M/S. SAREGAMA INDIA LIMITED,KOLKATA vs. ACIT, (TDS) CIRCLE - 59, KOLKATA, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: KOLKATA [Before Shri Mahavir Singh, JM & Shri Waseem Ahmed, AM]

I.T.A No. 1813/Kol/2009 Assessment Year: 2008-09

M/s. Saregama (I) Ltd. Vs. Assistant Commissioner of Income-tax, (PAN: AAACT9815B) (TDS), Circle-59, Kolkata. (Appellant) (Respondent)

Date of hearing: 30.10.2015 Date of pronouncement: 20.11.2015

For the Appellant:S/Shri J. P. Khaitan & Pratyush Jhunjhunwala, Advocates For the Respondent: Shri R. P. Nag, JCIT, Sr. DR

ORDER Per Shri Mahavir Singh, JM: This appeal by assessee is arising out of order of CIT(A)-XIX, Kolkata in Appeal No.445/CIT(A)-XIX/ACIT,Cir-59(TDS)/08-09 dated 24.08.2009. Assessment was framed by ACIT, Cir-59, Kolkata u/s. 201(1)/201(1A) r.w.s. 194J of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2008-09 vide its order dated 20.03.2008. 2. The only issue in this appeal of assessee is, against the order of CIT(A) confirming the action of AO in treating the outright purchase of copyright as payment of royalty, thereby, treating the assessee-default for not deducting TDS u/s. 194J of the Act and, therefore, raising demand u/s. 201(1) and also charging consequent interest u/s. 201(1A) of the Act. For this, assessee has raised following three effective grounds: “The grounds mentioned hereinafter are without prejudice to one another. 1(a). That on the facts and circumstances of the case, the learned CIT (Appeals) erred in upholding the action of the Assessing Officer in treating the appellant as assessee in default for the purpose of section 201 of the Act for not deducting TDS under section 194J of the Act on outright purchase of copyright. l(b). That on the facts and circumstances of the case, the learned CIT (Appeals) erred in upholding the action of the Assessing Officer in treating the outright purchase of copyrights by the appellant as payments for royalty. 2. That on the facts and in the circumstances of the case, the CIT (Appeals) erred in confirming the action of the Assessing Officer in recovering the tax u/s 201 of the Act from the appellant whereas the respective producers must have paid taxes on such income. 3 That on the facts and the circumstances of the case, the CIT(Appeals) erred in confirming the decision of the Assessing Officer in charging interest under Section 201(lA) of the Act.”

2 ITA No.1813/K/2000 M/s. Saregama (I) Ltd. AY 2008-09 3. Briefly stated facts are that the assessee is engaged in the business of producing music cassette, CDs, DVDs etc. According to AO, the assessee is acquiring two types of music rights. Firstly, where the music rights are obtained for a specified period, royalty is paid to the producers/artists from time to time based on the terms of the agreement. Secondly, the music rights are purchased outright and payments are made in lump sum amount. During the course of survey by the department u/s. 133A of the Act i.e. the TDS survey conducted on assessee’s business premises on 13.09.2007, it was observed that the assessee did not deduct tax at source on lump sum payment made on outright purchase of music rights. The AO required the assessee to explain as to why the assessee not treated as assessee in default u/s. 201(1) of the Act. The assessee explained before the AO that these payments made in lump sum amount for outright purchase of music rights are payments in respect to purchase of assets and not payment of royalty. But the AO treated these payments as royalty and he observed that the assessee company is regularly deducting tax u/s. 194J of the Act on these royalty payments. According to AO, the lump sum payment of all or any right of artistic work is also considered as royalty for the purpose of section 194J of the Act and according to him, the assessee is in default in respect of non-deduction of TDS from royalty payments u/s. 194J of the Act on the following transactions: Party Name Payment Date Amount of royalty Non TDS (Rs.) Interest u/s. payment (Rs.) 201(1A) (Rs.) M/s. Rasika Entertainments 22.08.07 550,000 55,000/- 9,900/- M/s. 3G digital Solutions 16.04.07 350,000 17,500/- 2,100/- Sree Chakra Films Pvt. Ltd. 07.08.07 750,000 75,000/- 5,250/- Moxie Entertainment Pvt. Ltd. 29.06.07 1,500,000 1,50,000/- 13,500/- Rituparna Ghosh Productions 18.06.07 8,500,000 8,50,000/- 76,500/- Total For F/Year 2007-08 11,650.000 11,47,500/- 1,07,250/-

