No TDS on purchase of negative rights of films

By | October 3, 2015

Whether Payment made to purchase negative rights of films on perpetual basis attract TDS under section 194J ?

TDS on purchase of negative rights of films

TDS on purchase of negative rights of films

Summary  of the Case on TDS on purchase of negative rights of films:

Section :194J, read with section 40(a)(ia), of the Income-tax Act, 1961

 Subject :Deduction of tax at source on Fees for professional or technical services (Film rights)

 Assessment years: 2008-09 and 2009-10

Facts of the Case on subject of TDS on purchase of negative rights of films :-

Assessee was a trader in films and film rights . Assessing Officer observed that assessee purchased film rights and paid amount for film rights to producers which was in nature of royalty .Assessing Officer made disallowance under section 40(a)(ia) for non-deduction of tax at source on said payment .

Held:-

where transaction between producers and assessee was sale of world negative rights on perpetual and permanent basis, there was no liability to deduct tax at source under section 194J on payment made by assessee and disallowance made by Assessing Officer was to be deleted.

TDS on purchase of negative rights of films

TDS on purchase of negative rights of films

Deep Analysis of the case on applicability of   TDS on purchase of negative rights of films  :-

IN THE ITAT HYDERABAD BENCH ‘A’

Deputy Commissioner of Income-tax

v.

V. Rama Krishna

P.M. JAGTAP, ACCOUNTANT MEMBER
AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER

IT APPEAL NOS. 2099 (HYD.) OF 2011 & 113 (HYD.) OF 2013
[ASSESSMENT YEARS 2008-09 AND 2009-10]

JULY  3, 2015

Smt. Vasundhara Sinha for the Appellant. S. Rama Rao for the Respondent.

ORDER

Smt. Asha Vijayaraghavan, Judicial Member – These are the appeals preferred by the Revenue against the order of the Commissioner of Income-tax (Appeals)-II Hyderabad, dated October 13, 2011 relating to the assessment years 2008-09 and 2010-11 respectively.

TDS on purchase of negative rights of films

TDS on purchase of negative rights of films

2. Briefly stated, the assessee is a trader in films and film rights. During the assessment proceedings the Assessing Officer 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 Rs. 66,66,595 under section 194J while making payment of Rs. 6,48,85,347, but not paid the tax deducted to the Government account. By applying the provisions of section 40(a)(ia), the Assessing Officer has disallowed an amount of Rs.6,48,85,347. While making the disallowance, the Assessing Officer 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 under section 194J of the Income-tax Act.

TDS on purchase of negative rights of films not deducted, Assessing Officer treated it royalty payment and Disallowed expenses u/s 40(a)(ia) :-

TDS on purchase of negative rights of films

TDS on purchase of negative rights of films

3. The Assessing Officer has also disallowed Rs. 10,78,32,153 under section 40(a)(ia) for non-deduction of tax at source on the ground that the payments made were in the nature of royalty. The Assessing Officer has stated it is seen from the profit and loss account that the assessee has purchased film rights to the extent of Rs. 17,27,17,500. As per the agreements furnished by the assessee, the assessee has entered into an 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 section 194J (payment for royalty) read with section 9 of the Income-tax Act (Explanation to section 9). The assessee was asked why the expenditure of Rs. 10,78,32,153 (total purchases of Rs. 17,27,17,500 – Rs. 6,48,85,347, TDS deducted and not paid) should not be disallowed under section 40(a)(ia). Vide his explanation letter dated December 2, 2010 has explained the TDS provisions under section 194J is not applicable in his case.

TDS on purchase of negative rights of films not applicable as per the Assessee because for him it is the business activity :-

TDS on purchase of negative rights of films

TDS on purchase of negative rights of films

4. The note given by the assessee on deduction of tax at source under section 194J is reproduced below:

“The assessee is dealing in trading of film rights. He acquires and sells satellite, 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 assessment year 2007-08 section 194J was amended and royalty was also included under professional payments and the assessee’s business is brought into the purview of section 194J 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 period or for such part of the rights only).

