2009 (4) TMI 541 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 194C to the World Right Controller Agreement.
2. Determination of default under Sections 201(1) and 201(1A) and liability for interest under Section 201(1A).

Issue-wise Detailed Analysis:

1. Applicability of Section 194C to the World Right Controller Agreement:

The primary issue was whether the World Right Controller Agreement, under which the assessee advanced money to KKEPL for the production of a film, constituted a work contract requiring TDS under Section 194C of the Income-tax Act. The Assessing Officer and CIT(A) concluded that the agreement was a contractual agreement for carrying out work, thus falling under Section 194C. The assessee argued that the advances were for financing purposes and not for carrying out any work, contending that the agreement did not fall within the ambit of Section 194C.

The Tribunal analyzed the provisions of Section 194C and relevant explanations, noting that the section applies to payments for carrying out any work in pursuance of a contract. The Tribunal emphasized that the term "any work" has a wide connotation but does not cover every type of work. The Tribunal referred to various judgments, including the Apex Court's decision in Associated Cement Co. Ltd. and the jurisdictional High Court's decision in East India Hotels Ltd., to clarify that not all activities fall under "any work" as per Section 194C.

The Tribunal found that the dominant objective of the agreement was financing the film production, with the auxiliary objective being the completion of the film to recover the advances. The Tribunal noted that the advances were refundable with interest, distinguishing the arrangement from a typical work contract. The Tribunal concluded that the film financing arrangement did not constitute a work contract under Section 194C, as the payments were advances to be recovered and not payments for carrying out work.

2. Determination of Default under Sections 201(1) and 201(1A) and Liability for Interest under Section 201(1A):

The second issue was whether the assessee committed a default under Sections 201(1) and 201(1A) by not deducting tax at source and was liable for interest under Section 201(1A). The Assessing Officer determined the tax payable under Section 194C and charged interest under Section 201(1A) on the amounts advanced to KKEPL.

The Tribunal, having concluded that the payments were advances for financing and not for carrying out work, held that the provisions of Section 194C did not apply. Consequently, the assessee was not liable to deduct tax at source under Section 194C. As a result, the Tribunal found that the assessee did not commit a default under Sections 201(1) and 201(1A) and was not liable for interest under Section 201(1A).

Conclusion:

The Tribunal allowed the appeals, reversing the CIT(A)'s orders for all three assessment years, concluding that the film financing arrangement did not fall under the scope of Section 194C. The Tribunal held that the assessee was not liable to deduct tax at source on the advances made to KKEPL and was not in default under Sections 201(1) and 201(1A).