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TMI Blog2009 (6) TMI 622X X X X Extracts X X X X X X X X Extracts X X X X ..... on 194J 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 - In the result, all the appeals of the assessee are allowed - ITA NOS. 1095 TO 1098/Mum/2007 - - - Dated:- 15-6-2009 - Order Per : R S Padvekar : J.M. 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 summarized 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king 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 finalized 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 turnov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actor 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance 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 charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase 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 v. 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 inten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Hon'ble 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods 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 Hon'ble Supreme Court in the case of Hindustan Shipyard Ltd. v. State of Andhra Pradesh 110 STC 533 are also guideposts in this regard, relevant portion of which is extracted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 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 mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tionships 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 exibition 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 eit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the producers and directors approached the assessee with the infrastructurespecially 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 withi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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