TMI Blog2015 (7) TMI 681X X X X Extracts X X X X X X X X Extracts X X X X ..... , dated 13.10.2011 relating to A.Ys 2008-09 and 1010-11 respectively. 2. Briefly stated, the assessee is a trader in films and film rights. During assessment proceedings AO observed from the 3CD report submitted by the assessee along with the return of income that the assessee has deducted tax at source to the extent of ₹ 66,66,595 u/s 194J while making payment of ₹ 6,48,85,347, but not paid the tax deducted to the govt. account. By applying the provisions of section 40(a)(ia), the AO has disallowed an amount of ₹ 6,48,85,347/-. While making the disallowance, the AO has observed that the assessee paid royalty for film rights to the producers and collected royalty on transfer of rights to various TV channels. The persons who have received the rights from the assessee have paid the amounts after deducting the tax at source u/s.194J of the IT Act. 3. The AO has also disallowed ₹ 10,78,32,153/- u/s. 40(a)(ia) for non deduction of tax at source on the ground that the payments made were in the nature of royalty. The AO has stated it is seen from the P L account assessee has purchased film rights to the extent of ₹ 17,27,17,500/-. As per the agreements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27 of the copyrights Act, 1957 the copyright in: a. Cinematograph films subsist until 60 years from the beginning of the calendar year next following the year in which the film is published and b. Sound recordings subsist until 60 years from the beginning of the calendar year next following the year in which the sound recording is published. Thus where the copy right in the cinematograph film is assigned for periods longer than 60 years it would be regarded as permanent transfer and the intention is transfer of the rights to use the film rather than providing service. In the case of transfer of copyright in cinematograph film for a period of less than 60 years from the beginning of the calendar year next to the year in which the sound recording/cinematograph is published, the transfer is temporary in nature and such rights would again vests with the original owner after the expiry of the assigned period. It is not a transfer in the right to use the goods but is a temporary transfer of rights. But when the transfer is for perpetual period or 99 years or when negative rights are transferred then it amounts sale but not royalty. Hence the assessee has not dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en given to various television channels and the buyers has deducted TDS on the payments made to the assessee. Hence, it is the common practice followed in this trade 2. Hence assessee has to deduct TDS on all the payments made or credited of ₹ 17,27,17,500/-. However, assessee-has deducted TDS on amount of payment of ₹ 6,48,85,345/- but not paid to the government account. This amount has been separately added in para no. 4. Now, the rest of the amount of ₹ 10,78,32,153/added u/sAO(a)(ia) for not deducting tax at source as the payments made are in the nature of royalty . 6. Aggrieved, assessee preferred appeal before the CIT (A). The CIT (A) held that the agreement deed between the assessee and the producer of the film John Apparao 40 plus which was referred to by the AO has also been carefully perused by him. The CIT (A) stated that as per the agreement it was agreed to transfer by way of sale the entire ownership of the film along with their exclusive world negative (picture sound) rights including the theoretical and non-theoretical and commercial rights of distribution, exhibition and exploitation by 35 mm(35mm rights are withheld by the assignor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other hand applied the provisions of section 194J r.w.s.9. The CIT (A) further noted that the AO also observed that the substance of the transaction is in the nature of royalty but not a sale because acquiring the entire ownership but limiting the same later on giving rights for five years from the first release of the film were totally contradictory to each other. Therefore he held that it was not an absolute sale and therefore the payments were towards royalty. The CIT (A) pointed out that this argument of the AO does not have merit because as pointed out by the assessee the world negative right which was sold was not an indivisible commodity or goods this comprises of innumerable distinct, identifiable and valuable rights as mentioned in the agreement which can be exploited separately and withholding of one such right for use for a term of five years (theoretical right in respect of 35mm film) with the consent of both the parties does not affect the character of sale of other rights. The CIT (A) observed that even the limiting the ownership in respect of first five years of theoretical exhibition of the film to the producer also does not restrict the right of the assessee p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excluded from the ambit of royalty as per d. (v) to Expl 2 to section 9 (l)(vi) of the IT Act. In view of the discussion above, the transaction on account of the agreement between the producers and the appellant appears to be the sale of world negative rights on perpetual and permanent basis and the provisions of Sec. 194J are not applicable and there is no liability to deduct tax at source therefore the disallowance made by the AO u/s. 40(a)(ia) is unwarranted and is therefore ordered to be deleted . 12. Aggrieved, Department is in appeal before us and has raised the following grounds: 1. The learned CIT(A) ought to have upheld the order of the Assessing Officer on the disallowance made U/s 40(a)(ia) treating the payment for purchases as royalty. 2. The CIT(A) erred in treating the transaction with regard to satellite rights as outright sale/purchase ignoring the fact that there are no rights passed on for the first five years. 3. Without prejudice to the above, the learned CIT(A) ought to have treated the payment made for exploitation of satellite rights by the assessee as acquisition of intangible asset and allowed depreciation @ 25% rather than allowing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Alaguvel vs. DCIT dated 21.07.2014 (52 Taxmann.com 231 (Madras) supports the view taken by the Hyderabad Bench wherein it has been held as follows: On earlier occasion, the Division Bench of the High Court in Mrs. K. Bhagyalakshmi v. Dy. CIT (2014) 221 Taxman 225 (2013) 40 taxmann.com 350 has considered elaborately the perpetual transfer of rights for a period of 99 years in terms of section 26 of Copyright Act and also the definition under clause (5) to Explanation 2 of section 9(1)(vi) in relation to royalty and had come to conclusion that transfer in favour of assessee is a sale and, therefore, excluded from definition of royalty under section 9(1)( vi). Explanation 2. [Para 17]. Therefore, the Tribunal erred in concluding that payment made by the assessee was royalty and not sale. [Para 17) . 15. Since the facts in the present case are similar, following the decision of the Coordinate Bench of the Hyderabad Tribunal and the decision of the Hon'ble Madras High Court in the case of Mrs. K. Bhagyalakshmi v. Dy. CIT (2014) 221 Taxman 225 (2013) 40 taxmann.com 350, we are of the opinion that the transactions on account of the agreement between the producers and the as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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