DCIT 1(3), MUMBAI vs. BLITZ MULTIMEDIA PVT. LTD., MUMBAI

आदेश / O R D E R Per Ashwani Taneja (Accountant Member): This appeal has been filed by the Revenue and Cross Objection (C.O.) filed by the assessee against the order of Ld. Commissioner of Income Tax (Appeals), Mumbai-2 {(in short ‘CIT(A)’}, dated 04.11.2010 passed against assessment order u/s 143(3) dated 14.12.2009 for the Assessment Year 2007- 08.

First we take up Revenue’s Appeal:

4.2. According to Assessing Officer, the assessee ought to have deducted tax at source which has not been done and therefore the expenditure was disallowed u/s 40(a) (ia) of the Income-tax Act. The background facts of the case noted in the assessment order are that as stated above the assessee was in the line of publishing magazines and one of the magazines published by assessee was known as Hi- Blitz. In the past, assessee had started incurring losses primarily because of the competition with the television media affecting the business of assessee in a substantial way. Therefore, the assessee entered into an agreement with Kingfisher Airlines Ltd under which a variant of the magazine Hi-Blitz was to be brought out as ‘in-flight’ magazine of Kingfisher Airlines. As a result, there would be one separate issue of the magazine over which there would be exclusive right of assessee and there will be an ‘in-flight’ magazine for Kingfisher Airlines. A minimum of 25,000 copies of ‘in-flight’ magazine was assured. Assessee was 4 V.J.M also agreed to receive printing cost of the magazines @ Rs.50/- per copy from Kingfisher Airlines, and at the same time assessee was supposed to give to Kingfisher Airlines a specified number of free advertisements in their magazines, the Hi-Blitz stand issue as well as the other magazines of the assessee i.e. Cine Blitz. As an integral part of this agreement, it was agreed upon that 50% of incremental advertisement revenue that assessee shall obtain over and above Rs.3 million per quarter shall be shared with Kingfisher Airlines in the ratio of 50:50. It is this amount which has been paid by assessee to Kingfisher Airlines which has been disallowed by Assessing Officer on the ground that assessee has not deducted tax at source on these payments.

4.3. Being aggrieved, the assessee filed an appeal before the Ld. CIT(A) wherein detailed submissions were made agitating the action of the AO. After considering these submissions, Ld. CIT(A) decided the issue in favour of the assessee and held that the assessee was not required to deduct tax at source on the said amount, and therefore, disallowance made by the AO was deleted.

4.4. Being aggrieved, the revenue has filed the appeal before the Tribunal.

4.5. During the course of hearing before us, Ld. DR has reiterated the stand of the AO. It has been vehemently argued

5 V.J.M by the Ld. DR that the payment has been made in pursuance to a service contract and therefore, the assessee was liable to deduct tax at source u/s 194C and since no TDS was deducted, therefore disallowance was rightly made by the AO. All the contentions made by the AO in his order were read and reiterated before us. Ld. DR also relied upon the judgment of Hon’ble Delhi Bench of ITAT in the case of ITO v. Bhasin Motors India P. Ltd. 16 SOT 319.

4.6. Per contra, Ld. Counsel of the assessee vehemently relied upon the order of the Ld. CIT(A) and reiterated most of the arguments as were made by the assessee before the First Appellate Authority. It was argued by him that in the scheme of the agreement, the payment made to KAL out of incremental advertisement revenue was nothing but sharing of ‘Revenue’ on which TDS was not liable to be deducted. He further argued that payment made to KAL was not for carrying out any ‘work’ as is contemplated in section 194C of the Act, and that the magazines published by the assessee were purchased by KAL and used by the latter as an in-house magazine on its flights. As per Ld. Counsel, the impugned amount was reimbursed as share of KAL and was not on account of any ‘work’ done by KAL or any advertisement done by it. He emphasized on the fact that no ‘work’ was done by KAL for the assessee, rather KAL had purchased magazines from the assessee and just placed them on the back of the seat in the aircraft. The advertisement revenue increased at its own and no element of ‘work’ done by KAL was involved. It was further submitted by 6 V.J.M him that section 194C would be attracted only when some ‘work’ is done by the payee having output in a tangible form. He relied upon the judgment of the Hon’ble Bombay High Court in the case of East India Hotels 320 ITR 526. He relied upon all the judgments which have been relied by Ld. CIT(A) in his order. He also relied upon the judgment of ITAT Ahmadabad in the case of Sunsel Drive-in- Cinema (P.) Ltd. 5 SOT 64 (Ahd), and ITO vs. Shringar Cinemas (P.) Ltd. 20 SOT 480 (Mum), for the proposition that where no ‘work’ is carried out by the payee and payment is done on account of share of revenue, then provisions of section 194C shall not be applicable and no TDS will be required to be deducted.

