Income Tax Appellate Tribunal - Madras
M. Suhramaniam vs Deputy Commissioner Of Income-Tax on 11 June, 1992
Equivalent citations: [1992]42ITD676(MAD)
ORDER
T.N.C. Rangarajan, Vice President
1. These appeals relate to the question whether the provisions of Section 35A of the Income-tax Act, 1961 were rightly invoked in computing the income of the assessee for the assessment years 1984-85 to 1987-88 and may be disposed of by a common order.
2. The assessee is an individual. He carries on the business of manufacturing pre-recorded cassettes and selling the same in the name of Echo Recording Co. That manufacturing requires not only the blank cassettes but also access to popular music or songs which have to be recorded in the cassettes. In order to obtain such popular songs the assessee enters into agreements with the producers of cinema films for obtaining the right to reproduce film songs. In respect of such agreements the expenditure incurred by the assessee was as follows:--
Asst. Year Number of Expenditure Sale of Sale of
Year ended Pictures records cassettes
Rs. Rs. Rs.
1984-85 30-6-1983 108 2,51,384 18,44,647 7,13,016
1985-86 30-6-1984 83 3,82,429 31.47,645 6,25.531
1986-87 30-6-1985 124 5,16,477 42,91,513 16,46,837
1987-88 30-6-1986 90 6,65,314 58,72,126 59,61,224
The assessee claimed that the expenditure incurred was in the nature of royalty and should therefore, be allowed as a revenue expenditure in computing the income. This claim was accepted by the assessment made under Section 143(1) for the assessment year 1985-86 on 29-9-1986. Similarly, for the assessment year 1984-85, the assessment was made under Section 143(3) on 19-3-1987 accepting the deduction of such expenditure. Thereafter on 2-2-1989 on a perusal of these assessments, the Commissioner of Income-tax was of the view that they were erroneous and prejudicial to the interests of the revenue because the royalty paid for acquiring copyright was wrongly allowed as revenue expenditure instead of treating it as capital expenditure. The assessee protested by letter dated 16-2-1989 and pointed out that the expenditure was not capital expenditure because the amount was paid as a percentage of the sales worked out on half yearly basis. However, the Commissioner was of the view that the assessee obtained a right to record the songs and no other person had the right during the currency of the contract and, therefore, the assessee had acquired an asset such that the expenditure was capital expenditure. He accordingly set aside the assessments and directed the Income-tax Officer to recompute the income.
3. In the meanwhile, the assessments for the assessment years 1986-87 and 1987-88 had been taken up and the same issue was raised by the ITO. The assessee wrote a letter dated 7-1-1989 pointing out that the agreements were entered into with the producers and artists with a token payment of Rs. 101 and the royalty was paid at 12.5 per cent if the total half yearly sales was upto Rs. 2 lakhs, 13.5 per cent between Rs. 2 lakhs and Rs. 10 lakhs and 14 per cent if the sales exceeded Rs. 14 lakhs. The assessee also pointed out that the popularity of the song was hardly a period of 6 months the assessee could not be said to have acquired any enduring benefit. The ITO was, however, of the view that the payments were covered by the provisions of Section 35A under which the expenditure could be allowed only over a period of 14 years equally. He accordingly allowed only 1/14th of the expenditure and disallowed the balance by his assessment dated 31-3-1989 for the assessment year 1986-87. The assessee appealed. But the CIT (Appeals) agreed with the ITO that the provisions of Section 35A were applicable as the expenditure was to be treated as capital expenditure. Similarly, for the assessment year 1987-88 the assessment was made on 22-3-1990 applying the provisions of Section 35A to allow l/14th of the expenditure. This was confirmed on appeal by appellate order dated 22-1-1991.
4. The assessee is in appeal against both the orders under Section 263 for the assessment years 1984-85 and 1985-86 as well as the appellate orders of the CIT (Appeals) for the assessment years 1986-87 and 1987-88. The main contention of the assessee is that the expenditure incurred is not capital expenditure in which case alone the provisions of Section 35A could be applied. According to the assessee, the payment was in the nature of royalty incurred for the purpose of regular production of the cassettes, the song being an input and, therefore, the expenditure a revenue expenditure. It was also submitted that even though the proforma agreement used the word "assign", the conduct of the party shows that it was actually understood as a licence and, therefore, the payment would be only a royalty. On the other hand, it was contended on behalf of the revenue on the analogy of publishers and printers that the assessee was actually acquiring a master record which was being reproduced in the cassettes and, therefore, the payment was only a capital expenditure. It was pointed out that a copyright can be assigned even in respect of specified territories and therefore the agreement which used the word 'assign' must be taken to mean only an acquisition of the copyright, the expenditure though paid in as a percentage of the sales was only a capital expenditure attracting the provisions of Section 35A.
