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Case Number

I.T.A No. 4017.MUM/2010, (A.Y 2007-08)

Attorney(S)

Appellant by: Shri V.V Shastri
Respondent by: Ms. Usha Dalal

Judges

N.V Vasudevan, J.M
R.K Panda, A.M

Acts

section 9(1)(vi) Explanation 2 clause (v) of the Income-tax Act, 1961 (the Act).
Provision of section 9(1)(vi), Explanation (2) clause
SECTION 194 A INCOME TAX ACT
INCOME TAX ACT
provisions of section 40(a)(ia )
section 40(a)( ia) 25
section 40(a)( ia)."2.

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Smart Summary

Tribunal Summary — Appeal by Revenue (Assessment Year 2007-08)

Factual and Procedural Background

This is an appeal by the Revenue against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] dated 12-03-2010 relating to assessment year 2007-08. The assessee is an individual proprietor carrying on business as Visual Reality engaged in dubbing work and dealing in movies.

During the relevant previous year the assessee paid Rs. 26,87,310 to M/s Sahamongkofilm International Co. Ltd., Thailand, for rights in respect of two films (Boa and Passion). The Assessing Officer (AO) held that this payment was in the nature of royalty chargeable to tax in India and, because the assessee did not deduct tax at source (TDS), disallowed the full amount under section 40(a)(ia) of the Income-tax Act.

Separately, the assessee paid Rs. 1,60,000 to a dubbing studio (Ninety Degrees) for studio hire/ dubbing work; the assessee deducted TDS at the rate applicable for contract payments (2%). The AO treated that payment as rent/lease (section 194-I) and disallowed the expenditure under section 40(a)(ia) for failure to deduct tax at the higher rate.

The assessee appealed to the CIT(A). The CIT(A) (i) held that part of the payment to the non-resident related to TV broadcasting rights (royalty) and attributed 25% of the total payment as taxable royalty for which TDS ought to have been deducted, limiting the disallowance under section 40(a)(ia) to that portion; and (ii) held that the studio payment fell within section 194C as payment to a subcontractor (work including broadcasting/telecasting), validating the 2% TDS and deleting the AO's disallowance. The Revenue appealed both findings to the Tribunal.

Legal Issues Presented

Whether the payment of Rs. 26,87,310 made to a non-resident for film rights was wholly disallowable under section 40(a)(ia) because it constituted "royalty" chargeable to tax in India (and subject to TDS under section 194J), or whether a portion of the payment was properly excluded from royalty by reason of Explanation 2 clause (v) to section 9(1)(vi) (which excludes consideration for sale, distribution or exhibition of cinematographic films from "royalty"), permitting a bifurcation that limits the disallowance to the royalty portion.
Whether the payment of Rs. 1,60,000 described as "studio hire charges" was properly treated by the AO as rent/lease chargeable under section 194-I (requiring tax deduction at a higher rate) or whether it was payment for work to a subcontractor falling under section 194C (including Explanation (iv) to section 194C(7) treating broadcasting/telecasting work as "work"), permitting deduction of tax at the lower rate actually applied by the assessee.

Arguments of the Parties

Revenue (Appellant) — Core Contentions

Ground No.1: The CIT(A) erred in allowing a deduction by directing that only 25% of the royalty payment be treated as attributable to royalty under section 40(a)(ia). The Revenue asserted that if the payment was in fact "royalty," the entire amount is liable to TDS under section 194J and, where TDS was not deducted, the entire payment should be disallowed under section 40(a)(ia).
Ground No.2: The CIT(A) erred in deleting the AO's addition of Rs. 1,45,455 by treating studio hire payments at the 2% (circa 2.04%) rate under section 194C instead of applying the section 194-I rate (the ground states 22.44% while the AO's note refers to 20%), and that reliance on Explanation (iv) to section 194C(7) was incorrect.

Assessee (Respondent) — Core Contentions

Regarding the payments to the non-resident (Boa and Passion): The assessee relied on the underlying agreements and contended that the payments were consideration for distribution and exhibition of cinematographic films and hence excluded from the definition of "royalty" under Explanation 2 clause (v) to section 9(1)(vi), which excludes consideration for sale, distribution or exhibition of films from royalty. The assessee pointed to separate licensing for TV rights and submitted evidence of amounts attributable to satellite TV broadcasting rights (e.g., Rs. 4,75,000 for TV rights for Boa).
Regarding studio hire charges: The assessee maintained that payment to Ninety Degrees was for work executed as a subcontractor (dubbing services using studio equipment and staff), and therefore the payments were correctly subjected to TDS under section 194C at the lower rate. The assessee relied on Explanation to section 194C(7) (specifically clause (iv) including broadcasting/telecasting and production of programmes) and placed on record contractual/transactional details showing dubbing for TV serials and agreements with telecasting companies.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Tribunal (N.V. Vasudevan, Judicial Member) reviewed the facts and the CIT(A)'s findings and addressed the two grounds raised by the Revenue.

