S. 194C — Payments made to producers, directors, actors for financing film production are not covered by S. 194C.

The objects of the assessee company inter alia included
production of feature films, TV serials, video films and documentary films, etc.
In the course of survey action it was found that assessee had made payments to
various film and T.V. serial producers and directors under different agreements.
The AO, on examining the agreements entered into, came to the conclusion that
the assessee has incurred expenditure for production of films as a whole. After
the film is produced, it acquires the entire right of the film concerned,
including the intellectual property right as well as complete ownership of
distribution and exhibition rights of the film and serial.

He rejected the arguments of the assessee that

(a) it has merely financed the film and has retained
control over negative rights of the completed film as assurance of realisation
of money from the producer;

(b) control over distribution of the film has been taken to
ensure best price available can be recovered from the distribution of the
film;

(c) the producer is in full command of making the film and
not the assessee;

(d) the assessee has neither produced the film, nor has it
got it produced;

(e) the producers/directors with whom agreements are
entered into and to whom advances are made are not
contractors/sub-contractors. For all these reasons the assessee contended that
the provisions of S. 194C are not attracted to the payments made by ic.

The AO held that advances made by the assessee to producers
and directors are covered u/s.194C. He issued notice u/s.201 treating the
assessee as an assessee in default and raised demands for tax and interest
u/s.201(1)/(1A).

In appeal, the CIT(A) gave partial relief to the assessee.
The assessee preferred an appeal to the Tribunal.

The Tribunal observed that :

(a) in majority of the agreements film-makers and producers
have right to participate in the surplus after repayment of the principal
amount and these terms support the case of the assessee that status of the
film-makers/ producers is also like principal, as in normal commercial
practice, once the contract is executed, the contractor is out of the project
and the entire surplus is enjoyed by the principal;

(b) while the relationships of the principal and contractor
can be determined on the basis of the terms of the agreement or contract, at
the same time, industry and trade practices and conventions are also to be
taken judicial note of, and considered before arriving at final conclusions,
in respect of the relationships created. In film industry, it is not uncommon
that the entire film project is financed by a third party, who otherwise is
not involved in the execution of a film project;

(c) the AO had admitted that the assessee has not hired the
services of the producer and director. This itself takes the
producers/directors out of the term “contractors” and hence, the first mandate
of S. 194C is not fulfilled;

(d) 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
the production of the film;

(e) Censor Board certificates in respect of the films which
the assessee has financed were all in the name of the producers. If the
assessee’s role was as a producer, then the Censor Board Certificates being
very important legal documents, would have shown the assessee as a producer.

On examining the agreements, the Tribunal concluded that no
relationship of ‘principal’ and ‘contractor’ was created between the assessee
and film-producers/directors, but all agreements were finance agreements with
unique features
to participate in the surplus by taking the risk of losses also.

The Tribunal held that the payments made by the assessee to
producers and directors of the film/TV serials cannot be said to be covered by
S. 194C. It held that the assessee is not a deemed defaulter u/s.201(1) and
there is no question of levy of interest u/s.201(1A).

The Tribunal allowed the appeal of the assessee.