TMI Blog2013 (8) TMI 627X X X X Extracts X X X X X X X X Extracts X X X X ..... in the business of production of feature films as contemplated in Rule 9A - Held that:- It is manifest from the relevant portion of the agreement between the assessee company and M/s Sahara India TV Network that the role of the assessee company as "production house" was limited to produce the films at the instance of the producer Sahara India TV Network strictly in accordance with the concept, theme, script, production value and production schedule etc. approved by the producer. Even any alteration in the approved details was to be done with the prior written consent of the producer - The activity of production of film was to be monitored and supervised by M/s Sahara India TV Network as producer and the instructions and advice given by M/s Sahara India TV Network to the assessee, be it commercial and otherwise, was binding on the assessee as the production house. M/s Sahara India TV Network as the producer was entitled to use , exhibit, market, sell, distribute, re-produce, assign and exploit etc. the films and parts thereof as may be decided by it being perpetual and global territory holders of the films and the assessee production house was not entitled to any rights, interests a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otherwise any contracts, sub - contracts licenses and concessions for or in relation to the objects or business mentioned or any of them, and to undertake execute carry out dispose of or otherwise turn to the same. In pursuance to object clause, the company has undertaken four contract from M/s Sahara India T.V. Network, and received advance of Rs. 20 crores - vide agreement dt. 24/09/2002. We may respectfully submit that the Company has started business of undertaking contracts for production of film. Theatrical - T. V. Channel etc. We further submit that the company has commenced it's business as soon as it has received contracts from M/s Sahara India TV Network for the production of film/T. V. serials. The signing of contracts with M1s Sahara India TV Network did amount to commencement of business and corollary to that, the expenses incurred after the commencement of business to allowable expenses. In support of this proposition, we rely on following judgements. a) CIT vs. Saurashira Cement Chemicals India Ltd. 91 ITR 1 70(Guj) which was followed by Bombay High Court in the case CIT Vs Raliwolf Ltd 121 ITR 262 202 ITR 662 (Bom). (Copy enclosed) b) Sarabhai Management Cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it can be said of that business that it is set tip. The words 'ready to commence' would not necessarily mean that all the integrated activities are fully carried out and/or wholly completed. The requirement is also complied with in a given case where an assessee had undertaken the first of the kind of integrated activities which the business is overall comprised of The question whether a business has been set up or not is always a question of fact which has to be decided on the facts and in the circumstances of each case". 11). The following observations of Chagfr CJ. in western India Vegetable Products case (1954) 26 ITR 151, 158(Bon,)-were-quoted with approval: "That is why it is important to consider whether the expression used in the Indian statute for setting up a business is different from the expression Mr. Justice Rowiatt was considering, viz, 'commencing of the business It seems to us that the expression 'setting up' means, as is defined in the Oxford English Dictionary, 'to place on foot' or 'to place on foot' or 'to establish', and in contradistinction to 'commence'. The distinction is this that when a business is established and is ready to commence business then it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty and 'The PRODUCER' may continue getting 'the said FILM' produced further by any other party in its discretion in any way. If however, ' The PRODUCER', even after termination and discontinuing 'The PRODUCTION HOUSE', at its own costs,' The PRODUCTION HOUSE' shall be entitled to get a reasonable fee for such scripts- screenplays and constituents, if used by 'The PRODUCER'. d) Notwithstanding anything contained hereinabove, 'The PRODUCER' may terminate this Agreement in its discretion if: i) The PRODUCTION HOUSE' commits a material breach of any term of this Agreement. ii). The prescribed production quality and the committed schedule of progress are not maintained as per 'The PRODUCER'S spec4flcations; and iii). There is any regulatory/court order restraining the making, progress and exploitations of 'the said FILM' or any other legal restraint which leads to the conclusion that Ws Sahara India TV Network is the producer, and we are acting as an agent for M/s Sahara India TV Network 2) Without prejudice to submission made herein above, assuming the provision of 9A 9B is applicable, we make alternative claim, as of today no film project could be commenced due to lack of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenditure has been incurred in relation to an activity prior to obtaining these contracts i.e. identification, introduction and negotiation with the contractee on behalf of assessee. Hence, even if the business is held as set up (which is not the case as except receipt of advance no positive activity is reflected even after 6 months of contracts), the expenditure is to be