2015 (7) TMI 681 - AT - Income Tax

Non deduction of TDS u/s 194J r.w.s. 9 of IT Act - payments made in the nature of royalty - Held that - The transactions on account of the agreement between the producers and the assessee appears to be the sale of world negative rights on perpetual and permanent basis and the provisions of section 194J are not applicable and there is no liability to deduct tax at source. The disallowance made by the AO u/s 40(a)(ia) is to be deleted. See ACIT vs. Aishwarya Arts Creations (P) Ltd 2014 (12) TMI 1015 - ITAT HYDERABAD and Mrs. K. Bhagyalakshmi Versus The Deputy Commissioner of Income Tax 2013 (12) TMI 1215 - MADRAS HIGH COURT - Decided in favour of assessee.

Issues Involved:
1. Disallowance of expenses under Section 40(a)(ia) for non-deduction of tax at source under Section 194J.
2. Classification of payments for satellite rights as royalty or outright sale.
3. Treatment of payments for satellite rights as acquisition of intangible assets eligible for depreciation.

Issue-wise Detailed Analysis:

1. Disallowance of Expenses under Section 40(a)(ia) for Non-deduction of Tax at Source under Section 194J:
The assessee, a trader in films and film rights, was found by the AO to have deducted tax at source on payments but not remitted it to the government. The AO disallowed the expenses under Section 40(a)(ia) for non-deduction of tax at source, treating the payments as royalty. The assessee argued that the transactions were outright sales, not royalties, and thus Section 194J was not applicable. The CIT (A) supported the assessee's view, noting that the agreements indicated absolute transfer of rights, excluding one right for a limited period, which did not affect the character of the sale. The CIT (A) concluded that the transactions were sales and not subject to TDS under Section 194J. The Tribunal upheld the CIT (A)'s decision, referencing similar judgments from the Hyderabad Bench and the Madras High Court, confirming that the payments were for outright sales and not royalties.

2. Classification of Payments for Satellite Rights as Royalty or Outright Sale:
The AO classified the payments as royalties, arguing that the rights were limited and thus not an absolute sale. The CIT (A) disagreed, stating that the agreements showed absolute transfer of rights, with the producers retaining only a limited right for a specific period. The CIT (A) observed that the withholding of one right did not affect the sale of other rights. The Tribunal agreed, citing the Hyderabad Bench's decision and the Madras High Court's ruling that perpetual transfer of rights constitutes a sale, not royalty. The Tribunal confirmed that the payments were for outright sales and not subject to TDS under Section 194J.

3. Treatment of Payments for Satellite Rights as Acquisition of Intangible Assets Eligible for Depreciation:
The Department argued that if the payments were not considered royalties, they should be treated as acquisition of intangible assets, eligible for depreciation. The CIT (A) did not address this directly, as it had already concluded that the payments were for outright sales. The Tribunal, having dismissed the Revenue's primary grounds, found this argument infructuous.

Conclusion:
The Tribunal dismissed the Revenue's appeals, confirming that the payments made by the assessee were for outright sales of film rights and not royalties. Consequently, the provisions of Section 194J were not applicable, and there was no liability to deduct tax at source. The disallowance under Section 40(a)(ia) was deleted, and the alternative ground regarding depreciation was rendered moot.

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