2013 (2) TMI 373 - AT - Income Tax

TDS u/s 194J - Disallowance u/s 40(a)(ia) - assessee, engaged in purchase and sale of rights in satellite and movies - as per AO agreements were only for assignment of rights and not for sale of right to assessee therefore there was no sale of rights to the assessee, thus Section 194J was applicable since payments were in the nature of royalty - CIT (Appeals) deleted the addition - Held that - Section 194J of the Act clearly mentions that it is incumbent on a person making payments for professional service, technical service and royalty, to deduct tax at source. Thus, the consideration for transfer of all or any rights in respect of any copyright, including copyright for films and video tapes, used in connection with television or tapes, would fall within the definition of royalty . What is excluded are consideration for sale, distribution and exhibition of cinematographic films. What the assessee paid here was not consideration for sale, distribution or exhibition of cinematographic films. Assessee did not purchase the cinematographic films as such through the transactions. Assessee had only received right for satellite broadcasting. The definition also does not say that it would apply only if the rights are considered only for a definite period. Even if the transfer of rights is perpetual or even if the transfer is only a part of the rights, as long as transfer is of any right relatable to a copyright of a film or video tape, which is to be used in connection with television or tapes, the consideration paid would be royalty only. Thus, the impugned transaction, would fall within the definition of royalty . Thus the payments made would fall within the definition of royalty and the assessee was duty bound under Section 194J to deduct tax at source on the payments effected. Such deduction having not been made, rigours of Section 40(a)(ia) stood attracted. The additional ground raised by the assessee that the rigours of Section 40(a)(ia) are attracted only on amounts standing payable at the end of the relevant previous year, is justified in view of the decision of Special Bench of this Tribunal in the case of Merilyn Shipping & Transports v. Addl. CIT 2012 (4) TMI 290 - ITAT VISAKHAPATNAM - allow appeal of the Revenue, but at the same time, remit the issue back to the file of the A.O. for applying Section 40(a)(ia) in the view of Merilyn Shipping & Transport s case (supra).

Issues Involved
1. Disallowance under Section 40(a)(ia) of the Income-tax Act, 1961.
2. Applicability of Section 194J regarding tax deduction at source for royalty payments.
3. Nature of payments for satellite rights-whether they constitute royalty.
4. Application of Section 40(a)(ia) to amounts paid during the relevant year versus amounts payable at the end of the year.

Detailed Analysis

Issue 1: Disallowance under Section 40(a)(ia) of the Income-tax Act, 1961

The primary issue is the disallowance of Rs. 25,71,19,000/- under Section 40(a)(ia) by the Assessing Officer (A.O.) due to non-deduction of tax at source. The A.O. determined that the payments made for purchasing satellite rights constituted royalty payments, which required tax deduction under Section 194J. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted this disallowance, concluding that the payments were for the purchase of rights and not royalty. However, the Tribunal found that these payments indeed fell under the definition of "royalty" as per Explanation 2 to clause (vi) of Section 9(1) of the Act. Therefore, the Tribunal held that the assessee was liable to deduct tax at source, and the disallowance under Section 40(a)(ia) was justified.

Issue 2: Applicability of Section 194J regarding tax deduction at source for royalty payments

The Tribunal examined whether the payments for satellite rights were subject to tax deduction under Section 194J. Section 194J mandates tax deduction at source for payments constituting royalty. The Tribunal referred to Explanation 2 to clause (vi) of Section 9(1) of the Act, which defines "royalty" to include payments for the transfer of rights related to copyrights, including films or video tapes used in connection with television. The Tribunal concluded that the payments made by the assessee for satellite rights fell within this definition of royalty, thus requiring tax deduction under Section 194J.

Issue 3: Nature of payments for satellite rights-whether they constitute royalty

The Tribunal analyzed the nature of the payments made by the assessee for satellite rights. The agreements indicated that the rights were transferred for a specific period (20 to 25 years), and the rights were not perpetual. The Tribunal noted that the definition of royalty does not exclude payments for temporary transfers of rights. Therefore, even though the rights were assigned for a limited period, the payments still constituted royalty. The Tribunal emphasized that the consideration paid for the rights to broadcast films through satellite systems fell within the scope of royalty as defined in the Act.

Issue 4: Application of Section 40(a)(ia) to amounts paid during the relevant year versus amounts payable at the end of the year

The assessee argued that Section 40(a)(ia) should only apply to amounts payable at the end of the relevant previous year, not to amounts already paid during the year. The Tribunal admitted this additional ground as a pure question of law. The Tribunal referred to the decision of the Special Bench in the case of Merilyn Shipping & Transports v. Addl. CIT, which held that Section 40(a)(ia) applies only to amounts payable at the end of the relevant previous year. Consequently, the Tribunal remitted the issue back to the A.O. to apply Section 40(a)(ia) in accordance with this interpretation and consider any higher court decisions available at the time.

Conclusion

The Tribunal allowed the Revenue's appeal, holding that the payments made by the assessee for satellite rights constituted royalty, requiring tax deduction under Section 194J. The disallowance under Section 40(a)(ia) was justified due to non-deduction of tax at source. However, the Tribunal also remitted the issue back to the A.O. to apply Section 40(a)(ia) as per the Special Bench's decision in Merilyn Shipping & Transports, which limits the application of Section 40(a)(ia) to amounts payable at the end of the relevant previous year. The cross-objection of the assessee was partly allowed.

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