4.7. We have gone through entire material and arguments placed before us by both the sides. It is noted by us that Ld. CIT(A) has correctly analysed the fact and provisions of law applicable. Therefore, before making our own analysis and discussion, we find it appropriate to reproduce the relevant findings of Ld. CIT(A) as under:

“7. I have perused the facts of the case, the agreement between appellant and Kingfisher Airlines and the decisions relied upon by Learned Counsel of appellant. A perusal of the order of assessment reveals that according to Assessing Officer, the contract between appellant and Kingfisher Airlines is a service contract for publication of in-flight magazine as per specifications of Kingfisher Airlines for distribution as in-flight magazine of the airline. He has argued that Kingfisher Airlines is aware of its captive distribution network in terms of its fleet of aircraft's and the high class audience represented by the aviation customers. The airline is also aware of its 7 V.J.M potential as revenue financing for appellant. Therefore, Kingfisher Airlines has sought compensation from appellant. There can be several modes through which compensation to the said arrangement can be fixed like piecemeal payments, lump- sum payments etc. According to him, in the instant case compensation has been fixed on the advertising revenue which is readily ascertainable.

To my mind, the perception of Assessing Officer is not correct. It is a fact not disputed by Assessing Officer that business of appellant had been declining. Assessing Officer has himself admitted that consequent to tie up with Kingfisher Airlines the advertisement receipts of appellant are bound to go up. In such a situation Kingfisher demanding a share in incremental advertisement receipts of appellant is perfectly justified. It cannot be considered compensation at all. It would just be sharing of advertisement revenue because Kingfisher Airlines is purchasing magazines from appellant in bulk for a specific use of aviation customers. There is no service contract here as envisaged by Assessing Officer. It is a kind of joint effort where an existing magazine which was in its declining phase is being revived for the benefit of both the concerned parties. The goodwill of Kingfisher, the name itself, the brand of the airline, is bound to attract the advertising world and yield increasing revenues to the publisher, the appellant. In terms of the agreement appellant is only getting 50% of the additional advertisement revenue, over and above a specified amount. This amounts to sharing of revenue and nothing else. The various case laws relied upon by Learned Counsel of appellant also suggests that in 8 V.J.M an agreement of the nature under consideration, this will amount to sharing of revenue on which tax is not required to be deducted at source, the provisions of TDS do not get attracted. To my mind then, appellant was not required to deduct tax at source and therefore disallowance as made by Assessing Officer is not justified. The ground of appeal is consequently allowed.”

4.8. In our considered opinion also the agreement between the assessee and KAL cannot be said to be an agreement in the nature of work contract or even service contract. The agreement between the two was on account of sharing of incremental advertisement only and nothing else. According to Ld. DR, displaying of magazine to the captive audience by KAL in its flight would itself fall within the definition of ‘work’. In this regard we beg to differ with the views of Ld. DR. The admitted facts are that KAL has purchased the magazines, which was a separate transaction and for which KAL had made payment to the assessee. Thus displaying of magazines by KAL was for its own consumption and purposes. Once the product of the assessee was purchased by KAL, thereafter whatever has been done by KAL with the said product was for own benefits, advantages and purposes of KAL only. Under these circumstances it could not be said at all that KAL had displayed the magazine for and on behalf of the assessee, nor it could be said that by placing the magazines on the back of the seats of the aircraft, KAL had done a ‘work’ for the assessee. KAL provided magazines to its guest passengers as part of its effort for creating a five star in-flight experience for its customers. Thus, increase in the advertisement revenue

9 V.J.M cannot be said to have occurred directly as a result of any ‘work’ done by KAL for on behalf of the assessee. Further, no such ‘work’ could have been recognized or merged in any tangible or quantifiable terms. Thus, without any hesitation, we can say that the impugned payment made by the assessee to KAL on account of sharing of incremental advertisement revenue shall not fall within the provisions of section 194C. The judgments relied upon by the Ld. Counsel and by the Ld. CIT(A) are directly applicable on the facts of the case. The case of Hon’ble Delhi Bench of the Tribunal in the case of ITO v. Bhasin Motors India P. Ltd., relied upon by Ld DR, shall not be applicable on the facts of this case, because in the said case admittedly the payee had done endorse ‘work’ for and on behalf of the payee, and thus, the facts of the said case are clearly distinguishable.

