M/s. Malayalamanorama Co. ltd, Kottayam V. ACIT, Kottayam

ITA 6/COCH/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61542 (ITAT-COCHIN)
• Duration Of Justice: 2 year(s) 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-06-2012
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 08-05-2012
• Assessment Year: misc
• Appeal Filed On: 07-01-2010
• Court: TRIBUNAL
• Department Lawyers: S VIJAYAPRABHA
• Assessee Lawyers: K I JOHN
• Keywords: Depreciation; Cost of acquisition; Capital expenditure
• Section: 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND B.R.BASKAR AN, AM I.T.A NO. 578/COCH/2009 ASSESSMENT YEAR: 2006-07 THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1, KOTTAYAM. VS. M/S. THE MALAYALA MANORMA COMPANY LIMITED, K.K. ROAD, KOTTAYAM. [PAN: AAACT 7597G] (REVENUE-APPELLANT) (ASSESSEE - RESPONDENT) I.T.A NO. 06/COCH/2010 ASSESSMENT YEAR: 2006-07 M/S. THE MALAYALA MANORMA COMPANY LIMITED, K.K. ROAD, KOTTAYAM. VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1, KOTTAYAM. (ASSESSEE -APPELLANT) (REVENUE - RESPONDENT) REVENUE BY SMT. S. VIJAYAPRABHA, JR. DR ASSESSEE BY SHRI K.I. JOHN, CA DATE OF HEARING 08/05/2012 DATE OF PRONOUNCEMENT 22/06/2012 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 26.10.2009 PASSED BY LD CIT(A)-IV, KOCHI AND THEY RELATE TO THE ASSESSME NT YEAR 2006-07. 2. IN THE APPEAL FILED BY THE REVENUE, THE DECI SION OF LD CIT(A) IN HOLDING THAT THE ROYALTY PAYMENT OF RS.19,04,043/- AS REVENUE IN NAT URE IS BEING ASSAILED. I.T.A. NO.578 /COCH/2009 & 06/COCH/2010 2 3. IN THE APPEAL FILED BY THE ASSESSEE, THE DEC ISIONS OF LD CIT(A) IN UPHOLDING THE ADDITION OF RS.2,43,25,000/- RELATING TO THE DISTRI BUTION RIGHTS OF FILM AND RS.8,25,000/- RELATING TO PURCHASE OF COPY RIGHTS OF FILM SONGS A RE BEING ASSAILED. 4. THE FACTS RELATING TO THE ABOVE SAID ISSUES ARE STATED IN BRIEF. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PRINTING AND PUBLISHING OF NEWS PAPERS AND MAGAZINES. THE ASSESSEE IS ALSO RUNNING A TELEVISION CHANNEL AND F OR THAT PURPOSE PURCHASES SATELLITE/TELEVISION RIGHTS OF FILMS. DURING THE CO URSE OF ASSESSMENT PROCEEDINGS, THE AO DISALLOWED FOLLOWING EXPENSES CLAIMED BY THE ASSESS EE. (A) COST OF ACQUISITION OF SATELLITE/TELEVISION R IGHTS OF FILMS - RS.2,43,25,000/- (B) ROYALTY PAYMENTS ON COPYRIGHTS OF FILM SONGS - RS. 19,40,043/- (C) PURCHASE OF COPY RIGHTS OF FILM SONGS - RS . 8,25,000/- IN THE APPEAL FILED BY THE ASSESSEE, THE LD CIT(A) DELETED THE ADDITION OF RS.19,40,043/- AND CONFIRMED THE DISALLOWANCE OF REMAINING TWO ITE MS. AGGRIEVED BY THE ORDER PASSED BY LD CIT(A), BOTH THE PARTIES ARE IN APPEAL BEFORE ON THE POINTS DECIDED AGAINST EACH OF THEM. 