Hence, the AO raised demand u/s. 201(1) of the Act for non-deduction of TDS at Rs.11,47,500/- and consequent interest u/s. 201(1A) of the Act at Rs.1,07,250/-. Aggrieved, assessee preferred appeal before CIT(A), who restricted the action of AO in respect of first four parties as given in the above chart except the fifth party namely Rituparna Ghosh Productions vide para 6 as under: “6. I have considered the submission of the appellant and perused the documents filed before me. I have also gone through the A.O's order u/s. 201(1)/201(lA) of the 1. T. Act. During the relevant previous year, the appellant has made total payments of Rs.1,16,50,000/- to M/s. Rasika Entertainments (Rs.5,50,000/-), M/s. 3G Digital Solutions (Rs.3,50,000/-), Sree Chakra Films Pvt. Ltd. (Rs.7,50,000/-), Moxie Entertainment Pvt. Ltd. (Rs.15,00,000/-) and M/s. Rituparno, Ghosh Productions (Rs.85,00,000/-) as lump sum payments for music rights and film etc. while making the payment to aforesaid

3 ITA No.1813/K/2000 M/s. Saregama (I) Ltd. AY 2008-09 persons, the appellant has not deducted tax u/s. 194J of the I. T. Act. As per the A.O., the payment to the aforesaid persons was in the nature of payment of royalty and hence the appellant was required to deduct the tax u/s. 194J of the Act. According to the A.O. the appellant's case is covered under the clause (v) of Explanation-2 to clause (vi) of sub- section (1) of Section 9. On the other hand, the appellant's contention before the A.O. as well as before me was that the payments made by the appellant to aforesaid persons did not qualify the definition of royalty because the appellant has made outright purchase of the rights and those rights were directly shown in the balance sheet as assets and depreciation was claimed. I find no substance in the submission of the appellant that the payments made by it are not covered under the definition of Royalty because as per clause (v) of Explanation-2 of section 9( l)(vi) of the 1. T. Act "Royalty" means consideration including a lump sum consideration ------- for the transfer of all or any rights in respect of any copyrights, 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 no including consideration for the sale, distribution or exhibition of cinematographic films. On perusal of copies of agreements between appellant and the aforesaid persons, I am of the opinion that in the cases of M/s. Rasika Entertainments, M/s. 3G Digital Solutions, Sree Chakra Films Pvt. Ltd. and Moxie Entertainment Pvt. Ltd. the payments are to be treated as payment of Royalty in view of provisions of clause (v) of Explanation-2 of section 9(1)(vi) of the I. T. Act because the payments have been made for transfer of all the assigned rights, title and interest in all works of a literary, dramatic, musical and artistic nature together with the sound recordings. However, in the case of payment to Rituparno Ghosh Productions, the payment has been made for purchase of all exclusive copyrights of the film "Khela". Thus, the payment of Rs.85,00,000/- made to Rituparno Ghosh Productions cannot be treated as payment of royalty covered under clause (v) of Explanation-2 of section 9(1)(vi) of the 1. T. Act. In view of above, the A.O. is directed to delete the tax demand of Rs.8,50,000/- raised u/s. 201(1) and interest of Rs.76,500/- charged u/s. 201(1A) of the 1. T. Act in the case of Rituparno Ghosh Productions. The demand raised u/s. 201(1) and interest charged u/s. 201(lA) of the Act in the cases of balance four parties is confirmed.” Aggrieved, assessee is in second appeal before Tribunal.

(i) acquisition of music/film rights for a specific period and payment of royalty to the music producers or artist from time to time.

ii) acquisition of copyrights of music/films from the music producers i.e. transfer of ownership of copyright for a lump sum consideration.

