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2016 (6) TMI 419 - ITAT HYDERABAD

2016 (6) TMI 419 - ITAT HYDERABAD - TMI - Allowability of the non-compete fee and the depreciation thereon - Held that:- We find that on demerger of the parent company, the assessee has succeeded to the issue of the depreciation on non-compete fee as well and therefore, the decision of the Tribunal for the A.Y. 2008-2009 (cited supra) on the very same issue would be consequential and applicable to the facts of the case before us. This appeal before us being for the subsequent assessment year, al .....

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hood of these resources being a possible source of revenue, cannot in the opinion of this Court justify its inclusion in the capital stream.

Disallowance of depreciation on film software library - Held that:- We find that this issue has arisen for the first time in the assessment year 2007-2008 when M/s. Ushodaya Enterprises P. Ltd., had taken over the business of M/s. Ushakiran Movies and M/s. Ushakiran Television. The issue had come up for adjudication before the A Bench of this .....

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terprises Limited. Therefore, this issue is also remitted to the file of the A.O. with a direction to give consequential effect after a decision is taken in the case of M/s. Ushodaya Enterprises Limited in accordance with the directions of the Tribunal. - Decided in favour of assessee for statistical purposes. - ITA.No.466/Hyd/2015, ITA.No.1249/Hyd/2015 - Dated:- 24-3-2016 - SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER For the Appellant :Mr. Arvind Sonde For t .....

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prises P. Limited. M/s. Ushodaya Enterprises P. Ltd., was in the business of producing and telecasting entertainment/news/ information programmes under the trade name of ETV and got demerged its Television business into three companies namely (1) M/s. Eenadu Television P. Ltd., (2) M/s. Prism TV P. Ltd., and (3) M/s. Panorama Television P. Ltd. The scheme of demerger was approved by the Hon ble High Court of A.P. vide order dated 15th December, 2010 w.e.f. 1st April, 2010. The non-telugu channel .....

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Ushodaya Enterprises P. Ltd., which is the parent company of M/s. Prism TV P. Ltd., acquired M/s. Ushakiran Television and M/s. Ushakiran Movies and that it entered into a non-compete agreement with M/s. Ushakiran Television and M/s. Ushakiran Movies on 30.01.2008 for non-competing in the business directly or indirectly for a period of five years from the date of agreement and accordingly, in the previous year relevant to the A.Y. 2008-09, the assessee company paid an amount of ₹ 670 cror .....

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educe the tax burden of M/s. Ushodaya Enterprises P. Ltd., in the guise of payment of non-compete fee to HUF concerns having huge brought forward losses. While disallowing the depreciation on the non-compete fee, the A.O. also discussed about the necessity of the non-compete fee and the valuation done for arriving at the huge figure of ₹ 670 crores in the hands of M/s. Ushodaya Enterprises P. Ltd., and allowability of depreciation on non-compete fee. He, therefore, disallowed the claim of .....

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prises P. Ltd., on its demerger and therefore, the decision of the Tribunal in the case of Ushodaya Enterprises P. Ltd., vs., ACIT, Circle-16(2), Hyderabad for the earlier assessment year i.e., A.Y. 2008-09 in ITA.No.26/Hyd/2011 and ITA.No.100/Hyd/2012 dated 22.10.2014 is very much applicable to the facts of the case before us. He has filed a copy of the said judgment before us wherein the Tribunal has remanded the issue to the file of the A.O. to examine the genuineness of the non-compete fee a .....

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that the Tribunal at paras 25 to 28 of its order has held as under : 25. We have heard the submissions of the parties and perused the orders of revenue authorities as well as other materials on record and also gone through the decisions cited. A perusal of the assessment order as well as the order passed by CIT(A) would leave no room for doubt that assessee s claim of depreciation on non-compete fee has been rejected basically for the following two reasons: 1. Genuineness of the payment made and .....

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reated the agreement entered into between assessee for payment of non-compete fee as a sham transaction as Shri Ramoji Rao is not only the owner of UKT and UKM being the karta of HUF to which these concerns belong but he also in his individual capacity is the Chairman of the assessee company. As such, assessee cannot be considered to be competing with himself. As it is an arrangement between related parties, there is no necessity for payment of noncompete fee. AO further observed that the assess .....

