TDS deductible U/s. 192 instead of 194J if employee- employer relationship exist

1. These grounds involve identical issue wherein assessee has contested the action of the lower authorities in holding that remuneration paid to six professionals engaged by the company was liable for deduction of tax at source u/s 192 as the same was in the nature of salary as against the claim of the assessee to deduct tax u/s 194J on these payments on the ground that these persons were acting in the capacity of independent professionals and not as employee of the company.

2. The brief background is that during the year assessee was engaged in the business of film production. A survey u/s 133A of the Income-tax Act, 1961 was conducted on 23-11-2006 on the assessee’s business premises. It was inter-alia noted by the AO that during the F.Y. 2004-05, the assessee company had paid remuneration to various persons in pursuance to the service contract agreement entered with these persons and the compensation paid to these persons was termed as ‘retainership fee’ and assessee deducted tax u/s 194J on these payments on the ground that these persons were independent professionals and amount paid to them was in the nature of ‘fee’. The AO went through the contract entered with these persons and he was of the opinion that there existed employer-employee relationship between the assessee and these persons and, therefore, assessee was required to deduct tax u/s 192. Accordingly, he worked out the amount of shortfall in TDS u/s 192 of the Act in the case of following persons:-

3. Being aggrieved, assessee filed appeal before Ld. CIT(A) wherein following submissions were made:-

“The business of the appellant company is laden with risks. The appellant company, being a film production company, is into an uncertain business. The activities of the company peak out when there is film under production and the activity level tapers off, when there are no films under production. Most of the people whose services are taken for film production are not employed on monthly basis but their services are used on a contractual basis so that in case of lull in business activities their contract can be terminated to save the cost. Such persons are hired or eased out based on the business needs of the company and therefore, they are not given employment with the company, unless the company is certain about the sustain ability of the need of their respective services for the business of the company. During the year, the company has utilized the services of the following persons and fees were paid to them as per the understanding of retainership.

These persons were not employees of the company and they were free to give their services to any other party. The company found it desirable to keep them on contract till such time the business of the company stabilized. Therefore they were not taken on employment but there services were contracted. While they were under the contract as professionals and not employed by the company, the company deducted tax @ 5% plus applicable surcharge and cess from the fees paid to them u/s 1941 as these persons were professionals. However, assessing officer claimed that these persons were in employment of appellant company and therefore, he raised a demand of Rs.3,70,1661- as shortfall in deduction of tax. It may be appreciated that the relation between these respective parties and the company were contractual relations and they were not that of employment. So much so that the appellant company did not deduct any professional tax of these parties from the payments made to them and they were liable to pay their own professional tax. These parties were not entitled for any gratuity or any other facility available to the employees. They had no fix hours of duty and there was no exclusivity. The parties as well as the company had a clear understanding that the relation was of taking professional services and not of employment. Under the circumstances, it was incorrect on the part of the assessing officer to assume that these professionals were under employment of the appellant company and demanding additional tax as TDS though the appellant company had lawfully deducted the applicable tax under 194]. For ready reference of your Honour the copies of the contracts as well as the ledger accounts of these parties are enclosed herewith. In light of the above submissions and the fact that the employee-employer relation is an understanding between an organization and an employee and not just a matter of inference, we request Your Honour to delete the demand raised by the assessing officer treating these contractual professionals as the employees of the company.”

4. During the course of hearing before us, the submissions made before the lower authorities were reiterated. It was vehemently argued by the Ld. Counsel that contract with these persons may have been termed as employment contract, but actually, these persons were acting as independent professionals. The arguments made by him have been summarized by way of a note and relevant part of the same is reproduced hereunder:-

“1. The contract between the Assessee and the professionals did not constitute an employer employee relationship as the intent of the Assessee and the professionals was not to enter into an employer employee relationship If the company and the employee had understood the agreement in a certain way and had acted upon that agreement, it is not open to the ITO to give another interpretation.

2. The Professionals engaged were not for regular work but were engaged in capacities that require and high amount of autonomy, inherent skills and qualification. The designations given to such professionals were ‘Production manager’, ‘Executive Assistant to the chairman’, ‘Manager accounts and finance’, ‘Avid in charge’, ‘Production executive’, ‘VFX service’, ‘Direction Services’, Editing Services’, “Executive services, ‘Supervisory Services’ and ‘ Production assistant’ which res ipsa shows that they were not mere executors and there was a large degree of professional discretion and that their tasks required technical or professional skills or experiences. The fact that they were given designations does not by itself show that an employer employee relationship exists but merely spoke to the scope of the type of assignments that were given to them.

