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2017 (1) TMI 1396 - AT - Income TaxTreatment to transaction as sale of goods - payment of royalty to the assessee - Home video licensing rights were to come back to the assessee after a period of 6 years - Held that - The agreement could be terminated within a period of 6 years and amount had to be refunded. The assessee had allowed licensee to use the rights and therefore the payment received by it has to be treated as royalty. The assessee is following mercantile system of accounting and is entitled to recognise his revenue on accrual basis. The rights of the TV Serial were to come back to the assessee after a period of 6 years. Thus it is not a case of sale. But receipt is directly related to royalty received by the assessee from the licensee. AS-9 allows deferment of royalty income. Thus in our opinion the assessee had rightly offered the incomes in six AY s proportionately. Therefore reversing the order of the FAA and considering the peculiar facts and circumstances of the case we decide the effective Ground of appeal in favour of the assessee.
Issues:
1. Addition of income based on agreement for sale of a TV serial. 2. Interpretation of terms of the agreement and recognition of income. 3. Treatment of payment received as royalty or sale consideration. 4. Application of Accounting Standard-9 on recognition of income. 5. Discrepancy in taxation of the same income in multiple assessment years. Issue 1: Addition of income based on TV serial agreement The Assessing Officer (AO) added Rs. 41.66 lakhs to the assessee's income, as the assessee had entered into an agreement for the sale of a TV serial. The AO found that the entire consideration fructified on the date of signing the agreement, leading to the addition of the said amount to the income declared by the assessee. Issue 2: Interpretation of agreement terms and income recognition The AO held that the terms of the agreement did not allow for deferment of income and that the entire consideration was received during the year. The First Appellate Authority (FAA) also upheld this view, stating that the assessee had sold his rights to the licensee, and the consideration received constituted income for the year under consideration. Issue 3: Treatment of payment as royalty or sale consideration During the appeal before the ITAT, the Authorized Representative argued that the payment received was royalty for the use of rights, not sale consideration. The ITAT examined the agreement terms and concluded that the payment was related to royalty, as the rights were to revert to the assessee after 6 years. Issue 4: Application of Accounting Standard-9 The ITAT considered Accounting Standard-9, which allows for the deferment of royalty income. It noted that the assessee had recognized income proportionately over six assessment years, in line with the mercantile system of accounting and accrual basis. Issue 5: Discrepancy in taxation of the same income The ITAT observed that the same income had been taxed in multiple assessment years, leading to double taxation. The ITAT reviewed the agreement terms, recognized the nature of the payment as royalty, and allowed the assessee's appeal, deciding the effective ground of appeal in favor of the assessee. In conclusion, the ITAT allowed the appeal filed by the assessee, reversing the order of the FAA based on the peculiar facts and circumstances of the case, and recognizing the income as royalty over a period of six assessment years.
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