GEM ENTERTAINMENT KFT,HUNGARY vs. ACIT, INT. TAXN.-CIRCLE-2(2), CHENNAI

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ITTPA 2/CHNY/2024Status: DisposedITAT Chennai08 July 2025AY 2018-197 pages
AI SummaryRemanded

What did the Tribunal hold?

The Tribunal noted that the AO taxed the entire license fee as royalty without proper bifurcation between theatrical and non-theatrical rights. The assessee contended that the agreements clearly bifurcated consideration for theatrical and non-theatrical rights, and the latter should be taxed as royalty, while the former should be excluded. The Tribunal, in the interest of justice, directed the AO to segregate the receipts into theatrical and non-theatrical components based on the agreements. Only the portion attributable to non-theatrical rights should be taxed as royalty after due verification. The AO was also instructed to consider the applicability of the India-Hungary Double Taxation Avoidance Agreement (DTAA), its beneficial provisions, relevant case laws, and CBDT circulars before re-determining taxability. The assessment order was set aside, and the matter was restored to the AO for de novo adjudication, with an opportunity for the assessee to substantiate its claims.

What were the facts?

The assessee, GEM Entertainment KFT, a Hungarian tax resident engaged in film production and distribution, filed an appeal against the final assessment order dated 30.10.2014 passed by the Assessing Officer (AO) under Section 147 read with Section 144C(13) of the Income-tax Act, 1961. This order was pursuant to directions from the Dispute Resolution Panel (DRP). The AO reopened the assessment based on information that M/s. Viswas Films P. Ltd. had remitted Rs. 66,61,000/- to the assessee for film purchases without deducting tax, which the AO considered royalty. During assessment, the AO identified total remittances of Rs. 8,21,71,715/- from four Indian entities, classifying them as royalty.

What were the issues?

1. Whether the remittances totaling Rs. 8,21,71,715/- received by the assessee from Indian entities for distribution and licensing of cinematographic films constitute royalty under Section 9(1)(vi) of the Income-tax Act, 1961, considering the exclusion for sale, distribution, or exhibition of cinematographic films. Assessee's contention: The remittances are for the sale, distribution, and exhibition of cinematographic films, which are explicitly excluded from the definition of royalty by Explanation 2 to Section 9(1)(vi). The DRP erred in classifying the entire income as royalty, ignoring this exclusion. The assessee also argued that license fees for theatrical rights, clearly bifurcated in agreements, should not be taxed as royalty. Reliance was placed on SPE India Films Holdings LLC and Yashovardhan Tyagi cases, and CBDT Circular No. 728. Revenue's contention: The remittances include consideration for non-theatrical rights such as TV, home video, Pay TV, and internet TV rights, which clearly fall under the definition of royalty, as only cinematographic rights were excluded.

Which sections of the Income-tax Act were involved?

Section 9(1)(vi),Section 147,Section 144C(13),Section 143(3),Section 144C(1),Section 144C(5)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI

Before: SHRI SS VISWANETHRA RAVI & SHRI JAGADISH

Hearing: 15.04.2025Pronounced: 08.07.2025

आदेश / O R D E R

PER JAGADISH, A.M : Aforesaid appeal filed by the assessee for Assessment Year (AY) 2018-19 arises out of final assessment order dated 30.10.2014 passed by Assessing Officer (A.O) u/s.147 r.w.s 144C(13) of the Income-tax Act, 1961 (hereinafter “the Act”) pursuant to the directions of Ld. Dispute Resolution Panel-2, Bengaluru u/s. 143(3) r.w.s 147 r.w.s 144C(1) of the Act dated 07.12.2023.

IT(TP)A No.02/Chny/2024 GEM Entertainment KFT :- 2 -:

2.

The assessee is a foreign company being a tax resident of

Hungary and in the business of production / distribution of

cinematography rights for films, video, audio etc. The A.O has

reopened the assessment on the basis of information that an Indian

company M/s. Viswas Films P. Ltd. has remitted Rs. 66,61,000/- to the

assessee towards purchase of films, but has not deducted tax on the

payment, which is Royalty as per DTAA and as per Income-tax Act.

During the assessment proceedings, the A.O found that the assessee

has received remittances of Rs. 8,21,71,715/- from the following

companies which is Royalty in nature:

S.No Name of Indian Entity TAN Amount 1 M/s. Viswass Films (P) Ltd. CHEV06339E Rs. 92,41,400/- 2 Avinaash Ranchor Jumani MUMA35884C Rs. 1,49,70,172/- 3 PVR Pictures Ltd. DELP07397F Rs. 5,41,33,124/- 4 VR Films & Studios Ltd. MUMV15594F Rs. 38,27,71,715/- Total Remittance received for the FY 2017-18 Rs. 8,21,71,715/-

3.

