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Income Tax Appellate Tribunal, “B’’ BENCH: BANGALORE
Before: SHRI B. R. BASKARAN & SMT. BEENA PILLAI
PER B.R. BASKARAN, ACCOUNTANT MEMBER:
The assessee has filed this appeal challenging the order dated 13.11.2017 passed by Ld. CIT(A)-3, Bengaluru and it relates to assessment year 2014-15. All the grounds urged by the assessee are directed against a single issue, viz., whether the Ld. CIT(A) was justified in confirming assessment of Rs.5.75 crores, being the amount received on sale of TV rights and audio rights of a feature film separately, instead of treating the same as part of “receipt on exhibition of film on commercial basis”.
Shri Vijaykumar Thimmegowda, Bangalore
Page 2 of 14 2. The facts relating to the above issue are stated in brief. The assessee is engaged in the business of production of feature films. During the year under consideration, the assessee produced a feature film in Kannada language and released the same on 13.1.2014. The assessee himself exhibited film on commercial basis in certain areas. He also sold audio and TV rights of the film. The total amount received by the assessee during the year under consideration is given below:- a) Receipts from exhibition of film in certain areas by appellant Rs.5,40,10,756/- b) Sale of audio rights Rs. 15,00,000/- c) Sale of T.V. Rights Rs.5,60,00,000/- Total Rs.11,15,10,756/- The assessee had incurred expenditure to the tune of Rs.14,94,89,613/- on production of the film. The assessee computed his income from business as per Rule 9A(3)(c) of I.T. Rules, which permitted the assessee to set off the expenditure on production of film against gross receipts on exhibition of film on commercial basis and allowed carry forward of remaining unclaimed expenditure to the next year, if the film is not released on a commercial basis atleast 90 days before the end of the such previous year. We have noticed earlier that the film was released only on 13.1.2014 and hence the period of release during the previous year relevant to the assessment year 2014-15 was less than 90 days. Hence the assessee availed the benefit of Rule 9A(3)(c) of I T Rules. Accordingly, the assessee set off the production expenditure against gross receipts of Rs.11,15,10,756/- (referred above) and carried forward remaining unclaimed expenditure of Rs.3,79,78,857/- to next year.
The A.O. noticed that, as per Rule 9A(3)(c) of I.T. Rules, the expenditure on production of film should be restricted to the amount realised by the film producer by exhibiting the film on commercial
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Page 3 of 14 basis or selling the rights of exhibition of the film. In the instant case, the A.O. noticed that the assessee did not sell rights of exhibition of film in any area. The A.O. noticed that the assessee has included the receipts from sale of audio rights and T.V. rights also in computing the amount realised from exhibition or sale of rights of exhibition. The A.O. took the view that the expression “amount realised from exhibition of film on a commercial basis” used in Rule 9A(3)(c) should not be construed to include all receipts from film such as sale of audio rights, T.V. rights. Accordingly, the A.O. took the view that the amount received by the assessee on sale of audio rights and TV rights aggregating to Rs.5.75 crores cannot be included in the category of “receipts from exhibition of films”. Before AO, the assessee placed his reliance on the decision rendered by Mumbai bench of ITAT in the case of Vieshesh Films (P) Ltd vs. DCIT, wherein it was held that the mode of exhibition was not prescribed in the rule and that exhibition of films on TV will clearly fall under the ambit of Rule 9A. The AO, however, expressed the view that the facts of the above said case are different, i.e., the assessee before Mumbai bench of ITAT exhibited film exclusively on TV and in that context only, the Tribunal has held that the mode of exhibition was not prescribed under Rule 9A and hence the producer can choose to exhibit through any mode. In the instant case, the assessee has exhibited the film himself in certain areas. Further, the AO expressed the view that rule 9A(3)(c) uses the phrase “himself exhibits film on a commercial basis in certain areas and sell the rights of exhibition of the film in respect of all or some of the remaining areas. Attaching importance to the word “areas” used in rule 9A(3)(c), the AO expressed the view that the same suggests exhibition in different geographical regions and not through different mediums.
