Entertainment sector consists of different segments under its fold such as television, radio, music, event management, films, animation and visual effects, broadcasting, sports and amusement etc. This sector has witnessed a strong growth in the last five years making it one of the fastest growing sectors in India.
Significance of the
Sector
India had 168 million
TV households in 2014, which makes it the third largest television market in
the world. The number of TV households will reach 196 million by 2019 along
with 175 million Cable & Satellite subscriber base, indicating 90 per cent penetration
of TV in households. The size of the television industry, estimated at Indian
Rupee (INR) 542 billion in 2015, will reach INR 1098 billion by 2020. Animation
and visual effects is new emerging area in India which offers opportunity in
both domestic and foreign market. The broadcast segment in India has around 800
satellite television channels and 242 FM channels. In the film segment, India
maintained its position as a top film producer and has produced 1827 digital
films in 2015. The Indian film industry is expected to reach INR 204 billion by
2019, up from INR 126.4 billion in 2014. The organized event management
industry in India has grown at 15 per cent annually from INR 28 billion in
2011-12 to INR 43 billion in 2014-15. The Indian sports sector is experiencing
a sea change with all-around developments initiated by the government such as
‘Khelo India’ and involvement of private sector by organizing tournaments
through various leagues. The estimated value of the sports infrastructure
market was INR 800 billion in 2016. Additionally, the sports sponsorship market
in India grew approximately at 12.5 per cent on year to year basis in 2015 to
reach INR 52 billion. [Source: Achievements
report (Media and Entertainment), Ministry of Information & Broadcasting]
Further, the Indian
Motion Picture Industry, or popularly known as the “Film Industry” is the
world’s largest in terms of tickets sold and number of films produced (nearly
1000 feature films and 1500 short films every year). The Indian film industry
grossed revenue of Rs. 17,300 crore in 2017 and it has grown at a CAGR
(Compound Annual Growth Rate) of over 10% in the last couple of years. It is
expected to grow at 11.5% year-on-year, reaching total gross realisation of Rs
23,800 crore by 2020. The main income of the Film Industry comes from domestic
theatres, followed by overseas theatres and broadcast rights. The Hindi film
industry, contributes 43% of the revenue, while the regional films contribute
the remaining 57%. In terms of number of films produced Telugu and Tamil movies
now outnumbered Hindi movies.
In 2001, Cinema
was given industry status
In 2001,
cinema was given industry status. Thereafter, the
film industry in India witnessed a major change in terms of financing and also
through the entry of global giants - from Walt Disney to 20th Century Fox - either
by itself or via partnership. Post 2001, the budgets of films have increased,
as have the frequency of their worldwide releases and the scale of their
grosses
Legal Frame Work
The assessees engaged
in the business of entertainment sector are governed by all the provisions of
the Income Tax Act that are generally applicable to the different class of
assessees viz. Companies, Firms, Trusts, Individuals etc. Further, the Income Tax
Act/rules provide specific tax incentives to the assessees of entertainment
sector. It provides deduction in respect of professional income from foreign
sources in case of author, playwright, artist, musician and actor; being a
resident in India. It also allows deduction in respect of expenditure on
production and on acquisition of distribution rights of feature films
Provisions
related to motion film industry
Section
285B of the Income Tax Act, 1961 read with Rule 121A of the Income Tax Rules
1962, prescribes that any person carrying on the production of a cinematograph
film during the financial year, shall file a Statement in Form 52A within 30
days from the end of such financial year or within 30 days from the date of the
completion of the production of the film whichever is earlier disclosing all
the particulars of payments of over Rs. 50,000 in the aggregate made by him or
due from him. Failure to submit the Statement will attract penalty under section
272A(2)(c) and also under section 277 as the case may be.
Text of
285B of the Income Tax Act,
1961
[1][285B. Submission of
statements by producers of cinematograph films or persons engaged in specified
activity.
Any person
carrying on the production of a cinematograph film or engaged in any specified
activity, or both, during the whole or any part of any financial year shall, in
respect of the period during which such production or specified activity is
carried on by him in such financial year, furnish within the prescribed period,
a statement in the prescribed form to the prescribed income-tax authority in
the prescribed manner, containing particulars of all payments of over fifty
thousand rupees in the aggregate made by him or due from him to each such
person as is engaged by him in such production or specified activity.
Explanation.
- For the purposes of this section, “specified activity” means any event
management, documentary production, production of programmes for telecasting on
television or over the top platforms or any other similar platform, sports
event management, other performing arts or any other activity as the Central
Government may, by notification in the Official Gazette, specify in this
behalf.]
KEY NOTE
1. Substituted by the Finance Act, 2022, with
effect from 01.04.2022. Prior to its substitution, section 285B, as inserted by
the Taxation Laws (Amendment) Act, 1975, with effect
from 01.04.1976 and later on amended by the Direct Tax Laws (Amendment)
Act, 1987, with effect from 01.04.1988, Finance Act, 1989, with effect from
01.06.1989, Finance (No. 2) Act, 1998, with effect from 01.04.1999 and Finance
Act, 2000, with effect from 01.04.2001, read as under :
“285B.
Submission of statements by producers of cinematograph films. - Any person
carrying on the production of a cinematograph film during the whole or any part
of any financial year shall, in respect of the period during which such
production is carried on by him in such financial year, prepare and deliver or
cause to be delivered to the Assessing Officer, within thirty days from the end
of such financial year or within thirty days from the date of the completion of
the production of the film, whichever is earlier, a statement in the prescribed
form containing particulars of all payments of over fifty thousand rupees in
the aggregate made by him or due from him to each such person as is engaged by
him in such production.”
Background
Section 285B was introduced by the
Taxation Law (Amendment) Act, 1975 to check the excessive expenditure shown by
film producers and enable the Income-tax Department to get information about
the recipients of payments for necessary action in their cases.
As per the provisions of Section 285B, any assessee engaged in the business of cinematographic films, for whole or part of the year, is required to furnish a statement providing the particulars of the payment made by him or due from him of a sum more than Rs. 50,000 in aggregate to each person (employee or otherwise) engaged by him in such production. Such statement was required to be furnished electronically to the assessing officer in Form 52A within 30 days from the end of the financial year or within 30 days from the date of completion of production, whichever was earlier.
Object of Section 285B
The object
of this provision is to check whether the recipient have shown appropriate
income or not.
Who is required to furnish a statement under Section 285B?
The following persons ('covered person') are required to furnish
the statement under Section285B:
(a) A person carrying on
the production of a cinematographic film; or
(b) A person engaged in
any of the following activity:
§
Event management;
§
Documentary production;
§
Production of programs for telecasting on television or over the
top platforms or any other similar platform;
§
Sports event management; and
§
Other performing arts or any other activity, as may be notified
by the Govt.
Reporting requirement under Section 285B shall apply to every
covered person, whether resident or non-resident. For instance, if a Hollywood
movie or any part thereof is shot in India and the producer of such film, being
a non-resident, engaged any person in India for the production of such film,
the reporting requirement under section 285B will attract in such cases also.
Payment by a covered person
The statement is required to be furnished when a covered person
makes payment to each such person engaged by him in the production of the film
or specified activity, and such person can be a covered or non-covered person.
No statement shall be required to be furnished by a non-covered
person for the payment made to a covered person.
For example, XYZ Ltd. (a manufacturing company) gives an event
management contract to Mr. A in Rs. 50,00,000. Mr. A. booked a hotel for Rs. 10,00,000
and a celebrity for the live performance for Rs. 30,00,000. In this case, XYZ
Ltd., being a non-covered person, is not required to furnish the statement.
However, Mr. A shall file the statement as event management is a specified
activity. He shall furnish the details of payment made to the hotel and to the
celebrity.
The reporting shall be required by the covered person whether
the payment is made or due to a resident or non-resident person.
Meaning of “cinematographic” film
The expression ‘cinematograph film’ has been defined in section
2(f) of the Copyright Act, 1957 to mean 'any work of visual recording and
includes a sound recording accompanying such visual recording and “cinematograph”
shall be construed as including any work produced by any process analogous to
cinematography including video films’.
The expression “cinematograph” has been defined in section 2(c)
of the Cinematograph Act, 1952 to include any apparatus for the representation
of moving pictures or series of pictures.
The expression “film” is defined in section 2(dd) of the
Cinematograph Act, 1952 to mean a cinematograph film.
The Chambers Twentieth Century Dictionary defines ‘cinematograph’
as an apparatus for projecting a series of instantaneous photographs so as to
give a moving representation of a scene, with or without reproduction of sound.
A film is defined as a sheet or ribbon of celluloid or the like prepared with
such a coating for ordinary photographs or for instantaneous photographs for
projection by cinematograph: a motion picture, or connected series of motion
pictures setting forth a story.
A combined reading of section 2(c) and section 2(dd) of the
Cinematograph Act, 1952 and section 2(f) of the Copyright Act, 1957, and the
dictionary meaning, indicates that, in common parlance and in technical
language, the words 'cinematograph film' refer to a film containing picture and
sound, fit for exhibition and which is generally referred to as a feature film
in the field of entertainment.
It can be submitted that the standalone photoshoot is not
covered under cinematograph film.
Specified Activities
Explanation to Section 285B provides that the following
activities shall be the specified activities:
(a) Event management;
(b) Documentary production;
(c) Production of
programs for telecasting on television or over the top platforms or any other
similar platform;
(d) Sports event
management;
(e) Other performing
arts; or
(f) Any other activity,
as may be notified by the Govt.
Section 285B has two limbs: (i) Carrying on the production of a
cinematographic film (ii) Any person engaged in specified activities. For the
second limb, the person can be engaged in any capacity and not necessarily into
production.
Consequences of failure to furnish the statement [Penalty under Section 272A(2)(c)]
If any person fails to furnish the statement in prescribed form
and time, he shall be liable to pay the penalty under Section 272A(2)(c) of Rs.
500 for every day during which the failure continues. However, no penalty shall
be imposed if the assessee proves reasonable cause for such failure.
Text of Rule 121A of the Income Tax
Rules, 1962
[1][121A. Form of
statement to be furnished by producers of cinematograph films or persons
engaged in specified activity.
(1) The
statement required to be furnished under section 285B by a person carrying on
production of cinematograph film or engaged in specified activity, or both,
shall be in Form No. 52A for each previous year.
(2) Form
No. 52A shall be furnished within sixty days from the end of the previous year.
(3) For
the purpose of section 285B, the prescribed authority shall be the Principal
Director General of Income-tax (Systems) or the Director General of Income-tax
(Systems), as the case may be, or any person authorised by the Principal
Director General of Income-tax (Systems) or Director General of Income-tax
(Systems).
(4) Form
No. 52A, shall be furnished electronically,-
(i) under digital signature, if the return of
income is required to be furnished under digital signature;
(ii) through electronic verification code in a
case not covered under clause (i).
(5) The
Principal Director General of Income-tax (Systems) or Director General of
Income-tax (Systems), as the case may be, shall,-
(a) specify the procedures, formats and standards
for the purposes of furnishing and verification of Form No. 52A;
(b) be responsible for the day-to-day
administration in relation to furnishing and verification of Form No. 52A; and
(c) be responsible for formulating and
implementing appropriate security, archival and retrieval policies in relation
to Form No. 52A.
(6) The
Principal Director General of Income-tax (Systems) or Director General of
Income-tax (Systems), as the case may be, or any person authorised by the
Principal Director General of Income-tax (Systems) or Director General of
Income-tax (Systems) shall forward Form No. 52A to the Assessing Officer.
Explanation:
For the purposes of this rule, “specified activity” shall have the same meaning
as assigned to it in the Explanation to section 285B of the Act.]
KEY NOTE
1. Substituted by the Income-tax (Thirtieth
Amendment) Rules, 2022, with effect from 14.09.2022. Prior to its substitution
rule 121A as inserted by the Income-tax (Third Amendment.) Rules, 1976, with
effect from 01.04.1976., read as under: “121A. Form of statement to be
furnished by producer of cinematograph films....
Text of
Rule 9A of the Income Tax Rules, 1962
[1][9A. Deduction in
respect of expenditure on production of feature films.
[2][(1) In computing the profits and gains
of the business of production of feature films carried on by a person (the
person carrying on such business hereafter in this rule referred to as film
producer), the deduction in respect of the cost of production of a feature film
certified for release by the Board of Film Censors in a previous year shall be
allowed in accordance with the provisions of sub-rule (2) to sub-rule (4).
Explanation
: In this rule,-
(i) “Board of Film Censors” means the Board of
Film Censors constituted under the Cinematograph Act, 1952 (37 of 1952);
(ii) “cost of production”, in relation to a
feature film, means the expenditure incurred on the production of the film, not
being -
(a) the expenditure incurred for the preparation
of the positive prints of the film; and
(b) the expenditure incurred in connection with
the advertisement of the film after it is certified for release by the Board of
Film Censors:]
[3][PROVIDED that the cost of production of
a feature film, shall be reduced by the subsidy received by the film producer
under any scheme framed by the Government, where such amount of subsidy has not
been included in computing the total income of the assessee for any assessment
year.]
(2) Where
a [4][***] feature film is
certified for release by the Board of Film Censors in any previous year and in
such previous year,-
(a) the film producer sells all rights of
exhibition of the film, the entire cost of production of the film shall be
allowed as a deduction in computing the profits and gains of such previous
year; or
(b) the film producer -
(i) himself exhibits the film on a commercial
basis in all or some of the areas; or
(ii) sells the rights of exhibition of the film in
respect of some of the areas; or
(iii) himself exhibits the film on a commercial
basis in certain areas and sells the rights of exhibition of the film in
respect of all or some of the remaining areas,
and the film is released for exhibition
on a commercial basis at least [5][ninety] days before the
end of such previous year, the entire cost of production of the film shall be
allowed as a deduction in computing the profits and gains of such previous
year.
(3) Where
a [4][***]
feature film is certified for release by the Board of Film Censors in any
previous year and in such previous year, the film producer—
(a) himself exhibits the film on a commercial
basis in all or some of the areas; or
(b) sells the rights of exhibition of the film in
respect of some of the areas; or
(c) himself exhibits the film on a commercial
basis in certain areas and sells the rights of exhibition of the film in
respect of all or some of the remaining areas,
and the
film is not released for exhibition on a commercial basis at least [5][ninety] days before the
end of such previous year, the cost of production of the film in so far as it
does not exceed the amount realised by the film producer by exhibiting the film
on a commercial basis or the amount for which the rights of exhibition are sold
or, as the case may be, the aggregate of the amounts realised by the film
producer by exhibiting the film and by the sale of the rights of exhibition,
shall be allowed as a deduction in computing the profits and gains of such
previous year; and the balance, if any, shall be carried forward to the next
following previous year and allowed as a deduction in that year.
(4) Where,
during the previous year in which a [6][***] feature film is certified for
release by the Board of Film Censors, the film producer does not himself
exhibit the film on a commercial basis or does not sell the rights of
exhibition of the film, no deduction shall be allowed in respect of the cost of
production of the film in computing the profits and gains of such previous
year; and the entire cost of production of the film shall be carried forward to
the next following previous year and allowed as a deduction in that year.
[7][(5)] Notwithstanding
anything contained in the foregoing provisions of this rule, the deduction
under this rule shall not be allowed unless,-
(a) in a case where the film producer -
(i) has himself exhibited the feature film on a
commercial basis; or
(ii) has sold the rights of exhibition of the
feature film; or
[8][(iii) has
himself exhibited the feature film on a commercial basis in some areas and has
sold the rights of exhibition of the feature film in respect of all or some of
the remaining areas,]
the
amount realised by exhibiting the film, or the amount for which the rights of
exhibition have been sold or, as the case may be, the aggregate of such
amounts, is credited in the books of account maintained by him in respect of
the year in which the deduction is admissible;
(b) in a case where the film producer has
transferred the rights of exhibition of the feature film on a minimum guarantee
basis, the minimum amount guaranteed and the amount, if any, received or due in
excess of the guaranteed amount or where the film producer follows cash system
of accounting, the amount received towards the minimum guarantee and the
amount, if any, received in excess of the guaranteed amount, are credited in
the books of account maintained by him in respect of the year in which the
deduction is admissible.
[9][(6)] Where the [10][Assessing Officer] is of
opinion that -
[11][(a)] the
rights of exhibition of the feature film have been transferred by the film
producer by a mode not covered by the provisions of this rule; or
[11][(b)] having
regard to the facts and circumstances of any case, it is not practicable to
apply the provisions of this rule to such case,
deduction
in respect of the cost of production of the film may be allowed by the [12][Assessing Officer] in
such other manner as he may deem suitable.
[13][(7)] For the purposes
of this rule,-
(i) the sale of the rights of exhibition of a
feature film includes the lease of such rights or their transfer on a minimum
guarantee basis;
(ii) the rights of exhibition of a feature film
shall be deemed to have been sold only on the date when the positive prints of
the film are delivered by the film producer to the purchaser of such rights or
where in terms of the agreement between the film producer and the film
distributor as defined in rule 9B, the positive prints are to be made by the
film distributor, the date on which the negative of the film is delivered by
the film producer to the film distributor.
[13][(8)
[14][Nothing contained in this rule shall
apply in relation to any assessment year commencing before the 1st day of
April, 1987.]
[15][***]
KEY NOTE
1. Inserted by the Income
Tax (Seventh Amendment) Rules, 1976. Rule 9A is
not ultra vires the provisions of the Act - V. Varghese v. DCIT (1994) 210
ITR 526 (Karn.).
2. Substituted by the
Income Tax (Second Amendment) Rules, 1986, with effect from 02.04.1986.
3. Inserted by the Income Tax (Seventh Amendment) Rules, 1989, with effect from 07.07.1989.
4. Words “regional language” omitted by the
Income Tax (Second Amendment) Rules, 1986, with
effect from 02.04.1986.
5. Substituted for “one hundred and eighty” by
the Income Tax (Ninth Amendment) Rules, 1998, with effect from 01.04.1999.
Earlier “one hundred and eighty” was substituted for “ninety” by the Income Tax
(Second Amendment) Rules, 1986, with effect from 02.04.1986.
6. Words “regional language” omitted by the
Income Tax (Second Amendment) Rules, 1986, with effect from 02.04.1986.
7. Renumbered as a result of omission of
sub-rule (5) by the Income Tax (Second Amendment) Rules, 1986, with effect from 02.04.1986.
8. Substituted by the
Income Tax (Second Amendment) Rules, 1986, with effect from 02.04.1986.
9. Renumbered as a result of omission of
sub-rule (6) by the Income Tax (Second Amendment) Rules, 1986, with effect from
02.04.1986.
10. Substituted for "Income-tax
Officer" by the Income Tax (Fifth Amendment) Rules, 1989, with retrospective effect 01.04.1988.
11. Relettered as a result of omission of clause
(a) by the Income Tax (Second Amendment) Rules, 1986, with effect from
02.04.1986.
12. Substituted for "Income-tax
Officer" by the Income Tax (Fifth Amendment) Rules, 1989, with
retrospective effect 01.04.1988.
13. Renumbered as a result of omission of
sub-rule (7) by the Income Tax (Second Amendment) Rules, 1986, with effect from
02.04.1986.
14. Substituted by the Income Tax (Second
Amendment) Rules, 1986, with effect from 02.04.1986.
15. The Table and Explanations 1 and 2 omitted
by the Income Tax (Second Amendment) Rules, 1986, with effect from 02.04.1986.
Completion of the production of the film
Form No. 52A has to
be filed within 30 days from the date of completion of
the production of the film. There may be two views as to the date of
completion of the production of the film. One is that the last date of any of
the activities relating to the completion of the film is the date of completion
of production. The other view, is the date of issue of certificate by the
Censor Board is the date of completion since the Censor Board may direct
reshooting or editing of the film. Rule 9A which is exclusively meant for the
Film Producer, refers to the certification by the Censor Board for recognizing
the revenue. Thus, the prevailing view currently is that the date of completion
of the film as referred to in Section 285B means the date on which the Censor
Board issues the Certificate to the film.