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ny, therefore, there is no question of paying non-compete fee as a person cannot compete with himself. Of course the CIT()A) has also held that as non-compete fee does not provide any asset of enduring nature, deprecation cannot be allowed. In this context, it is to be noted that assessee on 25/01/2008 has entered into subscription agreement and share purchase agreement with a domestic company, Viz.; Equator Trading Enterprises Pvt. Ltd. as per which the said domestic company agreed to make subs .....

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e 220 of paper book, we find a reference to such precondition in clause 2(a). Further, as it appears from the fact on record and which remains uncontroverted in pursuance to the condition imposed by the domestic investor assessee has entered into the non compete agreement with UKT and UKM for a period of 5 years on payment of noncompete fee of ₹ 670 crores, which is also approved by the domestic investor. It is the contention of assessee that as a result of fulfillment of such condition of .....

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yment of non-compete fee is not genuine or there is no necessity for paying the non-compete fee as the same person is controlling both the assessee company and the two other companies acquired by the assessee, the role of M/s Equator Trading Enterprises Pvt. Ltd. in any decision taken by assessee company has not at all been considered. Neither the AO nor the CIT(A) has examined the effect of acquisition of 39% of equity shares by another entity and whether after such acquisition of shares, it ca .....

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pete fee. However, such inference drawn by AO, in our view, is more on presumptions and surmises rather than on the basis of strong evidence. When two independent parties enter into an agreement on certain terms and conditions, it cannot be termed as sham or collusive without bringing sufficient evidence to prove such fact. AO cannot treat the transaction as a colourable device adopted by the parties merely on presumptions and surmises without proving the fact that either the promoters of both t .....

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s no necessity of payment of non-compete fee as the same person is controlling the assessee company as well as UKT and UKM, in our view, is without proper appreciation of facts and evidences brought on record, hence, cannot be sustained. 28. Even though the AO in the assessment order has also raised the issue of payment of non-compete fee for the purpose of setting off the loss sustained by the HUF and also has questioned the value of noncompete fee but the learned CIT(A) has not at all dealt wi .....

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lleged by the AO that the payment of non-compete fee was made on the one hand to enable the assessee to reduce its profit and at the same time allowing Shri Ramoji Rao HUF to adjust it against its huge brought forward losses. In this context, it is to be observed that in course of hearing before us the learned AR has submitted certain documents as additional evidence. A perusal of the said documents reveal that Shri Ramoji Rao HUF for the assessment year 2008-09 has not only shown the non compet .....

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sses, it needs to be examined whether still the payment of non-compete fee made by the assessee to Shri Ramoji Rao HUF can be held to be either non-genuine or not necessary. Therefore, considering the totality of the facts and circumstances we are of the view that as the impact of acquisition of 39% of equity shares by M/s Equator Trading Enterprises Pvt. Ltd. has not at all been examined by AO at the time of assessment proceeding or by the learned CIT(A) while disposing of assessee s appeal and .....

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or the A.Y. 2009-2010. This ground of appeal is accordingly treated as allowed for statistical purposes. 6. As regards ground No.2, against the treating of the cost of production of TV serials and programmes as capital expenditure, brief facts are that the assessee company debited an amount of ₹ 123,63,94,000 towards cost of production of TV serials and programmes for the year under consideration. Instead of claiming depreciation, the entire expenditure was claimed as revenue expenditure a .....

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or the assessee, while reiterating the submissions made by the assessee before the authorities below, has relied upon the decision of the Coordinate Bench of this Tribunal at Chennai and Mumbai and also the decision of Hon ble High Court at Delhi in support of his contention that the expenditure incurred on production of television programmes should be allowed as revenue expenditure under section 37 of the I.T. Act. Copies of the said decisions are also filed before us. 8. The Ld. D.R. on the ot .....

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telecast films, serials etc., through satellite channels. The rights over these films are purchased from the producers of the respective films for broadcasting through satellite television. These rights come with an embargo that the films shall not be broadcasted or aired for a specified period from the date of release in theatres depending upon the success at the box office and other factors. Till the time, such films are broadcasted, they are to be treated as stock in trade. Once the films ar .....

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arned from the subsequent telecasts is offered as income without claiming any expenditure. The assessee also generates revenue from broadcasting serials through satellite channels. The assessee gets revenue from production and broadcasting serials on the lines of feature films, the rights of broadcasting such serials are also treated as stock in trade till the time they are aired and the expenses are debited to the Profit & Loss account. The assessee treats the films and the serials at par a .....