5. On a consideration of the rival submissions, we are of the opinion that the assessee is entitled to succeed. Section 35A provides that in respect of any expenditure of capital nature incurred on the acquisition of copyrights used for the purposes of the business, there shall be a deduction equal to specified fraction of the amount of such expenditure. Obviously, this section can be applied only if it is found that the expenditure incurred was of a capital nature on the acquisition of a copyright. In order to find if the assessee has so acquired a copyright, we have to see the agreement of the assessee in conjunction with the provisions of the Copyright Act, 1957.
6. Under the Copyright Act, 1957, "work" includes a musical work and cinematograph film, which includes a sound track associated with a cine film. Under Section 13 copyright subsists in such works which means under Section 14(c)(iii) making of any record embodying the recording in any part of the sound track associated with the film by utilising such sound track and under Sub-section (d) the making of any other record embodying the same recording and broadcasting the same. Such copyright subsists until 50 years from the beginning of the calendar year next following the year in which the record is published as contained in Section 27. Section 18 provides that the owner of the copyright in an existing or future work may assign to any person the copyright either wholly or partially and either generally or subject to limitations and either for the whole term of the copyright or any part thereof. Under Section 30 the owner of the copyright may grant any interest in the right by licence. It may be relevant to note that under Section 52 certain acts are not to be infringement of copyright and one of them is,
(j) the making of records in respect of any literary, dramatic or musical work, if--
(i) records recording that work have previously been made by, or with the licence or consent of, the owner of the copyright in the work; and
(ii) the person making the records has given the prescribed notice of his intention to make the records, and has paid in the prescribed manner to the owner of the copyright in the work royalties in respect of all such records to be made by him, at the rate fixed by the Copyright Board in this behalf:
Provided that in making the records such person shall not make any alterations in, or omissions from, the work, unless records recording the work subject to similar alterations and omissions have been previously made by, or with the licence or consent of, the owner of the copyright or unless such alterations and omissions are reasonably necessary for the adaptation of the work to the records in question;
Rule 21 of the Copyright Rules, 1958 provides for issuing 15 days notice and paying the owner of the copyright, along with the notice, the amount of royalty due in respect of all the records to be made at the rate fixed by the Copyright Board in this behalf. This indicates that in the case of records Copyright Act recognises the payment of a standard royalty for the reproduction of records on commercial basis. The distinction between the payment of such royalty which is for a licence to reproduce the record and an assignment of the copyright will essentially be that in the case of an assignment the assignee becomes entitled to future royalties as owner of the copyright whereas the licensee can only commercially reproduce the records on payment of royalties.
7. With this background of copyright law, we have to see whether the agreements entered into by the assessee constituted an assignment or not. The proforma form of agreement is annexed to this order and may be read as part of this order. A perusal of this agreement shows that the word "assign" has been used in the preamble and Clauses 2,3 and 5. Clause 7 however provides for payment of a royalty which is a percentage of the sales at which royalty is to be paid as long as the copyright of the producer is protected. The assessee has stated before us that inspite of this agreement, All India Radio pays royalty to the producers for broadcasting the songs and Doordarshan pays royalty to the producers for telecasting the songs. It is also stated that the assessee has not given the right to any other person to reproduce the records. The label on the cassette does not claim any copyright and the only superscription is, Original film Sound track" (P.) & (C) 1985 Marketed by Echo Recording Co. Madras - 34.
Unauthorised public performance, broadcasting and copying of this recording prohibited.
It is stated that this is an attempt to prevent the piracy of the record.
8. The question now is whether the terms of the agreement in conjunction with the provisions of the Copyright Act and Rules and the conduct of the parties and the conditions of the trade could lead to the inference that the agreement was an assignment of the copyright or whether it was only a licence. We find that though the word 'assign' is used, the payment was only a fraction of the sales indicating that it was a royalty based on the variable amount of sale proceeds of the cassettes produced. Secondly, there is nothing to show that the assessee became the proprietor of the copyright with the right to licence the copyright to others and receive royalty. On the other hand, the fact that the producers have themselves received royalty from others inspite of existence of this agreement proves the contrary. Thirdly, the provisions of the Copyright Act, viz. Section 52(j) clearly indicates that it would not be an infringement for others to reproduce the record on payment of royalty. In that context the true test as to whether the assessee would acquire the copyright would be to see whether any person who reproduces the record in terms of Section 52(j) would pay royalty to the assessee or to the producer. The facts clearly indicate that the assessee would not have the right to receive such royalty because the producers have reserved such rights under the agreement. We are therefore convinced that inspite of the use of the word 'assign', the agreement was essentially a licence. The assessee would have been better advised to be precise in the language used in such agreements to avoid this kind of litigation.
9. The contention of the revenue was that since the agreement specifically uses the word 'assign' and Copyright Act made a clear distinction between an 'assignment' and a 'licence' and also provided for partial assignment, the agreement should be taken as a partial assignment.
