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TMI Blog2025 (2) TMI 697X X X X Extracts X X X X X X X X Extracts X X X X ..... uarantee of revenue for 6 years that means the assessee has given guarantee of license fee. It is only a guaranteed amount and the assessee has to meet out the above license fees otherwise, it has to recompensate the same to the licensor. In the agreement, there is no mention of any commitment that guarantee is for every year or to be compensated at the end of the 6th year. Therefore, it is closely linked to the earning of revenue. It is relevant to point out that the Hangama also entered into similar agreement with Zee Music and the same chart of music albums and date of commencement of dates are mentioned. Licensor has taken similar license from Zee and sublet the same to the assessee. It cannot be treated as license fees paid and claimed as expenditure. The dates mentioned in the start date of each album are the starting date of commercial utilization of respective album not the payment of license fees. Whether the license fees paid are to be considered as prior period expenses? - We observed that the AO has not understood the transaction and disallowed the part of royalty expenses as prior period expenses by observing the dates mentioned in the individual music titles, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as claimed the expenditure of previous years in this year but has not considered the revenue income from this album title pertaining to FY 2014-15. Why the expense incurred for purchasing the royalty for A Y 2015-16 should not be disallowed". Response of the Assessee Company: With regard to the above, at the outset it is submitted that Aalap Digital Music Pvt. Ltd. (Aalap) had entered into content licensing agreement with Hungama Digital Media Entertainment Pvt. Limited (HDMEPL) for procurement of the listed 20 titles belonging to the Zee Music in FY 2015-16. HDMEPL in turn had a content licensing agreement with Zee Music, which was entered on 03.07.2015, consequent to which the above referred debit note was raised by HDMEPL to Aalap in FY 2015-16. . There is no separate agreement for licensing of content by HDMEPL to Aalap entered in FY 2014-15. The agreement with Zee Music and HDMEPL was under discussion and was finally executed in FY 2015-16 which was after the music release of most of the titles. The title revenue was however received by HDMEPL prior to the date of the agreement. Thus the titles were assigned from prior date in case of these titles. Since the licensing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e date has been specifically mentioned in the agreement. It should be considered as 3rd of July, 2015 and if that is the case, the album titles released in FY 2014-15 under whose logo, were they being exploited. The assessee has not been able to substantiate the submissions made with other documentary evidence. 6. Further he observed that the assessee has not followed any matching concept of booking revenue to that of expenditure, nor has the assessee has followed any of the accounting standards be it Revenue Recognition i.e. Accounting Standard - 9 or be it Providing for expenses i.e. Accounting Standard - 29, nor the Chartered Accountant bothered to give notes to the above effect in the financial statements or in his Audit Report. He also rejected the submissions of the assessee that the entire amount of income provided in AY 2016-17 which is being earned from HDMEPL has been booked as an expense in the books of HDMEPL in AY 2017-18. With the above observation, he restricted the total royalty of payment of Rs. 11,79,49,313/- out of which he calculated Rs. 7,77,85,538/- prepaid expenses as the same is not relating to current assessment year. The relevant chart is reproduced on pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as under:- License fee for Sr. No. 1 to 18,20 & 23 Rs.11,73,62,500/- Transfer to Aalap Digital License fee for Sr. no. 19,21,22& 24 to 29 Rs. 2,61,37,500/- with HDMEPL Total Rs.14,35,00.000/- Copy of agreement between Zee Music Company and Hungama Digital Media Entertainment Pvt. Ltd is being enclosed at page 35 to 57. 3.5 After the close of the financial year, HDMEPL did not provide the statement of income emanating out of above agreement due to non compilation of data. Therefore assessee company recognized income of Rs. 3.5 Cr. in Balance Sheet for the year ended 31.03.2016 on provisional basis. On 22/09/2016 after signing the Balance sheet HDMEPL provided the statement of income amounting to Rs. 3,56,94,531/- on actual basis and thus balance amount of Rs. 6,94,531/- was included as income in FY 2016- 17. 3.6 Past financial performance of Aalap Digital Music Pvt. Ltd. is as under:- Fin. Year. Sale/Income (Rs.) Profit (Rs.) 2012-13 1,37,85,863/- (4,78,65,172/-) 2013-14 2,07,95,855/- 44,05,147/- 2014-15 1,78,27,074/- 1,77,24,096/- 4. During the course of assessment proceedings the A.O raised the following query On verificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9/2016. Although this content was sub-licensed to Aalap, HDMEPL generated revenue through exploitation of this content on various distribution platforms. A confirmation letter in respect of the revenue generated against these titles from HDMEPL along with letter dated 20/12/2018 is attached herewith at page no 120-133." 6. Finally the AO disallowed the royalty expenses amounting to Rs. 7,77,85,538/- by holding that the said expenditure pertains to prior period since the corresponding revenue booked pertains partially to previous year and partially to the year under assessment. Similarly, the expenses booked pertaining to royalty, of which 80% pertains to the FY 2014-15 as 16 albums titles were released in FY 2014-15. 