2013 (12) TMI 1215 - HC - Income Tax

High Court rules film rights payments not 'Royalty', no TDS needed. Disallowance under Section 40(a)(ia) not applicable.

Mrs. K. Bhagyalakshmi Versus The Deputy Commissioner of Income Tax

The High Court allowed the assessee's appeal, setting aside the Tribunal's order. It held that the payments made for acquiring film rights were for a sale ... Payments made for acquiring television rights amount to royalty - Held that:- As per clause (v) to Explanation (2) to Section 9(1) of the Act - 'Royalty' to mean consideration for 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 - The transfer deed clearly states that the transfer in favour of the assessee is for a perpetual period of 99 years - 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 - The nature of transaction, being a perpetual transfer for a period of 99 years, would undoubtedly fall within the scope of sale - 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 - Decided in favour of assessee. Issues Involved:1. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961.2. Applicability of Section 194J for Tax Deduction at Source (TDS).3. Classification of payments as 'Royalty' under Explanation 2 to Clause (vi) of Section 9(1) of the Act.4. Relevance of the decision in the case of Shri Balaji Communications.5. Perverse findings by the Income Tax Appellate Tribunal.Detailed Analysis:1. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961:The Assessing Officer (AO) made several additions to the assessee's income, including a disallowance of Rs.7,16,15,000/- for non-deduction of TDS under Section 194J of the Act, treating the payment as 'Royalty'. The First Appellate Authority reversed this disallowance, concluding that the payments were trading expenses and not 'Royalty'. The Tribunal, however, reinstated the disallowance, holding that the payments amounted to 'Royalty'.2. Applicability of Section 194J for Tax Deduction at Source (TDS):The AO concluded that the purchase of film rights fell under 'Royalty' and required TDS under Section 194J. The First Appellate Authority disagreed, stating that the payments were for trading expenses and not subject to TDS under Section 194J. The Tribunal reversed this, relying on a previous decision in the case of Shri Balaji Communications, and held that the payments were indeed 'Royalty'.3. Classification of payments as 'Royalty' under Explanation 2 to Clause (vi) of Section 9(1) of the Act:The crux of the dispute was whether the payments made by the assessee for acquiring film rights could be classified as 'Royalty'. The First Appellate Authority held that these payments did not qualify as 'Royalty' as per Explanation 2 to Clause (vi) of Section 9(1) of the Act. The Tribunal disagreed, stating that the payments were 'Royalty'. However, the High Court examined the sample transfer deed and concluded that the transfer was for a perpetual period of 99 years, effectively amounting to a sale. Hence, the payments were excluded from the definition of 'Royalty'.4. Relevance of the decision in the case of Shri Balaji Communications:The Tribunal relied on the decision in Shri Balaji Communications to classify the payments as 'Royalty'. The High Court found this decision distinguishable as the rights in that case were transferred for only 20 to 25 years, whereas in the present case, the transfer was for 99 years, making it a sale rather than a temporary transfer of rights.5. Perverse findings by the Income Tax Appellate Tribunal:The High Court found the Tribunal's findings to be incorrect. It held that the Tribunal erred in concluding that the payments were 'Royalty' and in reversing the First Appellate Authority's decision. The High Court reinstated the First Appellate Authority's finding that the payments were for the sale of film rights and not subject to TDS under Section 194J.Conclusion:The High Court allowed the assessee's appeal, setting aside the Tribunal's order. It held that the payments made by the assessee for acquiring film rights were for a sale and not 'Royalty', thus not requiring TDS under Section 194J. Consequently, the disallowance under Section 40(a)(ia) was not applicable. The connected miscellaneous petition was also closed.