TAX CASE (APPEAL) No.748 of 2013
M.P. No. 1 of 2013

MRS. CHITRA VENKATARAMAN AND T.S. SIVAGNANAM, JJ.

Suhrith Parthasarathy for the Appellant.
S. Swaminathan for the Respondent.

JUDGMENT

T.S. Sivagnanam, J. - This appeal by the assessee is directed against the order passed by the Income Tax Appellate Tribunal, Chennai "D" Bench dated 30.09.2013 in ITA No.1289/Mds/13 for the assessment year 2009-2010.

2. The assessee is a person carrying on business in the purchase and sale of Telugu films. The assessee filed return of income for the assessment year 2009-2010 on 29.09.2009 admitting a total income of Rs.33,10,829/-. The case was selected for scrutiny and a notice under Section 143(2)of the Income Tax Act, 1961 [The Act] was issued on 24.08.2010. The assessment proceedings were completed under Section 143(3) of the Act and the order of assessment dated 29.12.2011 was passed. The Assessing Officer made various additions, viz., (a) an addition of Rs.52,884/- as disallowance under Section 69C of the Act; (b) an addition of Rs.4,00,000/- on the advance received, which was treated as income; (c) disallowance of Rs.8,268/- under Section 14A r/w Rule 8D of the Income Tax Rules, 1962; (d) disallowance of Rs.7,16,15,000/- for non-deduction of TDS under Section 194J of the Act and (e) an addition of Rs.40,07,949/- on the basis of a disallowance of loan credit. Accordingly, the total income of the assessee was assessed at Rs.7,93,94,930/- and the total demand was calculated at Rs.2,75,87,552/-.

3. The assessee preferred appeal to the Commissioner of Income Tax (Appeals). The First Appellate Authority by order dated 27.12.2012 allowed the appeal in part by deleting the addition made under Section 69C of the Act and also reversed the finding of the Assessing Officer, which made a disallowance of Rs.7,16,15,000/- for non-deduction of TDS under Section 194J of the Act by invoking Section 40(a)(ia) of the Act. The Assessing Officer disallowed the said deduction of TDS under Section 194J of the Act on the ground that the purchase of film rights fell under the term "Royalty" and that the agreement entered into between the assessee with respect to purchase of film rights was termed as an assignment agreement and the assignee of the satellite rights and the person who transferred such rights was the assignor and such rights were given for a period of 99 years. Therefore, the Assessing Officer had concluded that it is not a sale but a mere grant of satellite right in the movie produced by the assignor and the payments made for transfer of such rights fall within the meaning of "Royalty". The First Appellate Authority while reversing the finding given by the Assessing Officer held that the payments made by the assessee could not be termed as 'Royalty' as they are not covered by Explanation 2 to Clause (vi) of Section 9(1) of the Act and the payment were covered by Section 28 of the Act as trading expenses and there was no scope for invoking Section 40(a)(ia) of the Act and therefore the First Appellate Authority held that the payments for acquiring of the film rights were not exigible for deduction of Tax at Source under Section 194J of the Act as they did not qualify as 'Royalty'.

4. Aggrieved by such order, the Revenue preferred appeal before the Income Tax Appellate Tribunal [The Tribunal]. The Revenue contended that a perusal of the agreement would show that there was no purchase or sale, but a mere assignment of certain rights and the assessee was obligated to deduct tax at source under Section 194J of the Act at the time of making payment and having failed to effect deduction of tax at source, the assessee was liable for disallowance under Section 40(a)(ia)of the Act.

