Income Tax Appellate Tribunal - Delhi
Super Cassettes Industries (P.) Ltd. vs Commissioner Of Income-Tax on 30 March, 1992
Equivalent citations: [1992]41ITD530(DELHI)
ORDER
--Change of opinion Ratio:
Every unfavourable order or merely change of opinion does not render the order erroneous and prejudicial.
Held:
The courts have been always taking a serious view of the action of the Commissioner and have more than once have held that section 263 must be invoked only when there is error and which error has caused prejudice to the revenue. Section 263 is not for the purpose of correcting every unfavourable order, is not for jurisdictional correction or for review of subordinate's order. Since the Commissioner has only proposed to take a different view from the one taken by the assessing officer, and section 263 is not being intended for change of opinion, the action of the Commissioner is set aside.
Application:
Also to current assessment years.
Income Tax Act 1961 s.263 ORDER A. Kalyanasundharam, Accountant Member
1. The assessee, a company engaged in the business of manufacturing of pre-recorded audio and video cassettes, as also blank audio and video cassettes, has filed this appeal aggrieved by the action of the Commissioner under Section 263 of the Income-tax Act. The assessee has raised as many as thirteen grounds, but, in effect, the issues are only two, viz., challenging the jurisdiction of the Commissioner and as to whether, the royalty paid for obtaining of the rights of reproduction amounting to Rs. 14,48,094 is an expenditure of capital nature or is allowable as revenue.
2. Shri Ganesan, appearing for the assessee, submitted that, the business of the assessee company is reproduction of audio sound and music from the master plate provided by the film producers and distributors. The master plate contains the original soundtrack of the film relating to the songs and with the help of this master plate, the company makes several copies of audio cassettes, which are ultimately sold in the market. He submitted that, the master plate is similar to a formula or a mould used in the manufacture. He submitted that, the company produces several of these cassettes for different films every year and for the reproduction of each series of cassettes, it requires a different master plate. He pleaded that, for each film that is being made, the producers require music cassettes and soundtrack, which the company manufactures with the help of this master plate and provides the cassettes prior to there lease of the film. He submitted that, the master plate is no doubt retained by the company, but, its use and reuse would entirely depend upon the marketability of the cassettes manufactured by it.
3. He submitted that, as soon as the series of the cassettes relating to a film are manufactured and marketed, the master plates become useless, though in rare cases, they do get reused for manufacturing cassettes of additional copies. He submitted that, the life of the master plate is very short, though, the assessee retains the copy rights of the same. He related the master plate to the licence granted for specific period for the manufacture and submitted, the licence that has been granted is similar to the one granted for the extraction of the limestone and the royalty so paid is allowable as a revenue expenditure. He submitted that, this has been so ruled by the Supreme Court in Gotan Lime Syndicate v. CIT [1966] 59 ITR 718. He submitted that, even where there has been a purchase of assets, but, the payment was related to the annual profits, then, it has been held that, the payment was revenue in nature, for which proposition, he placed reliance on the ratio of Supreme Court in Travancore Sugars & Chemicals Ltd. v. CIT [1966] 62 ITR 566. He submitted that, the ratio of the Supreme Court in Devidas Vithaldds & Co. v. CIT [1972] 84 ITR 277 was also on similar lines, where, the continuing partners were to pay for the retiring partner the amount for his goodwill.
4. He submitted that, the master plate is the formula, raw-material from which copies are made. He submitted that, since the master plate is only a raw-material, the cost of the purchase of the raw-material is an allowable deduction in evaluating the gross profit derived in the manufacture and sale of the copies. He made reference to the details of the royalty paid at pages 33-34 of the paper book and submitted that, the payments are for various producers and for different music programmes and they are all paid by relating to the turn over or sales. He submitted that, in the absence of any sale, there would be no royalty payable. He submitted that, this is how the facts of the case of the assessee are similar to the limestone extraction - Gotan Lime Syndicate's case (supra) decided by the Supreme Court. He then carried us through the agreement entered into with different producers, sample of which has been placed at pages 43-133. He made reference to the sample at pages 43-47 and submitted that, the producers are the sole owners of the mechanical reproduction rights of gramophone, magnetic tape etc. The producers are to provide the assessee the soundtrack or recorded tapes of music, songs and dialogue etc., before the film is released. The condition for the use of the soundtrack is that, it would be used for the mechanical reproduction only, on gramophone records, tapes etc. The producers have merely assigned their recording rights in favour of the company. The company on its part is required to submit half-yearly statement of sale to the producers. The clause 8 of the agreement by which the assessee is made the owner of the plate, are for the limited purpose of ensuring that, the producers are not allowed to provide the same to another competitor. He pleaded that, this master plate that contains the master information, sound, music, dialogue, is the raw-material, from which several copies are made.
