CASE LAW DETAILS
Decided by: ITAT, `A’ BENCH, MUMBAI, In The case of: Asiavision Home Entertainment Pvt. Ltd. v. ACIT, Appeal No.: ITA No. 3300/Mum/07, Decided on: December 7, 2009
________ _ORDER___ ______
Per : R K Panda:
This appeal filed by the assessee is directed against the order dated 29th January, 2007 of the CIT(A)-XI, Mumbai relating to assessment year 2003-04.
2. At the time of hearing the learned counsel for the assessee did not press grounds of appeal Nos. 2, 3 and 4 for which the learned DR has no objection. Accordingly these grounds are dismissed as not pressed.
3. Grounds of appeal No. 1 by the assessee reads as under:
“The learned CIT(A) erred in upholding addition of Rs.1,09,09,328/ – u/s. 40(a) of the Income-tax Act, 1961 on account of Royalty payment.”
4. Facts of the case, in brief, are that the Assessing Officer during the course of assessment proceedings observed from the Profit and Loss A/c. and the details filed by the assessee that the assessee has incurred the expenditure on royalty payment of Rs.1,09,09,328 to M/s. Columbia Tristar Films of India, Chase Manhattan Bank, 4, Chase Metro Tex Centre, 6th Floor, Broklin , New York 11245. The Assessing Officer asked the assessee to submit the details of TDS deducted and paid from the above royalty payment in view of the provisions of section 40(a) of the Incometax Act, 1961 (the Act). The assessee vide its letter dated 13th March, 2006 filed its reply, the relevant portion of the submission of which has been reproduced by the Assessing Officer in the body of assessment order and which is reproduced as under:
“The payment made to above party was for amount payable to them for the distribution and marketing of their cinematographic film on DVD and VCD. The said fees were payable on minimum guarantee basis and is calculated per piece as fees on distribution of said films. The Guaranteed License fees were paid in advance and the same was adjusted against sale of each DVD and VCD and at the end of the period if full advance is adjusted against minimum guarantee the further amount has to be paid to them. Accordingly, out of the payment made of fees the same is clarified as expenses for the year as per sale. The above payment is not per se Royalty as defined in the Act as defined in explanation 2 to section 9(1)(vi).
In the said definition it states that “transfer of all or any right (including the granting of a License) in respect of any copyright literacy, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for sale, distribution or exhibition of cinematographic films.”
5. In support of the above contention the assessee also enclosed the copy of the agreement between the assessee company and Mr. Vinod Mohindra, Chairman, VDC, VDC House, South Way, Wembley, Middlesex, HA9 OHB, England. However, the Assessing Officer was not satisfied with the explanation given by the assessee. He observed that royalty payment mentioned above is payable to M/s. Columbia Tristar Films of India (CTFI). The relevance of the copy of agreement furnished was not explained by the assessee. Therefore, the terms and conditions as per the agreement with VDC for royalty payment do not find place for deciding the allowability of payment to M/s. CTFI. Since the assessee did not deduct TDS from the royalty payment made to M/s. CTFI and since the assessee did not furnish any details of these documents to establish that the payment made to M/s. CTFI do not fall in the category of payment that is liable for deduction of tax at source as per the provisions of section 40(a) of the Act, the Assessing Officer disallowed the claim of royalty payment made to M/s. CTFI amounting to Rs.1,09,09,328 u/s. 40(a) of the Act.
6. In appeal, the CIT(A) confirmed the action of the Assessing Officer by holding as under:
“3.2 I have considered the rival submissions and the materials on record. Admittedly, the claim was in relation to royalty payment. The onus was squarely on the appellant to establish that it would not be so even though claimed. From the discussion in the body of the assessment order and narrated above, it is seen that the AO has allowed proper opportunity to the appellant to explain its position. The written submission filed during the assessment hearing has made a reference to sec. 9 (explanation 2) to state that it was not a case of payment of royalty “per se”. That means, it is otherwise a royalty. Further, the copies of agreement filed during assessment proceedings did not clear the matter. At the appeal hearing stage, the contentions made at the assessment stage were repeated. Under such facts and circumstances, I find that the appellant has itself claimed royalty payment. Late on, it backtracked on such claim without proper explanation. Under the facts and circumstances, the AO was left with no option other than to make the addition. At the appeal hearing stage also no material has been brought on record to controvert the findings of the AO. Consequently, the order of the AO deserves to be upheld.”
Aggrieved with such order of the CIT(A), the assessee is in appeal before us.