5. The assessee filed a Cross Objection before the Tribunal against that portion of the order of the First Appellate Authority, which was not in favour of the assessee. In the said Cross Objection, the assessee contended that the so called assignment agreement involved purchase of the copy right itself and is not in any way transfer of all or any other rights but transfer of copy right itself, which is a specific product, comprising a bundle of right. Further the assessee contended that the rights acquired was for 99 years and in terms of Section 26 of the CopyRight Act, 1957 the copy right would be valid and subsisted only for a period of 60 years and consequently any payment made towards cost of acquisition cannot be termed as 'Royalty'. Therefore the assessee submitted that neither Section 40(a)(ia) nor Section 194J of the Act would have any applicability to the assessment. The Tribunal by order dated 30.09.2013, allowed the appeal filed by the Revenue in part. Accepting the submission of the Revenue, the Tribunal held that the First Appellate Authority has erred in deleting the disallowance under Section 40(a)(ia) of the Act. For arriving at such a finding, reliance was placed on the decision of the Co-ordinate Bench of the Tribunal in the case of Asstt. CIT v. Shri Balaji Communications [2003] 140 ITD 687/30 taxmann.com 100 (Chennai) and by relying upon the said decision, the Tribunal concluded that the payments made by the assessee amounted to 'Royalty' as defined in Explanation 2 to clause (vi) of Section 9(1) of the Act. Hence, the Tribunal held that the assessee failed to deduct the tax at source under Section 194J of the Act and therefore, the disallowance made by the Assessing Officer under Section 40 (a)(ia) of the Act was correct.

6. Aggrieved by such order passed by the Tribunal, the assessee has filed this appeal and seeks admission of the Tax Case on the following substantial questions of law:

7. Before, we go into the contentions raised on either side, it has to be pointed out that if question No.3 as framed supra is answered in favour of the assessee and it is held that the payment made by the assessee were not 'Royalty', there would be no necessity to answer the other questions raised by the assessee.

8. Mr. Suhrith Parthasarathy, learned counsel appearing for the assessee after referring to the findings rendered by the First Appellate Authority submitted that under Explanation 2 to Clause (vi) of Section 9(1) of the Act, "Royalty" means consideration (including any lump sum consideration, but excluding any consideration, which would be the income of the recipient chargeable under the Head Capital Gains) for the transfer of all or any rights including granting of a licence in respect of any copy right, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films. By placing emphasis on the second limb of the Explanation and by referring to the various conditions and covenants contained in the agreement entered into between the assessee and the owner of the film, it is submitted that the assessee had purchased the world negative rights for a period of 99 years and the rights transferred included theatrical and commercial rights, falling within the exception created in Explanation (2) and the consideration paid for the sale of such rights stands excluded in terms of the said Explanation.

9. Learned counsel appearing for the assessee also referred to various other conditions in the agreement and submitted that the transfer in favour of the assessee is a transfer in perpetuity. Reference was also made to Section 26 of the Copy Right Act, 1957. Learned counsel for the assessee further submitted that the Tribunal placed reliance on its Co-ordinate Bench decision in the case of Shri Balaji Communications (supra) and the said decision is not applicable to the facts of the present case as the rights which was transferred in the said case were only for a period of 20 to 25 years and the Tribunal found that such transfer was not permanent. Therefore, the said decision is clearly distinguishable on facts.

10. Learned Standing Counsel appearing for the Revenue sought to sustain the order passed by the Tribunal. Learned Standing Counsel referring to the sample transfer deed dated 30.01.2008 filed by the assessee, which was entered into between the assessee and one Ms. Kakatiya Films and the terms of the agreement contained therein, submitted that it is only a licence, which has been granted in favour of the assessee and it is not a sale and there were several conditions in the agreement and it cannot be construed as an absolute transfer and therefore, the finding rendered by the Tribunal is fully justified. Further the learned Standing Counsel submitted that the Tribunal after going through the terms and conditions of the licence agreement had concluded that the rights, which was transferred to the assessee had not been transferred fully and there are certain restrictions and unless the transfer was absolute and unconditional it would not fall within the definition of sale and therefore, the Tribunal was justified in reversing the order passed by the First Appellate Authority in holding that the payments made by the assessee would amount to "Royalty".

11. We have considered the submissions made on either side and perused the materials placed on record. As stated above, we shall first take up for consideration question No.3 which is as follows:

"3. Whether the learned Income Tax Appellate Tribunal erred in concluding that the payments made by the appellant were tantamount to Royalty?"