5. Shri Ganesan submitted that, in the following assessment year 1986-87 too, the revenue had limited the royalty payment and the CIT(A), vide his order dated 23rd Feb. 1991 had allowed full deduction of the same. He submitted that, the relevant paras are 7-12.1 to 7-12.27. He submitted that, the frequency with which films are made, which results in new type of music has considerably reduced the life of the soundtrack, for it is outdated very fast. He submitted that, the plate of one could not be substituted for another and for every new music recording, a totally different plate is required, indicated very clearly that, the plate is nothing more than a raw-material. He contended that, merely for the reason that, the plate is paid in a lump-sum format, it does not make any difference because, without the contents of the plate, the plate are worthless and it for the contents that, the initial price is paid and it can never be equated with purchase of any technical know-how. He pleaded that, nor than the payment, the important fact that has to be given consideration of is the nature of the item that is acquired. Since the plate is the basic material to facilitate the copying of, the payment made for it, followed by the payment related as a percentage of the sale value, is nothing more than revenue and in all fours is identical to the royalty being paid on the quantity of limestone extracted.
6. Shri Ganesan submitted by referring to the ratio of the Madras High Court in Venkatakrishna Rice Co. v. CIT [1987J 163 ITR 129 that, the purpose of enacting Section 263 has been explained by the court as for setting right distortions and prejudices to the revenue. He submitted that, the Court has opined that, Section 263 is not to be applied for jurisdictional correction or for review of subordinate's order. He contended that, the Court has held that, Section 263 cannot be equated to regarded as approaching in any way the appellate jurisdiction much less the revisionary jurisdiction as contained in Section 264 of the Act. He pleaded that, the present act of the Commissioner is nothing more that, invoking of his superior status to that of the Assessing Officer and he has acted as an appellate authority, which is not his function at all. He pleaded that, merely because, another view is possible on the same subject, it has been held by the Madras High Court {supra), that, Section 263 is not intended for that purpose.
7. Shri A.K. Gupta, the learned departmental representative submitted that, the CIT was justified in every way to invoke Section 263 of the Act. He pleaded that, the master plate is the main capital item, with which, the assessee is able to make copies and earn profits. He submitted that, an asset with which the assessee makes profits is a capital asset. Since everything depended on the plate, the nature is clearly a capital expenditure. The initial payment by lump sum is towards the cost of raw-material and the balance is towards the royalty based on a percentage of the sale value. The manner of determination of the capital value should not deter from arriving at the true intention behind the transaction. He made reference to the clauses 3,4 and 8 of the agreement and also to page 4 of the order of CIT and submitted that, the reading of the order reveals that, it is not a mere change of opinion, but provides ample material indicating that, there was error in the order of the Assessing Officer, which has caused prejudice to the interests of revenue. He made reference to the Law of Income-tax by Sampath Aiyengar (1985 ed.) Vol. 5, page 4598. He also placed reliance on the Delhi High Court's ratio in Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375, for the proposition that, it is sufficient for the CIT to point out the errors that have been committed by the Assessing Officer and the consequent prejudice caused to the revenue.
8. We have given our very careful consideration to the rival submissions and also to the voluminous paper book containing 245 pages, filed by the assessee. The issue revolves around the nature of the amount paid for making of copies of the master plate supplied by the various persons to the assessee. It is not disputed that, but for the plate being provided, the assessee could not have produced the copies thereof and sell the same. This primary nature indicates that, the master plate is in the nature of basic raw-material. Unlike the tangible and visible products, which have raw-material that is either visible, tangible, the present product is reproduction of sound, music etc., embedded into magnetic tapes or gramophone records. The assessee also has been selling blank or empty magnetic audio tapes, on which, it does not pay any royalty. The payment of royalty is relatable to the magnetic tapes or the gramophone records filled with the same sound, music, dialogue etc. The production of filled tapes etc., is nothing more than duplication of the original. The original master plate is primarily a raw-material and incidentally happens to be the substratum of the business of the assessee. The only point of difference is that, the substratum part is entirely incidental to the main activity of reproduction of the original plate, which reproduction of the original is impossible without the original. Since the making of the master plate had cost the producer certain sum of money, he gets re-imbursement from the assessee partly in the shape of a fixed sum initially and partly by way of percentage of the sale value of the tapes and gramophone records. The selling price of the tapes of the gramophone records consists of the sale value of the basic empty tape or the blank gramophone record and the other elements towards the overhead cost in the filling them up with sound, music, dialogue etc. The plate obtained from a producer contains only that material that has been filled into it and the plate could be used to make exact copies of that plate only. From this point of view, it clearly indicates that, for every producer for whom copies are made from the plate, the plate is different. In other words, the final product as produced by the assessee is very different from one to another. For every series of items of music, sound etc., that is being made, the basic material is different and is never uniform. Therefore, the plate could be treated partly as a sample too, from which point of view, it could be stated as having some resemblance to a capital outlay. But, merely because, it has the combination of both the factors of capital and revenue, it would be wrong to hold that, the expenditure is in the nature of capital.
