2009 (5) TMI 621 - AT - Income Tax

Summary

Issues Involved:
1. Whether the transactions between the assessee and the entrepreneurs for the production of VCDs/DVDs are contracts for sale or work contracts under Section 194C.
2. The applicability of Section 194C and the consequent liability for non-deduction of tax at source.
3. The liability for interest under Section 201(1A) for non-deduction of tax at source.

Detailed Analysis:

1. Nature of Transactions: Sale or Work Contract
The primary issue is whether the transactions between the assessee and the entrepreneurs for producing VCDs/DVDs are contracts for sale or work contracts under Section 194C of the Income Tax Act. The assessee argued that these transactions were purchases of goods, while the Assessing Officer treated them as work contracts requiring tax deduction at source.

- The assessee was engaged in trading cassettes, VCDs, DVDs, and providing technical services and film production.
- A survey revealed that the assessee did not deduct tax under Section 194C on payments to replicators/manufacturers of VCDs/DVDs.
- The assessee contended that these were professional/technical services, not work contracts.

The Tribunal examined the business model, noting that the assessee acquired rights to multiple copies of films and outsourced the production of these copies to independent entrepreneurs. The entrepreneurs used their infrastructure, raw materials, and expertise to produce the VCDs/DVDs, bearing all associated costs and risks until delivery to the assessee.

2. Applicability of Section 194C
Section 194C mandates tax deduction at source for payments made for carrying out any work. The Tribunal analyzed whether the payments made by the assessee fell under this section.

- The Tribunal referenced Circular No. 681, which clarifies that contracts for the sale of goods are not covered under Section 194C.
- It was noted that the property in the VCDs/DVDs passed to the assessee only upon delivery, indicating a sale of goods rather than a work contract.
- The Tribunal also considered Circular No. 13/2006, which emphasized that contracts for the supply of goods fabricated as per specifications are contracts for sale if the property in goods passes upon delivery.

The Tribunal concluded that the transactions were contracts for sale, not work contracts, as the entrepreneurs bore the costs, risks, and responsibilities of production, and the property in the goods passed to the assessee only upon delivery.

3. Liability for Interest under Section 201(1A)
The Tribunal addressed the issue of interest liability under Section 201(1A) for non-deduction of tax at source.

- The CIT(A) had held that the assessee was in default under Section 201(1) but agreed that no liability for non-deduction of tax could be imposed if the payees had paid the tax.
- However, the CIT(A) upheld the interest liability under Section 201(1A) as mandatory.

Given the Tribunal's finding that the transactions were contracts for sale and not work contracts, the applicability of Section 194C was ruled out. Consequently, the assessee could not be treated as a defaulter under Section 201(1), and no interest under Section 201(1A) could be charged.

Conclusion
The Tribunal allowed the appeals, ruling that the transactions between the assessee and the entrepreneurs were contracts for sale, not work contracts. Therefore, Section 194C did not apply, and the assessee was not liable for tax deduction at source or interest under Section 201(1A).