Case Law Details
DCIT Vs Phonographic Performance Ltd. (ITAT Mumbai)
ITAT Mumbai held that the assessee is a mere step through entity which collected the royalty and licence fees on behalf of its member and thereafter distributed the net income to the concerned members. Such distributed income cannot be taxed in the hands of the assessee
Facts-
The assessee company was entitled to collect copyright licence fee / royalty from parties like broadcast companies, etc. on behalf of its members and after deducting / recouping the expenses on administration and local expenses for all these, the balance amount of licence fees was distributed among the concerned members.
The assessee filed its ROI on 14/09/2010 declaring total income of Rs.1,51,01,502/-. The assessee’s case was selected for scrutiny and assessment order u/s. 143(3) was passed on 27/12/2013 determining total income at Rs.1,54,05,720/-.
After that assessee’s case was reopened after issuing notices u/s. 148 of the Income-tax Act, 1961 for the reason that as per form 26AS, TDS aggregating to Rs.78,37,644/- was not reconciled and that the assessee has neither taken credit for such TDS nor has it declared the income pertaining to the impugned TDS amount.
AO then made an addition of Rs.7,83,76,440/- as undisclosed income determining the same from the TDS credits and thus made an addition of Rs.7,83,76,440/-. Aggrieved by the said order, the assessee was in appeal before the Ld.CIT(A). The Ld.CIT(A) deleted the said addition. Being aggrieved, revenue has preferred the present appeal.
Conclusion-
Held that the assessee company is a mere step through entity, which collected royalties and licence fees on behalf of its members and distributed the said amount to the concerned member after duly deducting the related expenses on actuals. It is pertinent to consider the submission of the assessee with regard to the method of accounting followed by the assessee company and how the receipts are accounted for.
It is essential to consider whether any income is real or hypothetical and that whether there is a corresponding liability of the other party to pay the amount to the assessee and that the probability of realization of income by the assessee are the factors that are to be considered to determine whether an income has accrued or not.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The captioned appeal has been filed by the Revenue as against the order of the Ld.Commissioner of Income-tax (Appeals)-17, Mumbai dated 26/02/2018 passed under section 250 of the Income-tax Act, 1961 pertaining to assessment year 2011-12.
2. Starting with the appeal filed by the revenue, the grounds of appeal are as under:-
“1. “On the facts and in the circumstances of the case and in the law, the Ld CIT(A) had erred in deleting the addition of Rs. 7,83,76,440/- being amount of unreconciled TDS and income not offered for taxation without appreciating the fact that the deductors have accounted the same in its books of account and have also subjected it to TDS, which has been remitted to the Government Treasury”.
2. “On the facts and in the circumstances of the case and in the law, the Ld CIT(A) erred in allowing relief to the assessee when the assessee has failed to show the relevant amounts as advances in the balance sheet as liabilities and failure of doing the same can construe to the only finding that income has accrued to the assessee “.
3. “On the facts and in the circumstances of the case and in the law, the Ld CIT(A) erred in holding that since the assessee is a step through society and since it was to distribute the accounts to concerned members, there would be no income in the hands of the assessee “.
4. “On the facts and in the circumstances of the case and in the law, the Ld CIT(A) erred in relying upon the Apex court decision in the cases Shoorji Vallabhdas 46 ITR 144(SC), Morvi Insdustries 82 ITR 835 & Godhra Electricity Co 225 ITR 746, without considering the fact of the case”.
5. “On the facts and in the circumstances of the case and in the law, the Ld CIT(A) erred in relying upon the Bombay High court decision in the case of CIT Vs Neon Solution Pvt. Ltd., without considering the fact of the case”.
3. The brief facts of the case are that the assessee company is incorporated under the Erstwhile Companies Act, 1913 and is a company limited by Guarantee and has no share capital. Subsequently, the assessee company was registered as a copyright society under section 33 of the Copyright Act. The assessee company is engaged in the business of granting / issuing licence for public performance and broadcasting, etc. for sound recordings of its members. The assessee company had around 230 members during the impugned year and was authorized to administer copyright music / sound recordings on behalf of its members. It is submitted that the copyright for music albums continued to be vested with the trust. The assessee company was entitled to collect copyright licence fee / royalty from parties like broadcast companies, etc. on behalf of its members and after deducting / recouping the expenses on administration and local expenses for all these, the balance amount of licence fees was distributed among the concerned members.