3. The covenants in contracts by themselves were wide in nature and afforded a large degree of flexibility for the retainers. There were no restrictive covenants on timings to come to office or leave, or any exclusivity bar. They were not subject to the general rules and regulations. They were not authorized to act as agents by entering into any commitments with third parties on behalf of the Assessee without express authorization. Though the number of days of leave were contractually fixed, there were no covenants binding the said professionals to the company rules and regulations as applicable to employees on the pay roll of the company.

The mere isolated mention of the word ’employment’ or ‘termination’ would not ipso facto make the said relationship a employer – employee relationship. The word termination is used non-exclusively in the Indian Contracts Act, 1872 in multiple sections such as Sec. 201, 202, 153 etc. even for contracts of agency and bailment. The use of the word ’employee’ in isolation in a heading of one of the clauses of the contract by itself would not result in an employer employee relationship. A contract has to be read as a whole and in light of the intentions of the contracting parties and one word in isolation in the title of a clause cannot lend colour to the entire contract especially when the operative part of the same clause says otherwise.

5.The said professionals were not provided any benefits of employment like PF, ESIC, gratuity, bonus etc. that form a part and parcel of employment. Even the option of exercising any such facility in the long run was not contractually provided to them.”

5. In support of its claim, the Ld. Counsel placed reliance upon the following judgments:-

1. CIT vs Yashodha Super Speciality Hospital [2011] 365 ITR 256 (Anbdhra Pradesh HC)

2. ACIT vs Grant Medical Foundation [21015] 375 ITR 49 (Bom)(HC)

3. ITO VS Entertainment Network td ITA No.13512/M/2014 dated 11/1/2017

6. Per contra, the Ld. DR appearing on behalf of the Revenue vehemently supported the orders of the lower authorities. It was argued by him that it is a clear cut case of employment of these persons. The perusal of the contract entered with these persons shows that they were hired as employees of the assessee company. It was submitted that the terms of the contract shows that requisite ingredients of employer-employee relationship exist in this case. Therefore, lower authorities have rightly held it to be a case of deduction of tax u/s 192. He placed reliance upon the decision referred to by Ld. CIT(A) in his order in the case of DCIT vs Wokhardt Hospitals Ltd 139 ITD 161 (Hyd). It was lastly argued by him that cases relied upon by the Ld. Counsel have been delivered on the basis of facts of those cases which are distinguishable from the facts of the case of the assessee before us.

9. We have gone through the orders passed by the lower authorities service contract with aforesaid 6 persons and also the submissions made before us. Firstly, we have analysed the service contract with these persons which have been enclosed in the paper book filed before us. One of the contracts is reproduced hereunder, for the sake of ready reference:-

“SERVICE CONTRACT

This service agreement is made on this 1^st December, 2003 between,

RED CHILLIES ENTERTAINMENTS PRIVATE LTD

Mannat, B.J. Road, Bandstand, Bandra West, Mumbai 400 050

(Hereinafter referred to as “RC”)

And

SANMJIV CHAWLA,

153, Oxford Towers

Andheri West,

Mumbai 400 058

(Hereinafter referred to as “SANJIV”)

Whereas RC is desirous of appointing SA NJI V on contractual basis for the purpose of performing certain duties, which may be assigned by RC from time to time and SA NJI V has consented to being appointed on following terms and conditions:

DUTIES:

You shall be designated as “PRODUCTION MANAGER and perform all such duties as may be assigned from time to time.

COMPENSATION AND BENEFITS:

RC shall pay SANJIV a total remuneration of Rs.60,000/- per month, subject to tax deduction at source, at applicable rate of tax.

In addition, you will be provided with a company car. The company will also provide you with a cell phone for local and official use.

LEAVES:

You shall report to office on daily basis to perform the duties assigned to you from time to time. However you shall not remain absent from work for more than 30 days in a calendar year.

DATE OF COMMENCEMENT:

Your contract will take effect from 1^st December, 2003.

TERMINATION OF EMPLOYMENT:

Either party will be entitled to terminate this contract at any time after giving ONE Month notice in writing. It may however be open for the company to waive the notice period or part thereof in the event of your resignation. In the case of termination by the compan^y it will be the company’s option to pay your remuneration in lieu of notice period.

OTHER TERMS AND CONDITIONS:

1. Confidentiality:

During the tenure of your service or later you will not divulge to any person whomsoever any trade secrets or process or any information regarding the business or finance of the company or any dealings, transactions or affairs which may come to your knowledge during the course of your employment and you shall exercise your best endeavor to prevent the publication or disclosure thereof.