The assessee claimed before us that in respect to item (i) above it does deduct TDS u/s. 194J of the Act and also claimed the expenditure as revenue. But while making payment of items mentioned in clause (ii), the assessee did not deduct TDS on the ground that such payment does not fall within the definition of royalty as defined under Explanation (2) to section 9(1)(vi) of the Act. The Ld. Counsel for the assessee now took us to assessee’s

4 ITA No.1813/K/2000 M/s. Saregama (I) Ltd. AY 2008-09 paper book and particularly the agreement entered with M/s. 3G Digital Solution Inc. dated 10.04.2007 wherein he drew our attention to the primary clause (A) and (C) of the agreement (which is enclosed in assessee’s paper book at page 48), which reads as under: “A. The Assignor by virtue of an agreement dated 7th February 2007 has obtained from M/s. Parker Bros., the sole and exclusive assignment of copyrights and all other rights in the Sound Recordings together with that of the Literary, Musical, Dramatic, Artistic works embodied in the Cinematograph Film ÄMMUVAGIYA NAAN” in Tamil language (hereinafter referred to as the “said Film”) as well as the cinematograph works of the portion of the said Film containing the audio visual song sequences only (hereinafter referred to as the “Song Sequences”). B. -------- C. The assignor has expressed its desire to transfer and assign to the Company all the assigned rights, title and interest in and to the Contract Works included therein embodied in the said Film, more fully detailed in Annexure hereto, which prior to execution of this Agreement vest in the Assignor, and the Company, relying on the aforesaid representation and assurances of the Assignor, has agreed to acquire, transfer and assign to itself the same in perpetuity at our for the consideration and upon the terms and conditions set out hereunder.” Ld. Counsel for the assessee at the same page drew our attention to clause 1(1) i.e. contract for works and the relevant clause reads as under: “1.1 ‘Contract Works’ shall mean all works of a literary, dramatic, musical and artistic nature together with the sound recordings as well as the cinematograph works/audio- visual recordings of the song sequences in the said Film, the particulars whereof are set forth in the Annexure hereto.” He also explained that the entire right, title and interest in the property is transferred by virtue of clause (4), which reads as under:

“4. The Assignor hereby transfers and assigns all rights, title and interest in the Contract Works for the Territory for the full copyright period as per the Copyright Act, 1957, as amended from time to time. The Company can exercise these rights at any time throughout the territory solely at the Company’s discretion.” According to him, the assessee company will be the owner of original plate within the meaning of Copyright Act, 1957 and any extension or modification thereof of any performance/works in pursuance of this agreement will be that of the assessee. For this, he drew our attention to clause 9, which reads as under. Even the entire consideration is referred to in clause 14 at page 53 of assessee’s paper book, which reads as under: “9. The Company shall be the owner of the original Plate within the meaning of the Copyright Act, 1957 and any extensions or modifications thereof of any performance/works in pursuance of this Agreement.” “CONSIDERATION AND PAYMENTS: In consideration, the Company agrees to pay to the Assignor a total consideration of Rs.3,50,000/- (Three Lakhs Fifty Thousand Rupees) only, being the all-inclusive amount for acquisition of all rights in the Contract Works for their exploitation in the Territory, as per schedule as follows:

5 ITA No.1813/K/2000 M/s. Saregama (I) Ltd. AY 2008-09 i. On execution of this Agreement Rs.1,00,000/- ii. On hand over of the DAT/Master/Digibeta/Betacam to Company Rs.2,50,000/- Total Rs.3,50,000/-”

In the eventuality of any violation in terms and conditions, the assessee company being owner of copyrights and all other rights is free to initiate legal proceedings against any person for enforcement and protection of its rights assigned to it under the terms and conditions of the agreement vide clause 20, which reads as under: “20. The Company being the owner of the copyrights and all other rights in the Contract Works assigned pursuant to this agreement, the Company shall have the right to conduct, in such form and manner as the Company may deem reasonable, any legal proceedings in the name of the Company against any person for the purpose of enforcement and protection of its rights assigned to it under the terms and conditions of this Agreement or against any person who has committed any act of commission or omission whereby the Company’s rights and interests under this Agreement are adversely affected.”

