatres and mere production of the film cannot be said to be end of film project.

20. In the order itself, the A.O had admitted that the assessee has not hired the services of the producer and contractor (Page No.3 of the order). That takes away the producers/ directors as a Contractor out of the clutches of Section 194C and hence, the first mandate of sec. 194C is not fulfilled. Moreover, production of the film goes through many stages and it is nowhere the case of the Revenue that the assessee has any active role in production of any of the film. The A.O has given more importance in respect of the TDS made by the Company from the advances given to some film producers. The assessee contended that the assessee deducted tax as an abundant precaution as the provisions of the TDS can be interpreted in either way. The CIT(A) himself has accepted that some of the agreements relating to the films like Mein Madhuri Dixit Banana Chahati Hum, The Rising, Munnabhai, Marigold etc. are out of the provisions of Section 194C, when in fact, as we find the terms of the agreements are more or less identical in respect of finance made to all the producers. It is admitted factual position that in many of the cases, part of the finance is made available by the producers and directors but, in some cases 100% finance is given by the assessee company. 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 by the A.O or the Ld. CIT(A) as the assessee can decide how to protect his money which is advanced in film industry. It is also not disputed in these cases that in respect of many of the films, even to the extent of 50%, there is a participation of the producers in the surplus.

21. In respect of the T.V, serials also, the Ld. CIT(A) has accepted that the finance made to Sobhana Desai Production Pvt. Ltd. is purely a financial transaction and not for production of film or serials but, in respect of the finance made for Bheesma International, Cinema vision India, Eagle Films Pvt. Ltd., etc., the Ld CIT(A) comes to the conclusion that the agreements are in the nature of the contract. Merely because, the producers are under contractual obligation, to procure a slot letter from Doordharshan for the telecast of the serial in favour of the assessee, thereby the assessee company can commercially exploit serial that does not mean that agreements between respective T. V. Serial producers are in the nature of agreement with the contractors . In our opinion, the said contractual obligation, in fact, support the case of the assessee that the T.V. Serial Producers are in the same footing as the Principal with that of the assessee company. On the above analogy, in respect of the T.V. serials also, we have to hold that the provisions of Section 194C are not applicable.

22. So far as Section 194C is concerned, the observation of the A.O that as per the agreements of advances given by the assessee company to the producers and directors, as the contracts for the specialised job undertaken by them and the fact that the producers and directors approached the assessee with the infrastructure specially available cannot shift the status of the assessee as a principal to the producers and directors is totally erroneous. We have already stated herein-above that all the Censor Board “Certificates in respect of the films to which, the assessee company has made finance are on the name of the said producers. If the assessee’s role was as a producer, then the Censor Board Certificates being very important legal documents, the assessee company’s name should have been shown as a producer. After considering the totality of the facts, we are of the opinion that in view of the terms entered into between the assessee company and the producers and directors of the films as well as the T.V. Serials, it cannot be said that the producers and directors are the ‘contractors’ within the meaning of Section 194C. We, therefore, hold that the provisions of Section 194C are not attracted to any of the agreements entered into between the assessee and the producers/ directors and sustained by the Ld. CIT(A). We, therefore, hold that both the authorities have erred in holding that the assessee is deemed defaulter within the meaning of Section 201(1) of the I.T. Act.

23. In respect of the application of Section 194J, it is seen that the assessee had made the payment to leading actor Mr. Aamir Khan on behalf of M/s. Maya Productions with whom the assessee had entered into agreement for investing some funds for the production of the film i.e. The Rising’. The Ld. CIT(A) has already held that the payments made to leading Actor Mr. Aamir Khan would not attract the provisions of Section 194J. Moreover, we have already held that the agreements entered into between the assessee company and producers and directors of the different films and T.V. Serials are in the nature of finance agreements, the said are out of the provisions of Section 194C. Even if the assessee has made payment directly 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 company attracted the provisions of Section 194J. We, therefore, hold that the provisions of Section 194J are not attracted.

24. In the light of above findings, as the assessee is not a deemed defaulter u/s. 201(1) of the Act, there is no question of levy of interest also u/s. 201(1A) of the Act. We, therefore, delete the same. Accordingly, we cancel all the orders passed by the A.O u/s. 201 and 201(1A), to the extent sustained by the Ld. CIT(A).

25. In the result, all the appeals of the assessee are allowed.

(Order pronounced in the open court on 15.06.2009.)

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Category : Income Tax (25362)
Type : Judiciary (10128)
Tags : ITAT Judgments (4531) Section 194C (124)

0 responses to “Provisions of section 194C not attracted to finance agreements between financing company and producers/directors of films/TV serials”

  1. bijay says:

    can a PVt.Ltd company is liable for payment of 1 core Artist Fees, other payment without agreement,bills.but tds is deducted against payment properly.In this case  can company is liable. pls suggestion me.

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