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.
From the agreement submitted by the taxpayer to the AO it was clear that payment made was only for the rental distribution and sale and not for TV or radio broadcasting.
Even though the taxpayer had paid royalty, tax was not required to be deducted since such payment is outside the definition of ‘royalty’ as per the provisions of section 40(a) of the Act. Accordingly, such payments made to foreign company cannot be disallowed under section 40(a) of the Act.
Contentions of the tax department
The tax department contended that tax officer has not gone through the agreement properly. Accordingly, the matter may be restored back to the file of the AO for fresh adjudication.
Ruling of the Tribunal
The Tribunal agreed with the taxpayer’s contention that the royalty was not paid for any TV or radio broadcasting and the tax department could not point out as to under which 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.
Although royalty has been paid as per the agreement, however, such ‘royalty’ is outside the definition of royalty as provided under explanation 2 to section 9( 1)(vi) of the Act and therefore, provisions of section 40(a) were not applicable.
Further the copy of the agreement was already furnished before the AO during the assessment proceedings. Therefore, contention of the tax department to allow tax officers to go through the agreement was not valid.
Accordingly, the Tribunal held that the payment of royalty made by the taxpayer was outside the purview of section 40(a) of the Act and therefore, tax was not required to be deducted from such royalty payment.
Our Comments:- The Mumbai Tribunal has laid down an important proposition that even if the payment made is in the nature of royalty understood in the normal parlance, it will not be considered as royalty under the Act unless it satisfies the definition provided under explanation 2 to section 9(1)(vi) of the Act.
It is pertinent to note that the decision does not deal with the provisions of the Copyright Act. It would be interesting to examine the impact of section 14, 51 and 52 of the Copyright Act on the issues raised in the current decision.