12. The assessee is in the business of purchase and sale of television rights for films and filed the return of income for the assessment year 2009-2010. The said return was selected for scrutiny and after issuing notice under Section 143(2) of the Act and after hearing the assessee, an order of assessment was passed on 29.12.2011. Aggrieved by such order, the assessee preferred appeal to the First Appellate Authority wherein the assessee contended that even according to the Assessing Officer, the nature of business of the assessee is purchase and sale of satellite Television rights of the films and on going through the agreement entered into between the assessee and the third parties, will leave no doubt that the assessee under the agreement acquired absolute rights including theatrical rights over the pictures, negative rights without any geographical area restrictions and the rights so transferred is for a perpetual period and therefore, it would amount to sale and the provisions of Section 194J of the Act nor any provisions of the Act governing the tax deduction at source is applicable. The First Appellate Authority examined 14 such agreements, which appeared to be the same and on the same line and one such sample agreement dated 30.01.2008 has been filed before this Court.

13. From a perusal of the said agreement, it is seen that the first party to the agreement is the holder of the World Negative Rights and Copy Rights of Cinematography Telugu Feature Film and the said party was desirous of disposing of the World Negative Rights, satellite rights and all other rights pertaining to the said picture of any interested purchaser. The assesee expressed their desire to acquire the same from the said Kakatiya films and the terms and conditions of transfer, which was recorded by means of deed of transfer dated 30.01.2008. The total consideration payable under the agreement has been mentioned in clause (1) of the agreement. For the purpose of this case, the entire sample agreement is extracted here under for ready reference:

This Deed of Transfer executed at Chennai on this 30th January, 2008

Between
M/s. Kakatiya Films, having their office at Plot No.219, I Floor, Phase III, Road No.78, Jubilee Hills, Hyderabad 500 033, represented by Mrs. Pengoti Saraswathi, W/o. Mr. Rammohan Rao, hereinafter referred to as 'ASSIGNOR' which term shall include his heirs, executors, administrators and legal representatives of the FIRST PART

AND
K. BHAGYALAKSHMI, residing at No.13, 1st Madley Street, T.Nagar, Chennai 600 017, hereinafter referred to as the ASSIGNEE of the SECOND PART(which respective terms shall wherever the context to permits mean and include their respective heirs, executors, administrators, legal representatives and assigns)

WHEREAS the ASSIGNOR is the World Negative Right holder and Copyright holder of the Cinematography Telugu Feature Film 'BATHUKAMMA' (colour) the details of which are mentioned in the Schedule to this Agreement.

WHEREAS the Picture and Sound Negatives of the said Picture is free from all commitments, disposals, charges, lien etc. and the Negatives are stored with M/s.GEMINI COLOUR LAB, HYDERABAD, for safe custody.

WHEREAS the ASSIGNORS are desirous of disposing of the WORLD NEGATIVE RIGHTS SATELLITVE TV RIGHTS and all other rights pertaining to the said picture to any interested purchaser/s.

AND WHEREAS the ASSIGNEES have expressed their desire to acquire the same from ASSIGNOR.
WHEREAS the Parties hereto have mutually agreed to reduce the terms and conditions of the Deed of Transfer into writing.

NOW THIS DEED OF TRANSFER WITNESSETH:

This Agreement in all respects shall be subject to the jurisdiction of the Courts of Law in Chennai city only.