However, it is a good
assessment practice to verify the receipt of Form 52A and its contents prior to
allowing expenditure on films. The purpose of introducing Section 285A was to
check inflation of expenditure by film producers.
Text of Section - 3, Cinematograph Act, 1952
PART II
CERTIFICATION
OF FILMS FOR PUBLIC EXHIBITION
[1][3. [2][ Board of Film
Certification]
3. (1) For the
purpose of sanctioning films for public exhibition, the Central Government may,
by notification in the Official Gazette, constitute a Board to be called the [2][Board of Film Certification] which
shall consist of a Chairman and [3][not less than twelve and not more than
twenty-five] other members appointed by the Central Government.
(2) The
Chairman of the Board shall receive such salary and allowances as may be
determined by the Central Government, and the other members shall receive such
allowances or fees for attending the meetings of the Board as may be
prescribed.
(3) The
other terms and conditions of service of the members of the Board shall be such
as may be prescribed.
1. Sections 3 to 6
substituted for sections 3, 4, 5 and 6 by Act 3 of 1959, with
effect from 12.03.1959.
2. Sections 3 to 6
substituted for “Board of Film Censors” by Act 49 of 1981, with effect from
01.06.1983.
3. Substituted for “not
more than nine” by Act 49 of 1981, with effect from 01.06.1983.
Text of Section - 6AB, Cinematograph Act, 1952
[1][6AB. Prohibition
of unauthorised exhibition of films.
No person
shall use or abet the use of an infringing copy of any film to exhibit to the
public for profit -
(a) at a place of exhibition which has not been
licensed under this Act or the rules made thereunder; or
(b) in a manner that amounts to the infringement
of copyright under the provisions of the Copyright Act, 1957 or any other law
for the time being in force.]
KEY NOTE
1. Inserted by the
Cinematograph (Amendment) Act, 2023, with effect from 11.08.2023.
Text of Section - 26, Copyright Act, 1957
26. Term
of copyright in cinematograph films.
In the case of
cinematograph film, copyright shall subsist until [1][sixty] years from the beginning of the calendar year next
following the year in which the film is published.
KEY NOTE
1. Substituted for
“fifty” by the Copyright (Amendment) Act, 1992, with retrospective effect from
28.12.1991.
[1] Film Studios
A film studio (also
known as movie studio or simply studio) is a major entertainment company or
motion picture company that has its own privately owned studio facility or
facilities that are used to make films, which is handled by the production
company. The majority of firms in the entertainment industry have never owned
their own studios, but have rented space from other companies. There are also
independently owned studio facilities, which have never produced a motion
picture of their own because they are not entertainment companies or motion
picture companies but they are companies who sell only studio space. With the
growing diversification of studios into such fields as video games, television,
theme parks, home video and publishing, they have become very big companies.
The studios have also transformed into financing and distribution entities for
the films made by many production companies. Many studios also offer tours of
their backlots like Ramoji Rao Film City in Hyderabad and Goregaon Film City in
Mumbai from which also they earn substantial revenue.
[2] Segments of Motion Picture Industry
There are
three distinguished segments of Motion Picture Industry:
(a) Production
(b) Distribution
(c) Exhibition
[3] Stages of Production
PRE-SHOOTING
§ Idea &
Concept
§ Script
& Its breakdown
§ Crew
identification & casting
§ Identification
of location
§ Budgeting
& scheduling
§ Market
analysis
§ Funding
§ Contract
with Cast & Crew
§ Insurance
SHOOTING
§ Planning
§ Matching
dates of all the cast & crew
§ Erecting
sets
§ Hiring
locations
§ Arranging
all the equipment
§ Shooting
§ Music
recording
POST-SHOOTING
§ Editing
§ Background
music
§ Dubbing
§ Negative
cutting
§ Other post
production
§ Printing
§ Publicity
§ Distribution
& release
Distribution
THEATRICAL
Domestic
(Divided In Six Territories)
(i)
Bombay Presidency
(ii) Delhi-Utter
Pradesh
(iii) Eastern
Circuits
(iv) MP &
Rajasthan
(v) East
Punjab
(vi) South
& Nizam
Overseas
Initially,
there was a Single distributor for Different Countries
Now movies
are being sold to multiple distributors for different nations
NON-THEATRICAL
(a)
Domestic
§ Satellite
§ Music
§ Video,
Cable, DVD, VCD
§ Internet
Others
(b) Overseas
§ Satellite
§ Music
§ Video,
Cable, DVD, VCD
§ Internet
Others
[4] Film Production
Numerous
persons are associated with the process of film Production. A diagrammatical
presentation of the persons involved in this process is given below
Film
Production Organisational Chart :
Presenter
(a)
Producer
§ Executive
producer
§ Location
Manager
§ Casting
Director
§ Production
Manager
(b) Director
§ 1st
Assistant Director
§ 2nd
Assistant Director
(c) Head of Department
(i)
Director of Photography
Assistant Camera
§ The Gaffer
§ Clapper
§ Best Boy
§ Focus
Fuller
(ii) Sound Designer
Sound Recorder
§ Loader
§ Boom Set
Prop
§ Sparks
Grip
(iii) Production Designer
Art Director
(iv) Editor
Dubbing Editor
(v) Costume
Make up
(vi) VFX (Visual Effects)
[5] Some of the important
persons associated in this process are described as under:
(i) Presenter: In films, a
presenter is a usually a wellknown executive producer credited with introducing
a film or filmmaker to a larger audience.This person is the source of funding
for the movie and the ultimate advocate for the investors and the intended
audience.
(ii) Producer: The Producer is
essentially the group leader and is responsible for managing/ coordinating the
production from start to finish. The producer develops the project from the
initial idea, makes sure the script is finalized, arranges the financing and
manages the production team that makes the film.
(iii) Director: The director is
primarily responsible for overseeing the shooting and assembly of a film. A
director works at the centre of film production, but is inextricably linked
with dozens of other people who get the job done together.
(iv) Director: The art director is
responsible for the film’s settings: the buildings, landscapes and interiors
that provide the physical context for the characters. This person is
responsible for acquiring props, decorating sets and making the setting
realistic.
(v) Production Manager: They are
the manager for the whole location, including the camera shoot. They coordinate
between departments and between the shoot and the producer or studio. They hold
the purse strings (although are accountable to higher powers), so are the
ultimate decider on fixing problems that can’t be resolved immediately on set.
(vi) Production Designer: The
production designer translates the script into visual form through story boards
which is a series of sketches on panels that shows the visual progression of
the story from one scene to the next. It ensures the visual continuity of the
film and serves as the director’s visual guide.
(vii) Actors: Responsible for
portraying the characters in a film, the actors work closely with the director
and cinematographer. They are the highest paid amongst all the persons
associated with a moviemaking.
(viii) Writer: Every movie has to
be first conceptualized and then written down in the story format. A writer
writes the entire story sometimes even with the dialogues. A separate dialogues
writer is also entrusted with the job of dialogues writing.
(ix) Screenwriter: While the dialogue
in a film may seem natural to the viewer, a writer carefully crafts it;
however, the screenwriter does far more than provide dialogue for the actors.
He or she also shapes the sequence of events in a film to ensure that one scene
transitions to the next so that the story will unfold logically and in an
interesting way. B. Technical Members of the Movie Production
(x) Costume Designer: Costumes convey a
great deal about the film’s time period and the characters.
(xi) Cinematographer: The
director of photography, or DOP, is responsible for capturing the script on
film or video. The DOP must pay attention to lighting and the camera’s
technical capabilities.
(xii) Editor: Shortly
after shooting begins, the editor begins to organize the footage and arranges
individual shots into one continuous sequence. Even in a single scene, dozens
of different shots have to be assembled from hundreds of feet of film.
[6]
Stages of production of a movie
The production of a
movie is carried out in 3 Stages
(a) Pre-Production
At the Pre-Production stage, the Producer finds a script or
hires someone to write one based on a book, article or an idea he may have.
When the script is ready; the budget is prepared and the Producer looks for
financiers to invest in his film. Also, at this point, the Actors, Director and
Production Manager and other staff are hired.
(b) Production
During the Production stage, the Director instructs the Actors
and confers with the Cinematographer and other technicians in order to get the
best possible shots. Once the entire script has been shot, the film moves to
the Post-Production stage.
(c) Post-Production
In Post-Production, the actors finish dubbing (if required) plus
Special Effects, Background Music and Sound Effects are added to the film. Once
Post-Production is complete the Producer sells the film to a Distributor for a
profit.
[7] Post-production (Film processing)
Post-production or
film processing is part of the process of filmmaking, video production and
photography. Post-production includes all stages of production occurring after
shooting or recording individual program segments. PostProduction is many
different processes grouped under one name, which include:
(a) Video
editing the picture of a television program using an edit decision list (EDL).
(b) Writing,
(re)recording, and editing the soundtrack.
(c) Adding
visual special effects mainly computer generated imagery (CGI) and digital copy
from which release prints will be made (although this may be made obsolete by
digital cinema technologies).
(d) Sound
design, sound effects, ADR, foley, and music, culminating in a Process known as
sound rerecording or mixing with professional audio equipment.
(e) Transfer
of color motion picture film to video or DPX with a telecine and color grading
(correction) in a color suite
There are many
companies mainly in the cities of Chennai, Mumbai, Hyderabad and Bangalore
which are involved in the above business of film processing and Post-Production
processes. Their main source of income is Virtual Print Fee which they collect
from the production houses and also may have income under other heads like
lease rental income on digital cinemas, maintenance service fee, technical
service income and advertisement revenue. The main heads under which the
expenses incurred are delivery and distribution charges, content processing
charges, installation charges, virtual print fee sharing charges, rent on
equipments and employee related expenses. The Assessing Officer has to be
vigilant as there may be a chance that these expenses may be inflated or may be
paid to other concerns without TDS as these are deductible under section 194J
of the Income Tax Act.
A Producer receives a
minimum guarantee fee from a distributor in return for film rights in a
territory within the country. If the movie does well and the distributor
recovers his money, any additional inflows get divided between the two.
Additional revenue comes from overseas rights, satellite rights, home video
market and, music (wireless and Internet downloads). If the producer owns the
intellectual property rights and has not sold it off in perpetuity (generally,
music rights are sold off in perpetuity, satellite for 10 years and digital
rights, viz. Hotstar/Netflix/ Amazon Prime are given for five years), he could
make money selling his library to a TV channel in the long term. The Producer
or say, executive producer gets the initial finances from banks or others such
as a high net worth individuals or companies to put in money as equity, or,
raise money upfront from distributors, or through selling some of the rights
early to finance the film.
[8] Film Distribution
The second important
segment is that of distribution of the movie so produced. A person who
distributes the film through the theatres is called film distributor. The
distributor buys the “distribution rights” from the producer, mostly in the
very beginning itself or sometimes after previewing the final cut. However, the
preacquiring of film distribution right is based on the cast, crew, director,
story and the producer’s past success record. Also, nowadays it is fairly
common that the producer himself, distributes the films without a third party
(or) an independent film producer so as to avoid the distributor expenses. On
the basis of entertainment tax and geography, Film Distribution Association of
India divided the state provinces into 11 circuits for distributing the films.
Sometimes, the distributors directly distribute films to all these circuits,
while other times the main distributor rents (or) sell the films to a local
film distributor.
Digital Film
Distribution
Many companies are
now doing the business of digital cinema distribution network and in cinema
advertising platform. They operate mainly satellitebased digital cinema
distribution network using their specific technical platforms. Now almost all
the cinemas are totally digitized and their digitization and delivery model has
been a key driver of extensive digitization of Indian cinemas and has enabled
widespread, same day release of movies across India. For instance a leading
Indian Digital film distributor along with its subsidiaries and associates,
operates 5,970 screens worldwide, including 5,289 screens across India and 681
screens across the Middle East, Mexico and the USA. These companies basically
add value to all stakeholders in the movie value chain, spanning movie
producers, distributors, exhibitors and the cinemagoing audience. They provide
value to movie producers and distributors by reducing distribution costs,
providing reach to a wide network, providing a faster method of delivery of
content and reducing piracy through encryption and other security measures.
They provide value to movie exhibitors throughout India by providing access to
first day release of movies on our digital platform. Audience benefits from
faster access to new movie releases and a consistent high quality viewing
experience.
Mostly these
companies also have in cinema advertising platform which enables advertisers to
reach a targeted, captive audience with high flexibility and control over the
advertising process. Their in cinema advertising platform also allows small
exhibitors who otherwise are not able to effectively monetise their advertising
inventory due to their limited scale and reach to receive a greater share of
advertisement revenue than they are able to using traditional advertising
methods.
[9] Film exhibition
The film exhibition
is the last segment of the motion picture industry wherein the movie is
displayed to the audience and actual income accrues in the produce rdistributor
exhibitor chain. An Exhibitor owns the theatre or sources a theatre. The
Distributor makes arrangements with Exhibitors to exhibit a film in as many of
their screens as possible and the Exhibitors earn a share of net collections
(revenue after educating entertainment tax from the gross collections) as
agreed upon. Generally, in the first week, the Exhibitors and Distributors
divide the net collections equally. In the second week the Exhibitors share
goes up to 57.50% and in the third week, the Exhibitors get 62.5% and
Distributors earn 37.5% share. Beyond that time, the Exhibitors earn 70% and Distributors
share drops to 30% of the net collections.
[10] Media services providers: (netflix/ amazon
prime/ zee5/ hotstar/ sony platforms)
These concerns’
primary business are its subscription based streaming Over The - Top (OTT)
media services which offers online streaming of a library of films and
television programs, including those produced inhouse. The growth of these
service providers in India in recent years is tremendous and their revenues are
growing in an exponential manner. They have greatly expanded the production and
distribution of both film and television series and offer a variety of original
content through their online library. These service providers like Netflix and
Amazon Prime almost operate all over the world except few countries. Their
efforts to produce new content, secure the rights for additional content, and
diversity all over the world have resulted in these companies mobilizing
hundreds of Crores of capital and are mainly spent in purchasing these
contents. These platforms now throw a great challenge to the traditional media
service providers like cinema theatres, etc. Practically every day thousands of
subscribers are getting added to these platforms in India.
Their operating model
is quite simple. They have two ways of generating the content which are mainly
movies and serials. First they purchase the content from various production
houses and most of the times even before the movies are released. For this they
enter into detailed agreements for purchasing the movies’ digital rights.
Second, they produce their own content. They hire a production team and pay a
lumpsum amount to these creative production houses to produce the type of
movies which they specifically want. These production houses subsequently take
care of all aspects of producing a movie. The same strategy applies for serials
also. Their income is solely depends on the subscription amounts they receive
from the customers. Since there is heavy competition among these service
providers, their sole concentration is to capture the bulk of market share and
are not thinking about making profits right now. So they are investing heavily
in purchasing and producing the contents and since the subscriptions are not
commensurate with the expenses incurred, most of them are likely to show heavy
losses. There are likely to be many Transfer Pricing issues which the TPOs
should concentrate. Most of the service providers in India like Amazon and
Netflix are purchasing the content from their Associated Enterprises (AE)
counterparts in US and Europe and the price with which they are being purchased
needs to be closely scrutinized by the Transfer Pricing Officers.
[11] Digital/
Satellite/ Music rights and other earnings
Of late digital
rights and satellite rights have gained so much importance in the media
industry. While collections at the box office remain a key source of revenues
for movies in India, a number of other drivers are fast becoming important
sometimes even deciding whether a movie will become profitable.
Digital rights refer
to the relationship between copyrighted digital works (such as film, music and
art) and user permissions and rights related to computers, networks and
electronic devices. Digital rights also refer to the access and control of
digital information. Satellite right is the legal permission given by the
producer of a film to a Television channel to show (broadcast) the film in TV.
It might be for a limited time period or for lifetime. There will be many
Clauses and conditions like the film can be shown in TV only after a particular
time period etc. Some factors affecting the average cost for these rights are
film cast, production banner (some established production houses can sell their
films on higher rate to channels than any new production houses), past record
of the people associated with the film, success or expectation of the film. It
also depends on the buzz it creates before the release and the cost will be
high also if the film is a blockbuster.
Gone are the days
when movies were released only for theatres or television. VOD (video on demand)
and OTT (over the top) platforms have opened up different channels through
which your film can reach out to a targeted audience. These platforms work on
subscriptions or advertisements, while the content owners can sell digital
rights of movies to these online channels or media platforms. Big players are
constantly looking for good engaging content. Times have changed drastically
and movie distributors in India are not just looking for theatrical releases.
Since the digital networks like Amazon Prime, Jio, Netflix, Zee5, Sony, Hotstar
etc., are penetrating the entire country in an exponential manner, the digital
rights have gained a huge value and there is a stiff competition among these
players to purchase quality content. Most of the digital rights are purchased
by the above players in India. However, since it will take some time for these
players to penetrate rural India, production houses recover a major portion of
their costs by selling satellite rights. Satellite rights are mainly purchased
by the TV channels. Similarly, music rights and other miscellaneous rights also
play an important role for the production houses in making profits out of the
movies produced by them. In all the rights, TDS is deducted when payments are
made for the transfer of the rights, be it digital or satellite. Many times,
the payments for rights like digital are received by the producers over a
period of time like 3 years and they offer the revenue over the same time
period. However, from the Income-tax angle, the income is accrued to the
producer in the year in which the agreement is entered into
A survey was
conducted on the producer of a blockbuster movie. During the course of survey,
it was found that Sale of Digital rights for the film to Netflix was not
accounted on accrual basis. Agreement value for the sale of digital rights was
6.5 million USD. After pointing out and questioned, the assessee offered the
entire income for taxation in the current year. The agreement said that payment
would be made by Netflix in equal instalments over a period of three years and
the asseseee was intending to defer the accounting of the income. However, the
agreement also clearly stipulated that the entire digital content rights has
been transferred in the current year itself and hence the entire income ought
to be offered in the year in which the agreement was entered. After the survey,
the assessee paid tax of Rs. 10 Crore immediately.
[12] Film financing
Filmmakers get their
films financed through many options. Some are obtaining loans from banks,
presell distribution rights, getting financial backup from large studios and
production houses, find equity funding etc.
(i)
Raising Loans from Banks and Financial Institutions: Filmmakers
are nowadays offering the distribution rights of their movies to distributors
for certain regions even before the movie goes into production. Once these
rights have been presold, they are using these contracts to go to a bank and
raise a loan. Distributors don’t pay up front with the entire amount, but their
guarantee to pay once the movie is complete serves as collateral to the banks.
This, however, works best for established producers. First time filmmakers
might find it hard to raise funds this way. They can instead get a loan from a
bank by providing a substantial security of their own.
(ii)
Investment by Big Studios and TV Channels: This is the best
possible approach for any aspiring or established filmmaker. Getting the
backing of a large studio or production houses gives them the financial and
intellectual muscle needed to execute a project as intensive as making a film.
Big studios such as Yash Raj and Mukta Arts have already invested in the
infrastructure needed and have the network and risk appetite to take on more
and more film making projects. Of late, corporate production houses like ZEE,
Viacom18 Motion Pictures, Reliance etc., have ventured and are behind the
financing the big ticket films. Once a big studio steps in, the filmmaker can
go ahead and make the movie fully knowing that they have the backing of a solid
movie business behind them.