7. The learned counsel for the assessee drew the attention of the Bench to provisions of section 40(a) of the Act and submitted that as per Explanation to the said provisions “royalty” shall have the same meaning as in Explanation 2 to clause (vi) of subsection (1) of section 9 of the Act. Referring to Explanation 2 to section 9(1)(vi), he drew the attention of the Bench to all the clauses and submitted that the assessee does not fall under any of the clauses. Referring to the copy of the agreement, he drew the attention of the Bench to clauses Nos. 1, 3, 6 and 13 of the agreement and submitted that it is only rental distribution and sale and not for TV or radio broadcasting. He submitted that nobody has challenged the copy of the agreement although it was produced before the Assessing Officer during the course of assessment proceedings. He submitted that even though the assessee has paid royalty, however, TDS is not required to be deducted since such payment is outside the definition of “royalty” as per the provisions of section 40(a) of the I.T. Act, 1961. He accordingly submitted that the order of the CIT(A) be set aside and the grounds raised by the assessee be allowed.
8. The learned DR, on the other hand, submitted the Assessing Officer and the CIT(A) have not gone through the agreement properly. Therefore, the matter may be restored back to the file of the Assessing Officer for fresh adjudication.
9. The learned counsel for the assessee, in his rejoinder, submitted that the copy of the agreement was filed before the Assessing Officer during the course of assessment proceedings. Therefore, it can be fairly presumed that he has gone through the same. Even now also it is not contradicted as to how the assessee falls under the TDS provisions.
10. We have considered the rival submissions made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We find there is no dispute to the fact that the assessee as per the licence agreement with Mr. Vinod Mohindra, Chairman, VDC has paid royalty of Rs.1,09,09,328 during the year. According to the Revenue since the assessee has not deducted tax at source from the royalty payment to M/s. CTFI, New York, therefore, the provisions of section 40(a) are attracted and such payment of royalty is not allowed as a deduction. However, it is the submission of the learned counsel for the assessee that the assessee is out of definition of “royalty” for the purpose of TDS.
11. We find as per clause (1) of the licence agreement the programmes which are subject of the licence agreement refer to the feature length and non feature motion pictures for which the licensor owns or controls the necessary rights in the territory. As per clause (6) of the said agreement the licensees shall exploit the programmes for rental and sale through distribution. We find clause 13 of the agreement relating to royalty reads as under:
13. Royalties: The licensees shall pay to the Licensors or if required by the Licensors directly to the Original Licensor by wire transfer of their bankers Chase Manhattan Bank of New York, as provided for in Paragraph 3.1 of the Standard Terms and Conditions, Royalties as follows:
(a) Video cassettes: For Rental and/or sell-through distribution of video cassettes, Royalties shall equal the greater of twenty per cent (20%) of Gross Receipts (as defined in the Standard Terms and Conditions) or EIGHTY U.S. CENTS (US$ 0.80) per Videocassette
(b) Video CD.
(i) For Rental and/or Self-Through distribution of single-disc Video CDs, Royalties shall equal the greater of twenty-five per cent (25%) of Gross Receipts of ONE U.S. DOLLAR (US$ 1.00) per Video CD sold; and
(ii) For Rental and/or Sell-Through distribution of double-disc Video CDs, Royalties shall equal the greater of thirty per cent (30%) of Gross Receipts, or ONE U.S. DOLLAR and THIRTY CENTS (US$ 1.30) per Video CD sold.”
12. We find as per Explanation to section 40(a) royalty shall have the same meaning as in Explanation 2 to clause (vi) of subsection (1) of section 9 of the Act. We find Explanation 2 to clause (vi) of subsection (1) of section 9 reads as under:
(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;
(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or
(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to [(iv), (iva) and] (v).
13. We find, admittedly, royalty has not been paid for any TV or radio broadcasting. The learned DR could not point out as to under which of the clauses of Explanation 2 to section 9(1)(vi) of the Act the payment of royalty falls so as to bring it into the definition of royalty. We, therefore, find merit in the submission of the learned counsel for the assessee that although royalty has been paid as per the agreement, however, such “royalty” is outside the definition of royalty as per Explanation 2 to sub clause (vi) of sub-section (1) of section 9 and therefore, provisions of section 40(a) are not applicable. Further the copy of the agreement was already furnished before the Assessing Officer during the course of assessment proceedings. We, therefore, do not find any merit in the submission of the learned DR that the Assessing Officer or the CIT(A) have not gone through the agreement properly. In this view of the matter, we hold that the payment of royalty made by the assessee is out side the purview of section 40(a) of the Income-tax Act, 1961, and therefore, no TDS is required to be made from such royalty payment. Accordingly, we set aside the order of the CIT(A) and direct the Assessing Officer to delete the disallowance. The ground raised by the assessee is accordingly allowed.
14. In the result, the appeal filed by the assessee is allowed.