Accordingly, the A.O. held that the receipt by way of sale of audio rights and TV rights does not fall under the category of “receipts from Shri Vijaykumar Thimmegowda, Bangalore
Page 4 of 14 exhibition of films” prescribed under Rule 9A of IT Rules. Since Rule 9A allows deduction of production expenses against receipt from exhibition of films only, the AO did not allow set off of expenditure on production against the amount of Rs.5.75 crores relating to sale of audio rights and TV rights. Accordingly, he assessed the above said amount of Rs.5.75 crores as income of the assessee.
The Assessee challenged the above said addition by filing appeal before Ld. CIT(A). The first appellate authority agreed with the view of the AO that Rule 9A talks about the “areas”. He held that “If the argument of the appellant that the sale of TV rights and sale of audio rights should also be considered as selling the rights of exhibition of the film, then the provisions of Rule 9A(3)(a)(b)(c) would become infructuous as the sale of TV rights and audio rights cannot be said to be in relation to the area not covered by (i) as above such rights will overlap with area covered by (i), i.e., where the film producer himself chooses to exhibit film on a commercial basis, as such TV rights and Audio rights allow the buyer to exercise such rights in such geographical areas where the appellant has himself exhibited the film in theatres.”
Before Ld. CIT(A) the assessee placed reliance on the decision rendered by Mumbai bench of ITAT in the case of Vieshesh Films (P) Ltd. Vs. DCIT (2008) 26 SOT 64 (Mum) and also the decision rendered by Hon’ble Supreme Court in the case of M/s. Laxmi Video Theatres and others Vs. State of Haryana and Others (1993) 3 SCC 715. The Ld CIT(A), however, held that these decisions are not applicable to the facts of the case. The observations made by Ld CIT(A) are extracted below:-
“4.6 In addition to above, the Rule 9A(7)(ii) provides that the right of exhibition of a feature film shall be deemed to have been sold only on the date when the positive prints of the film are delivered by the film producer to the purchaser of such rights. In case of sale of T.V. rights and audio rights, no such delivery of positive prints of the film is required to be done. A perusal of the clause 2(c) of the agreement for sale of T.V. rights, as entered into
Shri Vijaykumar Thimmegowda, Bangalore
Page 5 of 14 by the appellant shows that the appellant is only required to hand over the Digital Intermediate Data Files of the film either on a hard disc/LTO (Linear Tape Open) back up divide, DPX file and HD copy with 5.1 Audio. Similarly, for sale of audio rights no such delivery of positive prints of the film is required to be done. So, from this also the only conclusion which can be drawn is that the exhibition of feature film as referred to in rule 9A(3) does not include sale of TV rights or sale of audio rights.
4.7 The reliance of the appellant on Rule 9A(6) is also misplaced as the applicability of the said rule will come into the picture if Rule 9A(2)(3) cannot be applied. Rule 9A(6) would become applicable if the rights of the exhibition of the feature film have been transferred by the film producer by a mode not covered by the other provisions of Rule 9A. This rule thus also refers to revenue from sale of rights of exhibition of feature film and not from sale of T.V. rights or audio rights. Since rule 9A(3) can be applied to the facts of the case, so invoking rule 9A(6) to determine the deduction in respect of the cost of the production of the film is not required. The appellant has relied on the decision rendered in the case of Vieshesh Films (P) Limited Vs. DCIT (2008) 27 CCH 0628 by ITAT Mumbai Bench to support its arguments. This issue has been discussed by the A.O. in para 4.4 and 4.5 of his order and he has distinguished the facts of the case. It is further noted that the specific provisions contained in rule 9A(7)(ii) of the IT Rules were also not discussed in the said case. So, the decision in the said case cannot be applied to the case under consideration. 4.8 The reliance of the appellant on the decision of Supreme Court in the case of Laxmi Video Theaters Vs. State of Haryana and others AIR 1993 SC 238 is also misplaced as the issue of taxability of income from production of feature film or applicability of rule 9A of the Income Tax Rule was never under consideration. In the said case, the SC held that exhibition of pictures using VCRs/VCP in the video parlours would require the exhibitor to obtain a license in accordance with the provisions of Cinematograph Act 1952. This is for the reason that VCR/VCP were being used for public screening of the films. In the case under consideration, the sale of T.V rights and audio rights in itself do not amount to public screening as the majority of viewership would be confined to homes. Even if the purchaser resorts to public exhibition of the film on T.V., the sale consideration cannot be considered to be relating to the same alone. In absence of any such specific details in the agreement, the entire consideration has to be considered for general viewership of the T.V., which is at home.”
