2014 (10) TMI 183 - HC - Income Tax

Grant of satellite rights - Nature of transaction is sale or liable for TDS deduction u/s 194J or 194C Disallowance of expenses u/s 40(a)(ia) Payment made amounts to royalty or not - Business of Media and dealing in Movie/ Film Satellite Rights by taking them on Assignment basis and reassigning to the channels and derives income from salary, business and other sources - assessee furnished explanation for not deducting TDS and claimed that the purchase of film copy right is neither covered u/s 194J nor under sec.194C of the Act Held that - Following the decision in Mrs.K. Bhagyalakshmi vs Dy.CIT 2013 (12) TMI 1215 - MADRAS HIGH COURT - the payment made by the assessee were not royalty, but one of sale - whether the grant of satellite rights to the assessee under an agreement for 99 years is a Royalty, within the meaning of sec.9(1)(vi) of the Act or a sale in terms of sec.26 of Copy Right Act, is the common question of law raised the court has considered elaborately the perpetual transfer of rights for a period of 99 years in terms of Sec.26 of Copy Right Act and also the definition under clause 5 to explanation II to sec.9(1) of the Act in relation to Royalty and has come to the conclusion that the transfer in favour of the assessee is a sale and therefore, excluded from the definition of royalty under sec.9(1) explanation II (5) of the Act thus, the Tribunal has erred in concluding that the payments made by the appellant are Royalty and not sale Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the payments made by the assessee towards the acquisition of satellite rights constitute royalty and are subject to tax deduction at source under sec.194J of the Income Tax Act?
2. Whether the disallowance under sec.40(a)(ia) of the Income Tax Act was correctly upheld by the Income Tax Appellate Tribunal?
3. Whether the payments made by the appellant were tantamount to royalty or a sale?
4. Whether the findings of the Income Tax Appellate Tribunal were perverse and liable to be set aside?

Analysis:

Issue 1: The primary issue in this case was whether the payments made by the assessee towards the acquisition of satellite rights should be considered as royalty and thus subject to tax deduction at source under sec.194J of the Income Tax Act. The Assessing Officer contended that the payments debited as purchase of film rights warranted a TDS under Sec.194J. However, the Commissioner of Income Tax (Appeals) held that the consideration paid did not fall under sec.194J of the Act. The Income Tax Appellate Tribunal, on the other hand, concluded that the payments made would indeed fall within the definition of royalty, and therefore, the assessee was obligated to deduct tax at source. The High Court, after considering the facts and relevant legal provisions, held that the payments made by the appellant were not royalty but a sale, thereby setting aside the Tribunal's decision.

Issue 2: Another crucial issue was the correctness of the disallowance under sec.40(a)(ia) of the Income Tax Act. The Tribunal had upheld the disallowance, citing that the payments made by the assessee were tantamount to royalty, thus attracting the provisions of sec.40(a)(ia). However, the High Court, after a thorough analysis of the facts and legal precedents, disagreed with the Tribunal's conclusion. The Court held that the Tribunal erred in considering the payments as royalty and not as a sale, thereby allowing the assessee's appeal and restoring the findings of the Commissioner of Income Tax (Appeals).

Issue 3: The question of whether the payments made by the appellant constituted royalty or a sale was a significant aspect of the case. The High Court compared the facts of the present case with a similar case decided earlier and found that the substantial question of law raised was the same. The Court emphasized that the perpetual transfer of rights for a period of 99 years should be considered a sale under the Copyright Act, excluding it from the definition of royalty under the Income Tax Act. The Court, in line with its previous decision, held that the payments made by the appellant were not royalty but a sale.

Issue 4: Lastly, the High Court addressed the contention that the findings of the Income Tax Appellate Tribunal were perverse and should be set aside. After a detailed examination of the facts and legal provisions, the Court concluded that the Tribunal's decision to treat the payments as royalty was incorrect. The Court held that the Tribunal erred in its interpretation and upheld the appeal of the assessee, setting aside the Tribunal's order.

In conclusion, the High Court allowed the appeal of the assessee, setting aside the order of the Income Tax Appellate Tribunal and restoring the findings of the Commissioner of Income Tax (Appeals) regarding the nature of the payments made by the appellant for the acquisition of satellite rights.