treated as pre commencement expenses and considering the nature of business, i.e. contracts for film production, the allowability has to be dealt within the frameworks of accounting for contracts or special provisions for film production business. Hence the expenditure of Rs 50 Lakhs cannot be held to be incurred in relation to the business carried out during the year and therefore not allowable as revenue expenditure during the assessment year. Without prejudice to the above, even if the assessee is considered as contractor vis- -vis four contracts entered with M/s Sahara India, the expenses incurred in relation with these contracts which is a new business for the assessee should be capitalized towards these contracts only and allowable against the consideration of contracts as and when become due. As the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the film on a commercial basis in all or some of the areas; or (ii) sells the rights of exhibition of the film in respect of some of the areas; or (iii) himself exhibits the film on a commercial basis in certain areas and sells the rights of exhibition of the film in respect of all or some of the remaining areas, and the film is released for exhibition on a commercial basis at least ninety days before the end of such previous year, the entire cost of production of the film shall be allowed as a deduction in computing the profits and gains of such previous year. (3) Where a feature film is certified for release by the Board of Film Censors in any previous year and in such previous year, the film producer - (a) himself exhibits the film on a commercial basis in all or some of the areas; or (b) sells the rights of exhibition of the film in respect of some of the areas; or (c) himself exhibits the film on a commercial basis in certain areas and sells the rights of exhibition of the film in respect of all or some of the remaining areas, and the film is not released for exhibition on a commercial basis at least ninety days before the end of such previous year, the cost of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of various rights in the film including music, exhibition, satellite, video etc. Such rights are sold by producer or exercised by himself depending upon the circumstances. In this case the liability of so called producer towards production expenses is limited to a predetermined price in lieu of which he has obtained all the possible rights from the actual person putting in labour, money and knowledge for shaping the film. Thus, the underwritten covenant in this agreement is advance sale of all rights vested with the assessee as producer of the film for a consideration of Rs 7.50 Crores which includes it's profit component. Even, the debit note raised by M/s Idream suggests that the consultancy fee charged is for identification and introduction of party for fund requirement. The facts of case lead to only one conclusion that M/s Sahara India is none other than financer of the project and the agreements have been drafted to secure the rights of financier in the event of termination of agreement with or without completion of project. Against the lump sum payment of Rs 7.50 Crores per project M/s Sahara has secured all rights in the film in advance and in the event of premature termina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there has been a commencement of activity in the business of film production. Since M/s Idream Production was regularly engaged in the business of film production and film distribution, having exposure in media for more than seven years and in the line of film production and distribution of several block-buster movies like Bends-like Beckham, 16th December, Monsoon wedding, Agni Varsha, Jajantram Mamantram etc., M/s dream arranged for four contracts worth Rs.30.00 crores for the appellant. M/s Idream Production had undertaken field work like power point presentations of various scripts, commercial viability of the proposed films and also identified stories which were the proposed subject matter of the films. They had also undertaken promos and after a sustained effort on their part, Sahara Group entered into an agreement with the appellant and paid Rs.20.00 crores to the appellant as an advance. The appellant reiterated that it was due to the efforts of M/s ldream Production Pvt Ltd as introducer, that the Sahara Group entered into an agreement with the appellant. The Ld. Counsel also pointed out that a commission of Rs.50.0O lacs on total contract of Rs.30.00 crores works ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in relation to these films has to be allowed in the year of release as per provisions of Rule 9 A of the Income Tax Rules. The Ld. AR of the appellant has argued before me that the Rule 9A of the Income Tax Rules is applicable to film producers. The appellant has merely undertaken the contract for film production, which was akin to the contract undertaken by Contactor to construct a building for the builder. The Ld. AR tried to explain with an illustration of a contractor and a builder, Suppose the builder gives a contract to construct a building. The contactor shall construct the building the builder shall give labour charges to the contactor for the given task. In this case, the risk of loss on sale of flats and applicability of income tax laws as may be applicable, shall apply to the builder not to the contractor. Similarly, in