Film rights transfer treated as sale, not royalty; no tax deduction at source or disallowance under the Income-tax Act.

A 99-year irrevocable transfer of exclusive world negative, satellite, broadcasting and allied exploitation rights was treated as a transfer in the nature of sale, not a mere licence to use copyright. The court noted that the assignee could further assign the rights and that the absence of geographical restriction supported the conclusion that the consideration was for sale of cinematographic film rights, falling outside royalty under Explanation 2(vi) and within the exclusion in Explanation 2(v) to Section 9(1) of the Income-tax Act, 1961. The payments therefore did not attract tax deduction at source under Section 194J, and the corresponding disallowance under Section 40(a)(ia) was unsustainable.

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Issues: Whether the consideration paid for acquisition of film rights under a 99-year transfer deed amounted to royalty so as to attract tax deduction at source and disallowance under Section 40(a)(ia) of the Income-tax Act, 1961.

Analysis: The transfer deed showed that the assessee obtained exclusive world negative rights, satellite rights, broadcasting rights and allied exploitation rights for a period of 99 years, with no geographical restriction, with liberty to assign the rights further, and on an irrevocable basis. On these terms, the transaction was not a mere licence or limited use of copyright; it was a transfer in the nature of sale. The exclusion in Explanation 2(v) to Section 9(1) applied because the consideration was for sale of cinematographic film rights and not for royalty within Explanation 2(vi). The copyright period under Section 26 of the Copyright Act, 1957 also supported the view that the document was effectively one of sale. The cited coordinate bench decision was distinguishable because it dealt with a much shorter and non-permanent transfer.

Conclusion: The payments were not royalty, and no tax deduction obligation arose under Section 194J of the Income-tax Act, 1961. The disallowance under Section 40(a)(ia) was unsustainable.

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