Commissioner of Income Tax vs Kumudam Publications P. Ltd.

Ratanam J.

The assessee is a private limited company carrying on the business publishing periodicals called Kumudam and Kalkandu. These periodicals are

printed by another private limited company, viz., Kumudam Printers Private Ltd. (hereinafter referred to as ""the printer""). For the purpose of

printing the periodicals, on August 1,1972, an agreement was entered into between the assessee and the printer containing certain terms and

conditions which we shall notice in some detail later in the course of this judgment. During the assessment years 1974-75 and 1975-76, the

assessee paid to the printer substantial amounts by way of charges for composing striking, taking colour form impression, printing cover pages and

binding. In the course of the assessment proceedings for the assessment years 1974-75 and 1975-76, the Income - tax Officer noticed that the

assessee should have deducted tax u/s 194C of the Income Tax Act, 1961 (hereinafter referred to as "" the Act""). According to him the tax

deductible by the assessee for the relevant assessment years amounted to Rs. 44,063 and Rs. 42,600, respectively. Since, the assessee had not

deducted the tax at source and credited it to the Government''s account in terms of the provisions of section 194C of the Act read with rule 30 of

the Income Tax Rules, 1962, framed under the the Act, the Income Tax Officer charged interest at the rate of 12 per cent per annum as per the

provisions of section 201(1A) of the Act and directed the assessee to pay Rs. 16,919 and Rs. 11,330 respectively, for the two assessment years

in question. On appeal, the Appellate Assistant Commissioner, relying upon the instructions stated to have been issued by the Commissioner

relying upon the instructions stated to have been issued by the Commissioner of Income Tax based upon the minutes of the 11th meeting of the

Regional Direct Taxes Advisory Committee on July 17,1972, found that, under the terms of the agreement, the assessee provided all the materials

to the printer who did the job of printing only and the agreement entered into between the assessee and the printer would be in the nature of a

service contract, not attracting the printer would be in the nature of a service contract, not attracting the application of section 194C of the Act, in

that view, he cancelled the levy of interest u/s 201(1A) of the act in respect of both the assessment years. On further appeal by the Revenue before

the Tribunal contending that the agreement between the assessee and the printer was in the nature of a works contract or at least labour contract, it

was of the opinion that the printer, under the terms of the agreement, rendered only service and the agreement would be one for service only, not

attracting section 194C of the Act. In the result, the Tribunal upheld the cancellation of the levy of interest u/s 201(1A) of the Act and dismissed

the appeals. That is how the following two common questions of law, u/s 256(1) of the Act, have been referred to this court, for its opinion :

1 Whether on the facts and in the circumstances of the case, and having regard to the provisions of section 194C of the Income Tax Act, 1961,

the Appellate Tribunal was right in cancelling the interest levied u/s 201(1A) of the Income - tax Act, in the assessee''s case for non-deduction of

tax at source on the amounts paid by the assessee to Kumudam Printers Private Ltd. as the agreement dated August 1, 1972?

Whether the Appellate Tribunal''s view that the services rendered by Kumudam Printers Private Ltd. to the assessee under the agreement dated

August 1,1972, are in the nature of a contract for service and, therefore, the provisions of section 194C would not be applicable is sustainable in

law?

Referring to the terms of the agreement between the assessee and the printer which forms part of annexure""A"" to the stated case, learned

counsel for the Revenue submitted that, on a proper interpretation on construction, the agreement entered into between the assessee and the

printer was in the nature of a works contract and that the conclusion of the Tribunal, that it was a contract for service, not falling u/s 194C of the

Act, as its terms clearly made out that it was only a contract for service and not a contract for carrying out any work, as contemplated u/s 194C of

the Act.

Before proceeding to consider the submissions so made, it would be necessary to refer to sections 194C and 201 of the Act, in so far as they

are relevant for these references which run as follows :

194C(1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any

work (including supply of labour for carrying out any work) in pursuance of a contract between the 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,

shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or

by any other mode, whichever is earlier, deduct an amount equal to two per cent. of such sum as Income Tax on income comprised therein.

(1) If any such person and in the cases referred to in section 194, the principal officer and the company of which he is the principal officer

does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other consequences

which he or it may incur, be deemed to be an assessee in default in respect of the tax :

Provided that no penalty shall be charged u/s 221 from such person, principal officer or company unless the Income Tax Officer is satisfied that

such person or principal officer or company, as the case may be, has without good and sufficient reasons failed to deduct and pay the tax.

(1A) Without prejudice to the provisions of sub-section (1), if any such person principal officer or company as is referred to in that subsection

does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at twelve per

cent per amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid.

