TaxTMI 
TaxTMI 
2025 (2) TMI 697
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....isual rights of the non- Bollywood regional music content for exclusive commercial exploitation on mobiles & digital platform and for physical distribution & public performance. A show cause notice was issued to the assessee to explain the Royalty expenses claimed by it. In response to show-cause notice, assessee vide letter dated 20.12.2018 submitted as under :- Question: "that for the first 16 album titles the expenditure for royalty is for 6 years which also includes for FY 2014-15, the assessee has claimed the expenditure of previous years in this year but has not considered the revenue income from this album pertaining to FY 2014-15, the assessee has claimed the expenditure of previous years in this year but has not considered the revenue income from this album title pertaining to FY 2014-15. Why the expense incurred for purchasing the royalty for A Y 2015-16 should not be disallowed". Response of the Assessee Company: With regard to the above, at the outset it is submitted that Aalap Digital Music Pvt. Ltd. (Aalap) had entered into content licensing agreement with Hungama Digital Media Entertainment Pvt. Limited (HDMEPL) for procurement of the listed 20 titl....
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.... 5. He further observed that it is hard to accept the content revenue of movies released in FY 2014-15 has been assigned to the assessee and that also after the passage of 18 months. Further, after analyzing the various clauses of agreement between Zee Music and HDMELP, he came to the conclusion that it clearly depicts that are means of tracking the exploitation and converting the figures into the revenue figures and the time period frequency is also such that it would not take the months to capture the exploitation made as the same has to be done within 15 days before the end of each quarter as explained. Further the agreement says that it is valid for 6 years from the effective date, as no effective date has been specifically mentioned in the agreement. It should be considered as 3rd of July, 2015 and if that is the case, the album titles released in FY 2014-15 under whose logo, were they being exploited. The assessee has not been able to substantiate the submissions made with other documentary evidence. 6. Further he observed that the assessee has not followed any matching concept of booking revenue to that of expenditure, nor has the assessee has followed any of the accounti....
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....obile phones, ringtones, caller tunes, ring back tones etc. 3.4 During the year under consideration assessee company entered into content license agreement with HDMEPL on 20/12/2015 for exploitation 20 titles of film for Rs. 11,73,62,500/- plus service tax for 6 years for start from various dates. Copy of agreement as well as debit note of party is being enclosed at Page 25 to 34. These exploitation rights were first acquired by HDMEPL from Zee Music on 03/07/2015 for 29 films, at Rs. 14,35,00,000/- and Hungama Digital Media Pvt Ltd sub - licensed the rights to Aalap Digital Music Pvt Ltd for 20 films out of 29 films at cost price. The details of rights purchased by HDMEPL from Zee Music Company and sold to Aalap digital is as under:- License fee for Sr. No. 1 to 18,20 & 23 Rs.11,73,62,500/- Transfer to Aalap Digital License fee for Sr. no. 19,21,22& 24 to 29 Rs. 2,61,37,500/- with HDMEPL Total Rs.14,35,00.000/- Copy of agreement between Zee Music Company and Hungama Digital Media Entertainment Pvt. Ltd is being enclosed at page 35 to 57. 3.5 After the close of the financial year, HDMEPL did not provide the stat....
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....2014-15.Copy of content Licensing agreement between Aalap and HDMEPL already filed vide our letter dated 01/11/2018. The agreement with Zee Music and HDMEPL was under discussion and was finally executed in FY 2015-16 which was after the music releases of most of the titles. The titles revenue was however received by HDMEPL prior to the date of agreement. Thus the titles were assigned from prior date in case of these titles. The details of receipts on account of the various album titles for the financial year 2014-15 and 2015-16 along with letter dated 20/12/2018 is attached herewith at page no. 120 -133. Since the licensing agreement between Zee Music and HDMEPL and consequent sub licensing agreement between Aalap and HDMEPL was executed in FY 2015-16, all receipts on account of these albums were recognised on 22/09/2016. Although this content was sub-licensed to Aalap, HDMEPL generated revenue through exploitation of this content on various distribution platforms. A confirmation letter in respect of the revenue generated against these titles from HDMEPL along with letter dated 20/12/2018 is attached herewith at page no 120-133." 6. Finally the AO disallo....