Ground No.1 (Royalty / section 40(a)(ia) / section 9(1)(vi) Explanation 2 clause (v)) — Reasoning:

The Tribunal accepted the factual finding that the assessee acquired a bundle of rights in relation to the films (including distribution/exhibition rights and television/satellite rights) as shown by the agreement placed before the CIT(A).
The Tribunal relied on the statutory text of Explanation 2 clause (v) to section 9(1)(vi), which—by its terms—defines "royalty" to include consideration for rights in films for use in connection with television but expressly excludes consideration for the sale, distribution or exhibition of cinematographic films from the definition of royalty.
The CIT(A) had analyzed the contract and the receipts and concluded that while a portion of the payment related to distribution/exhibition (excluded from royalty), a meaningful portion related to TV rights (taxable as royalty). The CIT(A) attributed 25% of the amount paid as attributable to TV rights (royalty) and limited disallowance under section 40(a)(ia) to that portion.
On the record before the Tribunal, these factual findings (including the contractual allocation and the calculation leading to 25%) were not disputed. The Tribunal concluded that the CIT(A)'s bifurcation and restriction of disallowance to the TV-rights portion followed from the statutory exclusion in Explanation 2 clause (v) and was a proper application of law to the facts. Accordingly, the Tribunal upheld the CIT(A)'s approach and dismissed the Revenue's ground.

Ground No.2 (Studio hire / section 194-I v. section 194C) — Reasoning:

The Tribunal noted the factual finding (not challenged before it) that the assessee had used the services of the dubbing studio Ninety Degrees including the studio's equipment and artists/staff to carry out dubbing work.
The CIT(A) found that the arrangement satisfied the conditions of section 194C(7) Explanation (iv), which treats "work" to include broadcasting and telecasting including production of programmes for such broadcasting/telecasting; on that basis, the CIT(A) held that the payment was for getting work done through a subcontractor and was therefore taxable under section 194C (at the rate at which the assessee had deducted TDS), not as rent under section 194-I.
The Tribunal accepted the CIT(A)'s factual findings that the services involved use of studio facilities and personnel and were in substance payments to a subcontractor for work performed. Given these uncontested findings and the explicit inclusion of broadcasting/telecasting work within the scope of "work" in the Explanation, the Tribunal concluded that the assessee correctly applied section 194C and deducted TDS at the lower rate. No interference with the CIT(A)'s deletion of the AO's disallowance was warranted.

Holding and Implications

Core Ruling: REVENUE'S APPEAL DISMISSED.

Direct consequences for the parties (as reflected in the order):

The Tribunal upheld the CIT(A)'s bifurcation of the payment to the non-resident for film rights and sustained the limitation of the disallowance under section 40(a)(ia) to the portion (25%) attributable to TV rights (taxable as royalty). The balance of the payment, representing distribution/exhibition rights excluded from the definition of "royalty" by Explanation 2 clause (v) to section 9(1)(vi), is not disallowable under section 40(a)(ia) on the ground that TDS was not deducted.
The Tribunal also upheld the CIT(A)'s deletion of the AO's disallowance in respect of studio hire charges, finding that the payment to Ninety Degrees was for work performed by a subcontractor and therefore properly subjected to TDS under section 194C at the rate applied by the assessee.

Broader implications: The opinion applies the statutory text (notably Explanation 2 to section 9(1)(vi) and the Explanation to section 194C(7)) to the particular contractual facts before the authorities. The decision results in an outcome-specific affirmance of the CIT(A)'s factual allocation and tax withholding treatment; the opinion does not purport to lay down a new legal precedent beyond applying those statutory provisions to the facts of this case.

Disposition

The appeal filed by the Revenue is dismissed and the order of the CIT(A) dated 12-03-2010 is upheld in the respects described above.

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The Acit 11(1), Room No. 439, Aaykar Bhavan, Mk Marg, Mumbai - 20 () v. Shri Mansih Dutt, 19, Chhedva Apartments, Sion Trombay Road, Chembur, Mumbai 400071 ().