4.9. It is also noted by us that during the course of the course of assessment proceedings for assessment year 2009 – 10, the assessing officer raised query on the similar issue, in response, the assessee filed detailed reply along with copy of the agreement with KAL. The assessing officer considered the reply of the assessee, but did not make any disallowance in the assessment order passed under section 143 (3) dt 24.11.2011. Thus, the assessing officer himself has taken a view that no tax was required to be deducted on the said amount paid by the assessee. Under these circumstances, we find that taking a contrary view by the AO in the year under consideration was unjustified.

10 V.J.M 4.10. Thus, keeping in view all the fact and circumstances of the case, we find that findings of Ld. CIT(A) are in accordance with law and facts, and therefore these are upheld.

Now we shall take up Cross Objections of the assessee:

“The Learned Commissioner of Income Tax (Appeals)-2, Mumbai hereinafter referred to as the CIT(A), erred in rejecting the ground of appeal before him that not tax is required to be deducted at source in respect of payments made to Getty Images and Famous Pictures aggregating to Rs.7,59,645/-and consequently confirming the disallowance made by the Assessing Officer u/s 40a(i) of the IT Act. Your Respondents submit that, on the facts and in the circumstances of their case, provisions of section 40a(i) of the IT Act are not applicable in respect of expenditure of Rs.7,59,645/- and consequently no disallowance for non-deduction of tax in respect thereof is called for.

7. The brief facts required to address this issue are that as stated above, the assessee was engaged during the year in the business of publishing magazines. The AO made disallowance of an aggregating amount of Rs. 7,59,645/- being payments made to two entities, namely M/s Getty Images and M/s Famous- Pictures & Features Agency, one located in Singapore and another in United Kingdom, for procuring images and figures to be published in assessee’s magazines in India. The 11 V.J.M AO made the disallowance on the ground that these payments were in the nature of royalty and therefore, required deduction of tax at source which was not done, and therefore disallowance was made u/s 40(a)(i).

7.1. Being aggrieved, the assessee filed an appeal before the Ld. CIT(A) wherein the detailed submissions were filed. It was contended that provisions of TDS were not applicable since the impugned payments did not fall in the category of royalty as envisaged under the law but Ld. CIT(A), although accepted the reasoning given by Ld. Counsel but while concluding his decision, he agreed with the AO had held that TDS was required to be deducted, and since not deducted by the assessee, therefore disallowance was rightly made by AO and accordingly he upheld the action of the AO.

7.2. Being aggrieved, the assessee filed an appeal before the Tribunal. During the course of hearing, Ld. Counsel of the assessee argued this issue at length. It has been submitted by him that in this case the assessee had made a written agreement with the Singapore party and it was filed with AO, but in respect of party from UK, no written agreement was entered and therefore copies of bills and other correspondence were filed to explain nature of transaction. It was further submitted that payees were the owners of the photographs and images, and they uploaded these pictures on their website. The assessee was given user name and password to have access on these photographs and download them to be 12 V.J.M published in the magazines. It was submitted that for each downloading of the photographs the assessee was required to make separate payment. Thus, the download of the photographs and images was for a limited use and restricted purposes. He drew our attention on Double Taxation Avoidance Agreement with Singapore and UK and also drew our attention on the provisions of the Act to show that these payments did not fall within the definition of term royalty and therefore no TDS was required to deduct and therefore, the disallowance made by the AO was incorrect on law and facts.

7.3. Per Contra, the Ld. DR has also argued the case in detail. It was submitted by her that photographs would come within the definition of artistic work. She read before us provisions of section 9(1)(vi) explanation-2(v) to contend that the impugned payments would fall within the definition of royalty as provided in the above said provisions of the Act. Finally, she relied upon the judgment of Hon’ble Delhi Bench of the Tribunal in the case of Agence France Press v. ADIT, 153 ITD 568 (Delhi) wherein payments made for download of news photos were held to be payment for royalty after considering the aforesaid provisions of the Act as well as Indo-France Treaty.

7.4. In rejoinder, Ld. Counsel of the assessee distinguished the aforesaid judgment relied upon by the Ld. DR and submitted that the facts of the case was different. The terms and conditions contained therein were totally different and not applicable on the facts of the case before us. It was further

13 V.J.M submitted by him that the photo would not be included even within the extended meaning as given in the provisions of the Act wherein ‘films’ and ‘video tapes’ have been included but ‘photo’ has not been included. Thus, showing that intention of the legislature is clear that ‘photo’ would not be covered. He further submitted that even in the definition given under the treaty, a ‘photo’ would not be covered. Lastly, he submitted that factual reasoning of the assessee has been accepted by the Ld. CIT(A) which has not been disputed by the Revenue, therefore, the conclusion drawn as Ld. CIT(A) was contrary to the reasoning given in the order and therefore, order of the Ld. CIT(A) needs to be corrected.

