Court Upholds No TDS on Film Distribution Royalties, Citing Rule 28AA (of Income Tax Rules, 1962) Amendment

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Case Name:

Central Advertising Agency Vs Union of India & Others (High Court of Kerala)

WP(C).No. 25032 of 2009 (Y)

Date: 23rd August 2016

Key Takeaways:

1. Substantial changes have been made to Rule 28AA (of Income Tax Rules, 1962), removing previous restrictions on issuing certificates for lower or no tax deduction.
2. The court emphasized that royalties for sale/distribution of cinematographic films may fall outside the scope of TDS under certain conditions.
3. The judgment highlights the importance of approaching the assessing officer for consideration under the amended Rule 28AA (of Income Tax Rules, 1962).

Issue:

The central legal question is whether TDS should be deducted from payments made by TV channels to the petitioner for the sale/distribution/exhibition of cinematographic films.

Facts:

• The petitioner is engaged in purchasing satellite TV broadcast/exhibition rights for cinematographic films.
• They enter into agreements with TV channels for exhibiting these films.
• TV companies typically pay the petitioner an amount plus 7.5% as profit/royalty.
• The petitioner sought a declaration that no TDS should be deducted from these payments.
• Initially, a certificate was issued allowing tax deduction at a reduced rate of 3%.
• Later, the petitioner’s application for exemption was rejected based on Rule 28AA (of Income Tax Rules, 1962) and CBDT clarification.

Arguments:

Petitioner’s arguments:

• The definition of “royalty” in Section 9(1) (of Income Tax Act, 1961) excludes consideration for sale/distribution of cinematographic films.
• No TDS should be deducted for royalties paid for film distribution.

Revenue’s arguments:

• As per Rule 28AA (of Income Tax Rules, 1962), certificates under Section 197 (of Income Tax Act, 1961) can be obtained each year subject to prescribed conditions.

Key Legal Precedents:

1. K. Bhagyalakshmi v. The Deputy Commissioner of Income Tax, Media Circle-I [(2014) 265 CTR(Mad) 545]:

• Held that perpetual transfer of film rights for 99 years falls within the scope of sale.
• Consideration for sale/distribution of cinematographic films falls outside the definition of “royalty” under Section 9(1) (of Income Tax Act, 1961).

2. S.P. Alaguvel v. The Deputy CIT, Media Circle-1, Chennai (judgment dated 21/07/2014):

• Followed the K. Bhagyalakshmi judgment.

Judgment:

• The court did not delve into the merits of the contentions due to the amendment in Rule 28AA (of Income Tax Rules, 1962).
• It directed the petitioner to approach the assessing officer for necessary concessions under the amended Rule 28AA (of Income Tax Rules, 1962).
• The court extended the interim order allowing 3% TDS for one month to enable the petitioner to approach the assessing officer.
• The assessing officer was directed to consider the representation and pass appropriate orders within one month of receiving it.

FAQs:

Q: What is the significance of the amendment to Rule 28AA (of Income Tax Rules, 1962)?

A: The amendment allows the assessing officer to issue certificates for lower or no tax deduction if justified by the person’s tax liability, removing previous restrictions.

Q: Does this judgment definitively state that no TDS should be deducted for film distribution royalties?

A: No, the court didn’t make a definitive statement. Instead, it directed the petitioner to approach the assessing officer for consideration under the amended Rule 28AA (of Income Tax Rules, 1962).

Q: What is the importance of the K. Bhagyalakshmi case in this context?

A: This case established that perpetual transfer of film rights for 99 years can be considered a sale, potentially excluding such transactions from the definition of “royalty” for TDS purposes.

Q: What should companies in similar situations do based on this judgment?

A: They should approach their assessing officers with proper representations, seeking consideration under the amended Rule 28AA (of Income Tax Rules, 1962) for potential lower or no tax deduction.

Q: Did the court declare Rule 28AA (of Income Tax Rules, 1962) as ultra vires?

A: No, the court noted that substantial changes had been made to Rule 28AA (of Income Tax Rules, 1962), removing the need to consider its vires.

This writ petition has been filed seeking the following reliefs:

“(i) To declare that no TDS need be reduced from the payments made by TV channels to the petitioner with respect to sale/distribution/exhibition of cinematographic films by the petitioner to such TV channels for exhibition by such TV channels.

