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Dy. Commissioner of Income Tax, Circle 13 (1) Hyderabad Versus Shri V. Rama Krishna Hyderabad

2015 (7) TMI 681 - ITAT HYDERABAD

Non deduction of TDS u/s 194J r.w.s. 9 of IT Act - payments made in the nature of royalty - Held that:- The transactions on account of the agreement between the producers and the assessee appears to be the sale of world negative rights on perpetual and permanent basis and the provisions of section 194J are not applicable and there is no liability to deduct tax at source. The disallowance made by the AO u/s 40(a)(ia) is to be deleted. See ACIT vs. Aishwarya Arts Creations (P) Ltd [2014 (12) TMI 1 .....

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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 .....

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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 furnished by the assessee, assessee has entered into agreement with the sellers as a assignee purchased rights of the films to be telecasted from the assignors (producers). As the assessee has not deducted tax at source as per the provisions of Sec.194J (payment for royalty) r. w .s. 9 of IT Act (Expla .....

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e, DVD, cable, video, negative*, television rights from producers and other right holders and sells them to TV channels and others for consideration. For him the activity is business only. From the AY 2007-2008 section 194 ] was amended and royalty was also included under professional payments and the assessee's business is brought into the. purview of section 194] under royalty. Royalty shall mean a sum of money paid to the right holder for the permitted use of such rights, (i.e, for short .....

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perty created by him in" form of a cinematography film. Hence this is deemed to be a sale instead of royalties (royalties are paid only for permitted usage of single or multiple rights, temporarily or for specified periods only). The term sound recording is also defined in the Copyright Act, 1957 to mean recording of sound from which sounds can be produced. Thus any music tracks of the films which are recorded and in respect of which the video rights are assigned would be sound recordings a .....

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han 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 .....

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me is rejected for the following reasons. a. It is seen from the very nature of the business assessee is in the business of trading of rights of films. He has purchased entire ownership of the film with exclusive world negative (picture and sound), rights including the theatrical, nontheatrical and commercial rights of distribution, exhibition and exploitation. However, the sale is not complete because exploitation of theoretical rights are still with the assignor for a period of five years. Hen .....

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r exclusive World Negative (Picture & Sound) Rights including the theatrical, non-theatrical and commercial rights of Distribution, Exhibition & Exploitation by 35MM(35MM rights are withheld by the ASSIGNORS for the first 5 (FIVE) years from the first release of the FILM in theatres) " A close look of the above narration shows that the substance of the transaction is in the nature of royalty but not a sale because acquiring entire ownership but limiting the same later on by giving r .....

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of rights with a period specific which is nothing but payment of royalty. c. It is also further seen that the same rights has been 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 gove .....

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hat 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 assignors for the first five years from the first release of the film in theatres and it was also mentioned that the assignors (the producer) transfers to the assignees (the ap .....

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mp; Hindi languages and except 35mm theoretical exploitation for the first five years from the first release of the film in theatres as the absolute ownership over the negatives (picture & sound) have been sold and transferred to the assignees under this agreement. 7. The CIT (A) noted that the agreement also speaks of irrevocable rights given to the assignees with respect to various rights including the sole and exclusive rights to collect the royalties and revenues from performing rights s .....

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asis from the date of signing of this agreement. The CIT (A) opined that all this points to absolute transfer of all rights in the film excluding the 35mm theatrical exploitation for the first 5 years from the date of release of the film, except this one right, that too, for a limited period after the expiry of which this right also gets transferred automatically in favour of the assessee without any further legal formality. Therefore the CIT (A) held that contention of the assessee that the tra .....

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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 agreem .....

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ease that particular right also vests with the assessee without any further agreement or deed to that effect and this does not mean that the other rights were not transferred absolutely. The CIT (A) stated that this shows that the assessee has received the absolute ownership of the rights over the film excluding one right for a limited period and upon the expiry of the limited period that right also vests with the appellant without any further act by the parties concerned. 9. The CIT (A) pointed .....

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e film he would not be paid royalty, rather the producer would be paid royalty. 10. The CIT (A) noted that the assessee has also filed confirmation letters from various producers from whom he purchased the world negative rights, who have confirmed that the sale of the world negative rights of various features films to the assessee has been accounted for in their books' as consideration for sale. 11. The CIT (A) concluded as follows: A perusal of the assessment records, show that the has show .....

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as stock purchases at ₹ 80 lakhs & sale at ₹ 88 lakhs and profit of ₹ 8 lakhs. All these leads to the conclusion that the assessee has traded in the film rights on outright purchase and sale basis. Even for argument's sake if it is not consideration for sale it is still a distribution right which is also 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 agreem .....

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cer 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 a .....

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J(1) defines royalty, by referring to the meaning given in clause (vi) of Explanation 2 to section 9(1). [Para 8] As can be seen from the provision extracted hereinabove, royalty as per clause (vi) would take within its ambit rendering of any services in connection with the activities referred in sub clauses (i) to (v). It is further evident from the aforesaid provision that payments made by assessee can only be classified within clauses (v) of the Explanation 2 to section 9(1). On careful readi .....

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clear that right over the films have been assigned in favour of assessee perpetually for a period of 99 years without any restriction of geographical area. It is further evident that the assignee has assigned all the rights without retaining any right, for a consideration. That being the case, the payment made by assessee to the producers for acquiring satellite rights is towards outright sale, distribution or exhibition of cinematographic films, which are specifically excluded under clause (v) .....

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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, exclu .....

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