(iii)
Private Equity: Raising the finance needed for the movie from investors
requires an understanding of corporate law and having an excellent track record
as a filmmaker. Nowadays, many companies which have huge capital are entering
into the film world. Reliance Entertainment, for instance, is one such large
company that has made a foray into films. They are not a traditional movie
studio but work with a lot of producers to make movies. The reason a company
like Reliance would foray into entertainment is that they can expect a large
and quick return on their investment. Traditionally, companies consider 1520%
return per year on the capital they have invested to be a good number. Since
the return could be a lot higher and quicker in film making and distribution,
they have begun to actively consider film making as an investment opportunity.
(iv)
Digital Service Providers (VOD and OTT Platforms): In recent
years, many OTT and VOD providers like Netflix and Amazon Prime are financing
the production houses to produces their own films and which are released
through their own platforms.
(v)
Crowdfunding: With online communities becoming a huge part of the internet,
people are putting forward financial support for ideas that resonate with them.
Some crowdfunding platforms in India helps aspiring film makers and artistes
find the funds they need and some movies are financed in this way.
[13] Flow of income
in motion picture industry
A movie produced by a
Production House is nothing but its intellectual property. The rights of a
movie are exploited by exhibiting it for the audience. This value chain is
diagrammatically represented hereunder: Now-a-days upto 70% of box office
revenue is contributed by large theatre chains which have a panIndia presence.
The business models are explained in brief hereunder:
(i) Sharing of Revenue between Producer and
Distributor
(a)
Minimum Guarantee Plus Royalty Model: The distributor
acquires the right to distribute the film in a particular territory, for a
limited period, by paying a minimum guarantee to the producer. The excess of
distributor revenues over the minimum guarantee, print and publicity costs i.e.
‘overflow’ is shared with the producer in a preagreed ratio.
(b)
Commission/ Revenue Share Model: The distributor
retains a commission on the total amount collected from the exhibitor and
remits the rest to the producer. The distributor may pay a recoverable advance
to the producer, while acquiring the distribution rights. Such advance is
usually adjusted against the remittances to be made to the producer.
(c)
Outright Sale Model: The distributor purchases the entire
rights for the territory from the producer.
(ii) Sharing of Revenue between Distributor and
Exhibitor
(a)
Revenue Share Model: The box office collections, net of
entertainment tax, are shared between the distributor and the exhibitor in a
preagreed ratio. The entire risk of box office performance of the film is
shared between the distributor and the exhibitor.
(b)
Theatre Hire Model: The exhibitor collects the entire box
office collections, net of entertainment tax. He retains a fixed amount and
hands the balance net collection to the distributor. The entire risk of box
office performance of the film is borne by the distributor.
(c)
Fixed Hire Model: The distributor receives a fixed
amount per week from the exhibitor, irrespective of the film’s performance at
the box office. The entire risk of box office performance of the film is borne
by the exhibitor
(d)
Fixed Hire Plus Royalty Model: The distributor
receives a minimum guarantee from the exhibitor. Any box office collections,
net of entertainment tax, in excess of the minimum guarantee amounts are shared
between the distributor and the exhibitor in a preagreed ratio
[14] Revenue Recognition
Now, based on the revenue sharing models, revenue recognition norms can
be broadly be as under:
(i) Producers
(a) In case of
non-refundable minimum guarantee contracts and outright sale contracts, the
minimum guarantee or sale amount should ordinarily be recognised as revenue on
the date of the agreement or at such time as the common principles of revenue
recognition are satisfied. However, the Producer shows the income as per
provisions of Rule 9A of the Incometax Rules, 1962.
(b) In case of
commission contracts, revenue is recognised as it is earned from the exhibition
of the film.
(ii) For Distributors
(a) Distributor’s
share from theatrical exhibition is recorded as revenue as it is earned from
the exhibition of the film.
(b) Revenue is
recognised net of entertainment tax and exhibitor’s share.
(iii) For Exhibitors
(a) Exhibitor’s
share from theatrical exhibition is recorded as revenue as it is earned from
the exhibition of the film.
(b) Revenue is
recognised net of taxes and trade discounts.
[15] Taxation issues
in motion film industry
(i) Amortization of the Cost of Production for
Film Producer:
It is guided by Rule 9A which is a provision exclusively for the
Film Industry. This Rule deals with the amortisation of Cost of Production
(‘COP’) for a film producer. Rule 9A(1) provides that:
“In computing the profits and gains of
the business of production of feature films carried on by a person (the person
carrying on such business hereafter in this rule referred to as film producer),
the deduction in respect of the cost of production of a feature film certified
for release by the Board of Film Censors in a previous year shall be allowed in
accordance with the provisions of subrule (2) to subrule (4).”
As per Rule 9A sub rule (2), (3) and (4) deduction is allowed in
respect of cost of production of a feature film certified for release by the
Board of Film Censor in the previous year and if the film is released at least
90 days before the end of the relevant year. In case if film is released within
90 days, no loss is allowed.
(ii) As Per Rule 9A, Conformity of Production (CoP)
Means:
(a) All the expenditure incurred on the production of the film,
except:
§
Expenditure incurred on preparation of positive films.
§
Expenditure incurred on advertisement of the film after Censor
certificate.
(b) Subsidy received from the government will have to be reduced
from the cost.
The implication thereof is as under:
(a)
A film producer can claim a deduction for the cost of production
of a feature film certified for release by the Board of Film Censors in
computing the profits and gains of the business of production of feature films.
(b)
No deduction is allowed in the event the film producer fails to
exhibit the film in the year of its production. In this case, the entire cost
of production is carried over and allowed as a deduction to the following tax
years.
(c)
The cost of production is the expenditure incurred on the
production of the film but does not include any expenditure incurred for
preparation of the positive prints of the film and advertisement of the film.
(d)
Sale of Exhibition Rights: A film producer can claim a deduction
for the entire cost of producing a feature film certified for release in the
year of its production. However, the deduction is available only if the
exhibition rights are also sold during the same tax year.
(e)
Part-sale of Exhibition Rights: If the film producer exhibits
the film in certain areas and sells the exhibition rights in the remaining
areas in the year of its production, the entire cost of production is allowed
as a deduction only if the film is released for exhibition at least 90 days
before the end of the same tax year. If the film is not released, the cost of
production is allowed as deduction in the same tax year only to the extent of
aggregate amounts realised by the film producer by exhibiting the film and by
the sale of the exhibition rights. The balance, if any, is carried over (and
allowed as a deduction) to the following tax years.
(f)
It is also to be noticed that the benefit of Rule 9A is
available only if the realizations are credited by the producer in the books of
account regularly maintained.
The concept of Rule
9A is summarized in following Table
|
Censor
Board Certification |
Exhibition/
Sale of Rights |
Release
90 days before the end of the Financial Year |
Deduction
of ‘Cost of Production’ |
|
Completed |
Completed |
Completed |
Full
Deduction |
|
Completed |
Completed |
Not Completed |
To the
extent of Amount Realised |
|
Completed |
Not
Completed |
Not
Completed |
No
Deduction in the first year. In the second year, the whole of cost of
production is amortized whether the film is exhibited or not. |
Income Tax Law allows deduction of cost of production
Rule 9A of the Income Tax Rules 1962 allows
deduction of such expenditure incurred on production of feature films.
According to this Rule, while computing the profits and gains of the business
of production of feature films carried on by a person, the deduction in respect
of the cost of production of a film duly certified for release by the Board of
Film Censors shall be allowed in accordance with the provisions of sub-rule (2)
to sub-rule (4). Generally, cost of production includes expenditure on preparation
of positive films, expenditure incurred on its advertisement, subsidy received
from the government, however, such subsidy amount will be reduced from the cost
of production.
[16] Film Distributor
Deduction
for the Cost of Acquisition (Film Distributors)
The film
distributor can claim a deduction for the cost of acquisition of a feature film
in computing the profits and gains of the business of distribution of feature
films. No deduction is allowed if the film distributor fails to exhibit the
film in the year of its acquisition. In this case, the entire cost of
acquisition is carried over (and allowed as a deduction) to the following tax
years. The cost of acquisition, in relation to a feature film, means the amount
paid by a film distributor to a film producer for acquiring exhibition rights.
Text of
Rule 9B of the Income Tax Rules, 1962
[1][9B. Deduction
in respect of expenditure on acquisition of distribution rights of feature
films.
(1) In computing
the profits and gains of the business of distribution of feature films carried
on by a person (the person carrying on such business hereafter in this rule
referred to as film distributor), the deduction in respect of the cost of
acquisition of a feature film shall be allowed in accordance with sub-rule (2)
to sub-rule (4).
Explanation. - For
the purposes of this rule, “cost of acquisition”, in relation to a feature
film, means the amount paid [2][by the
film distributor to the film producer or to another distributor under an
agreement entered into by the film distributor with such film producer or such
other distributor, as the case may be] for acquiring
the rights of exhibition and, where the rights of exhibition have been acquired
on a minimum guarantee basis, the minimum amount guaranteed, not being -
(i) the amount of expenditure incurred by the
film distributor for the preparation of the positive prints of the film; and
(ii) the expenditure incurred by him in connection
with the advertisement of the film.
(2) Where
a feature film is acquired by the film distributor in any previous year and in
such previous year -
(a) the film distributor sells all rights of
exhibition of the film, the entire cost of acquisition of the film shall be
allowed as a deduction in computing the profits and gains of such previous
year; or
(b) the film distributor,-
(i) himself exhibits the film on a commercial
basis in all or some of the areas; or
(ii) sells the rights of exhibition of the film in
respect of some of the areas; or
(iii) himself exhibits the film on a commercial
basis in certain areas and sells the rights of exhibition of the film in
respect of all or some of the remaining areas,
and the film is
released for exhibition on a commercial basis at least [3][ninety] days before the
end of such previous year, the entire cost of acquisition of the film shall be
allowed as a deduction in computing the profits and gains of such previous
year.
(3) Where
a feature film is acquired by the film distributor in any previous year and in
such previous year the film distributor—
(a) himself exhibits the film on a commercial
basis in all or some of the areas; or
(b) sells the rights of exhibition of the film in
respect of some of the areas; or
(c) himself exhibits the film on a commercial
basis in certain areas and sells the rights of exhibition of the film in
respect of all or some of the remaining areas,
and the film is not
released for exhibition on a commercial basis at least [3][ninety] days before the
end of such previous year, the cost of acquisition of the film in so far as it
does not exceed the amount realised by the film distributor by exhibiting the
film on a commercial basis or the amount for which the rights of exhibition
have been sold or, as the case may be, the aggregate of the amounts realised by
the film distributor by exhibiting the film and by the sale of the rights of
exhibition, shall be allowed as a deduction in computing the profits and gains
of such previous year; and the balance, if any, shall be carried forward to the
next following previous year and allowed as a deduction in that year.
(4) Where
during the previous year in which a feature film is acquired by the film distributor,
he does not himself exhibit the film on a commercial basis or does not sell the
rights of exhibition of the film, no deduction shall be allowed in respect of
the cost of acquisition of the film in computing the profits and gains of such
previous year; and the entire cost of acquisition shall be carried forward to
the next following previous year and allowed as a deduction in that year.
(5)
Notwithstanding anything contained in the foregoing provisions of this rule,
the deduction under this rule shall not be allowed unless—
(a) in a case where the film distributor,-
(i) has himself exhibited the feature film on a
commercial basis; or
(ii) has sold the rights of exhibition of the
feature film; or
(iii) has himself exhibited the feature film on a
commercial basis in some areas and has sold the rights of exhibition of the
feature film in respect of all or some of the remaining areas,
the
amount realised by exhibiting the film, or the amount for which the rights of
exhibition have been sold, or, as the case may be, the aggregate of such
amounts, is credited in the books of account maintained by him in respect of
the year in which the deduction is admissible ;
(b) in a case where the film distributor has
transferred the rights of exhibition of the feature film on a minimum guarantee
basis, the minimum amount guaranteed and the amount, if any, received or due in
excess of the guaranteed amount, or where the film distributor follows cash
system of accounting, the amount received towards the minimum guarantee and the
amount, if any, received in excess of the guaranteed amount, are credited in
the books of account maintained by him in respect of the year in which the
deduction is admissible.
(6) For
the purposes of this rule,-
(i) the sale of the rights of exhibition of a
feature film includes the lease of such rights or their transfer on a minimum
guarantee basis;
(ii) the rights of exhibition of a feature film
shall be deemed to have been sold only on the date when the positive prints of
the film are delivered by the film distributor to the purchaser of such rights;
[4][(iii)
distributor shall include a sub-distributor.]
[5][(7) Nothing contained in this rule shall
apply in relation to any assessment year commencing before the 1st day of
April, 1987.]
KEY NOTE
1. Inserted by the Income
Tax (Seventh Amendment) Rules, 1976.
2. Substituted by the Income
Tax (Second Amendment) Rules, 1986, with effect from 02.04.1986.
3. Substituted for “one
hundred and eighty” by the Income Tax (Ninth Amendment)
Rules, 1998, with effect from 01.04.1999. Earlier “one hundred and eighty” was
substituted for “ninety” by the Income Tax (Second Amendment) Rules, 1986, with
effect from 02.04.1986.
4. Inserted by the Income Tax (Second Amendment) Rules, 1986, with effect
from 02.04.1986.
5. Substituted by the Income
Tax (Second Amendment) Rules, 1986, with effect from 02.04.1986.
Sale of Exhibition Rights: A film distributor can claim a deduction for the entire cost of acquisition of the film in the year of acquisition (subject to the sale of exhibition rights by the film distributor in the same tax year).
Part-sale of
Exhibition Rights: If the film distributor exhibits the film in certain areas and
sells the exhibition rights in the remaining areas in the year of its
acquisition, the entire cost of acquisition is allowed as a deduction only if
the film is released for exhibition at least 90 days before the end of the tax
year. If the film is not released, the cost of acquisition is allowed as a
deduction in the year of acquisition only to the extent of aggregate amounts
realised by the film distributor by exhibiting the film and by the sale of the
exhibition rights. The balance, if any, is carried over (and allowed as a
deduction) to the following tax years.
The concept of Rule
9B is summarized in following Table:
|
Exhibition/
Sale of Rights |
Release
90 days before the end of the Financial Year |
Deduction
of ‘Cost of Acquisition |
|
Completed |
Completed |
Full
Deduction |
|
Completed |
Not
Completed |
To the
extent of Amount Realised |
|
Not
Completed |
Not
Completed |
No
Deduction |
The accounts may also be perused to see whether the assessee following the mercantile system, has unjustifiably spread the consideration received from sale of satellite or other rights over a number of succeeding years, whereas, he should have offered it as a taxable receipt in the financial year in which the sale was finalised.
The
Assessing Officer may apply his mind to the debit of the entire cost incurred
in purchasing rights of a feature film as business inventory, rather than
capitalizing the same and claiming depreciation for intangible assets in light
of Exlanation 3 to Section 32(1) of the Act.
Denies deduction for acquiring film distribution rights absent revenue
realization on exhibitions
The issue of
applicability of Rule 9B was considered. The assessee, in this case, had
claimed deduction under Rule 9B(4) of the Act at Rs. 77,50,000/-, being the
cost of acquisition of the satellite and terrestrial television rights of five
Malayalam films acquired during the financial years 2004-05 to 2005-06. The
Assessing Officer noticed that the assessee did not make commercial use of the
said films in any of the aforesaid financial years. Hence, no income was
generated out of the acquisition of film rights. The Assessing Officer noticed
that, as per Rule 9B, generation of income either in the year of purchase of
rights or in the subsequent year is a primary condition for allowing deduction
either in the year of purchase or in the succeeding year. Accordingly, the
Assessing Officer held that the question of deduction of cost of rights of
films purchased during the year under consideration did not arise. Similarly,
he held that deduction of cost of rights acquired in the earlier years and
brought forward during the current year also did not arise at all. Accordingly,
he disallowed the amount of Rs. 77,50,000/- claimed under Rule 9B(4). The
findings of the AO were upheld by the Cochin Tribunal. On appeal to High Court:
Kerala High Court upholds ITAT order for Assessment year 2004-05, denies
deduction for expenditure incurred by assessee-company on acquisition of
distribution rights on three Malayalam films, as there was no exhibition of the
films on commercial basis and there was no amount realised on exhibition of
films; Notes that as per Rule 9B(5) which is non-obstante clause, deduction
shall not be allowed under Rule 9 unless the distributor credits in the P&L
A/c the amounts realised on exhibition of film on commercial basis; Holds that
deduction is permissible under Rule 9B only if the film has been commercially
exploited and an income received.”, relies on Bombay High Court ruling in
Prakash Pictures; Rejects the assessee's contention that as per Rule 9B(4)
deduction of cost of acquisition made in Assessment year 2004-05 shall be
carried forward to next year, holds that Sub-rule (4) of Rule 9B only permits
carrying forward of the cost of acquisition to the next year for the purpose of
claiming deduction, which can be claimed only if there is income generated by
the film and the same is credited to the books of accounts as provided in the
overriding sub-rule at Rule 9B(5). There can be no deduction permissible on the
cost of acquisition without generation of income credited in the books of
account. [In favour of revenue] (Related Assessment year : 2004-05)– [Malayala
Manorama Co. Ltd. v. ACIT, Kottayam [TS-362-HC-2018(KER)] – Date of Judgement :
26.06.2018 (Ker.)]
[17] Film
Exhibitor Entertainment Tax Subsidy
One
important legal issue settled by the Hon’ble Supreme Court was whether
Entertainment Tax subsidy was Capital or Revenue in nature. Entertainment Tax
is subsidy given by the State Governments to the Multiplex Cinema owners.
Entertainment Tax is part of the ticket price and collected by the multiplex
theatres from the viewers and paid to the respective State Governments. In
order to give incentive entertainment tax collected is allowed to be retained
by way of subsidy for certain initial years of operation of multiplex theater
complex. The assessee treated this subsidy as capital receipt; while the
Revenue treated this as revenue receipt.
This issue
has now been settled by Hon’ble Supreme Court in the case of CIT v. Chaphalkar Bros, wherein it was
held that the Entertainment Tax subsidy received by the Exhibitors is capital
in nature.
Where object of respective subsidy schemes of State Governments was to
encourage development of Multiple Theatre Complexes, incentives would be held
to be capital in nature and not revenue receipts
The
subsidy scheme of the State Government provided for an exemption of
entertainment duty in Multiplex Theatre Complexes newly set up, for a period of
three years, and thereafter payment of entertainment duty at the rate of 25 per
cent for the subsequent two years. In the assessment order it was found that
the aforesaid scheme was really to support the on going activities of the
multiplex and not for its construction.
The
Assessing Officer held that since the scheme took the form of a charge on the
gross value of the ticket and contributed towards the day-to-day running
expenses, it was in the nature of a revenue receipt. On appeal, the
Commissioner (Appeals) dismissed the appeal of the assessee upholding the order
of the Assessing officer. On second appeal, the Tribunal decided the ground in
favour of the assessee holding that the receipt was in the nature of a capital
receipt being an incentive to supplement the construction expenditure of new
set up of Multiplexes hence in the nature of capital receipt. On further
appeal, the High Court dismissed the appeal of the revenue holding that where
object of entertainment duty subsidy was to promote construction of multiplex
theatre complexes, receipt of subsidy would be on capital account. On appeal by
revenue to the Supreme Court:
Held
: Applying the test of purpose, the
Court was satisfied that the payment received by the assessee under the scheme
was not in the nature of a helping hand to the trade but was capital in nature. What is important is the fact that Sahney
Steel & Press Works Ltd. v. CIT (1997) 228 ITR 253 : 94 Taxman 368 (SC)
was followed and the test laid down was the ‘purpose test’. It was specifically
held that the point of time at which the subsidy is paid is not relevant; the
source of the subsidy is immaterial; the form of subsidy is equally immaterial.