ORDER

N.V. Vasudevan, Judicial Member. - This is an appeal by the revenue against the order dated 12-3-2010 of CIT(A) III, Mumbai relating to assessment year 2007-08. Ground No. 1 raised by the assessee reads as follows:

"1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing to allow deduction under section 40(a)( ia) 25 per cent of the royalty paid ignoring the fact that if the payment is a royalty, the same is liable to TDS under section 194J of the Income-tax Act and if the assessee fails to comply with the TDS provisions, the entire amount paid as royalty warrants disallowance under section 40(a)( ia)."

2. The assessee is an individual. He carries on business as proprietor of Visual Reality and does business of dubbing work and dealing in movies. During the previous year the assessee had made a payment of Rs. 26,87,310 to one M/s. Sahamongkofilm International Co. Ltd., 388, S.P. Bldg., 9th Floor, Zone-3, Phaholyothin Road, Samsennai, Phayathai, Bangkok - 10400, Thailand. Since the person to whom the payment was made was a non-resident, the Assessing Officer examined the question as to whether the assessee should deduct tax at source on the payment made to the non-resident and as to whether there was any income embedded in such payment arising in India chargeable to tax in the hands of the non-resident in India. If it is found chargeable to tax in India and if the assessee fails to deduct tax at source, then the assessee will not be entitled to claim payment as a deduction, in view of the provisions of section 40(a)( ia) of the Act. The plea of the assessee was that the payment was made in connection with distribution and exhibition of Cinematographic films and, therefore, the payment cannot be construed as royalty within the meaning of section 9(1)(vi) Explanation 2 clause (v) of the Income-tax Act, 1961 (the Act). The Assessing Officer however held that the payment was in the nature of royalty and therefore chargeable to tax in India. Since the assessee had not deducted tax at source, the Assessing Officer disallowed the claim of the assessee for deduction of a sum of Rs. 26,87,310 which was claimed as expenditure in the profit and loss account.

3. Before CIT(A), the assessee furnished the copy of agreement with M/s. Sahamongkofilm International Co. Ltd. On perusal of the agreement it was noticed that the assessee had acquired pay TV for Terrestrial, Cable and Satellite, Free TV Rights for Terrestrial, Cable Satellite and other TV Rights i.e., Pay Per View and Video on Demand for both subtitled and dubbed versions in Indian original languages and English. The films in question were Boa and Passion. The assessee drew the attention of the CIT(A) to the definition of royalty as per the Provision of section 9(1)(vi), Explanation (2) clause (v): Explanation 2, which provides that for the purpose of this clause, (i.e., Clause (v) of Explnation 2 to section 9(1)(vi) of the Act), "royalty" means consideration (including any lump sum consideration, but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for transfer of all or any rights (including the granting of a licence) in respect of any copy right, 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. The assessee submitted that the payment in question was consideration for distribution or exhibition of Cinematographic film. The assessee also had right to exhibit the aforesaid Cinematographic films.

4. The CIT(A) was of the view that out of the consideration Rs. 26,87,310 a portion of the payment has to be attributed to the rights in respect of pay TV, free TV and other TV rights. The CIT(A) therefore called upon the assessee to show cause as to why least a portion of the royalty payment be not attributable to the Rights in respect of pay TV, free TV and other TV rights. In response assessee submitted that insofar as the film Boa was concerned the receipts from TV rights distribution were Rs. 4,75,000 as compared to the total collection of Rs. 43,93,000. The contract copy for TV rights distribution was filed before the CIT(A) in respect of the film Boa where the Satellite TV broadcasting rights only were found to be licensed for a sum of Rs. 4,75,000, Rs. 25,000 for Boa in English language and for Rs. 4,50,000 for Anaconda Returns in Hindi Language. The Hindi Language film called Anaconda Returns was originally Boa. The CIT(A) on consideration of the above submissions, held as follows:

"2.1.4 It is therefore, seen that the Satellite TV broadcasting rights accounted for approximately 11 per cent of the receipts on behalf of the film Boa of the Appellant. Considering that the other (i) rights for pay TV, (ii) Terrestrial and Cable rights for Fee TV and (iii) other TV rights were not assigned by Appellant, there would be royalty payment attributable to these beyond the 11 per cent for Sattellite TV Rights also. Therefore, on the facts of the case it is held that 25 per cent of the amount paid on royalty was attributable to the taxable portion on which tax should have been deducted. In respect of Passion though Appellant had paid royalty of Rs. 4,47,885, the film was stated to have not been imported as Appellant considered it would not be censored for theatrical rights due to bold scenes in the movie. Nevertheless, royalty paid included the rights for TV also. Based on the above arguments, 25 per cent of royalty paid is held to be attributable to TV rights on which Appellant ought to have deducted tax. The disallowance under section 40(a)( ia) may be worked out accordingly by the Assessing Officer while giving effect to this order."