4. The assessee filed its return of income for the impugned assessment year on 14/09/2010 declaring total income of Rs.1,51,01,502/-. The assessee’s case was selected for scrutiny and assessment order under section 143(3) was passed on 27/12/2013 determining total income at Rs.1,54,05,720/-. After that assessee’s case was reopened after issuing notices under section 148 of the Income-tax Act, 1961 for the reason that as per form 26AS, TDS aggregating to Rs.78,37,644/- was not reconciled and that the assessee has neither taken credit for such TDS nor has it declared the income pertaining to the impugned TDS amount. The Assessing Officer then made an addition of Rs.7,83,76,440/- as undisclosed income determining the same from the TDS credits and thus made an addition of Rs.7,83,76,440/-. Aggrieved by the said order, the assessee was in appeal before the Ld.CIT(A). The Ld.CIT(A) deleted the said addition on the ground that the assessee was only a mere step-through society and that even if the assessee has received the said amount, the assessee company was duty bound to distribute the same amongst its members and that the same would not be the income of the assessee in whatsoever manner may be. The Ld.CIT(A) deleted the addition on the said ground that it was not the assessee’s income and that the assessee was not liable to the same.
5. The Revenue is in appeal before us as against the order of the Ld.CIT(A) upon deletion of the impugned addition made by the Assessing Officer.
6. The Ld.DR for the Revenue contended that the Ld.CIT(A) has erred in deleting the addition made by the Assessing Officer on the ground that the same does not pertain to the income of the assessee. The Ld.DR further stated that the Ld.CIT(A) has failed to consider the fact that the TDS of Rs.78,37,644/- was deducted as per form 26AS for the impugned year. The same was not reconciled and that it becomes irrelevant whether the assessee has taken credit for such TDS or not. The Ld.DR relied on the order of the Assessing
7. The Ld.AR for the assessee, on the other hand, contended that addition cannot be made merely by considering Form 26AS. The Ld.AR further stated that the assessee has not taken credit of the said TDS and was not aware of the parties, who have credited the said TDS amount. The Ld.AR also stated that the Assessing Officer had made the said addition without proper enquiry as to who has credited the same. The Ld.AR relied on the decision of the Ld.CIT(A).
8. We have heard the rival submissions and perused the materials on It is observed that the assessee company is a mere step through entity, which collected royalties and licence fees on behalf of its members and distributed the said amount to the concerned member after duly deducting the related expenses on actuals. It is pertinent to consider the submission of the assessee with regard to the method of accounting followed by the assessee company and how the receipts are accounted for. The detailed submissions of the assessee are reproduced below:-
“1. Method of accounting followed and how receipts are accounted for:
The company accounts for income when they receive the log records (usage reports) from the users/licensees for music used by them. The company processes -the log records, identifies the songs to respective members/music labels. Once this whole exercise is completed, the company accounts for the income by invoicing the licensees and simultaneously makes a provision for royalty payment.
The accrual of income can only happen when the log records (usage reports) are received from the licensees and music labels identified and invoice is raised. At times, it happens that the log reports given by the user may, due to his error, include songs of independent music companies, who are not members of the Company, which needs re be rectified at the time of processing of logs. Here, it is to be noted that the Company administers copyrights of only music labels who are its members’ and not those of non-members. Mere receipt of amount does not amount to accrual of income. At times, it also happens that broadcasters/licensees makes provision for royalty payment in their books (for reasons best known to themselves) but subsequently no payment nor log records are received by the Company. At times, licensees/user send a payment without accompanying details and usage reports and it takes time to obtain the required details and reconcile the same. At times, an unauthorized person, with whom license arrangement Is not in place, illegally uses our songs and sends some payment: the same cannot be accounted prior to resolving the legal Issues.
It is pertinent to note that, it is imperative that both the leg of transaction has to be done – accounting of income is not possible unless to whom it is payable is not identified. Finally, the amount paid after recoupment of actual expense incurred has to be Nil (once again working attached).