Applying
the aforesaid test contained in both Sahney Steel & Press Works Ltd.’s case
(supra) as well as CIT v. Ponni Sugars & Chemicals Ltd. (2008) 306 ITR
392 : 174 Taxman 87 (SC), it is viewed that the object, as stated in the
statement of objects and reasons, of the amendment ordinance was that since the
average occupancy in cinema theatres has fallen considerably and hardly any new
theatres have been started in the recent past, the concept of a Complete Family
Entertainment Centre, more popularly known as Multiplex Theatre Complex, has
emerged. These complexes offer various entertainment facilities for the entire
family as a whole. It was noticed that these complexes are highly capital
intensive and their gestation period is quite long and therefore, they need
Government support in the form of incentives qua entertainment duty. It was
also added that government with a view to commemorate the birth centenary of
late V. Shantaram decided to grant concession in entertainment duty to
Multiplex Theatre Complexes to promote construction of new cinema houses in the
State. The aforesaid object is clear and unequivocal. The object of the grant
of the subsidy was in order that persons come forward to construct Multiplex
Theatre Complexes, the idea being that exemption from entertainment duty for a
period of three years and partial remission for a period of two years should go
towards helping the industry to set up such highly capital intensive
entertainment centres. This being the case, it is difficult to accept the
argument of the revenue that it is only the immediate object and not the larger
object which must be kept in mind in that the subsidy scheme kicks in only post
construction, that is when cinema tickets are actually sold. The object of the
scheme is only one -there is no larger or immediate object. That the object is
carried out in a particular manner is irrelevant, as has been held in both
Ponni Sugars & Chemicals Ltd.'s case (supra) and Sahney Steel & Press
Works Ltd.'s case (supra).
The
assessee, also sought to rely upon a judgment of the Jammu and Kashmir High
Court in Shree Balaji Alloys v. CIT (2011) 333 ITR 335 : 198 Taxman 122 : 9
taxmann.com 255 (J&K). While considering the scheme of refund of excise
duty and interest subsidy in that case, it was held that the scheme was capital
in nature, despite the fact that the incentives were not available unless and
until commercial production has started, and that the incentives in the form of
excise duty or interest subsidy were not given to the assessee expressly for
the purpose of purchasing capital assets or for the purpose of purchasing
machinery.
After
setting out both the Supreme Court judgments referred to hereinabove, the High
Court found that the concessions were issued in order to achieve the twin
objects of acceleration of industrial development in the State of Jammu and
Kashmir and generation of employment in the said State. Thus considered, it was
obvious that the incentives would have to be held capital and not revenue.
The
finding of the Jammu and Kashmir High Court on the facts of the incentive
subsidy contained in that case is absolutely correct. In that once the object
of the subsidy was to industrialize the State and to generate employment in the
State, the fact that the subsidy took a particular form and the fact that it
was granted only after commencement of production would make no difference.
Further,
since the subsidy scheme in the West Bengal case is similar to the scheme in
the Maharashtra case being to encourage development of Multiplex Theatre
Complexes which are capital intensive in nature, and since the subsidy scheme
in that case is also similar to the Maharashtra cases, in that the amount of
entertainment tax collected was to be retained by the new Multiplex Theatre
Complexes for a period not exceeding four years, the West Bengal cases must
follow the judgment that has been just delivered in the Maharashtra case.
Accordingly, the appeals filed by the department are dismissed. [In favour of
assessee] – [CIT v. Chaphalkar Bros (2018) 400 ITR 279 : 300 CTR 113 : 252
Taxman 360 : (2017) 88 Taxmannn.com 178 (SC)]
Section
80IB(7A) of the Income Tax Act, 1961 read with rule 18DB, relates to deduction
available to multiplex owners.
Text of Rule 18DB of the Income Tax Rules, 1962
[1][18DB.
Prescribed area, facilities and amenities for multiplex theatres and
particulars of audit report, for deduction under sub-section (7A) and clause
(da) of sub-section (14) of section 80-IB.
(1) For the purpose of sub-section (7A) and clause (da) of sub-section
(14) of section 80-IB, the multiplex theatre shall have the following area,
facilities and amenities:-
(a) The total built-up area occupied by all the
cinema theatres comprised in the multiplex shall not be less than 22,500 square
feet, and shall consist at least 50% of the total built-up area of the
multiplex excluding the area specified for parking.
(b) The multiplex theatres shall be comprised of
at least three cinema theatres and at least three commercial shops.
(c) Total seating capacity of all the cinema
theatres comprised in the multiplex shall be at least 900 seats, and no cinema
theatre should consist of less than 100 seats.
(d) The total built-up area occupied by all the
commercial shops comprised in the multiplex theatre shall not be less than 3000
sq. ft., and the minimum built-up area of each shop shall not be less than 250
sq. ft.
(e) There shall be at least one lobby or foyer in
the cinema theatres, whose area shall be at least 3 sq. ft. per seat.
(f) The multiplex theatre shall have adequate
parking, toilet blocks and other public conveniences, as per local building or
cinema regulations, and shall also fulfil all local building or cinema
regulations in respect of fire and safety.
(g) The cinema theatres comprised in the
multiplex theatre shall use modern stereo projection systems with at least two
screen speakers per screen and one surround speaker per 25 seats in a theatre.
(h) The cinema theatres shall use seats with seat
pitch not less than 20" (centre to centre).
(i) Ticketing system employed by the cinema
theatres shall be fully computerised.
(j) The multiplex theatre cinema shall be
centrally air-conditioned.
Explanation. - For the purposes of this rule, the expression
"modern stereo projection systems" shall consist of xenon lamp,
platter and digital sound systems.
(2) A separate report of the audit, shall be furnished along with the
return of income in respect of each eligible multiplex theatre, in Form No.
10CCBA and shall be duly signed and verified by an accountant as defined in the
Explanation below sub-section (2) of section 288.
(3) In the first year of the claim of deduction, the assessee shall
enclose along with the audit report, a copy of approvals for exhibition of
cinema given by various State or local authorities, which shall, where
applicable, include the following :—
(a) no-objection certificate with respect to the
location of the multiplex by the concerned licensing authority;
(b) permission for construction of the multiplex
by the concerned licensing authority;
(c) permission to construct the building from the
town planning authority or municipal corporation;
(d) completion certificate or occupation
certificate, as the case may be, from the town planning authority or municipal
corporation, certifying the completion of the multiplex theatre, during the
period commencing on the 1st day of April, 2002 and ending on the 31st day of
March, 2005; and
(e) operating license issued by the concerned
licensing authority.
(4) After the first year of claim of deduction, in the subsequent four
years, the audit report shall be enclosed with the operating license issued
from time to time, by the concerned licensing authority for exhibition of
cinema.]
KEY NOTE
1.
Inserted by the Income Tax (Twenty-seventh Amendment) Rules, 2002, with
retrospective effect from 01.04.2002.
[18] Issues related to individuals artists
In Film industry,
professionals receive the income after deduction of tax. Most of the payments
are received from Recognised Production House and hence suppression of income
in audited books is not common. However, income from foreign tours,
participation in reality shows, endorsements and modelling may be understated
and even suppressed entirely. For “film artist”, the provisions of Section
44AA(3) read with rule 6F apply for the purposes of maintenance of books of
account. From the perspective of examination of books of account in these
individuals, the following issues deserve consideration:
(i) Method
of Revenue Recognition: In Film Industry most of the assessees prefer the Cash System
of Accounting. However, this method of accounting brings with itself some of
the most contentious disputes such as:
(a)
TDS Mismatch: Production houses follow mercantile system but assessee follow
cash system, which lead to TDS mismatch at the time of assessment and also at
the time of processing of the Return of Income.
(b)
Treatment of Advances: Many a times, the
assessee receives an advance from the producer. However, the project does not
commence till the yearend. This leads to the dispute as to whether the
recipient artist should treat the advance as income following the cash system
of accounting or whether it should be treated as an Advance in the Balance
Sheet and offer it as income when the corresponding services are rendered. In
one case, an actor had recognised revenue upon the release of the film. The
Assessing Officer held that once the services were rendered against such
advances, the same should be Recognised as income. The view of the Assessing
Officer was upheld by the Tribunal.
(ii)
Issue of Deemed Rental Income: It been
frequently seen in the Film Charge that most of the professionals invest
heavily in immovable properties and then take the plea that these properties
were being used for professional activities. The rental income being offered by
them is also not commensurate with the market rents.
(iii) Inflation of Expenses: In case
of movie artists, there is a thin line between professional and personal
expenses. In some instances personal expenses were claimed disguised as
professional expenses. In one case, the assessee had booked legal expenses
towards personal work under the head legal expenses. The same was examined and
added back by the Assessing Officer and the order was upheld by the Hon’ble
ITAT.
§ In another
such case, large travel expenses, not commensurate with the assignments of the
assessee, was claimed. Details of travels and corresponding assignments should
be called for in such cases.
§ In the
case of one reputed singer and producer, the details of foreign tour expenses
claimed was tallied with the details of foreign shows performed by the assessee
along with the dates of foreign shows. Once this data was tabulated by the
Assessing Officer, it was found that the expenditure booked were on dates which
were at variance with the dates of foreign shows. Consequent thereto, the claim
made was disallowed. This addition was subsequently confirmed by the ITAT.
§ In one
case, the actor had booked publicity expenses towards the movie in his books.
On scrutiny of the relevant contract it was seen that the promotion and
publicity of the movie was not the responsibility of the actor and as such he
was under no obligation to perform the same. The same was accordingly
disallowed and the said order was upheld by the Hon’ble ITAT.
[19] Foreign Incentives:
Many Indian
production houses shoot movies in foreign locations. By doing this, they
receive twin benefits of shooting in exotic locations and also receiving
subsidies from various governments. In this regard, the modus is to incorporate
a company abroad. The production of the movie occurs through this company and
the entire expenses are booked there. To this effect, the producer hires a
local line producer and makes payments to him. Finally, upon the completion of
the production, the Indian company purchases the movie from the foreign
company. At the end of the production, the company presents its complete
accounts to the respective foreign governments who grant the subsidy/incentive
as per their policies. In suitable cases, where the foreign incorporated
company is an AE, the AO/TPO may apply the TP provisions. In appropriate cases,
where the foreign company is not an AE, then the Assessing Officer may consider
making a reference to FTTR, CBDT as per the manual of exchange of information.
This incentive may be passed on to the Indian producer. The agreements between
the Indian Producers and the foreign company/ line producers should be
scrutinised in this regard.
[20] Miscellaneous Taxation Matters
In Mumbai, in one
particular case, it was observed that the assessee, which was engaged in the
business of renting of digital cameras to the Production Unit had claimed
depreciation at the rate of 60% thereupon on the reasoning that the cameras
were computer peripherals and without software, they were not workable. Thus,
depreciation was claimed at the rate admissible for computers. The Assessing
Officer repudiated this by demonstrating that a movie camera is used to take a
rapid sequence of photographs on an image sensor or on a film or digitally.
Although aided by computer and software, it is never a part of the computer
network itself. Moreover, a movie camera in no way helps and aids the computer
to carry out its logical, arithmetic and memory functions.
A similar issue came
up in the case of Cinetech Entertainment India (P)
Ltd. v. ITO wherein the Mumbai
Tribunal upheld the order of the Assessing Officer who rejected the claim of
higher depreciation on Film Projectors.
Film
projector cannot be said to be computer eligible for higher rate of
depreciation
The
assessee was engaged in the business of providing film projection services to
the theatres. The assessee claimed depreciation on film projector at a higher
rate treating it as ‘computer’. The Assessing Officer, however, allowed
depreciation on film projector at a lower rate holding that it was a part of
plant and machinery. The Commissioner (Appeals) upheld the order of Assessing
Officer. On second appeal:
Held
: Section 32 which grants depreciation allowance does not define the word
'computer'. However, the Special Bench of the Tribunal in the case of DCIT
v. Datacraft India Ltd. (2010) 40 SOT 295 (ITAT Mumbai) had the occasion to
consider the meaning of word 'computer' in detail.
From
the aforesaid order it is evident that just because some sort of computer
functions are necessarily involved, mechanical system cannot be said to be
computer unless its principal function cannot be done without the aid of
computer function. In other words, any machine or equipment cannot be described
as computer if its principal output or function is the result of some sort of
‘computer functions’ in conjunction with some non-computer functions. It was
held that in order to be called as computer, it is sine qua non that the
principal output/object/function of such machine could be achieved only through
‘computer functions’.
In
the present case, the concerned machine is a film projector. This is an optical
instrument for projecting an image upon a surface. It is a device that projects
a beam of light on to a screen for viewing a picture already programmed, fed
and input. Though some elements of computer functions are necessarily involved,
the projector cannot be said to be a machine whose principal
output/object/function is achieved only through computer function. Hence, the
film projector in this case cannot be said to be computer entitled for higher
rate of depreciation of 60 per cent applicable for computation. Accordingly,
there is no infirmity in the order of the authorities below. In the result,
this appeal filed by the assessee stands dismissed. [In favour of
revenue] (Related Assessment year : 2013-14) – [Cinetech Entertainment India (P) Ltd. v. ITO (2018) 169 ITD 218 : 90
Taxmannn.com 366 (ITAT Mumbai)]
Verification
of cash transactions
White
paper on black money issued by Ministry of Finance, Department of Revenue, CBDT
(May 2012) highlighted that the cash has always been a facilitator of black
money as transactions made in cash do not leave any audit trail. Given the
primary importance of cash in relation to generation and use of black money,
work needs to be done by way of legal curbs and regulations that can restrict
the generation and flow of black money within the economy.
As per
section 40A(3) of the Act, where the assessee incurs any expenditure in respect
of which a payment or aggregate of payments made to a person in a day,
otherwise than by an account payee cheque drawn on a bank or account payee bank
draft, or use of electronic clearing system through a bank account or through
such other electronic mode as may be prescribed, exceeds Rs. 10,000, no
deduction shall be allowed in respect of such expenditure..
Action point for Assessing Officer
Assessing Officer should obtain the
details from the assessee of the film rights purchasers, from whom the cash
payments were received by the assessee, to pass on the information to
jurisdictional Assessing Officers of purchaser. Not obtaining and sharing of
information by the Assessing Officer with the jurisdictional Assessing Officer
prevented verification of cash transactions and disallowance of the same
against the purchaser under section 40A(3) of the Act. Thus, the details of
persons making payment in cash needs to be shared with respective Assessing
Officer s to prevent possible leakage of revenue.
Abandoned Films: Deduction
of cost of production of films certified for release by the Board of Film
Censors is available as per Rule 9A. In case of films abandoned, a certificate
for release from the Board of Film Censors is not received. The CBDT has
clarified through Circular No. 16/ 2015 that cost of production of abandoned
films should be treated as a revenue expenditure and deduction allowed under
Section 37 of the Act.
Post-production Fees: At
times, Post Production work including VFX is outsourced to a foreign company
and the Indian film producer pays Post-Production fees to such foreign company.
The issue which arises in such cases is whether such Post-Production payments
amounts to “fees for technical services” under the relevant tax treaty/
domestic tax laws and, accordingly, trigger withholding tax applicability
(TDS). This would depend upon the specific services provided, documentation of
the same in the contract, and the relevant tax treaty provisions.
TDS Compliance:
It is important to
note that TDS deduction at the correct rate and its subsequent deposit is an
area of default with the film industry and the same must be carefully
scrutinised. This should be done on the facts of the individual agreement, the
Circulars of the Board and the extant interpretation of law by the Courts. The
correct applicability of either Section 194C or Section 194J of the Act on a
host of payments such as taking out final negatives of film, dubbing expenses,
print processing fee, hiring of equipment, labour and operators for production
purposes, payment for Post-Production professional services, including payments
made to overseas entities, etc., ought to be examined. For payments made to
overseas entities, the applicability of the DTAA and existence of a PE in India
may also be kept in mind.
Further, royalty
payments are subject to TDS provisions under the Act. Such payments are fairly
common in the film industry given the multiple deals relating to music rights,
distribution rights, overseas rights, satellite and video rights, etc. Thus, the
Assessing Officer may not consider the aforesaid from the angle of infringement
of Section 40(a)(ia) of the Act, but also consider communicating the default to
the Assessing Officer of the payer. Failure to do so has invited in the past,
audit objections involving large underassessment quantum.
Tax Evasion issues for Investigation
(i)
Producer:
The source of money for a new movie should always be deeply
scrutinized. There have been instances where the capital has been raised from
the tainted or dubious entities. The unsecured loan introduced in the Balance
Sheet of the producer should be the focus area for investigation.
§
The producer also makes certain inadmissible, illegal
expenses/payments in cash, mostly for approvals, outdoor shooting including
cash remuneration. This cash is generated by debiting bogus expenses in books.
Hence, to examine this issue, the production expenses should be carefully
scrutinized.
§
There have been instances where the singers were found to be in
receipt of unaccounted cash earned from private shows including marriage
functions. This cash to singers is generated by debiting bogus payments to
fictitious musicians (say, the payment was actually made to a troupe of 10
people, whereas, the vouchers were created for a troupe of 20 people).
§
Another mode of cash generation is to debit bogus marketing and
advertisement expenses in books. This practice is mostly prevalent in short
films or advertisement shoots companies, where they debit bogus advertisement
expenses and generate cash therefrom.
§
Producers are also found debiting production expenses as
nonproduction or overhead expenses. This is done as production expenses are
liable to be amortised, but by claiming certain expenses as nonproduction
expense the assessee deducts the entire expenditure in a single year.
§
It is necessary to scrutinise the basic documents which the Film
Production Unit uses for its daily activities to examine the expenses claimed.
Some of these basic documents are as under:
(a)
Continuity Report: It is prepared by the assistant
director which gives details of all the scenes actually shot. This report is
prepared with the purpose of preparing the next shot in continuation of earlier
shot. Therefore, all the minute details are mentioned in this report. On the
basis of this report, expenses related to setting expenses, location and
material used during the shooting can be verified.
(b)
Call Sheet: The daily call sheet is a filmmaking term for a sheet of paper
issued to the cast and crew of the film production, created by an assistant
director, informing them where and when they should report for a particular day
of shooting. The scrutiny of the call sheets may help in verifying the expenses
made by the producer towards junior artists and extras.
(c)
Budget Estimate: Every producer, before starting of a
movie, prepares an estimate of budget under each and every head of film making.
The producer, having indepth knowledge of the film industry and mindful of the
resources at his disposal, prepares a realistic headwise budget. Hence, the
budget estimate is very important to see and benchmark whether any expenditure
has been unduly inflated by the producer.
(ii) Distributor
§
In the case of the distributor, a common modus operandi is in
the form of raising of unsecured loans from his related concerns. Sometimes,
his own unaccounted money is routed through these entities or sometimes, the
distributor borrows cash from market, introduces it in the bank accounts of
relatives and then takes entry back from them as unsecured loans.
§
It is also a common practice of distributor making cash payments
to the exhibitors who own cinema theatres. This cash is generated by the
distributor by debiting bogus publicity expenses in its books. It is the
primary responsibility of the distributor to promote the movie through
advertisement and marketing. These publicity expenses are then to be shared
between distributors exhibitors and producers. Thus, the major chunk of
indirect expenses in the books of the distributor represents publicity expenses.
The distributor can suppress its income or can extract higher receipts from
producer/ exhibitor by debiting bogus publicity expenses in its books. Another
way of suppressing of income is by debiting bogus salary and travel expenses.
§
As soon as the movie is declared a hit, producers and
distributors bring in intermediaries to divert profit. A distributor acquires
world rights for a particular territory, then shows that he has raised finances
by selling those rights to sub distributors for a part of his territory. Such
sales offers scope for manipulation by way of bringing in unaccounted funds by
passing off profits of distribution to benami parties.