IN WITNESS WHEREOF THE PARTIES HEREUNTO HAVE SET THEIR HANDS ON THE DAY, MONTH AND YEAR FIRST ABOVE WRITTEN.
SCHEDULE

14. From the above conditions of transfer, it is seen that the total consideration payable is Rs.40 lakhs. On receipt of the payment as mentioned in Clause (1) above, M/s. Kakatiya films have assigned exclusive World Negative (picture and sound) Rights including theatrical and commercial rights of distribution, exhibition and exploitation of 35 mm though valid only after five years from the date of first theatrical release, 16 mm, 8 mm and any dimensions in all media performing rights and reproduce that film from the picture and sound negatives, etc. That apart, world satellite rights, satellite broadcasting service and Satellite Television Broadcasting Service and copy rights also stood transferred in favour of the assessee. Furthermore, such transfer was without restrictions to geographical area for a period of 99 years from the date of transfer deed. The Censor Certificate and all other papers and documents were also handed over to the assessee for their exclusive possession and enjoyment. The transferor undertook that they will not violate the agreement and permit the assessee to telecast the film without any liability and also undertook that they will not sell the VCD, DVD rights to any other party in future. Furthermore, on such transfer the assessee was entitled to assign their rights in part or full to other party at their sole and absolute discretion and the transferor was not entitled to claim for any revenue or consideration received by the assessee. There was a further declaration that they have not earlier transferred or assigned or alienated any right to third parties and the assessee will have full and absolute right to assign the copy right to broadcast the said film and there was also indemnity executed by the transferor in favour of the assessee. The said deed of transfer was irrevocable till the expiry of the period for 99 years. The schedule of the agreement also states that the period of the agreement is for a perpetual period of 99 years from the date of the said agreement.

15. It has to be seen as to whether the transfer effected in favour of the assessee would fall within Section 9(1) r/w Explanation (2)(v) to of the Act. Clause (vi) to Explanation (2) defines the "Royalty" to mean consideration (including any lump sum consideration, but excluding any consideration, which would be the income of the recipient chargeable under the Head Capital Gains) and in terms of Clause (v) to Explanation 2 of Section 9(1)of the Act, the transfer of all or any rights (including the granting of a licence) in respect of any copy right, 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 not including consideration for the sale, distribution or exhibition of cinematographic films. Therefore, to fall within the exclusion, as defined under clause (v) to Explanation (2) to Section 9(1) of the Act, if the consideration received as for the sale, distribution or exhibition of a cinematography film, then it would fall outside the scope of "Royalty" as defined under Explanation (2) in the proceedings.

16. In the preceding paragraphs, we have made an elaborate reference to the nature of transaction entered into by the assessee with the third parties. The sample transfer deed, clearly states that the transfer in favour of the assessee is for a perpetual period of 99 years. The party, who executed the agreement in favour of the assessee was desirous of disposing World Negative Rights, Satellite Television Rights and all other rights pertaining to the picture and the assessee enjoys the exclusive status, as the World Negative rights including theatrical rights owner. The assessee was also entitled to assign the said rights, which was transferred in their favour. Further the agreement was irrevocable and shall remain in force for a period of 99 years. In such a factual situation the nature of transaction, being a perpetual transfer for a period of 99 years, would undoubtedly fall within the scope of sale.

17. We have seen the various conditions contained in the sample transfer deed and there is a transfer of copy right in favour of the assessee. Though the agreement speaks of perpetual transfer for a period of 99 years, in terms of Section 26 of the Copy Right Act, 1957, in the case of cinematographic film, copy right shall subsist until 60 years from the beginning of the calendar year next following the year in which the film is published. Therefore, the agreement in the case on hand, is beyond the period of 60 years, for which the copy right would be valid, the document could only be treated as one of sale.

18. As far as the decision of the Co-ordinate Bench in the case of Shri Balaji Communications (supra), the rights which was the subject matter of the said decision were only for a period of 20 to 25 years and not of permanent nature. Therefore, the said decision is clearly distinguishable on facts and cannot be applied to the assessee's case.

19. In the light of the above discussion, we have no hesitation to hold that the findings of the First Appellate Authority was perfectly justified in holding that the transfer in favour of the assessee as sale and therefore, excluded from the definition of "Royalty" as defined under clause (v) to Explanation (2) of Section 9(1) of the Act.

20. In the light of the above decision, there would be no necessity for us to go into the other questions, which have been raised by the assessee. In the result, the order of the Income Tax Appellate Tribunal shall stand set aside and the Tax Case(Appeal) is allowed. No costs. Consequently, the connected miscellaneous petition is closed.