The Royalty income could be ascertained/ accrued and accounted for only when the party to whom the Royalty income belongs is identified based on usage reports received by the company. Till the above excercise is complete no income accrues to the Company.
As the Company is governed by the provisions of the Copyright Act 1957, the company is obliged to pay the income received from the Broadcasters/licensees to the copyright owner (member) and unless the usage report is received and verified and music labels properly identified and signed off, the right to book income in the Company’s books does not arise; and hence the same is, appropriately and as per Accounting Standard, accounted in the period this exercise is complete.
At times, the user may book a TDS entry in his books in one assessment year, but send the payment and usage reports to the Company in the next assessment year: after a delay of 5-6 months. If any party / licencee has accrued royalty in its books and deducted TDS then the Company claims it in the year in which income is considered/booked by the Company. Sometimes it may also happen that usage records are received but payment is not received from party: the company has accounted for the income and distribution in that year, but the party has accounted in the year of payment. In very few cases, party has deducted TDS on advance payment made for the contract period, but income is accounted by the Company on period basis in case of minimum guarantee / lumpsum payments – prorata TDS is considered by the company.
The above system of accounting is consistently followed by the company.
1. In the backdrop set out above and having regard to the method of accounting followed by the Appellant as also the Typical nature of the composition of the Appellant and nature of its activities, it is most respectfully submitted that the impugned addition is grossly unfair and is clearly untenable in that:
a. As explained at length in the letter of Appellant dated 13/12/2016, the Appellant had disputes with some of the Radio Broadcasters
b. In some cases, the License Agreements had expired and despite this, the concerned FM stations continued to broadcast the copyright music and thus, violate the copyright laws.
c. Accepting any payments from such parties and other parties with whom there were disputes would amount to regularizing their infringement and thereby adversely affecting the Position of the Appellant. This, would also prevent Appellant from obtaining the legal injunction against such parties. This would also set a wrong precedent in the market and would encourage other Broadcasters to also take copyright violations lightly.
d. It being the Prime Object and Responsibility of Appellant to protect copyrights of its Members from infringements and unauthorized usage, the Appellant could not accept payments from such parties in default.
e. The Appellant had filed several cases against various FM broadcasters like Radio Fever, Radio city, Synergy FM, Radio Mid day- Next Radio, Radio Indigo etc. Such cases were pending in various courts.
f. Thus, while the litigation was on with such parties, the Appellant could not even acknowledge the TDS made by such parties, let alone, receive any royalty payments from such parties.
g. Furthermore, till the Income had accrued, as per the Method followed by the Appellant, it did not account for such income, even though there would be TDS qua such income.
h. Thus, the basic finding of the learned AO (based on which the impugned addition has been made) is flawed and unfounded. The learned AO has failed to appreciate that merely because there was TDS made by some parties, would not mean that they had acknowledged the receipt of services by the Appellant and hence the Appellant was dutybound to declare such income.
i. It is submitted that there is a total lack of understanding of the nature of activity of Appellant on the part of the learned AO. As explained above. TDS made by parties with whom there were disputes would not tantamount to acknowledgement of receipt of services by such parties. On the contrary, such parties were in default of Copyright Infringement and unauthorized user and hence the Appellant could neither acknowledge TDS from such pat-ties, nor could it accept payments from such parties.
j. Thus, the very basis adopted by the learned AO to make the impugned addition is grossly flawed and no addition based on this premise is tenable.
k. Your Honor may kindly also recollect the Method Of accounting for revenue recognition followed by the Appellant. The Appellant would recognize any revenue only after it raised an Invoice to the concerned party. The Appellant would raise an Invoice, only after checking the Logs and after identifying and correlating the Log records with its Members’ song database/repertoire and satisfying itself about proper compliance the provisions of Agreement with the concerned Party.
l. This method of accounting has been followed by the Appellant from year to year and in scrutiny assessments made in the past as also in the later years, this method of accounting has been accepted and additions similar to the impugned additions have been made in any other years.