Accordingly, the Ld CIT(A) confirmed the order passed by AO and hence the assessee is in appeal before us.
Shri Vijaykumar Thimmegowda, Bangalore
The Ld A.R submitted that the phrase “exhibition of films on commercial basis” should not be restricted to traditional method of exhibition in theatres. He submitted that the technological change and advancement has made exhibition of films possible in different modes/mediums. Hence the meaning of above said phrase should be extended to all possible modes/mediums as per technological advancement, as the ultimate purpose of exhibition of films is to reach it for public at large viewing. He submitted that this aspect of technological advancement and change was recognised by Hon’ble Supreme Court in the case of M/s Laxmi Video Theatres and Others (supra). He further submitted that the tax authorities are not right in holding that the decision rendered by Mumbai bench of Tribunal in the case of Vieshesh Films (P) Ltd (supra) is not applicable. He submitted that the Tribunal has held in clear terms that the mode of exhibition is not prescribed in the Rules and hence the exhibition of films on Television would fall within the ambit of Rule 9A of I T Rules. Accordingly, the Ld A.R contended that the amount received by the assessee on sale of audio rights and TV rights should be included in receipts from exhibition of films.
8. On the contrary, the Ld D.R strongly supported the order of Ld CIT(A). In the alternative, the Ld DR submitted that the matter may be restored to the file of the AO for examining the claims of the assessee afresh.
9. We heard the parties and perused the record. We noticed that the assessee has received a sum of Rs.15.00 lakhs on sale of audio rights of film produced by it and Rs.5.60 crores on sale of TV rights of the same film. The question that arises for our consideration is whether these two receipts fall under the category of “amount realised on exhibition of film on a commercial basis”. This question
Shri Vijaykumar Thimmegowda, Bangalore Page 7 of 14 arises for the reason that the assessee has computed its income under Rule 9A of Income tax Rules. The provisions of sub-rule (3) to Rule 9A are relevant here and they are extracted below:- “9A. (1) In computing the profits and gains of the business of production of feature films carried on by a person (the person carrying on such business hereafter in this rule referred to as film producer), the deduction in respect of the cost of production of a feature film certified for release by the Board of Film Censors in a previous year shall be allowed in accordance with the provisions of sub-rule (2) to sub-rule (4). Explanation : In this rule,— (i) “Board of Film Censors” means the Board of Film Censors constituted under the Cinematograph Act, 1952 (37 of 1952); (ii) “cost of production”, in relation to a feature film, means the expenditure incurred on the production of the film, not being— (a) the expenditure incurred for the preparation of the positive prints of the film; and (b) the expenditure incurred in connection with the advertisement of the film after it is certified for release by the Board of Film Censors:] [Provided that the cost of production of a feature film, shall be reduced by the subsidy received by the film producer under any scheme framed by the Government, where such amount of subsidy has not been included in computing the total income of the assessee for any assessment year.] (2) Where a [***] feature film is certified for release by the Board of Film Censors in any previous year and in such previous year,— (a) the film producer sells all rights of exhibition of the film, the entire cost of production of the film shall be allowed as a deduction in computing the profits and gains of such previous year; or (b) the film producer— (i) himself exhibits the film on a commercial basis in all or some of the areas; or (ii) sells the rights of exhibition of the film in respect of some of the areas; or (iii) himself exhibits the film on a commercial basis in certain areas and sells the rights of exhibition of the film in respect of all or some of the remaining areas, and the film is released for exhibition on a commercial basis at least [ninety] days before the end of such previous year, the entire cost of production of the film shall be allowed as a deduction in computing the profits and gains of such previous year.
(3) Where a feature film is certified for release by the Board of Film Censors in any previous year and in such previous year, the film producer—
Shri Vijaykumar Thimmegowda, Bangalore
Page 8 of 14 (a) himself exhibits the film on a commercial basis in all or some of the areas; or (b) sells the rights of exhibition of the film in respect of some of the areas; or (c) himself exhibits the film on a commercial basis in certain areas and sells the rights of exhibition of the film in respect of all or some of the remaining areas, and the film is not released for exhibition on a commercial basis at least [ninety] days before the end of such previous year, the cost of production of the film in so far as it does not exceed the amount realised by the film producer by exhibiting the film on a commercial basis or the amount for which the rights of exhibition are sold or, as the case may be, the aggregate of the amounts realised by the film producer by exhibiting the film and by the sale of the rights of exhibition, shall be allowed as a deduction in computing the profits and gains of such previous year; and the balance, if any, shall be carried forward to the next following previous year and allowed as a deduction in that year.”