As per the Copyright Act of 1957, the producer is the owner of any cinematography film which is the property created by him, which is termed as negative rights as per trade. The producer has the absolute right to exploit the said film through various modes and means, both theatrically and non-theatrically. In such case, he gets royalty paid for exploitation of every individual right. Whereas in case of sale of negative rights, he is selling his entire property created by him in the 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 and copyright would subsist in such sound recordings.

Per sections 26 and 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 copyright 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 to sale but not royalty. Hence the assessee has not deducted tax on such transactions. For certain transactions, the assessee has deducted TDS to make sure that the sellers come under the tax purview.”

TDS on purchase of negative rights of films

TDS on purchase of negative rights of films

As per Assessing Officer TDS on purchase of negative rights of films is applicable because  sale is not complete because exploitation of theatrical rights are still with the assignor for a period of five years. There is no absolute sale:-

5. The Assessing Officer stated as follows:

“I have carefully considered the reply given by the assessee and the same is rejected for the following reasons.

a. It is seen from the very nature of the business, the 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, non-theatrical and commercial rights of distribution, exhibition and exploitation. However, the sale is not complete because exploitation of theatrical rights are still with the assignor for a period of five years. Hence, it cannot be treated as absolute sale. As the assessee was buying the rights for a limited period, it is nothing but paying royalty to the right holder. In this context even the agreement dated October 9, 2007 between assignors and assignees, i.e., the assessee in respect of the film ‘John Apparao 40 plus’ needs a little analysis. On page 2 para 1 starts as under :
‘(1) The assignors hereby transfers by way sale the entire ownership of the film mentioned in the schedule to this agreement along with their exclusive world negative (picture and sound) rights including the theatrical, non-theatrical and commercial rights of distribution, exhibition and 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 rights for five years from the first release of the film are totally contradictory to each other. Hence, it is not an absolute sale but for the payment of royalty. Therefore, I hold that the payment made by the assessee is nothing but royalty which is subject to TDS under section 194H and the same is added back under section 40(a)(ia).
b. Just because giving a different name to the transaction does not amounts to different transaction. As per the agreement, it is very clear that payments has been made for exploitation 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 the assessee has to deduct TDS on all the payments made or credited of Rs. 17,27,17,500. However, the assessee has deducted TDS on amount of payment of Rs. 6,48,85,345 but not paid to the Government account. This amount has been separately added in para 4. Now, the rest of the amount of Rs. 10,78,32,153 added under section 40(a)(ia) for not deducting tax at source as the payments made are in the nature of royalty.”
TDS on purchase of negative rights of films

TDS on purchase of negative rights of films

Assessee filed appeal claiming TDS on purchase of negative rights of films is not applicable:-

6. Aggrieved, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) held that the agreement deed between the assessee and the producer of the film “John Apparao 40 plus” which was referred to by the Assessing Officer has also been carefully perused by him. The Commissioner of Income-tax (Appeals) 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 and sound) rights including the theatrical and non-the-atrical and commercial rights of distribution, exhibition and exploitation by 35mm (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 appellant) the sole and exclusive ownership rights over the said film for the entire world on perpetual and permanent basis for a consideration of Rs. 80,00,000. The Commissioner of Income-tax (Appeals) observed that the assignees (the appellant) permitted to censor the film with the same title or anything else as per their desire for which the assignors have no objection and it was also agreed that the assignors will not have a single right left with them except dubbing rights and re-making rights for Tamil, Malayalam and Hindi languages and except 35mm theatrical exploitation for the first five years from the first release of the film in theatres as the absolute ownership over the negatives (picture and sound) have been sold and transferred to the assignees under this agreement.

7. The Commissioner of Income-tax (Appeals) 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 societies, mechanical copyright protection society, phonographic performance Ltd. the audio music companies and also sole and exclusive rights to perform the musical rights cointained in the film in public including performance by sound, broad-casting, television, cable TV, satellite TV, paid TV, DTH on perpetual and permanent basis. In effect as per clause 21, the agreement is irrevocable and the assignees for all purposes shall be the absolute owner of the said film on perpetual and permanent basis from the date of signing of this agreement. The Commissioner of Income-tax (Appeals) opined that all this points to the 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 Commissioner of Income-tax (Appeals) held that the contention of the assessee that the transactions with the producers amounted to sale has some merit.

