Aalap Digital Music Pvt. Ltd. Vs ACIT (ITAT Delhi)
The Delhi ITAT directed the Assessing Officer (AO) to reassess and re-do the valuation of the license fee expenditure claimed by the Assessee, allowing only the relevant amount as per law. The facts of the case are that the Assessee co., formed to commercially exploit music albums sub licensed to it through an agreement with ‘Hungama Music’, which in turn had obtained licensed rights from Zee Music. In line with the terms of the agreement, the Assessee paid during the year ‘Hungama’ a minimum upfront guarantee fee of ₹11.73 crore for six years.
The ITAT clarified that this guaranteed fee is not a royalty payment for the transfer of music rights, as Hungama retained ownership of the music. Instead, it’s a guaranteed amount that the Assessee must pay to Hungama, with potential penalties for failure to do so. The ITAT emphasized that this payment is closely linked to the Assessee’s revenue generation.
The ITAT noted inconsistencies in the accounting treatment of this payment. The Assessee booked the entire amount as an expense while keeping it as an outstanding trade payable and reported only ₹4.85 crore as income from royalties and licensing fees. The Tribunal found this approach commercially unviable and emphasized that the AO and the Assessee misunderstood the transaction structure. The payment should have been treated as deferred, to be amortized over six years. For the relevant assessment year, only the portion attributable to the period from December 2015 to March 2016 should have been considered as expenditure, with the remaining balance carried forward.