The A.O after examining these receipts, Section 9 of Income-tax

Act, Article 12 of the India-Hungary DTAA and the agreement with the

company remitting the amount has held that above amount is in the

nature of royalty and proposed to be added in the total income. The

assessee filed objection before DRP and the Ld. DRP after examining

the distribution and license agreement has held that assessee-

IT(TP)A No.02/Chny/2024 GEM Entertainment KFT :- 3 -:

company, as per the agreement, has given theatrical as well as non

theatrical rights (like TV, Home Video, Pay TV, Internet TV rights etc.)

to the Indian entities for television broadcast, therefore, as per the

Explanation 2 to Section 9(1)(v) of the Act, such rights are squarely

covered under the Royalty. The Ld. DRP accordingly rejected the

objection and issued direction to the A.O to pass the order u/s.

144C(5) of the Act. Accordingly, the A.O passed the assessment

order making addition of Rs. 8,21,71,715/- as Royalty.

4.

The Ld. Authorized Representative (A.R) of the assessee has

submitted that Explanation to Section 9(1)(vi) for A.Y 2018-19 prior to

the amendment in 2020 clearly stipulated that for the purpose of this

clause, Royalty means consideration (including any lump sums

consideration, but excluding any consideration which would be the

income of the recipient chargeable under the head “capital gains”) for

the transfer of all or any rights (including the granting of a license) in

respect of any copyright, 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 Ld. AR therefore, argued that the

IT(TP)A No.02/Chny/2024 GEM Entertainment KFT :- 4 -:

remittance of Rs. 8.2 Crores, was consideration for the sale,

distribution and exhibition of cinematographic films in India, which was

specifically excluded from definition of royalty and therefore cannot be

taxed as royalty. The Ld. AR has argued that the Hon’ble DRP failed

to observe that irrespective of whether cinematographic films were

exhibited in theatres or on TV etc, the entire film distribution income

earned by the assessee was termed to be royalty, ignoring the

exclusion clause of Explanation-2(v) of Section 9(1)(vi) of the Act. The

Ld. DRP has ignored the case laws in the case of SPE India films

Holdings LLC dated 03.06.2019 (ITAT-Mumbai) and in the case of

Yashovardhan Tyagi dated 23.06.2021 (ITAT-Delhi). The Ld. AR

without prejudice has stated that in all distribution agreements the ratio

of allocation of license fee to the assessee as theatrical and non

theatrical was mentioned, therefore the license fee for theatrical

cannot be taxed as royalty. The Ld. AR has also argued that as per

CBDT Circular No.728 dated 30.10.1995, the tax should be deducted

at source as per the provisions of the Act or DTAA whichever is more

beneficial to the assessee and in the present case, the Income tax Act

is more beneficial and therefore, the same should be applicable.

IT(TP)A No.02/Chny/2024 GEM Entertainment KFT :- 5 -:

5.

The Ld. Departmental Representative (DR), On the other hand,

has relied on the order of A.O/Ld. DRP and submitted that only

cinematographic rights has been excluded from the definition of

Royalty, but the assessee has also distributed the internet right non

theatrical rights like TV, home video, Pay TV, internet TV rights,

therefore, same clearly falls under the royalty.

6.

We have heard the rival submissions, and perused the

materials available on record. The A.O has assessed the remittance

of Rs.8,21,71,715/- from various Indian entities for the distribution

right/copy right acquired by way of purchase of films as royalty. The

assessee, through the distribution/license agreements has brought out

that the remittance is for theatrical as well as non theatrical rights and

as per the Explanation 2 to Section 9(1)(vi) of the Act consideration for

sale, distribution or exhibition for cinematographic films are to be

excluded from the definition of Royalty. The assessee has submitted

that the license agreements clearly bifurcates the consideration

between theatrical and non-theatrical rights. However, the A.O has

taxed the entire license fee as Royalty, without undertaking a proper

bifurcation of income attributable to theatrical and non-theatrical rights.

In light of the above, and in the interest of justice, we are of the

IT(TP)A No.02/Chny/2024 GEM Entertainment KFT :- 6 -:

considered view that the matter requires a fresh examination. The A.O is, accordingly, directed to segregate the receipts into theatrical and non-theatrical components based on the terms of the agreements, and tax only the portion attributable to non-theatrical rights as Royalty, after due verification. The A.O shall also consider the applicability of DTAA and the beneficial provisions thereof, along with the relevant case laws and CBDT circulars, before re-determining the taxability. Accordingly, we set aside the assessment order and restore the matter to the file of the A.O for denovo adjudication, in accordance with law and after giving due opportunity to the assessee to substantiate its claims.

7.

In the result, the appeal filed by the assessee is allowed for statistical purposes only.

Order pronounced on 08th day of July, 2025 at Chennai.

Sd/- Sd/- (यस यस िव�ने� रिव) (जगदीश) (Jagadish) (SS Viswanethra Ravi) लेखा सद�य लेखा सद�य /Accountant Member सद�य / Judicial Member लेखा लेखा सद�य सद�य �याियक सद�य �याियक �याियक �याियक सद�य सद�य चे�नई/Chennai, �दनांक/Dated: 08th July, 2025. EDN/-

IT(TP)A No.02/Chny/2024 GEM Entertainment KFT :- 7 -:

आदेश क� �ितिल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकर आयु�/CIT, Chennai/Madurai/Coimbatore/Salem 4. िवभागीय �ितिनिध/DR 5. गाड� फाईल/GF

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