Commissioner Appeal noted that TDS on purchase of negative rights of films is not applicable as the assessee has received the absolute ownership of the rights over the film:-

TDS on purchase of negative rights of films

No TDS on purchase of negative rights of films

8. The Commissioner of Income-tax (Appeals) noticed from the assessment order that the Assessing Officer has on one hand stated that the assessee has purchased film rights to the extent of Rs. 17,27,17,500 and on the other hand applied the provisions of section 194J read with section 9. The Commissioner of Income-tax (Appeals) further noted that the Assessing Officer 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 Commissioner of Income-tax (Appeals) pointed out that this argument of the Assessing Officer 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 (theatrical right in respect of 35mm film) with the consent of both parties does not affect the character of sale of other rights. The Commissioner of Income-tax (Appeals) observed that even limiting the ownership in respect of first five years of theatrical exhibition of the film to the producer also does not restrict the right of the assessee perpetually and by the end of five years from the date of first release 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 Commissioner of Income-tax (Appeals) 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.

Commissioner Appeal noted that TDS on purchase of negative rights of films not applicable as the Assessee has right of ownership over the film:-

9. The Commissioner of Income-tax (Appeals) pointed out that the contention of the Assessing Officer that the buyers for television rights have deducted TDS under section 194J on the payments made to the assessee (para 6.c of assessment order) will not support the stand taken by him because as per the agreements the perpetual and permanent rights in the negatives have been assigned to the appellant by the producers with a right to collect royalty for further transfer of rights to exhibit/telecast the films. If the appellant did not have the right of ownership over the film he would not be paid royalty, rather the producer would be paid royalty.

Commissioner Appeal noted that TDS on purchase of negative rights of films not applicable as the Assessee filed confirmation from producers that they have accounted for sale of world negative rights in their books as consideration for sale.

TDS on purchase of negative rights of films

TDS on purchase of negative rights of films

10. The Commissioner of Income-tax (Appeals) 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 feature films to the assessee has been accounted for in their books as consideration for sale.

Commissioner Appeal concluded that TDS on purchase of negative rights of films is not applicable as the Assessee had traded in the film rights on outright purchase and sale basis:- 

TDS on purchase of negative rights of films

TDS on purchase of negative rights of films ?

11. The Commissioner of Income-tax (Appeals) concluded as follows :

“A perusal of the assessment records, show that the assessee has shown Rs. 16,81,95,000 as sales and Rs. 4,30,06,000 towards closing stock and Rs. 17,27,17,500 as purchases which clearly indicate the intention of the assessee as to the treatment of the transaction as purchase and sale of films. It is also noticed that the rights over various pictures have been shown in the stock statements reflecting purchases and sales therefrom. The film ‘John Apparao 40 plus’ which was referred to by the Assessing Officer in the assessment order is also shown as stock purchases at Rs. 80 lakhs and sale at Rs. 88 lakhs and profit of Rs. 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 clause (v) to Explanation 2 to section 9(1)(vi) of the Income-tax 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 section 194J are not applicable and there is no liability to deduct tax at source therefore the disallowance made by the Assessing Officer under section 40(a)(ia) is unwarranted and is therefore ordered to be deleted.”