(ii) call for the records leading to Exhibit P6 order of the 3rd respondent and quash the same, by the issuance of a writ of certiorari or other writ order or direction;

(iii) issue a writ of mandamus or such other writ or direction, directing the 3 rd respondent to issue necessary certificate at reduced rate under Section 197(1) (of Income Tax Act, 1961) to the petitioner.

(iv) declare that the provisions of Rule 28AA (of Income Tax Rules, 1962) are inconsistent and ultravires the Act and are therefore liable to be struck down.”

2. As far as vires of Rule 28AA (of Income Tax Rules, 1962), 1961 (hereinafter referred to as 'the Rules') is concerned, the Rule has already undergone substantial changes w.e.f 01/04/2011.

The present rule reads as under:

“28AA. Certificate for deduction at lower rates or no deduction of tax from income other than dividends

(1) Where the Assessing Officer, on an application made by a person under sub-rule (1) of rule 28 (of Income Tax Rules, 1962) is satisfied that existing and estimated tax liability of a person justifies the deduction of tax at lower rate or no deduction of tax, as the case may be, the Assessing Officer shall issue a certificate in accordance with the provisions of sub-section (1) of section 197 (of Income Tax Act, 1961) for deduction of tax at such lower rate or no deduction of tax.

(2) The existing and estimated liability referred to in sub-rule (1) shall be determined by the Assessing Officer after taking into consideration the following:-

(i) tax payable on estimated income of the previous year relevant to the assessment year;

(ii) tax payable on the assessed or returned income, as the case may be, of the last three previous years;

(iii) existing liability under the Income- tax Act, 1961 and Wealth-tax Act, 1957;

(iv) advance tax payment for the assessment year relevant to the previous year till the date of making application under sub- rule (1) of rule 28 (of Income Tax Rules, 1962);

(v) tax deducted at source for the assessment year relevant to the previous year till the date of making application under sub- rule (1) of rule 28 (of Income Tax Rules, 1962); and

(vi) tax collected at source for the assessment year relevant to the previous year till the date of making application under sub- rule (1) of rule 28 (of Income Tax Rules, 1962).

(3) The certificate shall be valid for such period of the previous year as may be specified in the certificate, unless it is cancelled by the Assessing Officer at any time before the expiry of the specified period.

(4) The certificate for no deduction of tax shall be valid only with regard to the person responsible for deducting the tax and named therein.

(5) The certificate referred to in sub- rule (4) shall be issued direct to the person responsible for deducting the tax under advice to the person who made an application for issue of such certificate.

(6) The certificate for deduction of tax at lower rate shall be issued to the person who made an application for issue of such certificate, authorising him to receive income or sum after deduction of tax at lower rate.”

Therefore, there is no necessity to consider the vires of the Rules

3. The petitioner claims to be engaged in the business of purchase of Satellite TV broadcast/exhibition right of cinematographic film. It is stated that they normally enter into agreements that TV channels for exhibiting the cinematography films. According to the petitioner, normally TV companies pays the petitioner an amount calculated at the rate mentioned in the agreement plus 7.5% which is supposed to be the petitioner's profit by way of royalty as a right holder. Petitioner submits that it is the practice in the industry to pay such royalty to the persons who acquire the rights to the exhibition of cinematographic films. It is stated that the person who pays royalty is liable to credit certain amount to the account of the payee or at the time of payment, in terms of Section 194J (of Income Tax Act, 1961) (hereinafter referred to as 'the Act'). Royalty has been defined under Explanation 2 to Section 9(1) (of Income Tax Act, 1961), which reads as under:

“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 (of Income Tax Act, 1961);

(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 (iv), (iva)and (v)”.

4. According to the petitioner, the provisions clearly indicates that no TDS is liable to be deducted with respect to the royalty paid to the petitioner which apparently is a consideration for sale/distribution of cinematographic films. Petitioner had approached the competent authority seeking for a direction that no such tax should be deducted. However, by Ext.P4 dated 31/03/2009, certificate has been issued under Section 197(1) (of Income Tax Act, 1961) read with Rule 28AA (of Income Tax Rules, 1962) to the Asia Net Communications Ltd., to deduct income tax at the reduced rate of 3%. The certificate was for a period from 01/01/2009 to 31/03/2009.