In the instant case, the film was released on 13.01.2014 on a commercial basis and hence the period of release was less than 90 days and hence the income has to be computed as per clause (c) of sub-rule (3) of Rule 9A.
We have noticed that the tax authorities have given importance to the word “areas” occurring in Rule 9A and accordingly, they have taken the view that the amount realised on exhibition of film on a commercial basis would cover only theatrical release made in various areas. The Ld CIT(A) has accordingly, held that the sale of TV rights would violate the condition of exhibition of films in different areas, i.e., exhibition through TV would violate area restrictions. The Ld CIT(A) has further held that the exhibition of films through positive prints alone would be covered by Rule 9A of I T Rules.
In the case of Laxmi video Theatres and Others (supra), question that arose before the Hon’ble Supreme Court was whether exhibition of films through pre-recorded cassette by way of VCR/VCP would be covered by Punjab Cinemas (Regulation) Act, 1952. It was held as under by Hon’ble Supreme Court:-
Shri Vijaykumar Thimmegowda, Bangalore
“7. We are in agreement with this view. The definition of the expression ‘cinematograph’ contained in Section 2(c) of the Cinematograph Act, 1952 and Section 2(a) of the Act is an inclusive definition which includes any apparatus for representation of moving pictures or series of pictures. The said definition cannot be confined in its application to an apparatus for representation of moving pictures or series of pictures which was known on the date of the enactment of the said provision. It must be given a meaning which takes into account the subsequent scientific developments in thefield in accordance with principle of statutory construction laid down in Senior Electric Inspector v. Laxmi Narayan Chopra’. In that case it has been held—
[I]n a modern progressive society it would be unreasonable to confine the intention of a Legislature to the meaning attributable to the word used at the time the law was made, for a modern Legislature making laws to govern a society which is fast moving must be presumed to be aware of an enlarged meaning the same concept might attract with the march of time and with the revolutionary changes brought about in social, economic, political and scientific and other fields of human activity. Indeed, unless a contrary intention appears, an interpretation should be given to the words used to take in new facts and situations, if the words were capable of comprehending them.
The VCR/VCP were developed in 1970s and achieve the same purpose as the traditional media for exhibition of moving pictures. There is nothing in the Act which excludes the applicability of the Act to VCR/VCP.
The High Court was, therefore, right in holding that VCR/VCP are within the ambit of the definition of ‘cinematograph’ contained in Section 2(a) of the Act and the appellants in order to carry on the business of running video parlours/or showing pre- recorded cassettes of films through the medium of VCR/VCP must obtain a license in accordance with the provisions of the Act and the Rules.”
In the past, the only way of exhibition of commercial films was through theatrical release of films only, i.e., exhibition through projector using positive prints of films. Due to technical change and advancement, this method has been replaced by digital mode. Further, due to advent of Television and various commercial channels, the scope of mode of releasing of exhibition on commercial
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Page 10 of 14 basis has also undergone sea change. In fact, the TV channels have their foot prints all over the world. Hence, in the present modern society, it is possible for the producer of film to release through theatres, through TV channels and also through OTT platform. Hence, under the changing circumstances, it would not be appropriate to give literal meaning to Rule 9A(3)(c) of the IT Rules, which reads as under:-
“ the film producer himself exhibits the film on a commercial basis in certain areas and sells the rights of exhibition of the film in respect of all or some of the remaining areas” i.e., it may not be correct to give importance to the word “areas” occurring in the above said provision and hold that there should be clear demarcation of the areas between the producer and distributors. In our considered view, the primary importance should be given to the expression “exhibition of film on a commercial basis”. In fact, a careful perusal of the above said provision would show that the film producer can sell the rights of exhibition of film in respect of “all or some of the remaining areas”, despite he himself exhibits the film on a commercial basis. The use of word “all” would show that there is no area restriction as observed by Ld CIT(A), i.e., it is the commercial convenience of the parties concerned. Hence the main thrust should be on “exhibition of film on a commercial basis”. Further, due to technical advancement, it is now possible to sell audio rights separately apart from exhibition of feature films. Audio matter is part of feature film and is part of production of feature film. Nowadays, both audio & video form integral part of a feature film. In fact, a feature film without audio is rarest of rare feature. The cost of production of feature film includes expenditure on audio recording. Hence, we are of the view that the audio matter cannot be viewed separately distinct from the feature film, since it is intricately connected with the feature film. There should not be any dispute
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Page 11 of 14 that, in the Indian film scenario, songs form integral part of the feature film and many a times, many films turned out to be successful due to songs. Public at large could visualise the film scenes on hearing the songs. Hence, it was made possible to assign the audio rights of films/songs separately. Hence, we are of the view that sale of audio rights should form part of amount realised on exhibition of films on commercial basis. Accordingly, we are of the view that the amount realised on sale of audio rights and TV rights would fall under the category of “exhibition of film on a commercial basis”.