5. Aggrieved by the order of the CIT(A) the revenue has raised ground No. 1 before the Tribunal.

6. We have heard the submissions of the ld. D.R. who relied on the order of the Assessing Officer. It is clear from the order of the CIT(A) that the payment in question was made by the assessee for obtaining certain rights over the film Boa and Passion. The rights acquired by the assessee comprises of several rights. Such rights included distribution and exhibition of cinematographic films and also satellite TV protecting rights. In view of the specific provisions of Explanation 2, clause (v) of section 9(1)(vi) of the Act consideration for distribution or exhibition of cinematographic films are excluded from the purview of definition of royalty. The CIT(A) bifurcated the value of the rights acquired by the assessee and has attributed 25 per cent of the payments made as attributable to TV rights which would be royalty taxable in the hands of the non-resident in India. To that extent the CIT(A) has restricted the disallowance to be made under section 40(a)( ia) of the Act. Before us the facts as it transpired before the CIT(A) are not disputed. In such circumstances we are of the view that the conclusions arrived at by the CIT(A) are proper and have to be upheld. We, therefore, uphold the order of the CIT(A) and dismiss ground No. 1 raised by the revenue.

7. Ground No. 2 raised by the revenue reads as follows:

"2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition of Rs. 1,45,455 made on account of payment made on Studio Hire Charges at the rate of 2.04 per cent instead of at the rate of 22.44 per cent under section 194-I of the Income-tax Act by wrongly relying on the provisions of section 194C(7) Explanation (iv).

8. We have already seen that the assessee is engaged in the business of doing dubbing work. The assessee was having his own studio comprising of various dubbing equipments and professional artist to carry on the work of dubbing. Whenever the assessee's own studio could not be used the assessee used to give the job of carrying out dubbing work to other dubbing studios. In respect of one such work entrusted by the assessee to another studio by name Ninety Degrees the assessee had made a payment of Rs. 1,60,000. According to the assessee, the payment was made to a sub-contractor for execution of a contract and, therefore, in terms of section 194C the assessee deducted tax at source at 2 per cent. The Assessing Officer however, was of the view that the payment in question was rent paid by the assessee and, therefore, in terms of section 194-I of the Act the assessee ought to have deducted tax at source at 20 per cent. Since the assessee did not deduct tax at source at the proper rate the Assessing Officer disallowed the claim of the assessee for deduction of a sum of Rs. 1,60,000 under the head studio hire charges by invoking the provisions of section 40(a)(ia ) of the Act.

9. Before the CIT(A), the assessee submitted that the contract details were not called for during the assessment and that the work done by 90 Degree was for work as provided for under section 194C of the Act. The assessee pointed out that studio is booked and dubbing work is undertaken using studio equipment, staff etc. The word Studio Hire is a term generally used by industry to denote the various services rendered by the dubbing studio. But the real nature of work is a contract for carrying out work. The assessee relied on Explanation to section 194C(7) where at (iv) 'work' would include broadcasting and telecasting including production of programmes for such broadcasting or telecasting. The assessee furnished details of the work carried out by it from Studio 90 Degree which showed that in respect of TV serial Karma the assessee undertook dubbing work. The agreement between the assessee and Turner Entertainment a telecasting Company was also filed.

10. On consideration of the above submissions, the CIT(A) held as follows:

"2.3.2 Facts and materials on record are considered. It is seen that Assessing Officer had only asked Appellant to explain the payment but had not specified any evidence to be furnished. The submissions made during the appeal indicate that the studio was hired for utilizing the dubbing facilities which included service through the studio staff. Condition of section 194C(7) Explanation (iv) are met also. As such the payment made was coverable under section 194C under which tax was deduced. On facts, therefore, the disallowance made under section 40(a)(ia ) is deleted."

11. Aggrieved by the order of the CIT(A) the revenue has raised ground No. 2 before the Tribunal.

12. We have heard the rival submissions. As can be seen from the order of the CIT(A), the assessee had utilized the services of dubbing studio Ninety Degrees by using their equipments as well as the artists who were working for Studio Ninety Degrees. The assessee had thus carried out the work of dubbing by engaging services and the same was of the nature of getting work done through a sub-contractor. The findings of the CIT(A) in this regard are not in challenge before us. In such circumstances we are of the view that the provisions of section 194C were applicable and the assessee has rightly deducted tax at source at 2 per cent treating the payment as a payment to sub-contractor for carrying out a work. We do not find any ground to interfere with the order of CIT(A). Consequently ground No. 2 raised by the revenue is dismissed.

13. In the result, the appeal of the revenue is dismissed.

The Acit 11(1), Room... v. Shri Mansih Dutt, 19...