2015 (8) TMI 1197 - AT - Income Tax

Expenditure on purchase of Audio Rights - revenue v/s capital expenditure - Held that - We concur with the finding of the learned CIT(A) that the assessee is a manufacture of music and the new material is the master plate which can be obtained only by way of assignment of copyrights. Since the assignment of copy rights and the amount paid is for procuring new material and to ensure its smooth and legal supply as understood in the commercial parlance, the expenditure is Revenue in nature. The master plate of one movie cannot be used for another and for every movie a new and different master plate is required; indicating that the master plate is nothing more than raw material. From the factual matrix of the case on hand, we find that the master plate of a movie is only a new material from which copies are produced on cassettes for that movie only and being material to the evaluation of the gross profit derived from the manufacture and sale of copies / cassettes, would, in our considered view, be construed as Revenue expenditure. - Decided in favour of assessee.

Summary

Issues involved:
Appeal against order of CIT (Appeals) for Assessment Year 2006-07 regarding disallowance of expenditure on purchase of audio rights amounting to Rs. 51,59,100 as capital expenditure.

Analysis:
1. The Revenue appealed against the CIT (Appeals) order for Assessment Year 2006-07, challenging the treatment of expenditure on purchase of audio rights as revenue in nature. The Revenue contended that the acquisition of audio rights is a permanent acquisition, leading to enduring benefits for the assessee. The Revenue relied on the decision in Arvind Mills Ltd. v. CIT (SC) 197 ITR 422 to support its argument.

2. The Assessing Officer disallowed the claim of expenditure on audio rights, treating it as capital expenditure due to its permanent nature and enduring benefits. The assessee argued that the expenditure did not provide enduring benefits as the marketability of music produced from audio rights diminishes over time. The CIT (Appeals) analyzed the issue in detail and concluded that the expenditure on audio rights was revenue in nature. The CIT (Appeals) referenced various tribunal decisions supporting the assessee's position, emphasizing that the audio rights were akin to raw material for the business of manufacturing music.

3. The Tribunal upheld the CIT (Appeals) decision, stating that the assessee's business involved the reproduction of audio sound and music from original tracks provided by film producers. The master plate, considered as raw material, was used to manufacture copies of audio cassettes for each film. The Tribunal agreed that the expenditure on acquiring audio rights was revenue in nature, as it facilitated the production and sale of copies/cassettes, contributing to the gross profit. The Tribunal found no merit in the Revenue's argument and dismissed the appeal, affirming the CIT (Appeals) order regarding the treatment of expenditure on audio rights.

This detailed analysis of the judgment highlights the key arguments, assessments, and conclusions made by the authorities involved in the case regarding the treatment of expenditure on audio rights for Assessment Year 2006-07.