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2016 (1) TMI 126 - ITAT KOLKATA

2016 (1) TMI 126 - ITAT KOLKATA - TMI - TDS u/s 194J - outright purchase of copyright - non deduction of TDS - Assessee in default - Held that:- The assessee is an Indian company engaged, inter alia, in the business of manufacture and sale of audio cassettes, CDs etc. and also in production of films/TV Serials and in its course of business activities assessee made payments for acquisition of copyright of music/films from the music producers, i.e. transfer of ownership of copyrights for a lump su .....

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Decided in favour of assessee. - ITA No. 1813/Kol/2009 - Dated:- 20-11-2015 - Mahavir Singh, JM And Waseem Ahmed, AM For the Appellant : Shri J P Khaitan & Shri Pratyush Jhunjhunwala, Advs For the Respondent : Shri R P Nag, JCIT, Sr DR ORDER Per Shri Mahavir Singh, JM This appeal by assessee is arising out of order of CIT(A)-XIX, Kolkata in Appeal No.445/CIT(A)-XIX/ACIT,Cir-59(TDS)/08-09 dated 24.08.2009. Assessment was framed by ACIT, Cir-59, Kolkata u/s. 201(1)/201(1A) r.w.s. 194J of the .....

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has raised following three effective grounds: "The grounds mentioned hereinafter are without prejudice to one another. 1(a). That on the facts and circumstances of the case, the learned CIT (Appeals) erred in upholding the action of the Assessing Officer in treating the appellant as assessee in default for the purpose of section 201 of the Act for not deducting TDS under section 194J of the Act on outright purchase of copyright. 1(b). That on the facts and circumstances of the case, the lea .....

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rred in confirming the decision of the Assessing Officer in charging interest under Section 201(lA) of the Act." 3. Briefly stated facts are that the assessee is engaged in the business of producing music cassette, CDs, DVDs etc. According to AO, the assessee is acquiring two types of music rights. Firstly, where the music rights are obtained for a specified period, royalty is paid to the producers/artists from time to time based on the terms of the agreement. Secondly, the music rights are .....

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these payments made in lump sum amount for outright purchase of music rights are payments in respect to purchase of assets and not payment of royalty. But the AO treated these payments as royalty and he observed that the assessee company is regularly deducting tax u/s. 194J of the Act on these royalty payments. According to AO, the lump sum payment of all or any right of artistic work is also considered as royalty for the purpose of section 194J of the Act and according to him, the assessee is i .....

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06.07 8,500,000 8,50,000/- 76,500/- Total For F/Year 2007-08 11,650.000 11,47,500/- 1,07,250/- Hence, the AO raised demand u/s. 201(1) of the Act for non-deduction of TDS at ₹ 11,47,500/- and consequent interest u/s. 201(1A) of the Act at ₹ 1,07,250/-. Aggrieved, assessee preferred appeal before CIT(A), who restricted the action of AO in respect of first four parties as given in the above chart except the fifth party namely Rituparna Ghosh Productions vide para 6 as under: "6. I .....

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00,000/-) as lump sum payments for music rights and film etc. while making the payment to aforesaid persons, the appellant has not deducted tax u/s. 194J of the I. T. Act. As per the A.O., the payment to the aforesaid persons was in the nature of payment of royalty and hence the appellant was required to deduct the tax u/s. 194J of the Act. According to the A.O. the appellant's case is covered under the clause (v) of Explanation-2 to clause (vi) of subsection (1) of Section 9. On the other h .....

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f Explanation-2 of section 9( l)(vi) of the 1. T. Act "Royalty" means consideration including a lump sum consideration - for the transfer of all or any rights in respect of any copyrights, 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 no including consideration for the sale, distribution or exhibition of cinematographic films. On perusal of copies of agreements betwee .....

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e together with the sound recordings. However, in the case of payment to Rituparno Ghosh Productions, the payment has been made for purchase of all exclusive copyrights of the film "Khela". Thus, the payment of ₹ 85,00,000/- made to Rituparno Ghosh Productions cannot be treated as payment of royalty covered under clause (v) of Explanation-2 of section 9(1)(vi) of the 1. T. Act. In view of above, the A.O. is directed to delete the tax demand of ₹ 8,50,000/- raised u/s. 201(1 .....

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cassette, CDs etc. and also production of films/TV Serials etc. During the course of business activity of the assessee it has to make the payments for the following:- (i) acquisition of music/film rights for a specific period and payment of royalty to the music producers or artist from time to time. ii) acquisition of copyrights of music/films from the music producers i.e. transfer of ownership of copyright for a lump sum consideration. The assessee claimed before us that in respect to item (i) .....

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he drew our attention to the primary clause (A) and (C) of the agreement (which is enclosed in assessee's paper book at page 48), which reads as under: "A. The Assignor by virtue of an agreement dated 7th February 2007 has obtained from M/s. Parker Bros., the sole and exclusive assignment of copyrights and all other rights in the Sound Recordings together with that of the Literary, Musical, Dramatic, Artistic works embodied in the Cinematograph Film ÄMMUVAGIYA NAAN" in Tamil l .....

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tion of this Agreement vest in the Assignor, and the Company, relying on the aforesaid representation and assurances of the Assignor, has agreed to acquire, transfer and assign to itself the same in perpetuity at our for the consideration and upon the terms and conditions set out hereunder." Ld. Counsel for the assessee at the same page drew our attention to clause 1(1) i.e. contract for works and the relevant clause reads as under: "1.1 'Contract Works' shall mean all works of .....