In view of this clause of the agreement, Ld. Counsel for the assessee argued that this is outright purchase and nothing else and once this is outright purchase of copyright, which does not fall under the definition of royalty as provided in Explanation 2 to section 9(1)(vii) of the Act. According to him, in view of the above facts and circumstances, assessee is not liable to deduct TDS on the lump sum payment of outright purchase of copyright because it is not a royalty payment. He relied on certain case laws which will be discussed in later part of this order. 5. On the other hand, the Ld. Sr. DR relied on the orders of the lower authorities i.e. the order of CIT(A) and the A.O. 6. We have heard rival submissions and gone through facts and circumstances of the case. We have gone through the entire clause of the agreement and it is seen that the assessee has outright purchased the copyrights and payments for such outright purchase of copyrights was made in lump-sum. We also find that revenue has not contradicted the factum of outright purchase of copyrights by the assessee. The assessee has also treated such payments capital expenditure and not claimed as revenue in nature. All the agreement entered into between the assessee and other parties for outright acquisition of copyrights of music/films from the music producers i.e. transfer of ownership of copyright for a lump sum consideration are identically worded and for sample basis, the clauses of one of the agreement is reproduced above, which clearly reveals that the copyrights are outright purchase. Now it is to be decided whether the above outright purchase of copyright falls within the definition of royalty as provided in explanation 2 to

6 ITA No.1813/K/2000 M/s. Saregama (I) Ltd. AY 2008-09 sec. 9(1)(vi) of the Act or not? For the better appreciation of law involving the present case, it is worthwhile to go through the definition of royalty as provided in explanation 2 to section 9(1)(vi) of the Act, which reads as following: “Explanation 2.—For the purposes of this clause, “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— (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;] (v) the transfer of all or any rights (including the granting of a licence) 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 ; or (vi) the rendering of any services in connection with the activities referred to in sub- clauses (i) to 74[(iv), (iva) and] (v).” 7. In view of the above provision of explanation 2 to section 9(1)(vi) of the Act the term royalty takes into its ambit the copyright royalties. The transfer of the property is not the subject matter but it is the transfer of the right in respect of the property. We are of the view that these two types of transfers are distinct and have different legal effect. The first category of rights are purchased, which enables use of those rights, while the second category no purchase is involved but only right to use has been granted. Ownership denotes the relationship between a person and an object forming subject matter of ownership. This consists of rights, all of which are right in rem, being good against the entire world but not merely against a specific person and such rights are indeterminate in duration and residuary in character. When right in respect of a property is transferred, and not the right in the property, then, there is no transfer of the rights in rem which may be good against the world but not against the transfer. In that case the transferee does not have the rights, which are indeterminate in duration and residuary in character. The consideration paid in lump sum is not the decisive factor in the matter. That sum may be agreed for the transfer of the one right, two rights but not the ownership of the asset. Thus the definition of term royalty in respect to copyright, literary, artistic or

7 ITA No.1813/K/2000 M/s. Saregama (I) Ltd. AY 2008-09 scientific work, patent, inventions, process etc. does not extend to the outright purchase of the right to use an asset. In the case of the royalty, the ownership of the property or rights remains with the owner and the transferee is permitted to use the right in respect of such property. A payment of the absolute assignment and ownership of right transferred is not a payment for the use of something belonging to another party and, therefore, cannot be called as royalty. In an outright transfer/purchase the sale of the property is to be treated as opposed to licence, alienation of all rights in the property.

“17. Royalty, by its very nature is a sum payable to the owner of a design, invention or trade mark by another for using it. It is clearly opposed to an outright transfer. The original patent or the facility of other description continues to remain with the owner and the user would be permitted to avail of the facility in a limited or absolute manner on payment of royalty. On cessation of the arrangement, the user loses the right and the