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERU SED THE RECORD. THE ISSUE URGED IN THE APPEAL OF THE REVENUE RELATES TO THE DISALLOWAN CE OF RS.19,40,043/- RELATING TO ROYALTY PAYMENT, WHICH HAS SINCE BEEN DELETED BY LD CIT(A). THE FIRST APPELLATE AUTHORITY HAS DELETED THIS ADDITION WITH THE FOLLOW ING OBSERVATIONS: 5.1 DURING THE HEARING BEFORE ME IT IS PLEADED THA T THE AO HAS NOT RIGHT IN HOLDING BOTH THE EXPENSES AS CAPITAL EXPE NDITURE. I HAVE CAREFULLY EXAMINED THE FACTS OF THE CASE. DURING THE APPELLATE PROCEEDINGS THE AGREEMENT FOR PURCHASE OF COPY RIG HTS WERE EXAMINED. THE FACTS OF THE MATTER ARE AS UNDER: 5.2 THE PAYMENT OF ROYALTY OF RS. 19,40,043/- IS M ADE TO M/S. AUDIOTRAC MUSIC CO., CHENNAI UNDER THE AGREEMENT M ADE ON 01.07.2005. AS PER THIS AGREEMENT THE APPELLANT H AD AVAILED THE RIGHT I.T.A. NO.578 /COCH/2009 & 06/COCH/2010 3 OF SALES AND DISTRIBUTION OF THE MUSIC ALBUMS. TH E TERMS OF ROYALTY ARE DEFINED IN PARA 3 OF AGREEMENT ARE REPRODUCED BELO W: ROYALTY: THE LICENSEE AGREES TO PAY THE LICENSOR A ROYALTY EQUIVALENT TO 22% (TWENTY TWO PERCENT) OF MAXIMUM RETAIL PRICE ( MRP FOR CASSETTES AND COMPACT DISCS. THE ROYALTY PAYMENTS WILL BE MADE WITHIN 60 DAYS FROM THE MONTH OF SALE ON THE BASIS OF SALES STATEMENTS FURNISHED BY THE LICENSEE TO THE LICENSOR. FOR TH IS PURPOSE MRP OF NET SALE QUANTITY WILL BE CONSIDERED. IT IS FOUND THAT THE PAYMENT OF ROYALTY AS PER THE TERMS DEFINED ABOVE HAD BEEN MADE AFTER REALISATION AGAINST SALE AND D ISTRIBUTION OF MUSIC ALBUMS. SINCE THE ROYALTY PAYMENT IS DIRECTLY RELA TED TO THE REALISATION IT IS CLEARLY OF REVENUE NATURE, HENCE IS ALLOWABL E U/S. 37. IN VIEW OF THE ABOVE, THE AO IS DIRECTED TO ALLOW THE PAYMENT OF ROYALTY AS EXPENSE U/S. 37 AND WTHDRAW THE DEPRECIATION ALLOW ED AGAINST PAYMENT OF ROYALTY. IN THE RESULT, GROUND NO. 3 O F APPEAL IS ALLOWED. FROM THE TERMS OF AGREEMENT EXTRACTED BY LD CIT(A), WE NOTICE THAT THE ASSESSEE HAS NOT GOT EXCLUSIVE RIGHTS OVER THE FILM SONGS, BUT O NLY USER RIGHTS ON PAYMENT OF ROYALTY BASED ON THE SELLING PRICE. BEFORE US, THE LD A.R PLACED RELIANCE ON THE DECISION RENDERED BY HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. V.R.V BREWERIES & BOTTLING INDUSTRIES LTD REPORTED IN (2011) 244 CTR (DEL) 576 AND ALSO ON ANOTHER DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. G4S SECURITIES SYSTEM (INDIA) P LTD REPORTED IN (2011) 338 ITR 46. IN BOTH THE CASES IT HAS BEEN HELD THAT THE ROYALTY PAYMENT MADE FOR USER RIGHTS AND ALSO IN THE SITUAT ION WHERE THE ASSESSEE DOES NOT BECOME EXCLUSIVE OWNER OF THE KNOW HOW/TRADE MARK I S DEDUCTIBLE U/S 37(1) OF THE ACT. IN THE INSTANT CASE, THE ASSESSEE HAS NOT BECOME EX CLUSIVE OWNER OF THE COPY RIGHT OVER THE FILM SONGS AND THE ROYALTY PAYMENT IS MADE ON T HE BASIS OF SELLING PRICE. HENCE, WE ARE IN AGREEMENT WITH THE VIEW EXPRESSED BY LD CIT( A) ON THIS ISSUE. 6. THE FIRST ISSUE IN THE APPEAL OF THE ASSES SEE RELATES TO THE DISALLOWANCE OF COST OF ACQUISITION OF SATELLITE/TELEVISION RIGHTS OF FI LMS. IT WAS BROUGHT TO OUR NOTICE THAT THE CO-ORDINATE BENCH OF COCHIN TRIBUNAL HAS CONFIRMED SIMILAR ADDITION MADE IN THE HANDS OF THE ASSESSEE IN ASSESSMENT YEAR 2005-06. COPY O F ORDER DATED 11-08-2009 PASSED IN ITA NO.17/COCH/2009 IN THE HANDS OF THE ASSESSEE FOR ASSESSMENT YEAR 2005-06 WAS I.T.A. NO.578 /COCH/2009 & 06/COCH/2010 4 PLACED ON RECORD. THE LD A.R SUBMITTED THAT THE AS SESSEE HAS PREFERRED APPEAL AGAINST THE ORDER OF THE TRIBUNAL BEFORE THE HONBLE HIGH C OURT OF KERALA AND THE SAID APPEAL HAS SINCE BEEN ADMITTED. HOWEVER, THE FACT REMAINS THAT THE ORDER OF THE TRIBUNAL REFERRED ABOVE HOLDS THE FILED AS ON DATE. SINCE T HE DECISION RENDERED BY LD CIT(A) ON THIS ISSUE IS IN ACCORDANCE WITH THE DECISION OF TH E TRIBUNAL, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE SAME. ACCORDINGLY, WE UPHOLD THE ORDER OF THE TRIBUNAL ON THIS ISSUE. 