Department filed the appeal before tribunal claiming applicability of TDS on purchase of negative rights of films :-

TDS on purchase of negative rights of films

TDS on purchase of negative rights of films

12. Aggrieved, the Department is in appeal before us and has raised the following grounds :

“1. The learned Commissioner of Income-tax (Appeals) ought to have upheld the order of the Assessing Officer on the disallowance made under section 40(a)(ia) treating the payment for purchases as royalty.
2. The Commissioner of Income-tax (Appeals) 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 Commissioner of Income-tax (Appeals) ought to have treated the payment made for exploitation of satellite rights by the assessee as acquisition of intangible asset and allowed depreciation at 25 per cent. rather than allowing the entire payment as revenue expenditure.”
TDS on purchase of negative rights of films

TDS on purchase of negative rights of films

TDS on purchase of negative rights of films is not applicable as Section 9 specifically excludes consideration paid for sale, distribution or exhibition of cinematographic films :-

 

13. We find that similar identical issue has been considered by the Hyderabad Bench of the Tribunal in the case of Asstt. CIT v. Aishwaraya Arts Creations (P.) Ltd. [2015] 67 SOT 245  dated December 10, 2014 wherein it has been held as follows :

“Section 194J enjoins upon any person not being an individual or a Hindu undivided family to deduct tax at source on certain payments, one of them being royalty, to a resident. Clause (ba) of Explanation to section 194J(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 to in sub-clauses (i) to (v). It is further evident from the aforesaid provision that payments made by the assessee can only be classified within clauses (v) of the Explanation 2 to section 9(1). On a careful reading of the said clause (v), it becomes clear that though consideration paid towards transfer of all or any rights in respect of copyright, literal, artistic or technical work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but, it specifically excludes consideration paid for sale, distribution or exhibition of cinematographic films. On a perusal of assignment agreement between the assessee and producers of film, it becomes 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 the 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) of Explanation 2 from being treated as consideration paid towards royalty. In that view of the matter, the payments are outside the purview of section 194J. Hence, the assessee cannot be fastened with liability under section 201(1) and 201(1A) for having defaulted in deducting tax at source in terms of section 194J. (para 9)”

14. We also find that the Madras High Court in the case of S.P. Alaguvel v. Dy. CIT [2015] 228 Taxman 202 (Mag.)/[2014] 52 taxmann.com 231 (Mag) 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. Deputy CIT [2014] 221 Taxman 225 (Mad.) 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 the 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).”

Tribunal Concluded that TDS on purchase of negative rights of films is not applicable as agreement between the producers and the assessee appears to be the sale of world negative rights on perpetual and permanent basis;-

 TDS on purchase of negative rights of films

TDS on purchase of negative rights of films

 

15. Since the facts in the present case are similar, following the decision of the co-ordinate 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 [2013] 40 taxmann.com 350/[2014] 221 Taxman 225, we are of the opinion 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 Assessing Officer under section 40(a)(ia) is to be deleted and the ground Nos. 1 and 2 raised by the Revenue are dismissed.

16. The alternative ground rasied by the Revenue in ground No. 3 becomes infructuous as we have dismissed ground Nos. 1 and 2 of the Revenue.

17. In the result, the appeal in I.T.A. No. 2099/Hyd/2011 is dismissed.

I.T.A. No. 113/Hyd/2013-assessment year 2010-11.

18. In this appeal, the Revenue has raised the following grounds :

(i) On the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in deleting the disallowance made under section 40(a)(ia) treating the payment for purchase of satellite rights as royalty.
(ii) Without prejudice to the above, on the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred by not treating the payment made for exploitation of satellite rights by the assessee as acquisition of intangible asset eligible for depreciation at 25 per cent. rather than allowing the entire payment as revenue expenditure.
(iii) On the facts and circumstances of the case and in law the Commissioner of Income-tax (Appeals) erred in holding that the disallowance under section 40(a)(ia) is not applicable to the amounts paid before 31st March of the previous year.”

19. With regard to ground No. 1, we have already decided the same in I.T.A. No. 2099/Hyd/2011 for the assessment year 2008-09 and the same shall hold good for this assessment year also.

 TDS on purchase of negative rights of films

TDS on purchase of negative rights of films

20. Since we have already decided ground No. 1 and dismissed the Revenues ground, ground Nos. 2 and 3 become infructuous.

21. In the result, the appeal in I.T.A. No. 113/Hyd/2013 is dismissed.

22. To sum up, both appeals raised by the Revenue are dismissed.