7.5. We have gone through the submissions made by both the sides as well as order of the lower authorities. It is noted by us that the facts have been analysed by the Ld. CIT(A) on which both the parties unanimously agree, and therefore, we shall analyse the position of law on the admitted facts as discussed by the Ld. CIT(A). The facts as narrated by Ld. CIT(A) are that written terms of agreement with Singapore party and copies of bills and payments in respect of UK party show that terms of transactions with both of them are identical. The photographs of celebrities and other models, like those which the assessee has obtained through the website of these foreign parties, are generally taken by the photographers who are generally on contract with some corporate entity. These corporate entities become the owners of the photographs of these celebrities and others models by way of making payments to the celebrities,

14 V.J.M and thereby acquiring a right to use of these photographs in the manner they like. In this manner, these corporate entities become owners of such photographs. It has been analysed and held by Ld. CIT(A) on the basis of agreement and other terms of conditions that what has been given to the assessee its only the right to use a particular photograph, and right is limited to publication of the photographs in assessee’s own magazine. The Ld. CIT(A) has further stated that a limited right has been given to the assessee in lieu of a payment. It has been concluded by the Ld. CIT(A) that foreign party did not sell the ‘photo’, and therefore it cannot be classified a business transactions, since the ownership of the photographs has not been transferred to the assessee.

7.6. Ld. CIT(A) further holds that such limited rights given for the limited purpose shall fall within the definition of royalty in terms of Article 12 of DTAA with Singapore. It is further held by him that Article 13 of DTAA with UK is identical wherein the term royalty has similar definition as given in DTAA with Singapore. We do not find ourselves in complete agreement with the views of Ld. CIT(A). It is settled law and we need not debate much upon a settled principle that as per section 90(2) of the Act, out of the provisions of DTAA and Income Tax Act, the provisions which are more beneficial to the assessee can be availed by it for the purpose of determining its tax liability. It has been argued that the definition of the term royalty given in DTAA is more restrictive in nature as compared to the definition given in the Act, though, the impugned payment

15 V.J.M would not fall even in Section 9(1)(vi) read with its explanation 2(v). For the sake of simplicity, let us first analyse the provisions of Article 12, of DTAA with Singapore, which read as under: “any copyright of a literary, artistic or scientific work, including cinematograph film or films or taps used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information.”

7.7. Thus, our understanding of the definition given above is that to be included in the definition of ‘royalty’, the payment should be made for use of a copyright of the items which have been mentioned in the aforesaid Article. Even if we presume, although denied by the assessee, that photograph will fall in any one or more of the items mentioned in the above said definition, even, then it is mandatory on the part of the revenue before applying these provision to show that the payment was for use of ‘copyright’ and not ‘copyrighted article’. In our opinion, use of copyright and ‘copyrighted article’ are altogether two different things as has been held in many judgments also. The admitted fact is that the photograph has been given to the assessee for the limited purpose of its one time use in the magazine. The assessee can neither edit the photograph nor can it make copies of the photograph to be sold further or to be used elsewhere. The assessee is not permitted to make resale of these photographs

16 V.J.M to any other person for any other use. Thus, what has been permitted to the assessee is to make use of the article and not use of the copyright.

7.8. Thus, we find that the transactions of downloading of photographs for exclusive one time use for publication in the magazine did not fall within the provisions of relevant Article 12 of DTAA and therefore, assessee was not liable to deduct tax on the payments made for the same.

7.9. It is further brought to our notice that in the assessment year 2009-10 also payments were made to these very parties namely M/s Getty Images and M/s Famous-Pictures & Features Agency, for downloading of photos. But no disallowance has been made by the assessing officer in the assessment order passed under section 143 (3) dated 24.11.2011.

7.10. The case law relied upon by the Ld. DR would not be applicable on the facts of this case. It is noted that terms of the agreement in the case of Agence France Press (supra) were different. In that case, full rights were transferred. The assessee was free to use the downloaded news and other news items in any manner and was allowed to make further circulation of the same. In the given facts of the said case it was held that there was transfer of copyright, and therefore, relevant provisions of the Act and Indo-France treaty were attracted. The facts are distinguishable in the case before us.

17 V.J.M 7.11. In view of the discussion made by us, we find that the impugned payments were not liable for deduction of tax at source and therefore, the disallowance made by the AO is deleted.

Order pronounced in the open court on 13th April, 2016.