10. An analogous case can be the business of publishing and selling books where the publisher acquires the copyright of books and prints the books to make a profit. Such a case is that in the case of Hira Led Phoolchand v. CIT [1947] 15 ITR 205 (All.) relied on by the revenue, where it was held that the royalty paid for purchase of copyright was price paid for acquiring a capital asset and, therefore, capital expenditure. A close reading of that decision shows that they followed the case of IRC v. Longmans Green & Co. Ltd. 17 Tax Cas 272 on the finding that the payment was for an out and out purchase of copyright. The decision in Longmans Green & Co. Ltd. 's case (supra) however throws greater light on this question. Under the British Income-tax law applicable to the facts of that case the British company had to deduct tax at source in respect of payment of any royalty or sums paid periodically in respect of a copyright made to a foreign author. The British company had entered into an agreement with the author for the right of translating the book into English for which a lumpsum payment was made on signing the agreement with a proviso that even if more than 28,000 copies were printed a royalty of 10 per cent of the price of the books will be paid thereafter. The publisher claimed that the lumpsum payment was not a royalty and, therefore, not liable to deduct tax at source. The court posed the question whether the agreement was an assignment of copyright or only a licence and came to the conclusion that the agreement was only a licence. It was observed, I think it is obvious that between a partial assignment of copyright and a licence the line may run extremely fine, and I think this does run rather fine; but, construing the agreement in the light of the authorities and each agreement has to be construed in the light of its own facts, I think that the correct view here is that this was not an assignment of the copyright but rather a licence to do certain specific things - not, of course, to translate into every language, but to translate into one particular language, namely, English.
The court also came to the conclusion that what was paid as lumpsum was only a payment of or on account of royalties. In the present case also, we find that what was paid was in consideration of a licence to do a certain specific thing, viz. make copies of the song in cassettes and we are satisfied that on a proper construction of the agreement, it amounted only to a licence and the payment was a royalty.
11. Even if we approach the matter from the point of view of a partial assignment, it does not take the revenue further because that by itself does not conclude the issue whether the payment made was a capital or revenue expenditure. Among several tests to decide this issue, even the test of enduring benefit has not found to be really decisive. The courts have come to the conclusion that there is so far no single infallible test to decide whether the expenditure is capital or revenue. Each case depends upon its particular facts depending upon all the relevant circumstances so that a conclusion is reached according to the general tenor and combined effect. Recently, a distinction has been made by the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 between an advantage in the capital field and an advantage in facilitating the trading operation. In other words, the cost of acquisition of an income earning apparatus would be a capital expenditure while the cost of performing the income earning operation would be a revenue expenditure. (See the South Africa's case of New State Areas Ltd. v. IRC - SA [1946] 601). Similarly, the Madras High Court has pointed out in the case of CIT v. Sarada Binding Works [1976] 102 ITR 187 that periodical sums paid towards part of consideration but which are indefinite and depend upon future profit earned cannot be treated as capital nature.
12. The facts of the present case indicate that the song which the assessee was permitted to record in the cassette was in the nature of a basic raw material. The recorded cassette consisted of the cassette and tape on which the music was recorded. Therefore, the production of the recorded cassette cannot be complete unless the music is recorded in the cassette and together it forms the finished product. The royalty is paid on the price of each cassette sold and is, therefore, price paid for the raw material embedded in the cassette. Thus the royalty paid goes into the cost of production and varies with the quantity of cassettes produced. Even though the licence has been given for the duration of the copyright, the manufacture and sale of the cassettes itself will depend upon the popularity of the songs which in the case of film songs may not last even a year. Thus the recurring payment of royalty is dependent upon the production and sale of the cassettes recording that particular song and the liability is, therefore, uncertain and variable. Such an uncertain and variable payment cannot be regarded as a capital expenditure. Even if we apply the test of acquisition of profit making apparatus as against cost of performing income earning operation, we find that this falls under the second category. If the assessee had stepped into the shoes of the original owner as an assignee and earned income by granting licences of the copyright, then it would have been a capital outlay. But as long as the assessee itself manufactures the cassettes and pays royalty depending upon the quantity of cassettes manufactured, the outlay is only for the income earning operation. Therefore, we are fully convinced that the expenditure laid out did not give the assessee any enduring benefit and resulted only in a revenue expenditure. Moreover, the outlay was in consonance with the actual production and therefore a proper input of the income earning operation. Thus it was clearly a revenue expenditure. We find that similar view has been taken on identical facts by the Delhi Bench of this Tribunal in the case of Super Cassettes Industries (P.) Ltd. [IT Appeal No. 3108 (Delhi) of 1988 dated 30-3-1992].
13. In view of our decision that the expenditure claimed by the assessee was rightly deducted as revenue expenditure, the common order made under Section 263 for the assessment years 1984-85 and 1985-86 to consider the application of Section 35A was untenable and is therefore cancelled. Similarly, the treatment of the expenditure as capital expenditure and the application of Section 35A in making the assessments for the assessment years 1986-87 and 1987-88 were also untenable. Hence we set aside the orders of the authorities below for these assessment years on this point and direct the ITO to allow the entire royalty paid as revenue expenditure and re-compute the total income for these two assessment years.
14. In the result, all the appeals are allowed.