§
When a film flops, it is purchased on a minimum guarantee basis
by a distributor, who may have suffered losses in earlier years as well. To
help a near relative or sister concern having substantial income from their
other business including distribution of feature movies, the distribution
rights of the flop movie are transferred to relatives or sister concerns to
reduce their tax liability through setoff.
§
In cases of commercially successful movies, distribution rights
are passed on to a “Benamidar” or to a bankrupt dormant distributor. Such
distributors set off huge profits against previous preexisting losses on the
payment of small commission.
(iii) Exhibitor
§
A few exhibitors particularly that of Single Screen operators,
organise the sale of tickets in the black market with the help of their own
agents. This practice is prevalent particularly in small cities. In small and
medium towns, the exhibitors may underreport ticket sales or may not report
some shows altogether. Some single screen operators run 6 shows for selected
hit movies instead of usual 5 shows. The exhibitors then underreport the income
of the 6th show altogether. Another common trick employed by single screen
theatres is the addition of chairs in theatres over and above normal seating
capacity for which tickets are sold, sometimes at higher rates and not
accounted for.
§
There is also a tendency to understate the receipts from canteen
contractor, from sale of food and beverages inside the theatre as almost all
the receipts are in cash. Moreover, even the parking receipts collected by
contractors employed at the theatre are often underreported.
§
Instances have come to notice wherein the exhibitors have
resorted to debiting of bogus expenses by claiming fictitious commission for
procuring movies from distributors.
§
There are also instances where exhibitors had acquired
exhibition rights in obscure movies and paying disproportionate amount for its
exhibition thereby incurring losses just to reduce the profit during the year.
Obviously, the transaction for obtaining rights for such a movie is highly
doubtful and lacks commercial justification. The cash flows back to the
exhibitor from the seller of movie rights, who charges a commission for
arranging this transaction.
Some cross-border
taxation issues related to motion film industry
(i)
Tax Implications of Production of a film as a joint Venture between an
Indian & a Foreign Company:
An Association of Persons (‘AOP’) is taxable at the maximum rate
and payments to a member of AOP are not deductible in its hands. A member of an
AOP is, however, not again taxed in respect of its share. It may be noted that
after the amendment to Section 2(31) w.e.f. 01.04.2002, the objective of
producing income is no longer relevant to constitute an AOP and common business
purpose & common management are adequate. In the case of production of film
on a Joint Venture the underlying agreement needs to be examined carefully to
determine the correct assessment status as to whether an AOP has come into
existence or not.
(ii)
Indian Films Shot Overseas: It is common for Indian films to be
shot overseas (partly or fully). Typically, in such cases, the Indian producer
contracts with a line producer in the foreign country to assist with the
shooting and the film on payment of a fee. In certain case, a view has been
taken that such line producer fees amount to Fee for Technical Services and
taxes should be withheld accordingly. Thus, this aspect may be examined based
on the contractual terms (i.e. role/ responsibilities) agreed and documented
between the parties in the context of interpretation of law by the judicial
authorities
Verification
of transactions in respect of films shot abroad
For
shooting a feature film in foreign locations, Indian production houses hire the
services of foreign line production companies (line producers i.e. the resident
companies which are registered in that specific country). The pre and/or post
production expenses incurred by the foreign line producers are reimbursed by
the assessee (Indian production house) on the basis of the agreement entered
into between them and all the expenses reimbursed to the line producer are
being claimed as expenditure by the assessee in its profit and loss account.
Further, in most of the countries like United Kingdom (UK), Italy, Spain,
Australia, Mauritius etc. there is an incentive scheme run by the respective
Governments for film production houses with a view to promote tourism and
provide employment opportunities in their respective countries.
Tax
treaties signed under section 90 of the Act contain mechanism under the
‘exchange of information’ by virtue of which Assessing Officer can make request
to foreign jurisdiction for verification of production cost reimbursed by
Indian film producer to foreign line producers and quantum of
subsidies/incentives from foreign Government under section 90 of the Act.
The Assessing
Officers should also utilize the mechanism of ‘exchange of information’ under
section 90 of the Act with respect to the quantum and condition of the
incentive/subsidy received from foreign country.
Assessing
Officers should allow the claim made by the assessees against the production
cost reimbursed to the foreign line producers after making verification call
for the details of expenses on account of cost of production incurred by
foreign line producers under the mechanism for exchange of information in
section 90 of the Act. Also examine the claim made by the asseesses i.e.,
domestic producers. Thus, there remain no possibility of allowing
excess/irregular expenses.
(iii) Foreign Films Shot in India: The tax
implications should be evaluated for film producers/studios, actors (in front
of the camera) and crew (behind the camera). The following aspects needs to be
considered as per the obtaining facts and the prevailing legal view:
(a) Whether
the income of foreign producers is taxable in India in respect of operations
confined to shooting of a film in India for transmission out of India?
(b) Taxability
of foreign actors is covered under DTAA of tax treaties (Taxation of
entertainers and sportsperson). Income from personal services, as such,
performed in India should be taxable in India irrespective of whether or not
such actor is an employee. In case the performance income accrues not to the
actor but to another entity, such income may still be taxable in India. This is
an anti avoidance measure included in tax treaties.
(c) Foreign
crew would include all technicians. Taxability of their income should be
evaluated based on applicable criteria such as the nature of services rendered,
the legal form of entity, presence/ period of stay in India, relevant tax
treaty provisions
Variation in
treatment of cost of production paid to foreign line producer
Section
9(1)(vii) of the Act provides that income by way of fees for technical services
payable by a person who is a resident, outside India or for the purpose of
making or earning any income from any source outside India, shall be deemed to
accrue or arise in India. Further, as per explanation 2 to Section 9(1)(vii) of
the Act, ‘fees for technical services’ means any consideration (including any
lump sum consideration) for the rendering of any managerial, technical or
consultancy services.
In
Maharashtra, in the case of M/s Endemol South Africa (Proprietary) Ltd. (ESAL)
for Assessment year 2012-13, the Assessing Officer of International Taxation
had concluded that the line producer fee of Rs. 9.60 crore paid by the Indian
producer was of the nature of technical services for managerial and technical
services provided for the production and not in the nature of administrative
charges. On this ground, the AO had rejected the assessee’s claim of refund
stating that withholding of tax @ 10 per cent by the Indian producer while
making payment to ESAL was proper. This view was also sustained by the Dispute
Resolution Panel (DRP) considering such payment to line producer as fees for
technical services.
Verification
of transactions of inter-related parties and revenues earned by movie producers
The film
industry consists of the technological and commercial institutions of
filmmaking, artists and allied service providers. Considering the involvement
of multiple parties in making the movies, it is important that the information
furnished by an assessee is utilized to cross-verify the correctness of the
information given by another assessees having transactions with the former
(related party) to avoid the evasion of tax. Further, when different accounting
methods are adopted by the inter-related parties of film industry, then
comprehensive verification of the transactions is required to safeguard the
interest of revenue.
In film
industry, a producer is the key person who makes the profit from sale of
various rights (distribution rights, satellite rights, music rights,
sponsorship revenue etc.) of film produced by him. The receipts of the producer
mainly come from the distributors. The producer sells the distribution rights
broadly in three ways – (i) Minimum guarantee basis (ii) Outright lease and
(iii) Advance and commission clause lease which relates to overflow. Out of
these, under the third arrangement, if the earnings of film exceed the
specified limit, the surplus receipt (called ‘overflow’) is shared by the
distributor and the producer according to the ratio specified in the agreement
between them.
Verification
is to be made where the assessees had furnished the gross amount from sale of
film rights, however, no details were provided by the assessees whether the
income offered was on account of minimum guarantee or was from overflow of
revenue or whether the income was inclusive of overflow.
Verification
of transactions of inter-related parties and revenues earned by movie producers
The film
industry consists of the technological and commercial institutions of
filmmaking, artists and allied service providers. Considering the involvement
of multiple parties in making the movies, it is important that the information
furnished by an assessee is utilized to cross-verify the correctness of the
information given by another assessees having transactions with the former
(related party) to avoid the evasion of tax. Further, when different accounting
methods are adopted by the inter-related parties of film industry, then
comprehensive verification of the transactions is required to safeguard the
interest of revenue.
In film
industry, a producer is the key person who makes the profit from sale of
various rights (distribution rights, satellite rights, music rights,
sponsorship revenue etc.) of film produced by him. The receipts of the producer
mainly come from the distributors. The producer sells the distribution rights
broadly in three ways – (i) Minimum guarantee basis (ii) Outright lease and
(iii) Advance and commission clause lease which relates to overflow. Out of
these, under the third arrangement, if the earnings of film exceed the
specified limit, the surplus receipt (called ‘overflow’) is shared by the
distributor and the producer according to the ratio specified in the agreement
between them.
Verification
is to be made where the assessees had furnished the gross amount from sale of
film rights, however, no details were provided by the assessees whether the
income offered was on account of minimum guarantee or was from overflow of
revenue or whether the income was inclusive of overflow ?.
Justify in making additions to the income of assessees on ad hoc
basis
While
making additions to the income of assessees on ad hoc basis, Assessing Officers
are adopting different approaches in respect of disallowance although the
grounds of the additions are same. It is found that there is no uniformity in
making additions to the income of assessees on ad hoc basis in the assessment
orders. These additions were largely made on percentage basis ranging from five
per cent to 20 per cent on ad hoc basis for varied reasons such as ‘want of
vouchers’, unsubstantiated expenses, absence of third party vouchers etc.
However, no specific justification or the basis of additions was recorded in
the assessment orders by the Assessing Officers for the differential treatment
even though the grounds of addition were same.
This
indicates that there is no consistency in making ad hoc additions by the
Assessing Officers despite the fact that the grounds of additions were same and
in some cases even the Assessing Officers were same. No speaking orders were
made by Assessing Officers in their assessment orders to logically arrive at
the different percentage of additions especially in similar issues. Further,
where significant expenses were incurred, the ratio of ad hoc addition was one
per cent to 2.5 per cent as compared to ad hoc addition ranging from five per
cent to 50 per cent in lesser expenses claimed by assessees. Thus, assessments
made by Assessing Officers were inadequate and additions made were subjective
and arbitrary.
Assessing
Officer should make ad-hoc additions only after going into details and called
for supporting documents Assesses also cannot claim expenses without showing
commercial expediency. Expenses will not be allowed merely because bills are
there and payment has been made by Bank Account. Record specific justification
or the basis of additions in the assessment orders for the differential
treatment even though the grounds of addition were same.
Coordination
with Central Board of Film Certification
Films are
being certified by Central Board of Film Certification (CBFC), and there is
existence of exclusive film circle and film ward in four states, the Assessing
Officer is to verify the Form 52A (Every person carrying on production of
cinematograph film is required to furnish to the jurisdictional Assessing
Officer a statement in Form 52A providing particulars of all payments of over
Rs. 50,000) received vis-Ã -vis CBFC data of films certified. In the absence of
such cross verification, the Assessing Officer is not in a position to
ascertain about number of forms 52A required to be filed by the assessees.
Coordination with other State/Central Government Departments
According
to section 131(1) of the Income Tax Act, 1961 (Act), Assessing Officers shall,
for the purposes of this Act, have the same powers as are vested in a court
under the Code of Civil Procedure, 1908, including, inter alia, “compelling the
production of books of account and other documents”. Further, ITD Manual of
Office Procedure prescribed by CBDT (Para 9 – Chapter 4 of ITD MOP – Vol. III;
Para 34.2.2. under Chapter 9 of Vol. II) entrusts Income Tax Department with
the responsibility to liaise with other Government departments and agencies
like Enforcement Directorate, Central Board of Indirect Taxes & Customs,
Central Economic Intelligence Bureau, State GST Departments, District
Administration, Government agencies dealing with economic offences and police
authorities to enable income-tax authorities to get hold of vital information
on assessees, both existing as well as potential. So the information of the
assessee available with other departments should effectively utilized by
Assessing Officers while completing assessment, thereby leaving no scope of
leakage of revenue.
Coordination
with State Governments
Entertainment
tax, now subsumed in Goods and Services Tax (GST), could be obtained and
utilized by the Assessing Officer to verify the income offered through the
chain of producers upto the level of exhibitors on the sale of movie tickets
that was collected by the State Governments. Thus, box office collection could
be selected to cross verify the actual receipts shown in the books of the
assesses with respect to those shown for the purpose of entertainment tax.
Coordination
with Registrar of Copyrights
As per
section 33 to 35 of Copyright (Amended) Act, 2012 (Copyright Act is formulated
by Ministry of Commerce and Industry), the copyright society has to register
itself with the Registrar of Copyrights afresh after a period of five years.
Further, the renewal is subject to continued collective control of the
copyright society being shared with the authors of works in their capacity as
owners of copyright or of the right to receive royalty.
Assessing
Officer is required to whether fresh registration is taken by the assesse, if
not, thus violating the provisions of Copyright (Amended) Act, 2012. The
Assessing Officer also co-ordinate with the Registrar of Copyrights and taken
action in the case, so that undue benefit availed by the assessee can be prevented
and loss to exchequer avoided.
Text of
Section 80HHF
[1][80HHF. Deduction in
respect of profits and gains from export or transfer of film software, etc.
(1) Where
an assessee, being an Indian company [2][or a person (other than a company)
resident in India], is engaged in the business of export or transfer by any
means out of India, of any film software, television software, music software,
television news software, including telecast rights (hereafter in this section
referred to as the software or software rights), there shall, in accordance
with and subject to the provisions of this section, be allowed, in computing
the total income of the assessee, [3][a deduction to the extent of profits,
referred to in sub-section (1A),] derived by the assessee from such
business.
[4][(1A) For the purposes of sub-section
(1), the extent of deduction of profits shall be an amount equal to -
(i) eighty per cent of such profits for an
assessment year beginning on the 1st day of April, 2001;
[5][(ii) seventy
per cent thereof for an assessment year beginning on the 1st day of April,
2002;
(iii) fifty per cent thereof for an assessment year
beginning on the 1st day of April, 2003;
(iv) thirty per cent thereof for an assessment year
beginning on the 1st day of April, 2004,]
and no
deduction shall be allowed in respect of the assessment year beginning on the
1st day of April, 2005 and any subsequent assessment year.]
KEY NOTE
1. Inserted by the
Finance Act, 1999, with effect from 01.04.2000.
2. Inserted by the
Finance Act, 2000, with effect from 01.04.2000.
3. Substituted for
"a deduction of the profits" by the Finance Act, 2000, with effect
from 01.04.2001.
4. Inserted by the
Finance Act, 2000, with effect from 01.04.2001.
5. Substituted by the
Finance Act, 2001, with effect from 01.04.2002.
CBDT Instructions/ Circulars related to Entertainment Sector
Press
Information Bureau, Government of India, Ministry of Finance – Dated 08.03.2016
Issue of
clarification on contentious TDS issues on payments made by Television
channels, Broadcasters and Newspapers
With a view to bring
about clarity in the interpretation of certain contentious issues relating to
Tax Deduction at Source (TDS) on payments made by television channels,
broadcasters and newspapers, Central Board of Direct Taxes has issued two
Circulars.
Circular No.4/2016
dated 29.02.2016 deals with TDS on payments by broadcasters or television
channels to production houses for production of content or programme for
telecasting. It has been clarified in the Circular that in a situation where
the content/programme is produced as per the specifications provided by the
broadcaster/telecaster and the copyright of the content/ programme also gets
transferred to the telecaster/broadcaster, such contract is covered by the
definition of the term ‘work’ in section 194C of the Income-tax Act and,
therefore, subject to TDS under section 194C at 2%, rather than at a rate of 10% under section
194J as payment for ‘professional or technical services’.
Circular No.5/2016
dated 29.02.2016 deals with TDS on payments by television channels and
publishing houses to advertisement companies for procuring or canvassing for
advertisements. It has been clarified through the Circular that no TDS is
attracted on payments made by television channels/newspaper companies to the
advertising agency for booking or procuring of or canvassing for
advertisements. This clarification puts at rest the litigious issue as to
whether such payments/discounts are in the nature of ‘commission’ and so,
subject to TDS at the rate of 10% under section 194H.
CBDT Circular
No. 05/2016, Dated 29.02.2016
Subject : Tax Deduction at Source (TDS) on payments by
television channels and publishing houses to advertisement companies for
procuring or canvassing for advertisements.
The issue of
applicability of TDS provisions on payments made by television channels or
media houses publishing newspapers or magazines to advertising agencies for
procuring and canvassing for advertisements has been examined by the Board in
view of representations received in this regard.
2. It is noted that
there are two types of payments involved in the advertising business:
(i) Payment by client to the advertising agency,
and
(ii)
Payment by advertising agency to the television channel/ newspaper company
The applicability of
TDS on these payments has already been dealt with in Circular No. 715 dated 08.08.1995,
where it has been clarified in Questions No. 1 & 2 that while TDS under
section 194C (as work contract) will be applicable on the first type of
payment, there will be no TDS under section 194C on the second type of payment
e.g. payment by advertising agency to the media company.
3. However, another
issue has been raised in various cases as to whether the fees! charges taken or
retained by advertising companies from media companies for canvasing! booking
advertisements (typically 15% of the billing) is ‘commission’ or ‘discount’ .
It has been argued by the assessees that since the relationship between the
media company and the advertising company is on a principal-to-principal basis,
such payments are in the nature of trade discount and not commission and,
therefore, outside the purview of TDS under section 194H. The Department, on
the other hand, has taken the stand in some cases that since the advertising
agencies act on behalf of the media companies for procuring advertisements, the
margin retained by the former amounts to constructive payment of commission
and, accordingly, TDS under section 194H is attracted.
4. The issue has been
examined by the Allahabad High Court in the case of Jagran Prakashan Ltd. and
Delhi High Court in the matter of Living Media Limited and it was held in both
the cases that the relationship between the media company and the advertising
agency is that of a ‘principal to principal’ and, therefore, not liable for TDS
under section 194H. The SLPs filed by the Department in the matter of Living
Media Ltd. and Jagran Prakashan Ltd have been dismissed by the Supreme Court
vide order dated 11.12.2009 and order dated 05.05.2014, respectively. Though
these decisions are in respect of print media, the ratio is also applicable to
electronic medial television advertising as the broad nature of the activities
involved is similar.
5. In view of above,
it is hereby clarified that no TDS is applicable on payments made by television
channels! newspaper companies to the advertising agency for booking or
procuring of or canvassing for advertisements. It is also further clarified
that 'commission' referred to in Question No. 27 of the Board's Circular No.
715 dated 08.08.1995 does not refer to payments by media companies to
advertising companies for booking of advertisements but to payments for
engagement of models, artists, photographers, sports persons, etc. and,
therefore, is not relevant to the issue of TDS referred to in this Circular.
CBDT Circular No. 4/2016 dated 29.02.2016
CBDT Circular No. 4/2016 dated 29.02.2016 deals with TDS on
payments by broadcasters or television channels to production houses for
production of content or programme for telecasting. It has been clarified in
the Circular that in a situation where the content/programme is produced as per
the specifications provided by the broadcaster/telecaster and the copyright of
the content/ programme also gets transferred to the telecaster/broadcaster,
such contract is covered by the definition of the term ‘work’ in section 194C
of the Income-tax Act and, therefore, subject to TDS under section 194C at 2%,
rather than at a rate of 10% under section 194J as payment for ‘professional or
technical services’.
CBDT has
clarified that while applying the relevant provision of TDS on a contract for
content production, a distinction is required to be made between (i) a payment
for production of content/programme as per the specifications of the
broadcaster/ telecaster and (ii) a payment for acquisition telecasting rights
of the content already produced by the production house. The first condition
would be covered under the provision of Section 194C whereas the payments of
second nature would fall under other TDS provisions of Chapter XVII B of the
Act
CBDT Circular No. 16 of 2015, Dated 06.10.2015
Subject:- Non-applicability
of rule 9A of the Income-tax Rules 1962 in the case of Abandoned Feature Films-
The deduction in respect of the cost of production of a feature film
certified for release by the Board of Film Censors in a previous year is
provided in rule 9A of Income-tax Rules, 1962.