9. The payment of royalty is partly related to the sales made by the assessee is another factor that goes to indicate the nature of the royalty payment, as that of revenues. In the case of Travancore Sugars & Chemicals Ltd. (supra), the assessee had acquired certain assets, for which the assessee had paid part consideration in cash and the balance was payable based as a percentage of the annual profits for an indefinite period. The question that was considered by the Supreme Court was, whether, the percentage payment was capital or revenue. The Court ruled that, since the amount was payable for an indefinite period, and based as a percentage of the annual profits, it was on revenue account and had no relation to the initial fixed amount paid.
10. In Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, the Supreme Court had considered the concept of capital expenditure and revenue expenditure and had provided some guidance to distinguish the two. They have observed that, it is not necessary that every thing that results in a benefit of enduring nature, would automatically become a capital asset. They have observed to the effect that, the nature of an item has to be considered with reference to advantage in a commercial sense and it is only when the nature is that of capital, that, the expenditure is disallowable as revenue. They have observed that, if the advantage consists merely in facilitating the trading operations, or enabling to carry out the business more efficiently, leaving the fixed capital untouched, the expenditure would be on revenue account.
11. In the instant case, the component with the help 01 which, the assessee is able to carry out one of its activity of manufacturing and trading in pre-recorded tapes and gramophone records is the plate, which plate is not one but as many as the agreements for making of the copies are entered into. There is every likelihood that, the contract for making of copies may be entered into on the last of the days of the accounting year and that, the plate may have been paid for on the last of the few days of the year, and the reproduction of it may be still in process. All these factors are common in any business of manufacture. As submitted by the assessee, the product manufactured is based on reproduction of the sound, music etc. from the master plate into tapes and records by the use of electrical and magnetic impulses. These are embedded into the master plate, and the assessee only makes an identical copy of the same. The copy so made is therefore, possible only with the help of the original. Therefore, the master plate could be termed as the raw-material, formula etc. For every master plate provided to the assessee, except for the similarity of the blank plate, all other factors, such as music, sound, dialogue are very different. The activity of the assessee is basically that of a jobber, who carries on the functions of job-work, on the material provided or on the material prescribed to it by the owner. In the instant case, the assessee is allowed to use its own tapes, gramophone records manufactured by it, for filling them up with the sound contained in the master plate. The content of the plate is a design, the formula, raw-material all embedded into one. The plate in these circumstances could not be termed to be of capital nature. The initial payment of lump sum also does not change its basic character as elucidated above. The recurring payment dependent upon the sales also indicates that, the royalty would become due only when the product so made are sold and therefore, what is dependent upon an uncertain happening could not be on capital account at all. The recurring payment is similar in nature to the royalty or dead rent paid for the extraction of limestone from the quarries, as has been held by the Supreme Court in Gotan Lime Syndicate's case (supra). We are therefore of the opinion that, the royalty paid including the cost of the plate is on revenue account and hence fully allowable as deduction in computing the income from business.
12. Having decided the issue on merits, we would only mention that, the reading of the order of CIT passed under Section 263 is more on the lines of the approach of the appellate authority, which is not his role, as has been held by the Madras High Court in Venkatakrishna Rice Co's case (supra). The reading of his order indicates that, he is of a different opinion from that of his subordinate officer. The Courts have been always taking a serious view of the action of the Commissioner and have more often than one have held that, Section 263 must be invoked only when there is error and which error has caused prejudice to the revenue. The Madras High Court (supra) has amplified it further by stating that, Section 263 is not for the purpose of correcting every unfavourable order, is not for jurisdictional correction or for review of subordinate's order. Since, the Commissioner has only proposed to take a different view from the one taken by the assessing officer, and Section 263 is not being intended for change of opinion, the action of the Commissioner is set aside. On merits, we have already held that, the royalty payment is allowable as revenue.
In the result, the assessee succeeds.