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e Territory for the full copyright period as per the Copyright Act, 1957, as amended from time to time. The Company can exercise these rights at any time throughout the territory solely at the Company's discretion." According to him, the assessee company will be the owner of original plate within the meaning of Copyright Act, 1957 and any extension or modification thereof of any performance/works in pursuance of this agreement will be that of the assessee. For this, he drew our attentio .....

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3,50,000/- (Three Lakhs Fifty Thousand Rupees) only, being the all-inclusive amount for acquisition of all rights in the Contract Works for their exploitation in the Territory, as per schedule as follows: i. On execution of this Agreement Rs.1,00,000/- ii. On hand over of the DAT/Master/Digibeta/Betacam to Company Rs.2,50,000/- Total Rs.3,50,000/-" In the eventuality of any violation in terms and conditions, the assessee company being owner of copyrights and all other rights is free to init .....

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the purpose of enforcement and protection of its rights assigned to it under the terms and conditions of this Agreement or against any person who has committed any act of commission or omission whereby the Company's rights and interests under this Agreement are adversely affected." In view of this clause of the agreement, Ld. Counsel for the assessee argued that this is outright purchase and nothing else and once this is outright purchase of copyright, which does not fall under the def .....

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ival submissions and gone through facts and circumstances of the case. We have gone through the entire clause of the agreement and it is seen that the assessee has outright purchased the copyrights and payments for such outright purchase of copyrights was made in lump-sum. We also find that revenue has not contradicted the factum of outright purchase of copyrights by the assessee. The assessee has also treated such payments capital expenditure and not claimed as revenue in nature. All the agreem .....

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planation 2 to sec. 9(1)(vi) of the Act or not? For the better appreciation of law involving the present case, it is worthwhile to go through the definition of royalty as provided in explanation 2 to section 9(1)(vi) of the Act, which reads as following: "Explanation 2.-For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capita .....

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; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;] (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for us .....

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of the right in respect of the property. We are of the view that these two types of transfers are distinct and have different legal effect. The first category of rights are purchased, which enables use of those rights, while the second category no purchase is involved but only right to use has been granted. Ownership denotes the relationship between a person and an object forming subject matter of ownership. This consists of rights, all of which are right in rem, being good against the entire wo .....

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in the matter. That sum may be agreed for the transfer of the one right, two rights but not the ownership of the asset. Thus the definition of term royalty in respect to copyright, literary, artistic or scientific work, patent, inventions, process etc. does not extend to the outright purchase of the right to use an asset. In the case of the royalty, the ownership of the property or rights remains with the owner and the transferee is permitted to use the right in respect of such property. A payme .....

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d referred to the following para at page 377: "55. Keeping in view the aforesaid principles, we now embark upon the interpretative process in defining the ambit and scope of term royalty appearing in Explanation 2 to subclause (vi) of Section 9(1) of the Act. Sub-clause (i) deals with the transfer of all or any rights (including the granting of a licence) in respect of a patent, etc. Thus, what this sub- right in the property. The two transfers are distinct and have different legal effects. .....

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held by the Supreme Court in the case of Swadeshi Ranjan Sinha Vs. Hardev Banerjee [AIR 1992 SC 1590]. When rights in respect of a property are transferred and not the rights in the property, there is no transfer of the rights in rem which may be good against the world but not against the transferor. In that case, the transferee does not have the rights which are indeterminate in duration and residuary in character. Lump sum consideration is not decisive of the matter. That sum may be agreed fo .....

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ship of rights transferred is not a payment for the use of something belonging to another party and, therefore, no royalty. In an outright transfer to be treated as sale of property as opposed to licence, alienation of all rights in the property is necessary." 9. Ld. Counsel for the assessee also relied on the decision of Hon'ble Telengana & Andhra Pradesh High court in the case of CIT Vs. Andhra Petrochemicals Ltd. (2015) 373 ITR 207 (T&AP), wherein the very nature of sum payab .....

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oyalty. On cessation of the arrangement, the user loses the right and the owner of the facility gets full and absolute control over it. A note of caution need to be added here. Though the royalty is required to be paid periodically during the subsistence of the arrangement, it is quite possible for the parties to agree for payment of a lump sum. However, a lump sum payment would answer the description of royalty, if only it is referable to a fixed period for which the facility can be utilised. A .....

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a patent for the privilege of manufacturing or using the patented article ; Royalty is a tax or duty paid to the owner of a patent for the priv ilege of manufacturing or using the patented article ; something pro portionate to the use of a patented device, in other words, a kind of exercise, specific sums paid annually, or at other stated periods, for the right to use a patented device, whether it is used much or little or not at all. 'Royalty' is the most appropriate word to apply to re .....

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m is commonly used to designate the share of the proceeds of property paid to a person having some proprietary or creative interest therein by another who has obtained from the payee an absolute or qualified ownership of such property. It has been defined as a tax or duty paid to the owner of a patent for the privilege of manufacturing or asing the patented article ; rental ; something proportionate to the use of a patented device ; in other words, a kind of exercise ; specific sums paid annu al .....

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e compensation provided for the privilege of drilling for oil and gas, and consists of a share in the oil and gas produced under existing leases ; the share of the product or profit paid to the owner of the property. As applied to an existing lease, a share in the oil and gas produced, but the term does not include a perpetual interest in the oil and gas in the ground." 19. If these tests are applied to the amount that is paid by the respondent to the foreign company, it becomes difficult t .....

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