4.4.5 The appellant has also attempted to reconcile vide letter dated 12/12/2016, the TDS amount and related income which were not taken credit of was explained. Vide the Chart accompanying the said letter, the Appellant has explained:
i. Cases of TDS where the Appellant did not raise Invoices, nor was there any contract with the Party nor was any amount received/accepted from the In such cases mere TDS would not tantamount to accrual of income as there were disputes and litigation with such parties.
j. Instances of TDS where there was no recognition of TDS concerned income due to ongoing litigation and legal suits filed.
k. Instances of TDS where the related income was declared in later or earlier years based on the method of accounting followed by the Appellant.
l. Your Honor may readily appreciate that the Appellant had filed a full ; . reconciliation and had explained at length each entry of TDS of Rs. 78,,3 7,644 and how the related income was accounted or could not accounted.
m. The Learned AO gravely erred in not dealing on merits with such detailed explanations and reconciliation and making the huge addition in reference based only on surmises and in a mechanical manner.
2. Your Honor may also note that in cases where there were no disputes, the Appellant had recognized income in the years (Later or earlier) In which the income accrued as per its Method of Accounting and Invoicing. In all such cases, there would be double taxation of the same income, in that, once it would ‘ be taxed based on the stand taken by the learned AO and it would be taxed again in the year of accrual based on the Method of accounting of the Appellant.
3. Even the Law has recognized the fact that the TDS may be made in one year but the related income may accrue and may be declared in another year or years. This is recognized by Rule 37BA and sub rule (3i) Reads as under:
“Where tax has been deducted at source and paid to the Central Government and /[he Income is assessable over a number of years, credit for tax deducted at source shall be allowed across those years in the same proportion in which the income is assessable to tax.”
4.4.6 It is also submitted that since the Appellant did not claim credit for any part of the impugned TDS, neither the income equal to TDS amount nor any part of related receipt would partake the character of income in the hands of the Appellant for the year in reference.”
9. From the above submission of the assessee it is evident that the assessee has also tried to reconcile the TDS amount which were not taken credit of Rs.7,83,76,440/-.
10. The assessee has also submitted that the assessee was a mere facilitator and collected the royalty income on behalf of its members and subsequently distributed the net income to the concerned members. The assessee further stated that the assessee has filed its return under the Copyrights Act evidencing collection of royalty on behalf of its members and the distribution of the same to its members.
11. From the above observation, the assessee enforces that the income distributed to the concerned members has to be taxed in the hands of the members only and not on the assessee and that the same would not amount to the income of the assessee. The assessee has also submitted that the method of accounting for revenue recognition followed by the assessee has been consistently accepted and no addition was made in earlier years as well as in subsequent years. The assessee has also furnished copies of the assessment order pertaining to assessment years 2009-10, 2010-11, 2012-13 to 2015-16 before the lower authorities. The assessee claims that there was no change in the method of accounting followed by the assessee and that the assessee being a society of members has no right to retain any such income. The assessee is duty bound to distribute any income received by it to the concerned member. The assessee is entitled only to the expenses incurred in performing such activities. The Ld.CIT(A) has relied on the following decisions:-
1. Shoorji Vailabhdas 46 ITR 144 (SC),
2. Morvi industries 82 ITR 835
3. Godhra Electricity co 225 ITR 746,
12. We have considered the judicial precedents in the abovesaid decisions which reiterated the principle that it is essential to consider whether any income is real or hypothetical and that whether there is a corresponding liability of the other party to pay the amount to the assessee and that the probability of realization of income by the assessee are the factors that are to be considered to determine whether an income has accrued or not. We would also like to place reliance on the decision of the jurisdictional Bombay High Court in the case of CIT vs Neon Solutions Pvt Ltd (supra) which was also relied on by the Ld.CIT(A) for the fact that even in accrual method of accounting, income which cannot be realized and the collection of the same is uncertain, the same cannot be accounted.
13. Respectfully following the above said decision, we find no infirmity in the decision of the Ld.CIT(A) and we hereby uphold the order of the Ld.CIT(A). Resultantly, the appeal filed by the Revenue is dismissed.
14. During appellate proceedings, the Ld.AR of the assessee has submitted that if the appeal was decided in favour of the assessee, then the cross objection would not be pressed. As such, in view of our decision on the Revenue’s appeal, we dismiss the cross objection filed by the assessee.
15. In the result, both, the appeal of the revenue and the cross objection filed by the assessee are dismissed.
Order pronounced in the open Court on 12th day September, 2022.
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