Mar 242021
 

The assessee is in the business of film distribution in the name of M/s Sukrit Pictures. The assessee has paid an amount of Rs.2 crores as Minimum Guarantee Royalty (MGR) and has not deducted TDS. The Assessing Officer held that the payment would fall within the definition of “Royalty” and failure to deduct TDS as per Section 194J of the Income Tax Act, 1961 would attract provisions of Section 40(a)(ia) of the Act.

Whether the amount paid as MGR would attract Section 194J?

The provisions of section 194J of the Act with relation to “Royalty” are as per the Explanation 2 to Clause (vi) of sub-section (1) of section 9 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 license) in respect of a patent, invention, model, design, secret formula or process or trademark 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 trademark or similar property;
(iii) the use of any patent, invention, model, design, secret formula or process or trademark 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;]
(v) the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or videotapes 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).”

What is GMR? – A film distributor pays an amount as Minimum Guarantee Royalty (MGR) for the purchase of theatrical distribution rights. It is worthwhile to note that in such a case, copyright is always with the producer, and the distributor is only given the right to the exhibition of cinematographic films.

Analysis of facts:

Clause (v) of Explanation 2 to section 9(1) consists of two different transactions as given below:

Inclusive Part Non – Inclusive part
Transfer of all or any rights (including the granting of a license) in respect of any:

1.      copyright,

2.      literary,

3.      artistic or

4.      scientific work including

5.      films or videotapes for use in connection with television or

6.      tapes for use in connection with radio broadcasting.

Consideration for the sale distribution or exhibition of cinematographic films

 

It is wrong to hold that what the assessee purchased is copyrights and hence liable to TDS. In fact, the copyrights are always with the producer. The distributor is only given the right exhibition of cinematographic films. Hence, such transactions do not attract the provisions of TDS.

Moreover, the minimum guarantee amount which is paid by the distributor for acquiring the exhibition rights of a movie is a fixed expenditure for the distributor that is paid to producers irrespective of the fact whether the film generates a profit or incurs losses. Hence, the payments made by the assessee do not fall under the term “Royalty” and do not attract the provisions of TDS.

Hence, TDS is not liable to deduct on MGR.

Sensys

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