It is in the background of the aforesaid provision in the Act that the terms of the agreement have to be scrutinised in order to ascertain its real

nature. Annexure ""A"" to the stated case sets out the terms of the agreement entered into between the assessee and the printer in extension, but it

would be sufficient to notice a few of the clauses occurring therein and having a bearing on the questions raise. Clause 1 provides that the assessee

shall supply articles, stories, editorials, caricatures, cover pages and such other necessary printing materials as may be required and as the

exigencies demand. Clause 4 enabled the assessee to give the print order to the printer for the number of copies with supply of the paper required

for the purposes early, according to schedule ""A"" to the agreement. Clause 7 was to the effect that the printer shall print the magazines in the rotary

machine held by it or such other machinery as is suitable for the neat execution of the printing of the magazines, Kumudam and Kalkandu. Under

clauses 8 and 9 the assessee was enabled to order the number of pages and the number of copies required and the printing of the magazines by the

printer according to the specifications as per the standard size of the magazines. The printer, under clause 10 of the agreement, should deliver the

printed magazines well in advance for release and dispatch as per schedule ""B""to the agreement Under clause 11, the printer bound itself to deliver

the magazines fit for despatch to several places by the assessee, at the appointed time as per the time schedule. The assessee, under clause 13,

agreed to pay the printing charges to the printer at the rates quoted in schedule ""C"" clause 15 required the printer to pack the printed copies as per

the advice of the assessee and deliver them to the assessee according to the time schedule. Provision was made under clause 16 for increase or

decrease in rates for extra colour, depending upon the various colour insertions and the matter contained. Under clause 17, the assessee had

agreed to advance to the printer seven lakhs of rupees carrying interest at 11 per cent per annum and the a printer was required to charge for the

printing of the magazines once in a month as at the close of the month and render accounts, and the assessee undertook to pay the printing charges,

binding charges and such other incidental charges within thirty days of the submission of the bill by the printer. It is unnecessary to make a

reference to the other provisions in the agreement From the terms of the agreement, it is clearly seen that the assessee supplies to the printer the

articles, stories, editorials, caricatures and material for cover pages to be printed and published, the newsprint and other varieties of paper therefor,

the blocks, etc., and the printer, by the use of the rotary machine held by it, prints the magazines as required by the assessee according to its

requirements and specfications and the number of copies as per the time schedule for which the assessee pays the printer the printing charges

binding charges and other incidental charges within thirty days of the submission of the bill by the printer. Essentially, therefore, under the terms of

the agreement, with the help of the materials supplied by the assessee the printer produces the magazines and supplies them to the assessee for the

purpose of carrying on the business of the assessee. The intention of the contracting pairs under the agreement is in our view, to get the printing

work done by the printer by utilising the materials supplied by the printing of the magazines by the printer with the help of the materials supplied by

the assessee and to return the printed magazines duly bound and packed for dispatch by the assessee. In other words, under the terms of the

agreement the printer was carrying out the work of printing employing his machines and labour for carrying out that work and that too pursuant to

the agreement entered into between the assessee and the printer, on the terms and conditions referred to earlier. We are unable to find in the

language of section 194C(1) of the Act anything which would exclude the scope of its applicability to an agreement of this kind. The assessee was

responsible or liable, under the terms of the agreement for payment of the amount towards the printing charges to the printer, which is also a

resident company, and the purpose of the payment so made by the assessee, was for carrying out the printing work of the assessee with the

materials supplied by the assessee and with the machinery and labour provided by the printer for the purpose of printing the magazines. We find

from the order of the Tribunal that it had not considered the nature, scope and the result of the operations carried on by the printer under the terms

of the agreement, though with the materials supplied by the decision of this court in State of Tamil Nadu v. Anandam Viswanathan [1977] 39 STC

226 since affirmed by the Supreme Court in State of Tamil Nadu Vs. Anandam Viswanathan, to hold that the agreement between the assessee and

the printer was in the nature of a contract of service. The word ""service"" also means work and by printing the printer had carried out the work

within the meaning of section 194C(1) of the Act. We also do not find any support whatever from the circular relied on by the Appellate Assistant

Commissioner in the course of his order, for, it had listed out nine items of services with reference to which the provisions of section 194C of the

Act are inapplicable and the kind of work done by the printer under the terms of the agreement now under consideration, is not included therein.

By the work done by the printer, on the materials furnished by the assessee, that emerges is a magazine and in the light of the terms of the

agreement, between the assessee and the printer, the magazine is the result of the performance of work under the contract relating to printing by

the printer. We may also observe as pointed out by the Supreme Court in The State of Punjab Vs. Associated Hotels of India Ltd., that where the

principal objective or work undertaken by the payee of the price is not the transfer of a chattel qua chattel the contract is of work and labour and

the test is whether in substance, the contract is one of work and labour and test is whether, in substance, the contract is one of work and labour or

not. Applying this test propounded by the Supreme Court to is one for work and labour. We therefore, hold that the agreement in the present case

is in the nature of a works contract in that the printer carries out the work of printing with the help of the materials furnished by the assessee and

returns the magazines to the assessee Though counsel on both sides invited our attention to some decisions arising under the provisions of the

General Sales Tax Act, there is no need whatever to make a detailed reference to any of them a s the provisions of section 194C of the Act are

totally different from the relevant provisions of the General Sales Tax Act under which the question had arisen whether a transaction of this type

would constitute sales or works contract, for purposes of levy of sales tax under those Acts, We therefore, answer the question referred to us in

the negative and in four of the Revenue. The Revenue will be entitled to the costs of these references. Counsel; s fee Rs. 500 one set.