2. In the case of abandoned films, however, since certificate of Board
of Film Censors is not received, in some cases no deduction was allowed by
applying rule 9A of the Rules or by treating the expenditure as capital
expenditure.
3. The matter has been examined in light of judicial decisions on this
subject. The order of the Hon. Bombay High Court in the case of CIT v. Venus
Records and Tapes (P) Ltd. (2016) 66 taxmann.com 89 (Bom.) on this
issue has been accepted and the aforesaid disputed issue has not been further
contested. Consequently, it is clarified that rule 9A does not apply to
abandoned feature films and that the expenditure incurred on such abandoned
feature films is not to be treated as a capital expenditure. The cost of
production of an abandoned feature film, is to be treated as revenue
expenditure and allowed as per the provisions of Section 37 of the Income-tax
Act.
4. Being a settled issue, no appeals may henceforth be filed on this
ground by the officers of the Department and appeals already filed, if any,
already filed on this issue before various Courts/Tribunals may be
withdrawn/not pressed upon. This may be brought to the notice of all Officers
concerned.
CBDT Circular No. 736, dated 13.02.1996
Subject :
Clarification regarding applicability of provisions of section 194-I to film
distributors and exhibitors
Representations have been received from the various quarters regarding
applicability of the provisions of section 194-I of the Income-tax Act to the
sharing of the proceedings of film between film distributor and a film
exhibitor owning a cinema theatre. The matter has been examined by the Board
and the Board are of the view that the provisions of section 194-I are
not attracted to such payment because :
(i) The
exhibitor does not let out the cinema hall to the distributor;
(ii) Generally,
the share of the exhibitor is on account of composite services; and
(iii) The
distributor does not take cinema building on lease or sub-lease or tenancy or
under any agreement of similar nature.
You are requested to bring these instructions to the notice of the
Assessing Officer under your charge.
CBDT Circular No. 675, Dated 03.01.1994
Subject : Whether person,
who receives payment for film which has been produced, directed or scripted by
him, would be entitled to deduction under section 80RR
1. Section 80RR of the Income-tax Act, 1961 provides that an
individual resident in India, being an author, playwright, artist, musician,
actor or sportsman (including an athlete) who derives income in exercise of his
profession from the Government of a foreign State or any person not resident in
India shall be entitled to a deduction from his income of (i) 50%
of such income, or (ii) 75% of such income as is brought into
India in accordance with the Foreign Exchange Regulation Act, 1973 and rules
made thereunder, whichever is higher.
2. By Circular No. 3l, dated 25.10.1969 the Board
clarified that photographers and TV cameramen can be regarded as artists for
the purposes of section 80RR of the Act. A question has been raised whether a
person, who receives payment for a film which has been produced, directed or
scripted by him, would be entitled to deduction under section 80RR of the Act.
The Board has examined the matter and is of the view that a script
writer can be regarded as “playwright” and similarly “director” can be treated
as an ‘artist’ for the purposes of section 80RR of the Act. However, a producer
would not be entitled to deduction under section 80RR of the Act, because he
does not fall under any of the categories mentioned in the said section.
CBDT Circular No. 544, dated 15.09.1989 [Amend Circular No. 541, dated
25.07.1989] 15.09.1989]
Subject : Rule
9A of the Income-tax Rules, 1962 - Whether subsidy received by producers of
regional feature films, which has not been charged to tax, shall not be reduced
from cost of production of the film
1. The Board has received representations against the
taxation of the subsidy granted by the State Governments to producers of
feature films in regional languages.
2. The income-tax authorities have been treating the
subsidy as revenue receipt incidental to the carrying on of the business of
film production and have been charging it to tax. Different Benches of the
Income-tax Appellate Tribunal are divided on this issue. The Andhra Pradesh
High Court, in the case of CIT v. Chitra Kalpa (1989) 177 ITR 540
held that the subsidy has the character of a capital receipt.
3. With a view to avoiding controversy and litigation
in the matter, the Board has decided that such subsidy received by
producers of regional feature films should not be charged to tax as revenue
receipt.
4. In this connection, it may, however, be pointed out
that the Explanation to sub-rule (1) of rule 9A of the
Income-tax Rules, 1962, as amended by the Income-tax (Seventh Amendment) Rules,
1989 with effect from 7th July, 1989, provides, inter alia, that
the cost of production of a feature film shall be reduced by the subsidy
received by the film producer under any scheme framed by Government, where such
amount of subsidy has not been included in computing the total income of the
assessee for any assessment year. Conversely the amount received by producers
of regional feature films, which has not been charged to tax, shall be reduced
from the cost of production of the film for the purpose of rule 9A of the
Income-tax Rules, 1962.
5. The aforesaid amendment which has come into
force with effect from 7th July, 1989 will apply in relation to the assessment
year 1990-91 and subsequent assessment years. Similarly, the concession
provided under paragraph 3 of this Circular, which is intimately linked with
the amendment of the aforesaid rule 9A, will also apply in relation to the
assessment year 1990-91 and subsequent years.
CBDT Instruction No. 1727, dated 22.08.1986
Subject : Section 285B of the Income-tax
Act, 1961 - Film Producers - Submission of statement by - Statements should
contain all payments exceeding Rs. 5,000, and not merely such payments to
employees and professionals
1. Section 285B of
the Income-tax Act, 1961 provides that any person carrying on the production of
a cinematograph film during the whole or any part of any financial year shall,
in respect of the period during which such production is carried out by him in
such financial year, prepare and deliver to the Income-tax Officer, within
thirty days from the end of such financial year or within thirty days from the
date of the completion of the production of the film, whichever is earlier, a
statement in the prescribed form containing particulars of all payments of over
five thousand rupees in the aggregate made by him or due from him to each such
person as is engaged by him in such production as employee or otherwise. This
statement should be filed in Form 52A.
2. A person, who
without reasonable cause or excuse, fails to furnish in due time the statement
mentioned in section 285B becomes liable for imposition of a penalty under
section 272A(2) of the Income-tax Act, 1961. The quantum of penalty may extend
to Rs. 10 (Rs. ten only) for every day during which the failure continues.
3 & 4.** ** **
5. It has come to the
notice of the Board that perhaps some film producers have construed the
provisions of section 285B in a very restrictive manner with the result that in
some statements furnished in Form No. 52A only payments made to employees or
other engaged to render professional service were shown. This interpretation is
totally erroneous as under section 285B, a statement in Form No. 52A is to be
furnished in respect of all payments of over five thousand rupees in the
aggregate made by the film producer or due from him to each such person as is
engaged by him in film production as employee or otherwise and not merely in
respect of employees or others engaged to render professional services. The
Assessing Officer should keep this aspect in view while examining the accuracy
and correctness of the information furnished in Form No. 52A by film producers.
Effective checks should invariably be made in cases which the payments shown in
Form 52A form a small percentage of the total cost of the production of a film.
6.** ** **
7. All such cases
where Form No. 52A should have been filed by the film producers and has not
been filed should be reviewed with a view to imposing penalties under section
272A(2). Feasibility of launching prosecution under section 277 of the
Income-tax Act, 1961 should be examined in all cases where it is found that the
statement given in Form No. 52A was false.
Some
Important Case Laws Related Entertainment Sector
Assessee,
engaged in business of cinema photographic films, claimed service charges
paid to a marketing company related to a film which was subsequently
abandoned and never released, entire expenditure incurred on said project,
including service charges were business loss and were to be allowed as such
Section 28(i) of the
Income-tax Act, 1961 - Business loss/deductions - Allowable as (Abandoned
project) - Assessee-company, engaged in business of cinema photographic films,
claimed expenses with respect to service charges towards marketing services. Assessing
Officer opined that service charges paid by assessee were related to a film
which was still under production. He thus, added said charges as work in
progress in film project and disallowed claim of assessee. Commissioner
(Appeals) held that since assessee’s film did not certify for release, said
expenses could not be allowed. Since film was subsequently abandoned and never
released, entire expenditure incurred on said project, including service
charges were business loss and were to be allowed as such. [In favour of assessee] (Related Assessment year :
2013-14) – [Steller Films (P.) Ltd. v. ACIT (2022) 145 taxmann.com 253 (ITAT
Mumbai)]
Assessee,
engaged in business of cinema photographic films, claimed interest
expenditure with respect to borrowed funds, since said project was eventually
abandoned and film was never released, interest expense being
incurred wholly and exclusively for business purpose was to be allowed as
deduction
Section
37(1) of the Income-tax Act, 1961, read with rule 9A of the Income-tax Rules,
1962 - Business expenditure - Allowability of (Abandoned project) -
Assessee-company, engaged in business of cinema photographic films, claimed
interest expenses with respect to borrowed funds. Revenue was of view that said
borrowed funds were used for film production and film was not released during
year and as such expenses is were capital in nature. Since said project was
eventually an abandoned project and film was never released, very basis of
disallowance ceased to hold good in law and interest expense being incurred
wholly and exclusively for business purpose was to be allowed as deduction. [In favour of assessee] (Related Assessment year :
2013-14) – [Steller Films (P.) Ltd. v. ACIT (2022) 145 taxmann.com 253 (ITAT
Mumbai)]
Assessee
had entered into agreements with third parties for conferring distribution
rights of films for consideration and search conducted at premises of assessee
revealed that assessee had not disclosed entire amounts received under
agreements for assessment and assessee claimed that it did not receive entire
amount as part of it had been waived as movie failed at box office, however,
Tribunal on examination of ledger accounts seized during search, had come to a
definite conclusion that assessee had already received entire amount from
distributors much before release of film, addition of balance amount as
undisclosed income under section 158BC was justified
Undisclosed
income of any other person (Scope of ) - Assessee was a partnership firm
engaged in production of feature films. Assessee, entered into three agreements
with third parties for conferring on them distribution rights of film ‘Love
Birds’. Search was conducted in business and residential premises of assessee
and on basis of search report, proceedings under section 158BC read with
section 158BD were initiated against assessee firm and they were called upon to
file their return for block period in question. It was noticed that part of
amounts derived from agreements were shown for regular assessment, and in
respect of balance amounts not received as per agreements, it was not shown and
offered for assessment - Assessing Officer noticed that balance amount was not
offered for tax and hence he was of view that it was an undisclosed income for
block period. Assessee stated that it did not receive balance amount as it had
been waived as movie failed at box office and hence, it should not be treated
as a concealed income and it did not warrant initiation of proceedings under
section 158BC read with section 158BD. However, agreements that had been
entered into by assessee with distributors clearly indicated that same had
nothing to do with flop of film at box office or otherwise. Moreover, Tribunal
on examination of ledger accounts seized during search had come to a definite
conclusion that assessee had already received entire amount from distributors
much before release of film and therefore question of waiver would not arise.
Therefore, Tribunal rightly confirmed addition of balance amount as undisclosed
income assessable under section 158BC. [In favour of revenue] (Block period 01.04.1987 to 17.03.1997) – [Pyramid
Films International v. DCIT (2022) 137 taxmann.com 413 (Mad.)]
Allows choreographer Farah Khan proportionate depreciation, interest, operating expenses for residence-cum-office
Assessee-Individual is a popular film director and choreographer, filed
her return declaring an income of Rs. 99.19 lacs for Assessment year 2013-14.
The Assessee was owner of 6 flats in a building at Andheri-Lokhandwala, Mumbai,
and all the units were stated to be held as office-cum-residence of the
Assessee. It was submitted that Assessee used a specified part as her office
and the remaining part was being used as her residence. For the part used as
her office, she claimed an aggregate deduction of Rs. 1.55 Cr. for: (i)
Interest on Loan (ii) Depreciation on property used as office (iii)
Depreciation on Furniture & Fixtures (iv) Society Charges (v) Electricity
Charges, under the relevant provisions of section 36(1)(iii), 32 and 37(1). The
expenses were claimed deductible on the plea that half of the premises were
used as Assessee’s office while the remaining half was used as residence. The
area of office and residence was stated to be clearly demarcated and having an
office next door to Assessee’s residence, would provide her comfort of not
having to be in public spaces except where necessary. During the course of
assessment proceedings, the Assessing Officer called
for details of the above expenditure in specified formats and contending
absence of any satisfactory explanation from the Assessee and holding that
Assessee was unable to produce any documentary evidence to substantiate that
the premises were being used as office, disallowed the claim of Rs. 1.55 Cr.
and added it to her income.
On appeal with the CIT(A), he observed that the Assessee was a
well-known choreographer and earning significant income from professional
activities and earning of such huge professional income would not be possible
without any specified business place. The CIT(A) deleted the disallowance
relying on the Bombay High Court ruling in CIT v. Western
Outdoor Interactive (P) Ltd. (2012) 349 ITR 309 : [TS-614-HC-2012(BOMBAY)-O]
(Bom.) wherein it was held that “when the benefit / deduction is
available for a particular number of years on satisfaction of certain
conditions and under the provisions of the Act, then without withdrawing or
setting aside the relief granted for the first Assessment year in which claim
was made and accepted, the Assessing Officer cannot withdraw the relief for
subsequent assessment years”
Mumbai ITAT allows Assessee’s (Farah Khan,
Choreographer) claim of Rs. 1.55 Cr. for depreciation, interest on
loan and society maintenance & electricity expenses on part of the
residential units used for professional purposes; Assessee, an owner of 6
flats in Mumbai, demonstrated that a specified part of the residential
property was being used as her workplace, while remaining part as her
residence to justify the claim of expenditure against her business income
of Rs. 99.19 Lacs for Assessment year 2013-14 which was disallowed by
Revenue; On appeal, the CIT(A) deleted the additions holding
that for a professional choreographer, earning such huge professional
income would not be possible without any specified business place, and noted
that claim was allowed in earlier years; ITAT observes that Assessee
being an artist would require creative space for professional
engagements, and that for the year under consideration she did
not use any other space for her
work; Further, observes that the 6 units were acquired
by the Assessee, the relevant details of which were
verified by the Revenue; ITAT remarks that the depreciation on
the block of assets has been allowed to the Assessee in earlier
years, the same could not be denied in this year since individual assets have
lost their specific identity; With regards to the interest on loan,
ITAT holds that interest paid on loan has been bifurcated between
residential portion and office portion and interest paid relating to office
portion has been claimed as deduction under section 36(1); Applies
the rule of consistency for allowing society maintenance and electricity
expenditure under section 37(1) as the were allowed in the earlier
years. [In favour of assessee] (Related Assessment year : 2013-14) – [ACIT
v. Farah Khan [TS-649-ITAT-2021(Mum)] – Date of Judgement
: 29.07.2021 (ITAT Mumbai)]
Movie distributor’s ‘minimum guarantee royalty’
payment not Royalty under section 9(1)(vi); No TDS liability thereon
Delhi ITAT
holds 'minimum guarantee royalty' paid by a distributor for acquiring the
exhibition rights of a movie, not in the nature royalty under section 9(1)(vi)
and hence, do not attract the provisions of TDS under section 194J; Refers to
the Explanation 2 to Section 9(1)(vi) defining the term Royalty and observes
that sale, distribution or exhibition of cinematographic films are excluded in
the definition; Noting that the copyrights are always with the producer and the
distributor is only given the right for exhibition of cinematographic films,
states that the Assessing Officer wrongly held that what the assessee purchased
is copyrights and hence liable to TDS; Further explains that the minimum
guarantee amount 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
and accordingly concludes that the payments made by the assessee do not fall
under the term Royalty” and do not attract the provisions of TDS.” [In favour
of assessee] (Related Assessment year : 2011-12) – [ITO v. Sh. Yashovardhan
Tyagi [TS-250-ITAT-2020(DEL)] (ITAT Delhi)]
Allows expenditure on exhibition of movies through audio and TV under rule 9A(3)(c)
ITAT allows assessee's appeal against disallowance of expenditure to a
film distributor on exhibition of films via audio and TV; Holds that rule
9A(3)(c) covers modern media like TV, OTT, and audio within the ambit of
'areas'; States 'In our considered view, the primary importance should be given
to the expression 'exhibition of film on a commercial basis''; Applies Supreme Court ruling in Laxmi Video Theatres where
expenditure incurred in exhibition of films via VCR/VCP was held allowable;
Follows ruling of co-ordinate bench in Vishesh Films that dealt with the
taxability of proceeds from sale of TV rights was held against the assessee.
Assessee is engaged in the business of production of feature films.
Assessee himself exhibited film on commercial basis in certain areas and also
sold audio and TV rights of the film and incurred an expenditure of Rs. 14.94
crores. The assessee computed his income from business as per Rule 9A(3)(c).
The assessee set off the production expenditure against gross receipts of
Rs.11.15 crores and carried forward the remaining unclaimed expenditure of Rs.
3.79 crores to the next year. Revenue held that the receipt by way of sale of
audio rights and TV rights does not fall under the category of 'receipts from
exhibition of films' prescribed under Rule 9A and disallowed the expenditure of
Rs. 5.75 crores. CIT(A) confirmed the assessment order. Aggrieved assessee
preferred an appeal before ITAT and .
Key Observations:
1. ITAT notes that the assessee has received a sum of
Rs.15.00 lakhs on sale of audio rights and Rs.5.60 crores on sale of TV rights
of the same film and finds that the question that arises was whether these two
receipts fall under the category of amount realised on exhibition of
film on a commercial basis”.
2. ITAT observes that the film was released on 13.01.2014 on a
commercial basis and the period of release was less than 90 days and hence, the
income has to be computed as per Rule 9A(3)(c).
3. ITAT further notes that the tax authorities have given
importance to the word areas” occurring in Rule 9A and accordingly, they have
taken the view that the amount realised on exhibition of film on a commercial
basis would cover only theatrical release made in various areas.
4. ITAT refers to the Supreme Court ruling in Laxmi video Theatres
and Others, where the Supreme Court upholds the order of the High Court
that VCR/VCP are within the ambit of the definition of 'cinematograph'
contained in Section 2(a) and the appellants in order to carry on the business
of running video parlours/or showing pre-recorded cassettes of films through
the medium of VCR/VCP must obtain a license.”
5. ITAT states, 'In the past, the only way of exhibition of
commercial films was through theatrical release of films only...but in the
present modern society, it is possible for the producer of film to release
through theatres, through TV channels and also through OTT platform. Hence,
under the changing circumstances, it would not be appropriate to give literal
meaning to Rule 9A(3)(c). ITAT further states that the main thrust should be on
exhibition of film on a commercial basis”.
6. ITAT holds that the audio matter cannot be viewed separately
distinct from the feature film, since it is intricately connected with the
feature film.
7. ITAT relies on the Mumbai ITAT ruling in Vieshesh Films (P)
Ltd., where it was held that the mode of exhibition has not been prescribed in
Rule 9A and hence exhibition of films in TV channels also would fall under Rule
9A.
8. ITAT concludes that the amount realised by the
assessee on sale of audio rights and TV rights of the film would fall under the
category of exhibition of films on a commercial basis” and directs the
Assessing Officer to allow deduction of expenditure incurred on production.–
[In favour of assessee] (Related Assessment year : 2014-15) – [Shri Vijaykumar
Thimmegowda v. ITO [TS-575-ITAT-2020(Bang)] – Date of Judgement
: 02.11.2020 (ITAT Bangalore)]
NOTE
As per Rule 9A(3)(c) provides for deduction to the film producer
when he exhibits the film on a commercial basis in certain areas and sells the
rights of exhibition of the film in respect of all or some of the remaining areas and
the film is not released for exhibition on a commercial basis at least ninety
days before the end of such previous year, the cost of production of the film
in so far as it does not exceed the amount realised by the film producer by
exhibiting the film on a commercial basis or the amount for which the rights of
exhibition are sold or, as the case may be, the aggregate of the amounts
realised by the film producer by exhibiting the film and by the sale of the
rights of exhibition, shall be allowed as a deduction in computing the profits
and gains of such previous year; and the balance, if any, shall be carried
forward to the succeeding previous year and allowed as a deduction in that
year.