8 ITA No.1813/K/2000 M/s. Saregama (I) Ltd. AY 2008-09 owner of the facility gets full and absolute control over it. A note of caution need to be added here. Though the royalty is required to be paid periodically during the subsistence of the arrangement, it is quite possible for the parties to agree for payment of a lump sum. However, a lump sum payment would answer the description of royalty, if only it is referable to a fixed period for which the facility can be utilised. A lump sum payment, without mentioning the period is prone to take away such amount from the definition of royalty. In the Law Lexicon by Sri P. Ramanatha Aiyar the following meaning is ascribed to the word royalty. "Royalty. Has several meanings : (1) percentages or dues payable to landowners for mining rights ; (2) sums paid for the use of a patent ; (3) percentages paid to an author by a publisher on the sales of a book. Other definitions : A royalty is a tax or duty paid to the owner of a patent for the privilege of manufacturing or using the patented article ; Royalty is a tax or duty paid to the owner of a patent for the priv ilege of manufacturing or using the patented article ; something pro portionate to the use of a patented device, in other words, a kind of exercise, specific sums paid annually, or at other stated periods, for the right to use a patented device, whether it is used much or little or not at all. 'Royalty' is the most appropriate word to apply to rental based on the quantity of coal or other mineral that is or may be taken from a mine." 18. In Corpus Juris II, royalty is defined as under : "Royalty or royalties. A. As noun. In its primary and natural sense, merely the English translation or equivalent of 'regalitates,' 'jura rega lia,' 'jura regia.' Formerly the word referred to the prerogative of the king to take gold and silver discovered in land privately owned. In case of copyrights and patents the term is commonly used to designate the share of the proceeds of property paid to a person having some proprietary or creative interest therein by another who has obtained from the payee an absolute or qualified ownership of such property. It has been defined as a tax or duty paid to the owner of a patent for the privilege of manufacturing or asing the patented article ; rental ; something proportionate to the use of a patented device ; in other words, a kind of exercise ; specific sums paid annu ally, or at others stated periods, for the right to use a patented device, whether it is used much or little or not at all. The word has been held an appropriate term as applied to improvements which are non-patentable. In oil and gas leases, a share of the product or profit reserved by the owner for permitting another to use the property ; the amount reserved or the rental to be paid to the original owner of the whole estate ; the compensation for the privilege or rights created by the lease ; the compensation provided for the privilege of drilling for oil and gas, and consists of a share in the oil and gas produced under existing leases ; the share of the product or profit paid to the owner of the property. As applied to an existing lease, a share in the oil and gas produced, but the term does not include a perpetual interest in the oil and gas in the ground." 19. If these tests are applied to the amount that is paid by the respondent to the foreign company, it becomes difficult to treat it as royalty. Firstly, the amount is paid in a lump sum and it is not referable to any particular period. Secondly, though there is a possibility to interpret the clauses in such a way that,-

9 ITA No.1813/K/2000 M/s. Saregama (I) Ltd. AY 2008-09 (a) the foreign company retained with it the ultimate patent but per mitted the respondent in a related manner, that too by prohibiting the sub lease or other unauthorised uses, thereby bringing the act nearer to the one of the royalty, and (b) the transfer was not on payment of any periodical royalty but was only to the extent which is necessary for installation and thereby treating it as a concomitant part of the comprehensive agreement ; the predominant factors are suggestive of the fact that the consideration paid by the respondent, even under the licence know-how, and engineering agreement or against the DTA Agreement being treated not as royalty. Another reason is that it is not a mere licence know-how but is coupled with engineering.” 10. From the above facts and precedents cited, the assessee is an Indian company engaged, inter alia, in the business of manufacture and sale of audio cassettes, CDs etc. and also in production of films/TV Serials and in its course of business activities assessee made payments for acquisition of copyright of music/films from the music producers, i.e. transfer of ownership of copyrights for a lump sum consideration. The assessee is not dealing in copyrights or sale or purchase of copyrights is not its business. Accordingly, the transaction was a transaction of outright purchase of copyright and not a mere payment for past and future royalties. The price paid for outright purchase of copyright was price paid for acquiring a capital asset. Accordingly, we are of the view that neither AO nor CIT(A) was justified in treating the assessee in default for not deducting TDS on these transactions. Accordingly, this issue of assessee’s appeal is allowed. 11. In the result, the appeal of assessee is allowed. 12. Order is pronounced in the open court on 20.11.2015 Sd/- Sd/- (Waseem Ahmed) (Mahavir Singh) Accountant Member Judicial Member

Dated : 20th November, 2015 Jd. Sr. P.S Copy of the order forwarded to: APPELLANT – M/s. Saregama (I) Ltd., 33, Jessore Road, Dum Dum, 1. Kol-700028. Respondent – ACIT(TDS), circle-59, Kolkata. 2 The CIT(A), Kolkata 3. 4. CIT Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order,

Asstt. Registrar.