the case of the appellant, the appellant is merely entitled to production fees only, like the labour charges in the case of Contactor- builder. The point, which the appellant ha tried to emphasise before me, was that the appellant has undertaken a contract to provide various film related services to M/s. Sahara India TV Network. The appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Sahara India TV Network as financer and distributor and the reliance of ld. CIT(A) to hold that the assessee is not a film producer was clearly misplaced. He contended that the specific adverse findings recorded by the A.O. on this aspect of the matter as well as the other aspect have not been appreciated by the ld. CIT(A) in the right perspective while deleting the disallowance made by the A.O. on account of consultancy fees paid to M/s Idream Productions Pvt. Ltd. He urged that the impugned order of the ld. CIT(A) is therefore liable to be reversed on this issue. 10. The ld. counsel for the assessee invited our attention to the submissions made on behalf of the assessee before the ld. CIT(A) as reproduced by the ld. CIT(A) in his impugned order and submitted that all the points raised by the A.O. while disallowing the assessee's claim for deduction on account of consultancy fees paid to M/s Idream Productions Pvt. Ltd. were duly and satisfactorily explained by the assessee. As regards the objection of the A.O. that the said expenditure was not incurred by the assessee in connection with the existing business, he submitted that there being unity of control and management, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment and securities and the contracts for film production were executed by it for the first time during the year under consideration, there was complete unity of control and management and this position has not been disputed even by the ld. D.R. at the time of hearing before us. In the case of B.R. Ltd. vs. CIT (supra) cited by the ld. counsel for the assessee, the Hon'ble Supreme Court held that for the purpose of ascertaining whether two lines of business constitute the same business, the decisive test is unity of control and management of the two lines of business. It was held that if there is common management and common control of the business, the new line of business constitutes expansion of the existing business. 12. As regards the stand of the A.O. that the expenditure in question on consultancy fees was pre-commencement expenditure, it is observed that the four contracts with Sahara India TV Network worth Rs. 30 crores were entered into by the assessee during the year under consideration itself i.e. on 24-9-2002 and even the advance of Rs. 20 crores was received by the assessee for the execution of the said contracts. The first important step of the business related ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vity of assessee company as well as M/s Sahara India TV Network and the same being relevant in the present context is reproduced hereunder:- - "WHEREAS. 'The PRODUCER' is in the business of producing various types of audio-visual programmes including Feature Films etc. either on its own or through commissioning the same to individual creative parties/producers, acquiring perpetual ownership of copyrights thereof for all exploitation, whether commercial or otherwise including exhibition, transmission, broadcast, telecast copying, re-production and distribution etc. in India and Overseas across the global territory through all means, media, mechanism, format and technology etc., whether in existence or to be developed/propounded in future (when developed/propounded). - "AND WHEREAS, 'The PRODUCTION HOUSE' is in the business of producing various types of audio-visual programmes including Feature Films and assigning perpetual copyrights therein to the Contracting parties and possesses the necessary resources and expertise to properly produce the same on audio-visual/ cinematographic film medium to faithfully match, shape and emerge thereon to pre-decided theme, literary story-line ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... j) - That 'The PRODUCER' shall have the exclusive rights to 'the said FILM' for dubbing, conversion, adaptation and re-production etc. in all other formats, media, regional and foreign languages in perpetuity and in the global territory and if desired by 'The PRODUCER', 'The PRODUCTION HOUSE', undertakes to execute such jobs, the reasonable actual cost of which shall be borne by 'The PRODUCER'. m) - That, 'The PRODUCER' shall, perpetually and in the global territory, be entitled to use, exhibit, market sell, distribute, re- produce, assign and exploit etc. 'the said FILM' and parts thereof in any way by any means in whichever way, to be decided exclusively by 'The PRODUCER' being the PERPETUAL AND GLOBAL COPYRIGHT HOLDER of 'the said FILM' and all its constituents, in which the 'The PRODUCTION HOUSE' shall have no rights, interests and/or claims etc. whatsoever, except the GROSS CONSIDERATION expressly provided herein." 14. It is manifest from the relevant portion of the agreement between the assessee company and M/s Sahara India TV Network that the role of the assessee company as "production house" was limited to produce the films at the instance of the producer Sahara Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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