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....r's taxable income then there was no reason on the part of Assessing Officer to disallow only one part of the prior period adjustments, i.e., the prior period expenditure. Consequently, the addition made by the Assessing Officer cannot be sustained. In any event, in view of the settled legal position, no substantial question of law arises in the present proceedings. Hence, the present appeal, being bereft of merit, is dismissed but with no order as to costs. On the allow ability of above mentioned expenses the other case law is as under: - B) Escorts Ltd Vs. DCIT 90 Taxmann 272 (Delhi ITAT) C) Times Internet Ltd Vs. Add. C1T 88 Taxmans 387 (Delhi ITAT) Copy of the above citation sis being enclosed at page no.134-154. In view of the above, it is prayed that the present disallowance of Rs. 7,77,85,538/- be deleted." 8. After considering the above submissions, ld. CIT (A) dismissed the grounds raised by the assessee with the following observations :- "In the present case, the appellant has considered the relevant receipts in the books of accounts on 22/09/2016 i.e. FY 2016-17 whereas the liability of the royalty exp....
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....enditure was allowed in the AY 2003-04. 'However in the present case, the prior period expenditure is claimed in AY 2015-16 and the relevant income is shown in AY 2017-18. Therefore contention of the appellant is not acceptable. In view of the above discussion, the addition made by the AO is confirmed. Thus the ground of appeal raised by the appellant is dismissed." 9. Aggrieved with the above order, assessee is in appeal before us raising following grounds of appeal :- "1. That on the facts and circumstances of the case and in law, the order passed by National Faceless Appeal Centre, New Delhi is bad in law. 2.1 That on the facts and circumstances of the case and in law the CIT(A) was not justified in upholding the addition of Rs. 7,77,85,538/- made by the AO on account of disallowing the royalty expense incurred by the appellant during the year by treating the same as prior period expenses disregarding the fact that the income amounting to Rs. 3,50,000/- corresponding to the royalty expense was duly accounted for during the assessment year 2016-17. 2.2 That the CIT(A) was not justified in observing that the relevant income pertaining to ....
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....et along with annual accounts for FY 2015- 16 were finalized prior to 22.09.2016 i.e. on 01.09.2016, in the annual accounts for FY 2015-16, income of Rs. 3,50,00,000/- pertaining to FY 2014-15 and FY 2015-16 was recognized on provisional basis and include taxable income. As per the statement received from HDMEPL total income was Rs. 3,56,94,231 out of which revenue pertaining to FY 2014-15 is Rs. 1,43,52,320/- and for FY 2015-16 is Rs. 2,13,42,212/-. Since the assessee has recognized Rs. 3,50,00,000 in FY 2015-16 balance revenue of Rs. 6,94,231/-, was further recognized in the FY 2016-17 relevant to AY 2017-18. Therefore, accounting standard 9 for revenue recognition and accounting standard 29 were duly followed. Copy of the ledger account is enclosed herewith on page 1 to 6. * Coming to the observations of CIT(A) made via para 6.2 of the appeal order that the appellant had claimed entire royalty payment expenses of Rs. 11,79,49,313/- in AY 2016-17 but the income related to the said 16 titles related to FY 2014-15 relevant to AY 2015-16 was not considered in FY 2015-16 relevant to AY 2016-17 and therefore the matching concept was not followed it is submitted that the obser....
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....ile setting aside the orders of the authorities below direct the Assessing Officer to allow the claimed expenditure during the year. The grounds involving the issue are accordingly allowed." In the above para Hon'ble ITAT Bench H New Delhi clearly stated that merely because an expenditure relates to a transaction of an earlier years, it does not become a liability payable in the earlier years unless it can be said that the liability was determined and crystallized in the said year. In the case of assessee company the liability was determined and crystallized on 20.12.2015 and therefore the same was recognized as expenses in the said assessment year. Copy of judgement is enclosed at Page No. 146 to 153 of paper book." 11. On the other hand, ld. DR for the Revenue relied on the orders of the lower authorities. 12. Considered the rival submissions and material placed on record. We observe from the record that the assessee company was established to commercially exploit the music albums of various tracks available with Hungama and Zee Music. We observed that assessee and Hungama entered into license agreement on 20.12.2015 and the license holder, Hangama granted perm....
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....he income from the date of entering the agreement, the license fees is payable subsequent to the agreement. Therefore, the assessee has adopted wrong method of accounting and not commercially viable method of settlement. Therefore, we are directing the AO to allow only the license fees relevant for the current period i.e., for the period of 4 months (from December 2015 to March 2016) out of Rs. 195,60,416/- (guaranteed license fees for the year), the amount of Rs. 65,20,140/-, balance amount of license fees which as per accounts submitted before us shows that it is not paid but kept as trade liabilities. Therefore, the claim of expenses of Rs. 11,79,49,313 to be disallowed and allow only the expenses of Rs. 65,20,140/- and balance amount has to be allowed to carry forward the same for the next assessment year. 14. Even otherwise, if we consider the above payment was made during this year, even then the amount paid of Rs. 11,79,49,313/- has to be treat as deferred payment of license fees, which has to be amortized over the period of 6 years. In this year, the assessee has utilized the license only for 4 months and balance amount has to be amortized in the next 5 years and 8 month....