Applicability of TDS on Royalty payment to US based Copyright Holder on sale and distribution of cinematographic films on DVD and VCD

Recently, the Mumbai bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Asia vision Home Entertainment Pvt. Ltd. Vs ACIT has held that royalty paid for the distribution and marketing of cinematographic film on DVD and VCD cannot be considered as royalty paid for TV or radio broadcasting rights and for the purpose of dis allowance under section 40(a) of the Income-tax Act, 1961 (the Act) ‘royalty’ shall have the same meaning as provided under explanation 2 to section 9(1)(vi) of the Act.

Although the payment made by the taxpayer was in the nature of royalty was outside the definition of royalty and therefore, such expenditure cannot be disallowed under section 40(a) of the Act.

The taxpayer entered into the licence agreement with VDC. As per the agreement the taxpayer made royalty payment of INR 11 million to M/s. Columbia Tristar Films of India, a USA based company (foreign company) for the distribution and marketing of their cinematographic film on DVD and VCD. The said fees were payable on minimum guarantee basis and was calculated per piece as fees on distribution of said films. Such Guaranteed License fees were paid in advance and the same were 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. The Assessing Officer (AO) observed that since the taxpayer failed to provide the relevance of the agreement, the terms and conditions as per the agreement with VDC for royalty payment do not find place for deciding the allow ability of payment to the foreign company. Further, since the taxpayer failed to deduct tax on the royalty payments made to the foreign company the AO disallowed the expenditure under section 40(a) of the Act. The Commissioner of Income-tax (Appeals) confirmed the dis allowance made by the AO.

Contentions of the taxpayer

The taxpayer contended that as per explanation to section 40(a) of the Act, ‘royalty’ shall have the same meaning as provided under explanation 2 to section 9( 1)(vi) of the Act. Further, the payments made by the taxpayer does not fall under any of the clauses as provided in Explanation 2 to section 9(1)(vi) of the Act.

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