By TIOL News Service

CHENNAI, DEC 26, 2013: THE issue before the Bench is - Whether any payment made for transfer of copyright for a perpetual period of 99 years is not royalty but a transaction for sale. And the verdict favours the assessee.

Facts of the case

The assessee is a person carrying on business in the purchase and sale of Telugu films. The assessee filed return of income admitting a total income of Rs 33,10,829/-. The case was selected for scrutiny and a notice under Section 143(2) of the Income Tax Act, 1961 was issued on 24.08.2010. The assessment proceedings were completed under Section 143(3) of the Act and the order of assessment dated 29.12.2011 was passed. The Assessing Officer made various additions, viz., (a) an addition of Rs.52,884/- as disallowance under Section 69C of the Act; (b) an addition of Rs.4,00,000/- on the advance received, which was treated as income; (c) disallowance of Rs.8,268/- under Section 14A r/w Rule 8D of the Income Tax Rules, 1962; (d) disallowance of Rs.7,16,15,000/- for non-deduction of TDS under Section 194J of the Act and (e) an addition of Rs.40,07,949/- on the basis of a disallowance of loan credit. Accordingly, the total income of the assessee was assessed at Rs.7,93,94,930/- and the total demand was calculated at Rs.2,75,87,552/-.

On appeal, the CIT(A) partly deleted the addition made under Section 69C of the Act and also reversed the finding of the Assessing Officer, which made a disallowance of Rs.7,16,15,000/- for non-deduction of TDS under Section 194J of the Act by invoking Section 40(a)(ia) of the Act. The Assessing Officer disallowed the said deduction of TDS under Section 194J of the Act on the ground that the purchase of film rights fell under the term "Royalty" and that the agreement entered into between the assessee with respect to purchase of film rights was termed as an assignment agreement and the assignee of the satellite rights and the person who transferred such rights was the assignor and such rights were given for a period of 99 years. Therefore, the Assessing Officer had concluded that it was not a sale but a mere grant of satellite right in the movie produced by the assignor and the payments made for transfer of such rights fell within the meaning of "Royalty". The First Appellate Authority while reversing the finding given by the Assessing Officer held that the payments made by the assessee could not be termed as 'Royalty' as they were not covered by Explanation 2 to Clause (vi) of Section 9(1) of the Act and the payment were covered by Section 28 of the Act as trading expenses and there was no scope for invoking Section 40(a)(ia) of the Act and therefore the First Appellate Authority held that the payments for acquiring of the film rights were not exigible for deduction of Tax at Source under Section 194J of the Act as they did not qualify as 'Royalty'.

On appeal, the Revenue argued before the Tribunal that a perusal of the agreement would show that there was no purchase or sale, but a mere assignment of certain rights and the assessee was obligated to deduct tax at source under Section 194J of the Act at the time of making payment and having failed to effect deduction of tax at source, the assessee was liable for disallowance under Section 40(a)(ia)of the Act.

The assessee filed a Cross Objection before the Tribunal against that portion of the order of the First Appellate Authority, which was not in favour of the assessee. In the said Cross Objection, the assessee contended that the so called assignment agreement involved purchase of the copyright itself and was not in any way transfer of all or any other rights but transfer of copyright itself, which was a specific product, comprising a bundle of right. Further the assessee contended that the rights acquired was for 99 years and in terms of Section 26 of the CopyRight Act, 1957 the copy right would be valid and subsisted only for a period of 60 years and consequently any payment made towards cost of acquisition cannot be termed as 'Royalty'. Therefore the assessee submitted that neither Section 40(a)(ia) nor Section 194J of the Act would have any applicability to the assessment. The Tribunal allowed the appeal filed by the Revenue in part. Accepting the submission of the Revenue, the Tribunal held that the First Appellate Authority had erred in deleting the disallowance under Section 40(a)(ia) of the Act. For arriving at such a finding, reliance was placed on the decision of the Co-ordinate Bench of the Tribunal in the case of Assistant Commissioner of Income Tax vs. M/s.Shri Balaji Communications (2013-TII-10-ITAT-MAD-INTL) and by relying upon the said decision, the Tribunal concluded that the payments made by the assessee amounted to 'Royalty' as defined in Explanation 2 to clause (vi) of Section 9(1) of the Act. Hence, the Tribunal held that the assessee failed to deduct the tax at source under Section 194J of the Act and therefore, the disallowance made by the Assessing Officer under Section 40 (a)(ia) of the Act was correct.