However, later when the petitioner submitted an application for exemption, by order dated 04/04/2009, the claim was rejected on the ground that as per Rule 28AA (of Income Tax Rules, 1962) and the clarification issued by the Central Board of Direct Taxes, the certificate under Section 197 (of Income Tax Act, 1961) for deduction of tax at lower rates cannot be issued and therefore petitioner's application for exemption is not sustainable. It is impugning the aforesaid order that this writ petition has been filed inter alia contending that the rule is ultra vires the Statute and that appropriate directions are to be issued quashing Ext.P6 and for a declaration that no TDS is liable to be deducted from the amount paid by the Satellite companies/television channels to the petitioner.

5. Statement has been filed on behalf of the 3rd respondent iner alia stating that as per Rule 28AA (of Income Tax Rules, 1962), certificate under Section 197 (of Income Tax Act, 1961) can be obtained each year subject to the satisfaction of the conditions prescribed.

6. Learned counsel for the petitioner placed reliance on the judgment of the Madras High Court in K.Bhagyalakshmi v. The Deputy Commissioner of Income Tax, Media Circle-I [(2014) 265 CTR(Mad) 545] wherein while considering a similar factual situation regarding transfer deed executed by the copyright purchasers, the Madras High Court while considering the question whether the payments made by the appellant would tantamount to royalty, held at paragraphs 14 and 15 as under:

“14. It has to be seen as to whether the transfer effected in favour of the assessee would fall within Section 9(1) (of Income Tax Act, 1961) r/w Explanation (2)(v) of the Act. Clause (vi) to Explanation (2) defines the “Royalty” to mean consideration (including any lump sum consideration, but excluding any consideration, which would be the income of the recipient chargeable under the Head capital Gains) and in terms of Clause (v) to Explanation 2 of Section 9(1) (of Income Tax Act, 1961), the transfer of all or any rights (including the granting of a licence) in respect of any copy right, 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. Therefore, to fall within the exclusion, as defined under clause (v) to Explanation (2) to Section 9(1) (of Income Tax Act, 1961), if the consideration received as for the sale, distribution or exhibition of a cinematography film, then it would fall outside the scope of “Royalty” as defined under Explanation (2) in the proceedings.

15. In the preceding paragraphs, we have made an elaborate reference to the nature of transaction entered into by the assessee with the third parties. The sample transfer deed, clearly states that the transfer in favour of the assessee is for a perpetual period of 99 years. The party, who executed the agreement in favour of the assessee was desirous of disposing World Negative Rights, Satellite Television Rights and all other rights pertaining to the picture and the assessee enjoys the exclusive status, as the World Negative rights including theatrical rights owner. The assessee was also entitled to assign the said rights, which was transferred in their favour. Further the agreement was irrevocable and shall remain in force for a period of 99 years. In such a factual situation the nature of transaction, being a perpetual transfer for a period of 99 years, would undoubtedly fall within the scope of sale.”

7. Judgment in K.Bhagyalakshmi (supra) has been followed by another Division Bench in S.P.Alaguvel v. The Deputy CIT, Media Circle-1, Chennai as per judgment dated 21/07/2014. I do not think that this Court should delve into the merits of the contentions urged especially on account of the fact that any exemption for the deductor not to deduct tax in terms of Rule 28AA (of Income Tax Rules, 1962) has to be considered by the competent authority. As far as Ext.P6 is concerned, it is with reference to the application submitted by the petitioner for exemption of payment of tax for the year 2009. Substantial change has now been made in Rule 28AA (of Income Tax Rules, 1962) so far as assessing officer is entitled to issue a certificate if the tax liability of person justify deduction of tax at lower rate and no deduction of tax could be made. The earlier restriction imposed under Rule 28AA (of Income Tax Rules, 1962) has been taken away by the present amendment.

8. Under such circumstances, it is for the petitioner who is involved in such transactions to approach the assessing officer concerned and seek for necessary concession in terms of Rule 28AA (of Income Tax Rules, 1962). I do not think that any further direction is required to be issued as statutory provision is available to take care of such situations. An interim order had been passed by this Court permitting tax to be deducted by the respective deductors only at 3% in terms of Ext.P4. The said situation shall continue for a period of one month to enable the petitioner to approach the assessing officer with a proper representation and on receipt of the said representation, the assessing officer shall consider the same and pass appropriate orders within a period of one month from the date of receipt of the representation.

This writ petition is hence disposed of with the above directions.

(sd/-)

(A.M.SHAFFIQUE, JUDGE)