We find support for our view from the decision rendered by Mumbai bench of Tribunal in the case of Vieshesh Films (P) Ltd (supra). In this case, the assessee argued that the release of film in TV channels would not fall under Rule 9A of the Act. The facts of this case are that the assessee produced two films viz., Ghulam and Ashique. The assessee incurred loss of Rs.99.91 lakhs in respect of Ashique. The assessee sought of set off this loss against its business income. It objected to the application of Rule 9A on the ground that this film was intended to be sold to TV channels only and not for theatrical release and hence Rule 9A was not applicable. It was contended that Rule 9A/9B were applicable to feature film meant for theatrical release and could not be applied to the film made exclusively for release on TV. The view taken by Ld CIT(A) has been narrated as under by the Tribunal:- “The ld. CIT(A), thereafter, analyzed the provisions of Rule 9A and held that in the wordings of Rule 9A there was no reference to mode of release of film and, therefore, the contention of the assessee that only feature films, which were produced for theatrical release only fell within the ambit of Rule 9A was not tenable. The ld. CIT(A) further held that Rule 9A was applicable where a feature film was exhibited by the producer himself and/or rights of its exhibition were sold, hence, when feature film was exhibited through the medium of television also fell within the ambit of Rule 9A. The ld. CIT(A) also held that the term 'feature film' was nowhere defined in the Income-tax Act and as per general understanding, it was full length film, to be shown in Shri Vijaykumar Thimmegowda, Bangalore
Page 12 of 14 one go, hence, once this film was certified by the Censor Board as a feature film, Rule 9A became applicable. The ld. CIT(A) also held that the exhibition referred to in Rule 9A, did not mean the exhibition of feature film compulsorily in theatres only and once a film was, certified for release by Board of Film Censor in a previous year, cost of production of such film was to be allowed in accordance with the provisions of sub-rule (2) to sub-rule (4) of Rule 9A, hence, the assessee's case was to be examined in accordance with these provisions. Thereafter, the ld. CIT(A) examined the Agreement dated 23-2-1999 entered into by the assessee with M/s. Essel Vision whereby TV Satellite broadcast rights and pay TV rights were given for Asia region. However, as per the 2nd Agreement dated 21-4-1999, the world rights were given to Essel Vision. The ld. CIT(A) also noted that this film was approved by the Censor Board for release on 17-11-1998. Thus, after taking into consideration these facts, the ld. CIT(A) held that the assessee's case fell within the sub-clause (b) of sub-rule (3) of Rule 9A. The ld. CIT(A) also rejected the contention of the assessee regarding impact on realization after the film was shown on TV because Rule 9A provided for deduction of cost of production in a specific manner irrespective of assessee's discretion regarding its exhibition in various territories at various points of time. The ld. CIT(A) also confirmed the action of the Assessing Officer in not applying the provisions of sub-rule (6) of Rule 9A of Rules for the reason that the assessee could not demonstrate the fact that conditions for invoking said sub- rule existed. Accordingly, he confirmed the action of the Assessing Officer.”