On appeal, the HC held that,

++ the assessee is in the business of purchase and sale of television rights for films and filed the return of income for the assessment year 2009-2010. The said return was selected for scrutiny and after issuing notice under Section 143(2) of the Act and after hearing the assessee, an order of assessment was passed on 29.12.2011. Aggrieved by such order, the assessee preferred appeal to the First Appellate Authority wherein the assessee contended that even according to the Assessing Officer, the nature of business of the assessee is purchase and sale of satellite Television rights of the films and on going through the agreement entered into between the assessee and the third parties, will leave no doubt that the assessee under the agreement acquired absolute rights including theatrical rights over the pictures, negative rights without any geographical area restrictions and the rights so transferred is for a perpetual period and therefore, it would amount to sale and the provisions of Section 194J of the Act nor any provisions of the Act governing the tax deduction at source is applicable. The First Appellate Authority examined 14 such agreements, which appeared to be the same and on the same line and one such sample agreement dated 30.01.2008 has been filed before this Court;

++ from a perusal of the said agreement, it is seen that the first party to the agreement is the holder of the World Negative Rights and Copy Rights of Cinematography Telugu Feature Film and the said party was desirous of disposing of the World Negative Rights, satellite rights and all other rights pertaining to the said picture of any interested purchaser. The assesee expressed their desire to acquire the same from the said Kakatiya films and the terms and conditions of transfer, which was recorded by means of deed of transfer dated 30.01.2008. The total consideration payable under the agreement has been mentioned in clause (1) of the agreement;

++ from the conditions of transfer, it is seen that the total consideration payable is Rs.40 lakhs. On receipt of the payment as mentioned in Clause (1) above, M/s.Kakatiya films have assigned exclusive World Negative (picture and sound) Rights including theatrical and commercial rights of distribution, exhibition and exploitation of 35 mm though valid only after five years from the date of first theatrical release, 16 mm, 8 mm and any dimensions in all media performing rights and reproduce that film from the picture and sound negatives, etc. That apart, world satellite rights, satellite broadcasting service and Satellite Television Broadcasting Service and copy rights also stood transferred in favour of the assessee. Furthermore, such transfer was without restrictions to geographical area for a period of 99 years from the date of transfer deed. The Censor Certificate and all other papers and documents were also handed over to the assessee for their exclusive possession and enjoyment. The transferor undertook that they will not violate the agreement and permit the assessee to telecast the film without any liability and also undertook that they will not sell the VCD, DVD rights to any other party in future. Furthermore, on such transfer the assessee was entitled to assign their rights in part or full to other party at their sole and absolute discretion and the transferor was not entitled to claim for any revenue or consideration received by the assessee. There was a further declaration that they have not earlier transferred or assigned or alienated any right to third parties and the assessee will have full and absolute right to assign the copy right to broadcast the said film and there was also indemnity executed by the transferor in favour of the assessee. The said deed of transfer was irrevocable till the expiry of the period for 99 years. The schedule of the agreement also states that the period of the agreement is for a perpetual period of 99 years from the date of the said agreement;

++ it has to be seen as to whether the transfer effected in favour of the assessee would fall within Section 9(1) r/w Explanation (2)(v) to of the Act. Clause (vi) to Explanation (2) defines the "Royalty" to mean consideration (including any lump sum consideration, but excluding any consideration, which would be the income of the recipient chargeable under the Head Capital Gains) and in terms of Clause (v) to Explanation 2 of Section 9(1) of the Act, the transfer of all or any rights (including the granting of a licence) in respect of any copy right, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films. Therefore, to fall within the exclusion, as defined under clause (v) to Explanation (2) to Section 9(1) of the Act, if the consideration received as for the sale, distribution or exhibition of a cinematography film, then it would fall outside the scope of "Royalty" as defined under Explanation (2) in the proceedings;

++ in the preceding paragraphs, we have made an elaborate reference to the nature of transaction entered into by the assessee with the third parties. The sample transfer deed, clearly states that the transfer in favour of the assessee is for a perpetual period of 99 years. The party, who executed the agreement in favour of the assessee was desirous of disposing World Negative Rights, Satellite Television Rights and all other rights pertaining to the picture and the assessee enjoys the exclusive status, as the World Negative rights including theatrical rights owner. The assessee was also entitled to assign the said rights, which was transferred in their favour. Further the agreement was irrevocable and shall remain in force for a period of 99 years. In such a factual situation the nature of transaction, being a perpetual transfer for a period of 99 years, would undoubtedly fall within the scope of sale;

++ we have seen the various conditions contained in the sample transfer deed and there is a transfer of copy right in favour of the assessee. Though the agreement speaks of perpetual transfer for a period of 99 years, in terms of Section 26 of the Copy Right Act, 1957, in the case of cinematographic film, copy right shall subsist until 60 years from the beginning of the calendar year next following the year in which the film is published. Therefore, the agreement in the case on hand, is beyond the period of 60 years, for which the copy right would be valid, the document could only be treated as one of sale;

++ as far as the decision of the Co-ordinate Bench in the case of Balaji Communications, the rights which was the subject matter of the said decision were only for a period of 20 to 25 years and not of permanent nature. Therefore, the said decision is clearly distinguishable on facts and cannot be applied to the assessee's case;

++ in the light of the above discussion, we have no hesitation to hold that the findings of the First Appellate Authority was perfectly justified in holding that the transfer in favour of the assessee as sale and therefore, excluded from the definition of "Royalty" as defined under clause (v) to Explanation (2) of Section 9(1) of the Act.

++ in the result, the order of the Income Tax Appellate Tribunal shall stand set aside and the Tax Case(Appeal) is allowed.

(See 2013-TIOL-1090-HC-MAD-IT)