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they do not expire on the date of first telecast as contemplated by the assessee. The rights are intangible assets within the meaning of Explanation (iii) to Section 32 and do not fall within the purview of Section 37(1). The assessee is entitled to claim depreciation on same. 9. The issue of amortization of cost of movie and serial rights, programme production expenses, consumable and media expenses by treating them as intangible assets u/s.32(1)(ii) has been dealt in detail by the CIT (Appeals .....

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in the case of CIT Vs. Global Vantedge (P) Ltd., reported as 354 ITR 21 (Del). The Id. DR has not been able to controvert the well reasoned order of the CIT (Appeals) on the issue. Accordingly, the findings of the CIT (Appeals) on the issue are affirmed and this ground of appeal of the Revenue in respect of all the AYs is dismissed. 9.1. In the case of Zee Media Corporation Ltd., (Formerly known Zee News Limited), Mumbai vs. DCIT, Circle-7(3), Mumbai, the G Bench of Tribunal at Mumbai in ITA.No .....

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ws items purchased are debited to the P and L account as they do not have the repeat telecast value, other items like the TV program and the film rights constitutes 'current assets', which are amortised over the years and the period of such amortization is given in the said Note. Per contra, the case of the revenue on these issues is that these items constitute 'intangible depreciable capital assets' and provisions of section 32 of the Act apply. Considering the same, we shall no .....

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erms of the revenue generation by way of advertisement from the sponsors. As such, it is a settled issue at the level of Hon'ble Delhi High Court in the case of Television Eighteen India Ltd (supra) that the claims of the assessee relating to news/non-fictional items are allowable. Even otherwise, even if some income generated, that is not criterion for describing the items as 'intangible assets' for the purpose of invoking the provisions of section 32(ii) of the Act. We rely on the .....

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reasoning. Therefore, considering all the points mentioned above, we are of the firm opinion that the decision of the AO/CIT(A) is unsustainable legally. Hence, the assessee is entitled to claim the purchases of news items/non-fictional items as an allowable expenditure. Accordingly, we direct the AO to delete the relevant addition. b. On the debits relating to the purchases of the TV Programs/Film rights: Assessee amortised the 'inventories' as per the method of accounting consistently .....

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We find similar issue of amortization of the TV Programs/Film rights came up before the Chennai Bench of the Tribunal wherein the issue was decided in favour of the assessee and rejected the AD's proposal to invoke the provisions of section 32(ii) of the Act in respect of the above programs/rights. As such, the Ld DR's argument on the applicability of the AS-26 to the TV Programs and Film rights is not supported by any precedents and therefore, the arguments raised by the Revenue are not .....

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s followed the judgment of the Hon ble Delhi High Court in the case of CIT vs. Television Eighteen India Limited reported in (2014) 364 ITR 597 (Del.). The relevant portion of the judgment of the Hon ble Delhi High Court is reproduced as under : The revenue has preferred this appeal claiming to be aggrieved by an order of the Income Tax Appellant Tribunal (ITAT) dated 17.03.2006. The question of law framed in this case is:- (i) Whether the Income Tax Appellate Tribunal was right in holding that .....

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sets. In the return filed by the assessee for the Assessment Year 1997, the said amount was claimed as revenue expenditure. According to the assessee this expenditure was allocated for the creation of news achieves , which comprised of its published or telecasted programmes. The AO capitalised this amount holding that the expenditure led to creation of an asset of enduring advantage. The CIT (Appeals) on appeal, however, reversed the findings of the AO. It was noticed that the news archives were .....

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12. It is admitted that no separate account was maintained wherein any expenditure was debited which could be earmarked towards creation of News Archives library. The assessee felt a part of footage of the news based on programmes produced has repeat value which could be used for the production of programme in future. The assessee, therefore, estimated 10% expenditure incurred as reasonable to be attributable to the News Archives library. The assessee has been engaged in the production of such .....

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hat perspective, we are of the opinion that the estimated value assigned to the News Archives cannot be treated to be an expenditure incurred in the capital field. We, therefore, uphold the order of CIT (A) on this ground. In this case, there is no dispute that the data base of the programmes which are utilised for the creation of news archives belonged to the assessee. The future likelihood of these resources being a possible source of revenue, cannot in the opinion of this Court justify its in .....

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