The Tribunal agreed with the view taken by Ld CIT(A) and held that the mode of exhibition has not been prescribed in Rule 9A and hence exhibition of films in TV channels also would fall under Rule 9A. The relevant observations made by the Tribunal are extracted below:- “17. We have considered the submissions made by both the parties, material on record and orders of the authorities below. It is noted that the assessee has claimed that the film "Ashique" was produced for telecast exclusively on TV. It has also been claimed that mode and technology of producing films for TV is different from film produced for theatrical exhibition. However, we find that the assessee has taken a Certificate from Central Board of Film Certification, which is valid for theatrical release only. Hence, how a film produced for theatrical release, having a different material/technology, can be claimed to have been produced exclusively for TV telecast and if it is not so, then, why the Certificate from the Censor Board, was obtained. The assessee has also claimed that the premier of this film took place on the TV. However, as commonly known, when the film is shown, for the first time, on the TV, it is known as premier on TV and this fact does not necessarily mean that the film was not released in the theatre or was not meant for theatrical release. Hence, this contention of the assessee does not render any assistance to the cause of the assessee. The assessee has claimed that this film was produced for TV. However, as per commercial practice, films are produced in such a manner only when the producer enters into exclusive arrangement before hand and the cost of production as well as consideration for telecast
Shri Vijaykumar Thimmegowda, Bangalore Page 13 of 14 rights is also settled before hand. However, in the present case, the assessee has entered into assignment agreement with Zee Tele Films on 23-4- 1999 i.e., much after the date of production as well as approval by the Censor Board. Hence, in the absence of any material on record to show contrary, claim of the assessee that this film was produced exclusively for TV is also rejected. From Schedule-II attached to the Assignment Agreement between the assessee and Zee Tele Film, it is noted that the Star Cast is Saif Ali Khan and Twinkle Khanna who at the relevant point of time, were not acting in the TV Serials or films made for TV telecast, hence, this fact also goes against the assessee's claims. It is also noted that the assessee has reduced cost of production of this film by Rs. 125 lakhs, however, from the Zee Tele Films, the assessee has received a consideration of Rs. 60 lakhs only and no material has been brought on record to show the source of balance Rs. 65 lakhs which may have been realized either from any other distributors or TV Telecast companies and in both the situations, the assessee's claim that it was produced exclusively for exhibition on television stands contradicted.
Having stated so, now we deem it fit to consider the claim of the assessee regarding application of Rule 9A of the Income-tax Rules, 1962. The Assessing Officer has held Rule 9A, was applicable because of the fact that Form 52A had been filed by the assessee and at no point of time the assessee claimed or furnished information regarding the fact that this film was being produced only for TV. The Assessing Officer has also held that if it was released on TV, it was one of the modes of exhibition and for the reason also that Rule 9A was applicable. We find that Rule 9A has been specifically provided by the Legislature to compute the Profits and Gains of Business of production of feature films. As per Rule 9A(2), the film producer is entitled for deduction of cost of production of the film on selling of rights of exhibition of the film in the year in which the film is certified for release by the Censor Board and if the film is released in such year on commercial basis at least for 90 days before the end of such year. It is also provided that the film producer may himself exhibit the film on commercial basis in all or some of the areas or may sell the right of exhibition of the film on commercial basis in respect of some of the areas or may exhibit the film on commercial basis in certain areas and may sell the right of exhibition of the film in respect of all or some of the remaining areas. Thus, the requirement is exhibition of the film on commercial basis - either by the producer himself or by selling the rights of exhibition to another person. The mode of exhibition has not been prescribed and it may be so because of the fact that when this rule was brought on statute, the concept of production of film for TV exclusively was not evolved particularly, in view of the fact that television had got no such wide reach. Even otherwise, exhibition on TV has also been exploited by the assessee on a commercial basis as it has been done for monetary consideration, hence, exhibition of films on television, in such circumstances, in our opinion, clearly falls within the ambit of Rule 9A of the Income-tax Rules, 1962.”
Shri Vijaykumar Thimmegowda, Bangalore Page 14 of 14 In the above said case, the department took the view that the amount realised on sale of TV rights of the film would be covered by Rule 9A, which is exactly the case of the assessee before us. The contention of the revenue was accepted by the Tribunal.
In view of the foregoing discussions, we hold that the amount realised by the assessee on sale of audio rights and TV rights of the film would fall under the category of “exhibition of films on a commercial basis”. Accordingly, we direct the AO to allow deduction of expenditure incurred on production against the above said receipts also. The order passed by Ld CIT(A) is accordingly set aside.
In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 2nd Nov, 2020