2. Commitments and Dealings:

You will not enter into any commitments or dealings on behalf of the company for which you have no express authority nor alter or be a party to any alteration of any principle or policy of the Company or exceed the authority or discretion vested in you without the previous sanction of the Company or those in authority over you.

3. Notices:

All notices and other communications which are required to be or may be given will be in writing and will be given in person or will be mailed to you at your office e-mail address or to such other address as mutually decided.

In acceptance of the above terms and conditions, please sign the duplicate copy of this letter.

Yours Faithfully,

For RED CHILLIES ENTERTAINMENTS PRIVATE LTD

Sd/-

Director

I agree to accept the above terms and conditions

Sd/-

(SANJI V CHAWLA)”

Perusal of the aforesaid contract shows that Shri Sanjiv Chawla has been appointed as ‘Production Manager’ for performing all the duties as may be assigned to him from time to time. In the case of professional, who is engaged on independent basis, assignments/duties to be executed are generally specified in advance whereas in the case of Shri Chawla it has been clarified that he shall perform all the duties as will be assigned to him from time to time. The independent professionals are engaged in specific assignments / jobs whereas employees are assigned with the duties which are not feasible to be defined in specific terms in advance. Only designation can be given and functional profile can be assigned in advance and that is what has been done.

7. Further, the remuneration has been fixed @ Rs.60,000/- per month. There is no variation clause or escalation clause indicating that remuneration shall be increased or decreased depending upon the quantum of work. Thus, it indicates that the remuneration has been fixed keeping in view the relationship of an employee and employer. It is also worthwhile to note here that Shri Chawla has been provided with a company car along with a mobile phone.

These perks have been provided as are generally provided in the case of an employee. These perks also indicate that Shri Chawla has been engaged on full time basis and that is why the assessee company was pleased to provide these facilities to Shri Chawla.

8. It has also been noted that it has been stipulated in the agreement that Shri Chawla shall attend office on daily basis to perform the duties as may be assigned to him from time to time by the assessee company. He has also been provided with leaves of around 30 days in a year. Thus, impliedly, for the remaining days he shall be attending the office. These types of terms are kept in the case of employees only and not in the case of independent professionals.

9. A condition has been stipulated for ‘termination of employment’. That itself shows that this contract has been drafted keeping in view the relationship of employer-employee. Thus, the totality of terms and conditions of this agreement clearly indicates that there existed an employer-employee relationship between Shri Chawla and the assessee company and he was hired as an employee by the assessee company and not in the capacity of an independent professional.

10. It has been argued by Ld. Counsel that there was no payment of PF, ESI, gratuity, bonus, etc. In our opinion, payment of these incentives is one of the indicators of existence of employer-employee relationship but not the conclusive or the only ingredient. It depends upon the overall financial terms entered into between the employer and employee. In the case before us, the overall remuneration of Rs.60,000/- per month has been fixed keeping in view this factor that these incentives shall not be paid by the assessee to Shri

11. Further, despite our specific queries, Ld. Counsel was not able to show anything contrary to the natural inference that can be drawn from the perusal of the agreement. Nothing has been shown to prove that Shri Chawla was not engaged on full time basis or he was working on part time basis with the company as an independent professional and he was free to take up other assignments. No cogent reason could be given before us as to why the designation of Production Manager was assigned if he was acting simply as an independent professional. Thus, in our considered opinion, the facts and the evidences brought before us duly establish that there existed an ‘employer-employee’ relationship between the assessee company and Shri Chawla. Similarly in the case of other persons, it is noted that all the terms and conditions are identical. Ms. Sushma Chitnis designated as ‘Executive Assistant to the Chairman’, Shri Blesson Oomen has been designated as ‘Manager Cum Accounts & Finance’, Shri Amitabh Shukla designated as ‘Avid Incharge’, Shri Vishal Punjabi designated as ‘Production Executive’, and Shri Rajesh Wanmali designated as ‘Production Assistant’. The remaining terms and conditions in the case of all these persons were same. Thus, the facts and the evidences brought before us clearly establish that there existed an employer-employee relationship between these persons and the assessee and thus, the assessee was liable to deduct TDS u/s 192 because the remuneration paid to them constituted ‘salary’. The judgments relied upon by the Ld. Counsel are not applicable on the facts of the case before us. These judgments were delivered on the basis of peculiar facts of those cases and were based upon the contracts entered in those cases. Therefore, keeping in view totality of facts and circumstances of this case as discussed above, these grounds are rejected.