2014 (12) TMI 1015 - AT - Income Tax

Requirement to deduct tax on payments made for acquiring satellite rights - Whether payments made by assessee for acquiring satellite rights of films is in the nature of royalty as defined u/s 9(1) Explanation 2 thereby requiring deduction of tax at source in terms with section 194J Held that - The payment made by assessee to the producers for acquiring satellite rights is towards outright sale, distribution or exhibition of cinematographic films, which are specifically excluded under clause (v) of Explanation 2 from being is treated as consideration paid towards royalty - the payments are outside the purview of section 194J of the Act - assessee cannot be fastened with liability u/s 201(1) and 201(1A) for having defaulted in deducting tax at source in terms of section 194J. Relying upon Mrs. K. Bhagyalakshmi Versus The Deputy Commissioner of Income Tax 2013 (12) TMI 1215 - MADRAS HIGH COURT wherein it has been held that payments being towards sale, distribution or exhibition of cinematographic films would fall outside the scope of royalty as defined under Explanation 2 of section 9(1) - Though the agreement speaks of perpetual transfer for a period of 99 years, in terms of Section 26 of the Copy Right Act, 1957, in the case of cinematographic film, copy right shall subsist until 60 years from the beginning of the calendar year next following the year in which the film is published - the agreement is beyond the period of 60 years, for which the copy right would be valid, the document could only be treated as one of sale thus, the order of the FAA is upheld being rightly of the view 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 - the payments made by assessee not being in the nature of royalty, the provisions of section 194J will not apply Decided against revenue.

Summary

Issues:
Whether payments made by the assessee for acquiring satellite rights of films constitute royalty as defined under section 9(1) Explanation 2, necessitating tax deduction at source under section 194J.

Analysis:
The case involved a dispute regarding the classification of payments made by the assessee for acquiring satellite rights of films as royalty under section 9(1) Explanation 2, leading to a tax demand under sections 201(1) and 201(1A). The Assessing Officer (AO) contended that the payments were in the nature of royalty, attracting section 194J. However, the assessee argued that the payments were for sale, distribution, or exhibition of cinematographic films, falling outside the definition of royalty as per section 9(1) clause (v) of Explanation 2.

During the appeal before the Commissioner of Income Tax (Appeals) [CIT(A)], it was observed that the AO failed to provide adequate reasoning on how the payments constituted royalty under section 9(1), thus rendering the tax demand unsustainable. The CIT(A) allowed the appeal, emphasizing the lack of substantiated reasons for invoking sections 201(1) and 201(1A).

The Tribunal examined the statutory provisions of section 194J and section 9(1) Explanation 2 to determine the applicability of royalty. It was noted that the payments made by the assessee pertained to outright sale/purchase of satellite rights without any retention of rights by the assignor, falling within the exclusionary provision of section 9(1) clause (v) of Explanation 2. Consequently, the Tribunal upheld the CIT(A)'s decision, ruling that the payments were not royalty, thereby dismissing the department's appeal.

Moreover, reference was made to a judgment by the Madras High Court, which established that similar payments for perpetual acquisition of satellite rights constituted a sale and were not considered royalty under section 9(1) Explanation 2. The Tribunal applied this precedent to the present case, affirming that the payments made by the assessee did not qualify as royalty, thereby absolving the assessee from liability under section 194J and sections 201(1) and 201(1A).

In conclusion, the Tribunal upheld the CIT(A)'s decision, emphasizing that the payments for acquiring satellite rights were not royalty as per the statutory provisions, leading to the dismissal of the department's appeal. The judgment highlighted the distinction between payments for sale of cinematographic films and those constituting royalty, providing a clear rationale for the decision rendered on 10/12/2014.