Allows amortization of cost of acquisition of film broadcasting rights
over 5 years
Chennai ITAT allows amortization of cost of acquisition of film
broadcasting rights to assessee engaged in business of sale of time slots and
in-house production of television programs & events during Assessment year
2005-06 and 2006-07; The Assessing Officer disallowed amortization of the cost
of the acquisition of the film broadcasting rights and treated the cost of
acquisition of the film broadcasting rights as intangible asset; ITAT upholds
CIT(A)’s order holding that the assessee is entitled to amortize the cost of
acquisition of the movie rights over a period of five years, relies on Chennai
ITAT in the case of Sun TV Network Ltd., in ITA No.1515 to 1520/Mds/2013 vide
order dated 31.10.2013 and M/s. Mavis Satcom Ltd., in ITA No.1659 to
1663/Mds/2013 videorder dated 18.03.2014. [In favour of assessee] (Related
Assessment years : 2005-06 & 2006-07) – [ACIT v. Asianet Star
Communications (P) Ltd.
[TS-224-ITAT-2019(CHNY)] – Date of Judgement : 11.04.2019 (ITAT
Chennai)]
Disallows Section 37(1) deduction to director for advertisement
expenses for exhibiting film
Chennai ITAT disallows deduction under section 37
towards advertisement/marketing expenses incurred by assessee (Director of
Cinema-Autography) for Assessment year 2008-09; During relevant Assessment year,
Revenue had not doubted the genuineness of the expenses, but had rejected
assessee’s claim on the grounds that as per the agreement between the assessee
and the film producer, the assessee had to produce the film and ultimately hand
it over to the producer, thereby the marketing expenses for the purpose of
exhibition of the film were the functions of the producer and not the assessee-
director; ITAT upholds Revenue’s view that the business of the assessee was
only limited to the direction of the film, which had to be handed over to the
producer post completion; Separately allows deduction on expenses incurred for
editing charges, boarding and lodging, donation and entertainment expenses
being in the nature of production of film/direction. [In favour of Both,
Partially] (Related Assessment year : 2008-09) – [Shri M. Perarasu v. ACIT [TS-745-ITAT-2018(CHNY)] – Date of
Judgement : 19.12.2018 (ITAT Chennai)]
Compensation received by Sushmita Sen for allegedly being sexually harassed, not taxable either under section 2(24) or under section 28
Mumbai ITAT rules that compensation of Rs. 95 lacs received by Sushmita
Sen (assessee, a film actress) from Coca Cola India Limited (CCIL) towards
damages caused to assessee's reputation, not income liable to tax for
Assessment year 2004-05, deletes addition; Assessee had received a total amount
of Rs. 145 lacs in lieu of settlement for breach of terms of celebrity
engagement contract; ITAT observes that only an amount of Rs. 50 lacs was due
to assessee under the Contractual terms, thus observes that the additional
amount of Rs. 95 lacs did not arise out of exercise of
profession; Refers to the correspondences exchanged between assessee and
CCIL, notes that the balance amount of Rs.95 lacs is stated to be received
towards damages arising out of her being sexually harassed by CCIL
employee, for having disparaged her professional reputation by false
allegations and for the repudiatory breach of contract by CCIL; ITAT
holds that such compensation could not be termed as any benefit,
perquisites arising to assessee out of exercise of profession, rules that
it cannot be construed to be assessee's income either under section
2(24) or under section 28.
Sushmita Sen (assessee), a film actress by profession was assessed in
scrutiny assessment during AY 2004-05 wherein it was noted by Assessing Officer
that a receipt of 95 lacs by assessee was not disclosed in return. Assessee had
received a sum of Rs.145 Lacs from Coca Cola India Limited (CCIL) but offered
only a part of the same i.e. Rs.50 Lacs to tax and claimed the balance Rs.95
Lacs to be capital receipts in nature of compensation. Assessee submitted that
CCIL had raised a claim of Rs.145 Lacs against the assessee for non-performance
of contractual commitment, however subsequently it paid the compensation to
assessee due to assessee's alleged sexual harassment by an employee of CCIL .
Thus assessee contended that the amount was paid by CCIL to avoid negative
publicity / embarrassment which would have jeopardized the business of the
company world over. However on failure to substantiate the same, Assessing
Officer made addition of Rs 95 lacs. On appeal CIT(A) confirmed the Assessing
Officer’s order. Aggrieved, assessee filed an appeal before Mumbai ITAT.
Before ITAT, Revenue
contended that he amount of Rs. 145 Lacs received by the assessee was in lieu
of settlement between the two parties for breach of terms of celebrity
engagement contract and therefore taxable in hands of assessee. Revenue
argued that payment received by the assessee was part and parcel of business
and profession and did not amount to abrupt close down of the business or
profession and therefore were revenue receipts.
Before ITAT, assessee
contended that she had entered into a commercial contract with CCIL to endorse
/ promote the products of CCIL for consideration of Rs.150 lacs. Assessee
submitted that Rs 145 lacs were received as compensation in lieu of sexual harassment
case filed by the assessee against an employee of
CCIL. Assessee further
contended that since Rs 50 lacs was outstanding amount due to her under the
contract, the same was offered for taxation out of Rs 145 lacs and balance not
being as per contract was capital in nature and not offered for taxation.
ITAT observed that
assessee had entered into Celebrity Engagement Contract with ITAT over a period
of two years to undertake / facilitate promotional, advertising of CCIL
products. ITAT noted that due to dispute between the 2 parties on availability
of schedules / dates, CCIL terminated the contract and demanded refund of Rs
145 lacs from assessee. However, ITAT noted that assessee issued a legal notice
to CCIL, USA by alleging that the termination was mala-fide and dishonest and
was for the collateral and illegal purpose to punish the assessee since she
rightly resisted the sexual harassment by an employee of CCIL in the course of
discharge of his duties.
ITAT noted that
assessee held CCIL and its USA based parent company liable for all the
consequences flowing from the assessee being made a victim of sexual harassment
by an employee of CCIL and for having failed to discharge its statutory duty of
providing a safe work place environment protected from sexual harassment.
ITAT noted that assessee claimed the balance sum of Rs. 50 Lacs due to her
under the contract and specifically reserved her right to claim the damages
arising out of her being sexually harassed for having disparaged her well
established professional reputation by false allegations of gross negligence
and willful conduct and for the repudiatory breach of contract by CCIL. Thus,
ITAT noted that assessee alleged the termination was done for collateral and
illegal purpose of punishing the assessee for resisting attempts of sexual
harassment by an employee of CCIL.
ITAT stated that CCIL
agreed to pay a sum of Rs. 145 lacs towards full and final settlement of all
her claims against CCIL against which assessee was to confirm that thereafter,
she had no claim of whatsoever nature against CCIL. ITAT stated that CCIL had
already paid a sum of Rs. 1 Crores under the contract to the assessee which is
evident from the copies of TDS certificates issued by CCIL and therefore the
balance payment of Rs 50 lacs due to the assessee at the time of dispute was
offered by assessee for taxation.
ITAT stated that the
final settlement was not a simple settlement of commercial claims of the
assessee arising out of contractual terms. ITAT stated that assessee had
received an amount of Rs. 145 Lacs out of which Rs. 50 Lacs was offered to tax
but the balance of Rs. 95 lacs was received for loss of reputation etc which,
being capital in nature, claimed to be not taxable. Thus ITAT held that the
contract did not envisage any additional payment over and above the amount of
Rs. 150 Lacs to the assessee. ITAT remarked that, the said compensation did not
accrue / arise out of exercise of profession and could not be construed to be
the income. within the meaning of Section 2(24) and Section 28 of the Income
Tax Act, 1961. The compensation could not be termed as any benefit, perquisites
arising to the assessee out of exercise of profession. ITAT thus deleted
addition of Rs. 95 Lacs. Separately, ITAT held that since there was no
concealment of income or furnishing of inaccurate particulars on the part of
the assessee, the penalty order under section 271(1)(c) would not
survive. [In favour of assessee] (Related Assessment year : 2004-05) – [Sushmita
Sen v. ACIT [TS-665-ITAT-2018(Mum)] – Date of
Judgement : 14.11.2018 (ITAT Mumbai)]
Film production co., an industrial undertaking,
eligible for Section 80J deduction
High Court
allows Section 80J deduction to assessee (a Film production co.); Holds the
activities of production of a film amounts to manufacturing of an article or
goods; Opines that ‘film production will have to be considered as a
manufacturing activity and the undertaking will have to be considered as an
industrial undertaking as the same is considered under excise law and other
allied laws also.’; Relies on coordinate bench ruling in CIT v. D.K.
Kondke. [In favour of the assessee] (Related Assessment
year : 1981-82) – [CIT v. Rupam Pictures (P) Ltd. [TS-272-HC-2015(BOM)] – Date of
Judgement : 05.05.2015 (Bom.)]
Assessee acquired satellite television rights of some films for a period of 99 years under irrevocable deed of transfer with a liberty to telecast said film without any liability and even with a further right to assign in favour of third party copyright to broadcast said firm, it was a case of sale of satellite television rights and, thus, payment made for same would not fall within definition of ‘royalty’ as per Explanation 2 to clause (vi) of section 9(1)
Assessee was in business of purchase and sale of television rights for
films. During relevant year, assessee purchased satellite television rights of
some Telugu films. In course of assessment, Assessing Officer opined that
payments made to acquire satellite rights amounted to ‘royalty’ as defined in
Explanation 2 to clause (vi) of section 9(1). It was noted that deed of
transfer was irrevocable till expiry of period for 99 years which was in excess
of prescribed period of 60 years under section 26 of the Copyright Act, 1957. Further,
transferor undertook that they would not sell VCD, DVD rights to any other
party in future. It was also found that assessee had full and absolute right to
assign copyright to broadcast said films and in respect of said assignment
agreement, transferor was not entitled to claim any revenue or consideration
received by assessee. On facts, transfer of satellite television rights of
films in favour of assessee amounted to sale and, therefore, assessee was not
required to deduct tax at source while making payments to acquire televisions
rights in question. [In favour of assessee] (Related Assessment year : 2009-10)
– [K.
Bhagyalakshmi vs. DCIT (2014) 265 CTR 545 : 221 Taxman 225 : (2013) 40
Taxmannn.com 350 (Mad.)]
Payment
made for acquiring right for satellite broadcasting of film amounted to
‘royalty’ within meaning of Explanation 2 to section 9(1)(vi)
That assessee was
engaged in purchase and sale of rights in satellite and movies. The assessee
debited in its account a sum of Rs. 25.71 crore for purchasing satellite rights
of films and programs. The Assessing Officer found that such rights were brought
from various parties at varying cost. He was of the opinion that such
agreements were only for assignment of rights and not for sale of right to
assessee. The rights were only for 20 to 25 years and were not of permanent
nature. Therefore, there was no sale of rights to the assessee. In such
circumstances, the Assessing Officer concluded that section 194J was applicable
since payments were in the nature of royalty. The Assessing Officer finding
that the assessee had not deducted tax at source while making aforesaid
payments, disallowed same under section 40(a)(ia). The Commissioner (Appeals)
took a view that though the agreements were named as ‘assignments’, these were
only purchase agreements. Complete ownership of satellite copyrights were
transferred. He thus held that assessee was not liable to deduct any tax at
source since it acquired the rights over the movies. Accordingly, the
disallowance made by the Assessing Officer was deleted. On revenue's appeal:
Held : In view of
Explanation 2 to section 9(1)(vi), the consideration for transfer of all or any
rights in respect of any copyright, including copyright for films and
videotapes, used in connection with television or tapes, would fall within the
definition of 'royalty'. What is excluded are consideration for sale,
distribution and exhibition of cinematographic films. What the assessee paid
here was not consideration for sale, distribution or exhibition of
cinematographic films. Assessee did not purchase the cinematographic films as
such through the transactions. Assessee had only received right for satellite
broadcasting.
The definition also
does not say that it would apply only if the rights are considered only for a
definite period. Even if the transfer of rights is perpetual or even if the
transfer is only a part of the rights, as long as transfer is of any right
relatable to a copyright of a film or videotape, which is to be used in
connection with television or tapes, the consideration paid would be royalty
only. In such a situation, assessee was duty-bound under section 194J to deduct
tax at source on the payments effected. Such deduction having not been made,
rigours of section 40(a)(ia) stood attracted. However, the additional ground
raised by the assessee that the rigours of section 40(a)(ia) are attracted only
on amounts standing payable at the end of the relevant previous year, is
justified in view of the decision of Special Bench of this Tribunal in the case
of Merilyn Shipping & Transports v. Addl. CIT 136 ITD 23 : 20
taxmann.com 244 (ITAT Visakha) (SB). In the result, the appeal of revenue
is allowed but at the same time, the issue is remitted back to the file of the
Assessing Officer for applying section 40(a)(ia) as per law. [In favour of
revenue] (Related Assessment year : 2008-09) – [ACIT v. Shree Balaji
Communications (2013) 140 ITD 687 : 30 Taxmannn.com 100 (ITAT Chennai)]
NOTE
However on different facts, the Hon’ble Madras High Court in K.
Bhagyalakshmi v. DCIT [(2013) 40 Taxmannn.com 350 (Mad.), observed that
where assessee acquired satellite television rights of some films for a period
of 99 years under irrevocable deed of transfer with a liberty to telecast said
film without any liability and even with a further right to assign in favour of
third party copyright to broadcast said films, it was a case of sale of
satellite television rights and, thus, payment made for same would not fall
within definition of ‘royalty’ as per sub clause (v) to Explanation 2 to Clause
(vi) of Section 9(1). Thus, the issue needs to be considered as per the facts
in each case and the liability for TDS to be determined, accordingly.
Abandoned feature film, a ‘stock-in-trade’ for producer; Expense revenue
in nature
Abandoned
film project expense allowed as revenue expense to producer; Feature film held
as stock-in-trade for producer; Rejected Revenue's argument that film, when
completed, be considered as stock-in-trade, and when not complete, be
considered as capital; As per Rule 9A, a feature film not given a treatment
different from that to manufacture or production of an article or thing.
The assessee, A.K. Films (P) Ltd., is engaged in the business of
producing feature films and television programmes. During Assessment year 2005-06,
assessee, alluding to Rule 9A, sought deduction of expenditure on an abandoned
film project of Rs. 88.31 lacs. Assessee the project was shelved because
continuing the same would have led to higher losses. However, Assessing Officer
disallowed the expenditure on the ground that a feature film is a capital asset
in the hands of the producer and loss arising on it cannot be treated as
revenue loss prior to its release. For this purpose, Assessing Officer relied
on Bombay High Court ruling in Sadicha Chitra v. CIT [(1991) 189 ITR 774
(Bom.)], wherein a feature film was held to be a capital asset.
On appeal, CIT(A) held that a film is to be treated as stock-in-trade in
the hands of the film producer and expenditure on it would be a revenue
expenditure. The CIT(A) distinguished High Court ruling relied on by the
Revenue; and further relied on Mumbai ITAT’s decision in Rajesh Khanna v.
ACIT [ITA 4804/Bom/2000]. Aggrieved, the Revenue filed an appeal before
Mumbai ITAT.
Referring to Revenue's reliance on Sadicha Chitra, ITAT noted that
though issue in said case was taxability of subsidy granted to Marathi film
producers, the basis provided by High Court was considering a feature film to
be a capital asset in the hands of a film producer. ITAT then discussed the
dichotomy by Revenue that a film project, when completed, would be regarded as
stock-in-trade of business and expenses thereon to be allowed. ITAT further
referred to Revenue's stand that a film project could be regarded as capital in
nature where incomplete and abandoned. ITAT held that reliance on Bombay High Court
ruling in Sadicha Chitra by the Revenue was misplaced but not irrelevant.
ITAT further observed that though CIT(A) had relied on various rulings
including Rajesh Khanna ruling, none of them were placed on record. Further,
ITAT noted that no specific finding from these rulings were produced to
understand the basis thereof or to find out whether the Bombay High Court in
Sadicha Chitra was considered or not.
Considering the legal position, ITAT analysed whether cost of a feature
film was revenue expenditure or capital one. ITAT held that principles guiding
them are well settled. ITAT referred to Rule 9A which prescribes the manner of
computation of the profits and gains of the business of production of features
films. ITAT noted that it mandates for the allowance of the entire cost of
production of a feature film where it is released for exhibition for a period
of 90 days during the relevant previous year. Further, a shorter period of
release would merit a deduction to the extent of the revenue realized, with the
balance in the following year. ITAT also noted that the uncertainty of the
commercial benefit or value that a film may yield is perhaps the guiding reason
for the said rule.
ITAT thus ruled that as per Rule 9A, a feature film is not given a
treatment different from that to manufacture or production of an article or
thing.
Ruling in favour of the assessee, ITAT, concluded that a feature film is
only a stock-in-trade of his business for a film producer. ITAT further held
that where not released for exhibition, i.e. 'sold' directly or indirectly, the
same is to be necessarily carried over as such. ITAT held that There is, therefore,
no question of the same being regarded as capital in nature, where the film for
some reason cannot be completed and the project is shelved. The only condition
to which this would be subject is of the said suspension of work being not
temporary, so that there is in fact no loss of value, of which though there is
no indication in the present case. The loss ensuing thus would only be the loss
for the year of its incurrence, i.e., the year in which the film project is
abandoned.” ITAT, thus, allowed deduction of expenditure on an abandoned film
project of Rs. 88.31 lacs. [In favour of assessee] – [ACIT v. A.K.
Films (P) Ltd. [TS-628-ITAT-2013(Mum)] – Date of Judgement
: 11.12.2013 (ITAT Mumbai)]
Cost
of production of film can be allowed as deduction only when conditions as
specified under rule 9A are satisfied, and such deduction cannot be permitted
by adopting an indirect method of reducing value of film
The valuation of
closing stock has to be made as per Rule 9A and the assessee cannot claim
artificial reduction in the value of closing stock even if the assessee cannot
sell the movie produced by him.
Assessee was in
business of production of TV serials/film. During course of assessment
proceedings, Assessing Officer found that assessee had reduced value of closing
stock and booked certain loss. Assessee contended that due to certain reasons,
a movie which was produced by him could not be sold and since film did not have
any buyers, he had reduced value of closing stock on ground that market value
of feature film was less than cost of production and, accordingly, claimed
deduction of loss - Assessing Officer did not accept explanation and observed
that assessee had artificially reduced market value of closing stock without
any basis and, accordingly, no deduction would be allowed - Whether expenditure
on production of film is allowable as deduction as per provisions of rule 9A,
and no deduction is permissible de-hors provisions of rule 9A. Since assessee
had not fulfilled conditions as specified under rule 9A he could not claim such
deduction by adopting an indirect method of reducing value of closing stock. [In
favour of revenue] (Related Assessment year : 2007-08) – [Sagar Sardhadhi v.
ITO (2012) 148 TTJ 86 : 135 ITD 153 : 18 Taxmannn.com 348 (ITAT Mumbai)]
Services
provided by overseas entity in connection with making logistic arrangement for
shooting of different films of assessee outside India were in nature
of commercial services and amount received for such services constituted
business profit of service provider which could not be taxed in India in
absence of any PE in India of said service providers
Section
9 of the Income-tax Act, 1961, read with articles 5, 7 and 12 of the DTAA
between India and UK, Poland, Brazil, Canada and Australia - Income - Deeemd to
accrue or arise in India - Business profits - Assessee-company was engaged in
business of production of films, shooting of which was often done outside India.