7. On perusal of the agreement and relevant details, it is the submission of the appellant that the agreement with Zee Music and HDMEPL was under discussion and was finally executed in FY 2015-16 which was after the music releases of most of the titles: The titles revenue was however received by HDMEPL prior to the date of agreement Thus the titles were assigned from prior date in case of these titles. Since, the licensing agreement between Zee Music and HDMEPL and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssions, ld. CIT (A) dismissed the grounds raised by the assessee with the following observations :- "In the present case, the appellant has considered the relevant receipts in the books of accounts on 22/09/2016 i.e. FY 2016-17 whereas the liability of the royalty expenses was crystalized vide agreement dated 20/12/2015. Thus it can be seen that the facts of present case are not identical to the case law relied upon by the appellant. Hence the contention of the appellant is not acceptable, The appellant has relied upon another decision of Hon'ble ITAT Delhi in the case of Escorts Ltd Vs. DCIT 90 Taxman 272. I find that in this case, the disallowance made by the AO on account of prior period of expenses were partly confirmed by the Ld CIT(A) however Hon'ble ITAT deleted the disallowance on the ground the said expenses were not prior period expenses but the same was current years expenditure. Thus it can be seen that the facts of present case are not identical to the case law relied upon by the appellant. Hence the contention of the appellant is not acceptable. Further the appellant, by relying the decision of Hon'ble ITAT Delhi in the case of Times Internet Ltd Vs. ACIT, R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nting to Rs. 3,50,000/- corresponding to the royalty expense was duly accounted for during the assessment year 2016-17. 2.2 That the CIT(A) was not justified in observing that the relevant income pertaining to the royalty expenditure was shown in AY 2017-18 disregarding the fact that the relevant income of Rs. 3,50,000/- was shown in AY 2016-17 when the royalty expenditure was claimed." 10. At the time of hearing, ld. AR for the assessee submitted asunder :- * "In the assessment order 2 specific defects have been pointed out for making addition towards prior period expenses, it is the preliminary contention of the appellant that looking to the facts of the case the liability to incur royalty expense gets crystalized in FY 2015-16 relevant to AY 2016-17 pursuant to execution of agreement for acquisition of rights by assessee company from HDMEPL vide agreement dated 20.12.2015. Since prior to 20.12.2015, there was no agreement and the liability for royalty expenses was not crystalized till that date. Further it is highlighted that HDMEPL was also not having ownership rights of these titles during FY 2014-15 and the same were acquired by them from ZEE Music pursuant to agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itles related to FY 2014-15 relevant to AY 2015-16 was not considered in FY 2015-16 relevant to AY 2016-17 and therefore the matching concept was not followed it is submitted that the observation of AO in respect of next year recognition of revenue is nothing but wrong interpretation of facts as revenue to the extent of Rs. 3,50,00,000/- was duly recognised in FY 2015-16. * Coming to the legality on which the assessee company relied and the same were rejected by the C!T(A), case wise submission is as under: o CIT vs. Exxon Mobile Lubricants Pvt Ltd 8 Taxmann.com 249 (Del) The facts of the case are that agreement was entered into with a company "E" in August 2002 with retrospective effect from Jan to March 2002. The assessee incur expenses in January to march 2002 and the same were claimed as prior period expenses during AY 2003-04. The said claim was rejected by the AD on the ground that the expenses were actually incurred during AY 2002-03. However tribunal held that liability of assessee under agreement had accrued in August, 2002, when agreement was executed and, therefore, its liability to pay for period January, 2002 to March, 2002 arose and crystallized in August, 2002. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Music. We observed that assessee and Hungama entered into license agreement on 20.12.2015 and the license holder, Hangama granted permission to the assessee to use the above license held by it, which was previously acquired by another agreement entered by Hungama with Zee Music. As per the terms of license agreement, the assessee has agreed pay the licensor i.e., Hangama a minimum guarantee fee of Rs. 11,73,62,500/- for 6 years. Therefore, it is only a minimum guarantee license fee not a Royalty payment towards transfer of property. The property right was only with licensor. Technically, the assessee has given only a guarantee of revenue for 6 years that means the assessee has given guarantee of license fee of Rs. 1,95,60,416/- (11,73,62,500/6 years) per annum. It is only a guaranteed amount and the assessee has to meet out the above license fees otherwise, it has to recompensate the same to the licensor. In the agreement, there is no mention of any commitment that guarantee is for every year or to be compensated at the end of the 6th year. Therefore, it is closely linked to the earning of revenue. It is relevant to point out that the Hangama also entered into similar agreement w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year, the assessee has utilized the license only for 4 months and balance amount has to be amortized in the next 5 years and 8 months. Based on the above findings, we are of the view that the method of accounting adopted by the assessee is not proper. 15. After considering the assessment order, we observed that the AO has not understood the transaction and disallowed the part of royalty expenses as prior period expenses by observing the dates mentioned in the individual music titles, which is not date of acquiring the license but it is the date of start date of commercial exploitation of relevant tracks. In our considered view, the method adopted by the assessee as well as the disallowance made by the AO is not appropriate. Therefore, we direct the Assessing Officer to redo the assessment denovo and consider the above observation and allow the relevant expenditure as per law. At this stage, we cannot change the Balance Sheet even though followed the wrong method of recognition of income & expenditure. The Assessing Officer has to determine the actual income and expenses by treating the license fees paid as deferred revenue expenditure and allow the relevant cost during the license ..... X X X X Extracts X X X X X X X X Extracts X X X X
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