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Payment for perpetual transfer of copyright in a feature film for 99 years amounts to sale and not royalty
 

Payment for perpetual transfer of copyright in a feature film for 99 years amounts to sale and not royalty

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Recently, the Madras High Court (High Court) in the case of K. Bhagyalakshmi (the taxpayer) held that consideration paid for transfer of copyright in a feature film for a period of 99 years cannot be ...

Recently, the Madras High Court (High Court) in the case of K. Bhagyalakshmi (the taxpayer) held that consideration paid for transfer of copyright in a feature film for a period of 99 years cannot be treated as ‘royalty’ under Section 9(1)(vi) of the Income-tax Act, 1961 (the Act).

The High Court held that as per the Copyright Act, 1957, in the case of cinematographic film, copyright subsists until 60 years whereas, the taxpayer has acquired the rights for 99 years and therefore, the transaction can only be treated as a sale. It was further held that ‘sale’ of cinematographic film would fall within the exclusion clause of the definition of ‘royalty’ under the Act and therefore not taxable as ‘royalty’.

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    Payment for perpetual transfer of copyright in a feature film for 99 years amounts to sale and not royalty Payment for perpetual transfer of copyright in a feature film for 99 years amounts to sale and not royalty Document Transcript

    • KPMG FLASH NEWS KPMG IN INDIA Payment for perpetual transfer of copyright in a feature film for 99 years amounts to sale and not royalty 17 January 2014 Background Facts of the case Recently, the Madras High Court (High Court) in the case 1 of K. Bhagyalakshmi (the taxpayer) held that consideration paid for transfer of copyright in a feature film for a period of 99 years cannot be treated as ‘royalty’ under Section 9(1)(vi) of the Income-tax Act, 1961 (the Act).  The taxpayer is engaged in the business of purchase and sale of Telugu films. During the year under consideration, the taxpayer entered into an agreement with a film producer, for acquiring absolute rights of the feature film by way of assignment of exclusive World Negative Rights including theatrical and commercial rights of distribution, exhibition and exploitation of the film. Further, as per the aforesaid agreement, world satellite rights and copyright were also transferred in favour of the taxpayer. Such transfer was without restrictions to geographical area for a period of 99 years from the date of transfer deed.  The taxpayer treated the payment for such transaction as a sale of cinematographic film and did not deduct tax on the same. The High Court held that as per the Copyright Act, 1957, in the case of cinematographic film, copyright subsists until 60 years whereas, the taxpayer has acquired the rights for 99 years and therefore, the transaction can only be treated as a sale. It was further held that ‘sale’ of cinematographic film would fall within the exclusion clause of the definition of ‘royalty’ under the Act and therefore not taxable as ‘royalty’. _________________ 1 K. Bhagyalakshmi v. DCIT (Tax case (Appeal) No. 748 of 2013) – Taxsutra.com © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
    •  However, the Assessing Officer (AO) held that it is not a sale but a mere grant of satellite right in the movie by the film producer and the payment made for transfer of such right would fall within the meaning of ‘royalty’ under the Act. Consequently, the payment was disallowed for non-deduction of tax under Section 194J of the Act on the payment in the form of ‘royalty’. High Court’s ruling  As per the specific exclusion in the definition of ‘royalty’ under the Act, if the consideration is received for the sale, distribution or exhibition of a cinematographic film, then it would fall outside the scope of ‘royalty’ under Section 9(1)(vi) of the Act.  In the instant case, the High Court observed that transfer of rights in feature film in favour of the taxpayer is for a perpetual period of 99 years. The taxpayer 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. The High Court held that in such a factual situation, the transaction would fall within the scope of ‘sale’.  The High Court further observed that though the agreement provides for a perpetual transfer for a period of 99 years, as per Section 26 of the Copyright Act, 1957, in the case of cinematographic film, copyright shall subsist until 60 years from the beginning of the calendar year next following the year in which the film is published. Therefore, the agreement in the present case is beyond the period of 60 years, for which the copyright would be valid and hence, the transaction could only be treated as sale.  In the case of Balaji Communications , the rights were only for a period of 20 to 25 years and not of permanent nature, therefore the said decision is distinguishable on facts of the present case.  It is pertinent to note that the Mumbai Tribunal in the 3 case of Warner Brothers Pictures Inc held that payment to a foreign company for ‘distribution’ of cinematographic film is not taxable as ‘royalty’ under the Act. The Tribunal held that in view of the exclusion clause in the definition of ‘royalty’ under the Act in relation to sale, distribution or exhibition of cinematographic film, the payment made to the foreign company would not be considered as ‘royalty’. Accordingly, it has been held that the perpetual transfer of copyright in a feature film in favour of the taxpayer is in the nature of sale and therefore, excluded from the definition of ‘royalty’. 2 Our comments This is a welcome ruling of the Madras High Court where it has been held that payment made for perpetual transfer of copyright in cinematographic film amounts to sale. The High Court, placing reliance on the provisions of the Copyright Act, 1957, observed that copyright in case of a cinematographic film shall subsist until 60 years and the agreement in the present case being beyond 60 years, the transaction could only be treated as ‘sale’. _______________ 2 ________________ 3 ADIT v. Warner Brother Pictures Inc [2012] 49 SOT 438 (Mum) ACIT v. Balaji Communications (ITA No. 1744/Mds/2011, dated 20 December 2012) © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
    • www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903,Near Vodafone House,Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Infinity Benchmark, Plot No. G-1 10th Floor, Block – EP & GP, Sector V Salt Lake City, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International The KPMG name, logo and “cutting through complexity“ are registered Cooperative (“KPMG International”), a Swiss entity. All rights reserved. trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.