For shooting films outside India, its production unit used to go abroad and
services required in connection with work of shooting abroad were availed from
various overseas service providers. During year under consideration, assessee
made payment to five such overseas service providers for services availed in
connection with shooting of different films which mainly included arranging for
extras, arranging for security, arranging for locations, arranging for
accommodation of cast and crew, arranging for necessary permissions from local
authorities, arranging for makeup of stars, arranging for insurance cover, etc.
Above said services rendered by overseas service providers would not fall
within ambit of technical services as given in Explanation 2 to section
9(1)(vii) instead they were in nature of commercial services and amount
received by them from assessee for such services constituted their business
profit which was not chargeable to tax in India in absence of any PE in India
of said service providers. Therefore, assessee was not liable to deduct tax at
source from said payments and Assessing Officer was not justified in treating
assessee as in default under section 201. [In favour of assessee] (Related Assessment year : 2006-07) – [Yash Raj Films (P)
Ltd. v. ITO(International Taxation), Mumbai (2012) 28 taxmann.com 247 (ITAT
Mumbai)]
Logistics services for film shooting abroad not FTS
Yashraj Film (payer) not liable to deduct tax at source on payment made
abroad for services in respect of arrangement of logistics for shooting of
films outside India; Services rendered include obtaining necessary permissions,
arranging 'extras' & shooting equipment, arranging make-up of casts, etc.;
Payment does not amount to fees for technical services but in the nature of
commercial services.
The assessee, Yash Raj Film (P) Ltd, is engaged in production of films.
The shooting of films is often held outside India. During Assessment year
2006-07, the assessee made payments to non-residents, on which no tax was
deducted at source. The payments were made to various parties from UK, Brazil,
Canada, Australia and Poland. The services rendered by overseas entities
included arrangement of shooting locations, obtaining necessary permissions
from authorities, arrangement for shipping and custom clearance, arranging for ‘extras’,
meals, shooting equipment, etc., rendering help in obtaining visas, arranging
make-up of casts, etc. The assessee claimed that these payments were in the
nature of business profits and were not taxable in the hands of non-residents,
as they did not have a permanent establishment (PE) in India. The assessee also
contended that the services were rendered outside India.
The Assessing Officer held that payments were in the nature of fees for
technical services (FTS) and the assessee should have deducted tax at source under
section 195. On appeal, the CIT(A) held that the services were in the nature of
pure commercial services and hence, amount paid would fall under the category
of business profits. Since the recipients did not have PE in India, the
payments were not taxable in India.
Income Tax Department was in appeal before ITAT against the CIT(A)'s
order. Income Tax Department contended that the nature of services was such
that technical expertise was needed to render them. It was also contended that
services required element of managerial skills and also the knowledge of local
laws. Hence, the payments were in nature of FTS and were taxable in India. Ruling
in favour of the assessee, Mumbai bench of ITAT confirmed the order of the
CIT(A).
ITAT observed, ..merely because some managerial skill is required to
render the services, it would not make the services to be managerial services
as envisaged in Explanation 2 to section 9(1)(vii). Similarly, the requirement
of knowledge of local laws on the part of the service providers to render the
services such as obtaining the permissions for shooting from the local
authorities or for arranging insurance of the crew members and shooting
equipments would not change the basic nature of the services which otherwise
are commercial services as held by the learned CIT(Appeals).”
ITAT placed reliance on Mumbai ITAT ruling in UPS SCS (Asia Ltd. v.
Assistant Director of Income-tax (International Taxation) (2012) 50 SOT 268 :
18 Taxmann com. 302 (ITAT Mumbai), in which it was held that freight and
logistic services could not be termed as managerial or consultancy services.
ITAT also relied on rulings in Deputy Director of Income-tax, International
Taxation v. Tata Iron & Steel Co Ltd. (2010) 132 TTJ 566 : 6 ITR(T) 463 : (2009)
34 SOT 83)(ITAT Mumbai) and DCIT v. Parasrampuria Synthetics Ltd. (2008) 20
SOT 248 (ITAT Delhi).
Accordingly, ITAT concluded that services rendered outside India in
connection with logistics arrangement were in the nature of commercial
services. Hence, payment made for such services was not taxable in the absence
of PE in India. (Related Assessment year : 2006-07) – [ITO v. Yash Raj
Films (P) Ltd. [TS-906-ITAT-2012(Mum)] – Date of Judgement
: 20.12.2012 (ITAT Mumbai)]
Film production amounts to ‘work’, attracts TDS under
section 194C, not under section 194J
Lumpsum
payment by the producer for production of cinematographic film subject to TDS under
section 194C and not under section 194J; Production of feature film for
broadcasting and telecasting amounts to ‘work’ as defined under section 194C;
Delhi High Court ruling in Prasar Bharti (Broadcasting Corporation of India)
relied upon; No Section 40(a)(ia) disallowance for short deduction of tax.
Payments to
Bhairav Films were made in different Assessment years ie. Assessment year 2003-04,
Assessment year 2004-05 & Assessment year 2005-06. The assessee did not
deduct tax at source on the payment made in Assessment year 2003-04.
However, TDS under section 194C was made @ 2.2% on the remaining two
installments paid in subsequent years.
The assessee
computed profits and gains of the business of production of film in terms of
rule 9A of the Income Tax Rule, 1962. Rule 9A specifies the method for
determination of cost of production of a feature film produced by a producer,
which has been certified for release by the Film Censors Board. In terms of
Rule 9A, the assessee was entitled to claim the cost of production of the film
in Assessment year 2005-06. The assessee accordingly claimed deduction
for cost of production of Rs. 5.35 crores in Assessment year 2005-06.
During the
assessment proceedings, the Assessing Officer held that the payment made by the
assessee was for availing technical or professional services and hence tax was
deductible under section 194J @ 5.23%. Since the assessee had deducted tax
@.2.2%, the Assessing Officer disallowed the proportionate payments under
section 40(a)(ia).
The assessee
contended that the payment was in the nature of providing finance for the
production of film and the negative rights of the film were obtained as a
consideration for such finance. The assessee contended that the payment fell
under the provisions of Section 194C and not 194J. The assessee also argued
that the provisions of Section 194C were not applicable to individuals prior
to 01.06.2007 and it had deducted tax under section 194C for Assessment
year 2004-05 and 2005-06 by mistake. It was also argued that it was a
case of short deduction and not the non-deduction of tax and provisions of Section
40(a)(ia) had no application to short deduction. The CIT(A) upheld the
disallowance and the assessee was in appeal before ITAT.
Relying on
the decision of Delhi High Court in CIT v. Prasar Bharati (Broadcasting
Corporation of India) (2008) 292 ITR 580 (Del.), a Mumbai bench of ITAT
held that production of film would amount to ‘work’ as defined under section 194C
and hence, TDS provisions under section 194C would be applicable for payment
for production of film. Accordingly, provisions of Section 194J did not
have any application. Delhi High Court decision in Prasar Bharati was
rendered in the context of production of television programme.
ITAT
observed, “Fundamentally, there is no difference between production of
film for broadcasting and telecasting except that cinemotograph films are
exhibited in theatres for viewing by the public……The expression “work” has not
been defined for the purpose of Section 194-C of the Act. The normal
meaning of the expression “work” should therefore apply. By Expln.III
(b) to Section 194-C of the Act, the legislature only clarified that the
expression ‘work’ shall also include broadcasting and telecasting including
production of programmes for such broadcasting or telecasting. It
would, therefore, be reasonable to hold that the expression “work” would also
include within its fold production of motion films or cinematographic films
such as the one which the assessee got produced through Bhairav films for which
it made payments. The payment made by the assessee would therefore fall for
consideration only under the provisions of Section 194-C of the Act.”
ITAT held
that the Finance Act 1995 inserted Explanation 3 to Section 194C, under which
‘broadcasting and telecasting including production of programmes for such
broadcasting or telecasting’ was specifically included in the definition of the
term ‘work’ with effect from 01.07.1995. ITAT observed that though Section 194J
was simultaneously inserted by the Finance Act 1995, it was a general provision
and when a specific provision in the form of Section 194C was available, the Assessing
Officer could not resort to general provision.
ITAT further
observed that since provisions of Section 194C were not applicable to
individuals prior to 01.06.2007, the assessee was not required to deduct tax at
source on payment made for production of a feature film. Accordingly,
disallowance under section 40(a)(ia) was not applicable.
ITAT also
upheld the contention of the assessee that since it was a case of short
deduction as against non-deduction of tax, provisions of Section 40(a)(ia) had
no applicability. ITAT placed reliance on Kolkata ITAT ruling in S K
Tekriwal 48 SOT 515 (Kol).
ITAT also
ruled upon various other issues like addition under section 41(1), disallowance
of excess un-recoupment cost of production of another film and powers of ITAT
to entertain claim not raised in income-tax return or during the assessment.
The assessee,
a proprietor of M/S. Neha Arts, was engaged in the business of production of
cinematographic films. The assessee entered into a contract with Bhairav Films,
another proprietorship concern, to produce a film viz. Tango Charlie.
Under the agreement, Bhairav Films agreed to bear all the costs related to
remuneration to artists, wages and allowances of personal staff of artists,
interest on finance for the film, publicity expenses, music expense such as
remuneration payable to music director, lyricists, musicians, background score
and also payment to other technicians, etc. Bhairav Films also agreed to
deliver the first print of the film at its own cost. The assessee had agreed to
make lumpsum payment of Rs 5.35 Cr to Bhairav films. The assessee was
however entitled to the negative rights of the film. [In favour of assessee] – [Nitin
M. Panchamiya v. ACIT [TS-109-ITAT-2012(Mum)] –
Date of Judgement : 17.02.2012 (ITAT Mumbai)]
Dress Designer is an ‘artist for the purpose of
Section 80RR
Assessee
in his return of income for assessment years 1999-2000, 2000-01 and 2001-02
claimed a deduction under section 80RR. The deduction was claimed in respect of
the design fees received by the assessee from persons not resident in India in
convertible foreign exchange. The Assessing Officer rejected the claim of the
assessee, holding that the assessee was not an author, or a playwright, artist,
musician, actor or sportsman and hence did not fall within one of the
categories to whom a deduction can be allowed. Appeals filed by the assessee
were dismissed by the Commissioner (Appeals). The Income-tax Appellate Tribunal
allowed the appeal for assessment year 2001-02 by an order dated 31-10-2008.
The Tribunal followed that order while deciding the appeals for assessment
years 1999-2000 and 2000-01 on 16.12.2008. The revenue is in appeal under
section 260A.
The High
Court observed that The essential requirements of section 80RR are that (i) The
deduction is available to a resident individual who is an author, playwright,
artist, musician, actor or sportsman, including an athlete; (ii) The gross
total income of such a person must include income derived by him 'in the
exercise of his profession'; (iii) The income must be derived from a Government
of a foreign State or from any person not resident in India. If these
requirements are met, then in computing the total income of the individual a
deduction is allowable, to the extent provided, at a proportion of the amount
which is brought into India in convertible foreign exchange within the
stipulated period”
Further the
High Court observed that an artist is a person who engages in an activity
which is an art. Artists, as we understand them, use skill and imagination in
the creation of aesthetic objects and experiences. Drawing, painting,
sculpture, acting, dancing, writing, film making, photography and music all
involve imagination, talent and skill in the creation of works which have an
aesthetic value. A designer uses the process of design and her work requires a
distinct and significant element of creativity. The canvass of design is
diverse and includes graphic design and fashion design. An artist, as part of
his or her creative work, seeks to arrange elements in a manner that would
affect human senses and emotions. Design, in a certain sense, can be construed
to be a rigorous form of art or art which has a clearly defined purpose. Though
the field of designing may be regarded as a rigorous facet of art, creativity,
imagination and visualization are the core of design. Dress designing has
assumed significance in the age in which we live, influenced as it is by the
media and entertainment. As a dress designer, the assessee must bring to his
work a high degree of imagination, creativity and skill. The fact that
designing involves skill and even technical expertise does not detract from the
fact that the designer must visualize and imagine.” The high court thus held
that a dress designer is an artist for the purpose of
Section 80RR. [In favour of assessee] (Related Assessment years :
1999-2000, 2000-01 and 2001-02) – [CIT v. Tarun R. Tahiliani
[TS-162-HC-2010(BOM)] – Date of Judgement : 14.06.2010 (Bom.)]
Deduction for expenditure incurred on production of
feature films appropriately governed by Rule 9(A); Rule 9(A)(3) entitles
assessee to carry forward balance of production cost of film and claim
deduction of the same
Supreme Court in a case involving a feature film producer held that,
Rule 9(A) provided for deduction of expenditure incurred on production of
feature films. The Rule was applicable when the feature film, certified by the
Board of Film censors, was not released for 180 days in the previous year for
commercial exhibition.
Observing that in the present case the film ‘Santhwanam’ had not
been exhibited for more than 180 days in the previous year, Supreme Court held
that, “While computing the income or loss for the relevant assessment year
1992-93 the assessing officer had to take into account the number of days on
which the film was commercially exhibited and then allow the deduction for cost
of production of the film to the extent of the collections made during the
period of exhibition only”.
For the
aforesaid reasons the Supreme Court found the assessee to be entitled to carry
forward the balance of cost of production to the next following previous
year and claim deduction of the same in that year. [In favour of
assessee] (Related Assessment year : 1992-93)
– [CIT, Thiruvanathapuram v. Joseph Valakuzhy [TS-54-SC-2008] – Date of
Judgement : 06.05.2008 (SC)]
Assessee, who had taken up production of film, failed to submit statements under section 285B because he was not aware of said provision and as soon as notice was issued to him, he submitted statements, penalty imposed under section 272A(2) upon assessee for non-compliance of section 285B was to be deleted
Penalty for
failure to answer question, sign statements, etc. - The assessee had
taken up the task of production of certain film during financial years 1988-89
to 1992-93. As the assessee failed to submit the statements as required
under section 285B in the required period, a notice was issued and
served on him. Assessee submitted the statements. As no reasons were specified
for not filing the statement within time, another notice was issued. In
response to the said notice, assessee explained that it was his first and last
venture which had flopped and due to the ignorance of legal formalities, he
could not submit the statements. The Assessing Officer, however, imposed
penalty upon the assessee under section 272A(2). On appeal
Commissioner (Appeals) upheld the Assessing Officer’s order. On second appeal,
the Tribunal set aside the order of the Assessing Officer. On revenue’s appeal
:
Held : The explanation given by the assessee for not filing the statement showed that it was his first venture in film production and it had also flopped and, therefore, he did not continue in the business. He was not aware that under the provisions of the Act, he was required to submit the statement within thirty days from the expiry of the relevant assessment year. As soon as he got the notice, he submitted the statements. In fact, no tax was due from him. Therefore, the explanation of the assessee appeared to be reasonable.
In view of the law laid down by the Supreme Court in the case of Motilal
Padampat Sugar Mills Co. Ltd. v. State of UP (1979) 118 ITR 326
(SC), it is clear that there is rule that ignorance of law is no excuse
but there is no presumption that everyone knows the law. In view of the
Supreme Court ruling and the explanation given by the assessee, the Tribunal
was justified in quashing the order of penalty passed by the Assessing Officer.
[In favour of assessee] - [CIT v. Schell International (2005) 278 ITR 630 :
148 Taxman 446 : 200 CTR 243 (Bom.)]
Rental income earned by filmmaker by letting out
studios, assessable as business income
Madras High Court
held that rental income earned by the assessee by letting out studios was
assessable as business income and not income from house property, where the
assessee was engaged in film-making business. “Whether a particular
letting is business or not has to be decided in the circumstances of each case
and in the setting and background of facts and there is no such thing as a
naturally born commercial asset, as an asset becomes a commercial one in view of
the use to which it is put in a business and not owing to its inherent
qualities.”
High Court
also held that expenditure incurred by the assessee in production of two films,
that were later abandoned, was revenue expenditure. Loss arising on account of
giving up of the production of films, based on commercial expediency, was
allowable as business expenditure.
High Court
further held that the conversion of the exclusive proeprty of the assessee by
making it available to a partnership of which he is a partner would not
constitute a sale, nor can the process of conversion be regarded as one
amounting to discarding, demolishing or destroying the building, machinery,
plant or furniture. Such conversion could not, by any stretch of imagination,
be regarded as either demolishing or destroying the assets. Nor would it be
governed by the expression 'discarded.” [In favour of Both, Partially] – [B.
Nagi Reddy v. CIT [TS-10-HC-1991(MAD)] – Date of Judgement : 10.06.1991 (Mad.)]
Assessee-company
carried on business of production and distribution of
cinematograph films – During relevant assessment year, assessee
produced and released a firm – It had financed production of
said film under an agreement entered into with
a film producer namely, ‘A’ – Disputes arose between parties as to
who was producer of said film, – By an arbitral award, both assessee
and ‘A’ were declared as producers – Subsequently, a settlement was
arrived at between assessee and said producer whereby producer gave up all his
claim as producer of said film including share of profits and other
benefits in favour of assessee for some consideration – By payment made under
settlement, assessee was not acquiring any capital asset nor was it perfecting
its title which was already clarified by arbitration award but said sum was
spent to make business productive of profit and, therefore, sum in question was
for business expediency and, as such, allowable as revenue expenditure
Section 37(1) of the Income-tax Act,
1961 – Business expenditure – Allowability of –The assessee-company carried on
business of production and distribution of cinematograph films. During the
relevant assessment year, it produced and released for exhibition a film.
In respect of this film, the assessee had entered into an agreement with
one ‘A’, a film producer, whereunder the assessee was to finance the
production and to be the distributor of the film. The film was
produced and it secured the President's award. Disputes arose between the said ‘A’
and the assessee as to who was the producer of the film and the
matter was referred to the arbitration. By the arbitral award, ‘A’ and the
assessee was declared as the joint producer of the said film. There were
certain other disputes between the parties regarding the agreement and those
disputes were settled by the terms of a settlement. Under the settlement the
assessee had to pay an amount to ‘A’ so as to enable him to give up all his
claim as producer of the said film including his 40 per cent share of
profits and other benefits reserved to him by the agreement. This sum paid to ‘A’
was claimed as forming part of the cost of the film, so as to be
considered in giving amortisation allowance. The ITO disallowed the claim
holding that although the payment made to ‘A’ was a capital payment, it had
nothing to do with the cost of production of the film in question and
could not be allowed either as revenue expenditure or for amortisation. The AAC
upheld the order of the ITO. The Tribunal did not accept the assessee’s
contention that the sum paid to ‘A’ was forming a part of the cost of the
production of the film. The Tribunal, however, held that the said sum
would have to be taken into account in the hands of the assessee in arriving at
profit or loss from the picture. On reference :
Held : It appeared in the background of
the facts of the case, that the sum was paid to clear the title in the carrying
on of the business which was clouded by the litigation and the counter-claims
of ‘A’. By the expenditure of the said sum, the assessee was not acquiring any
capital asset, as such, viz., his right over the film had
already been acquired nor was the assessee perfecting his title which was
clarified by the award of the arbitrator. But in running the business or to
make the business productive of profit the sum was spent to settle the matter
and in that background of expediency of the running of the business this amount
was spent. The amount spent for that business expediency, in the background of
the facts and circumstances of the case, could be considered to be revenue
expenditure and, applying the correct principles, if the Tribunal had taken
that view, there was no reason to interfere with the decision of the Tribunal. [In favour
of assessee] (Related Assessment year : 1960-61) – [CIT v. De Luxe Film
Distributors Ltd. (1978) 114 ITR 434 (Cal.)]
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