7. THE NEXT ISSUE IN THE APPEAL OF THE ASSESSEE RELATES TO THE DISALLOWANCE OF RS.8,25,000/- RELATING TO THE PURCHASE OF COPY RIGH TS OF FILM SONGS. THE LD CIT(A) HAS CONFIRMED THIS ADDITION WITH THE FOLLOWING OBSERVAT IONS:- 6. DISPUTE INVOLVED IN GROUND NO. 4 IS SUBSTANTIALLY D IFFERENT FROM GROUND NO. 3 ALTHOUGH A.O. HAS ADJUDICATED UPON TH EM TOGETHER. IN RESPECT OF PAYMENT FOR ACQUISITION OF COPY RIGH T IN FILM SONGS THE APPELLANT HAS PRODUCED AN AGREEMENT BETWEEN M/S. C ENTURY FILMS, KOTTAYAM AND THE APPELLANT SIGNED ON 16.11.2005. A S PER THIS AGREEMENT, THE COMPLETE COPYRIGHT IN THE FILM SONG S DESCRIBED IN THE SCHEDULE TO THE AGREEMENT ARE TRANSFER FOR PERPETU ITY AGAINST PAYMENT OF A LUMP-SUM CONSIDERATION. THE AGREEMENT SHOWS THAT FILM IS TO BE RELEASED WITHIN SIX MONTHS OF SIGNING OF THE AGREE MENT. IT IS UNDISPUTED THAT NO REALIZATION IS BOOKED AGAINST A CQUISITION OF THIS COPYRIGHT UPTO END OF THE PREVIOUS YEAR INVOLVED I N THIS APPEAL. THE TERMS AND CONDITIONS OF THE COPYRIGHT AGREEMENT CL EARLY SHOW THAT A COMPLETE COPYRIGHT IN THE INTELLECTUAL PROPERTY IS TRANSFERRED TO THE APPELLANT FOR A LUMP-SUM CONSIDERATION. THE TRANS FER IS IRREVOCABLE AND THE RIGHTS ARE TO BE HELD IN PERPETUITY BY THE ASSIGNEE. IT SHOWS THAT AN INTANGIBLE ASSET HAS BEEN PURCHASED FOR A LUMP-SUM CONSIDERATION. THE ASSET IS NOT SHOWN AS CLOSING STOCK IN THE P&L A/C. THESE FACTS CLEARLY ESTABLISHED THAT THE COMPLETE COPYRIGHT IN THE FILM SONGS ACQUIRED FOR A LUMP-SUM CONSIDERATION OF RS. 8,25,000/- IS NOTHING BUT, ACQUISITION OF A INTANGIBLE CAPITAL A SSET. IN VIEW OF THE ABOVE, THE AOS DECISION OF TREATING THE EXPENDITU RE OF RS. 8,25,000/- AS CAPITAL EXPENDITURE AND ALLOWING DEPRECIATION @ 25% OF THE COST IS HELD TO BE VALID, HENCE THE SAME IS CONFIRMED. TH IS GROUND OF APPEAL IS DISMISSED. IN RESPECT OF THIS PAYMENT, THE LD CIT(A) HAS GIVEN A CLEAR FINDING THAT THE ASSESSEE HAS OBTAINED COMPLETE COPY RIGHT OVER THE FILM SONG S ON MAKING LUMP SUM PAYMENT. I.T.A. NO.578 /COCH/2009 & 06/COCH/2010 5 HENCE, WE AGREE WITH THE VIEW OF THE LD CIT(A) THAT THIS PAYMENT CONSTITUTES CAPITAL EXPENDITURE IN THE HANDS OF THE ASSESSEE. 8. IN THE RESULT THE APPEALS FILED BY THE REVEN UE AS WELL AS THE ASSESSEE ARE DISMISSED. PRONOUNCED ACCORDINGLY ON 22-06-2012 SD/- SD/- (N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 22ND JUNE, 2012 GJ COPY TO: 1. M/S. THE MALAYALA MANORMA COMPANY LIMITED, K.K. ROAD, KOTTAYAM. 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE -1, KOTTAYAM. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-IV, KOC HI. 4. THE COMMISSIONER OF INCOME-TAX, KOTTAYAM. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) ITAT, COCHIN