A. Kalyanasundharam, Accountant Member -
(1.) THE assessee, a company engaged in the business of manufacturing of pre-recorded audio and video cassettes, as also blank audio and video cassettes, has filed this appeal aggrieved by the action of the Commissioner under Section 263 of the Income-tax Act. THE assessee has raised as many as thirteen grounds, but, in effect, the issues are only two, viz., challenging the jurisdiction of the Commissioner and as to whether, the royalty paid for obtaining of the rights of reproduction amounting to Rs. 14,48,094 is an expenditure of capital nature or is allowable as revenue.
(2.) Shri Ganesan, appearing for the assessee, submitted that, the business of the assessee company is reproduction of audio sound and music from the master plate provided by the film producers and distributors. The master plate contains the original soundtrack of the film relating to the songs and with the help of this master plate, the company makes several copies of audio cassettes, which are ultimately sold in the market. He submitted that, the master plate is similar to a formula or a mould used in the manufacture. He submitted that, the company produces several of these cassettes for different films every year and for the reproduction of each series of cassettes, it requires a different master plate. He pleaded that, for each film that is being made, the producers require music cassettes and soundtrack, which the company manufactures with the help of this master plate and provides the cassettes prior to there lease of the film. He submitted that, the master plate is no doubt retained by the company, but, its use and reuse would entirely depend upon the marketability of the cassettes manufactured by it.
He submitted that, as soon as the series of the cassettes relating to a film are manufactured and marketed, the master plates become useless, though in rare cases, they do get reused for manufacturing cassettes of additional copies. He submitted that, the life of the master plate is very short, though, the assessee retains the copy rights of the same. He related the master plate to the licence granted for specific period for the manufacture and submitted, the licence that has been granted is similar to the one granted for the extraction of the limestone and the royalty so paid is allowable as a revenue expenditure. He submitted that, this has been so ruled by the Supreme Court in Gotan Lime Syndicate v. CIT  59 ITR 718. He submitted that, even where there has been a purchase of assets, but, the payment was related to the annual profits, then, it has been held that, the payment was revenue in nature, for which proposition, he placed reliance on the ratio of Supreme Court in Travancore Sugars & Chemicals Ltd. v. CIT  62 ITR 566. He submitted that, the ratio of the Supreme Court in Devidas Vithaldds & Co. v. CIT  84 ITR 277 was also on similar lines, where, the continuing partners were to pay for the retiring partner the amount for his goodwill.
(3.) HE submitted that, the master plate is the formula, raw-material from which copies are made. HE submitted that, since the master plate is only a raw-material, the cost of the purchase of the raw-material is an allowable deduction in evaluating the gross profit derived in the manufacture and sale of the copies. HE made reference to the details of the royalty paid at pages 33-34 of the paper book and submitted that, the payments are for various producers and for different music programmes and they are all paid by relating to the turn over or sales. HE submitted that, in the absence of any sale, there would be no royalty payable. HE submitted that, this is how the facts of the case of the assessee are similar to the limestone extraction - Gotan Lime Syndicate's case (supra) decided by the Supreme Court. HE then carried us through the agreement entered into with different producers, sample of which has been placed at pages 43-133. HE made reference to the sample at pages 43-47 and submitted that, the producers are the sole owners of the mechanical reproduction rights of gramophone, magnetic tape etc. The producers are to provide the assessee the soundtrack or recorded tapes of music, songs and dialogue etc., before the film is released. The condition for the use of the soundtrack is that, it would be used for the mechanical reproduction only, on gramophone records, tapes etc. The producers have merely assigned their recording rights in favour of the company. The company on its part is required to submit half-yearly statement of sale to the producers. The clause 8 of the agreement by which the assessee is made the owner of the plate, are for the limited purpose of ensuring that, the producers are not allowed to provide the same to another competitor. HE pleaded that, this master plate that contains the master information, sound, music, dialogue, is the raw-material, from which several copies are made.;