M/S Kas Movie Makers Pvt. Ltd. vs Commissioner Of Income Tax-Ii.
2010 Latest Caselaw 1997 Del

              THE HIGH COURT OF DELHI AT NEW DELHI

%                               Judgment Reserved on: 13.04.2010
                                Judgment Delivered on: 19.04.2010
+            ITA 484/2010

M/S KAS MOVIE MAKERS PVT. LTD.                        ... Appellant

                                - versus -

COMMISSIONER OF INCOME TAX-II.                       ... Respondent

Advocates who appeared in this case:
For the Appellant   : Mr M.S.Syali, Sr.Advocate with Mr.M.P.Rastogi &
                      Mr K.N.Ahuja
For the Respondent  : Mr Sanjeev Sabharwal

CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE V.K. JAIN

     1.    Whether Reporters of local papers may be allowed to
           see the judgment?                                            Yes
     2.    To be referred to the Reporter or not?                       Yes

     3.    Whether the judgment should be reported in Digest?           Yes

V.K. JAIN, J.

1. This appeal was filed against the order of the Income

Tax Appellate Tribunal dated 23.3.2009 in ITA No. 159/Del/07

for the A.Y. 2003-2004 and ITA No.555/Del/06 for the

A.Y.2002-2003, whereby the appeals filed by the Revenue were

allowed and the orders passed by CIT(A) were set aside. We

however have treated it as appeal against the order passed in

ITA No. 155/Del/06/06 for the A.Y. 2002-03.

2. The appellant/assessee claims to be engaged in the

business of manufacture of television film software, for which

professional services were provided by it to the foreign clients

for shooting cinematograph films in India. For the assessment

years in question, the appellant claimed deduction under

Section 80 HHF on the ground that it was engaged in the

business of transfer, by any means, out of India, of film

software, television software, music software, television news

software, including telecast rights. The appellant did not

produce its agreement with the foreign party, for production of

film, before the Assessing Officer. For the A.Y.2002-2003, the

Assessing Officer, after considering the reply submitted by the

appellant to the show-cause notice, found that the assessee

was providing services such as arrangement of raw material,

engaging technicians, hiring equipments, etc., the film was

shot by foreigners who brought their own equipments such as

camera, motion picture stock and took the same back while

leaving India and, therefore, deduction under Section 80 HHF

was not available to it. The Assessing Officer for the A.Y.2003-

2004 also disallowed the benefit of Section 80 HHF to the

appellant on the ground that the assessee was only a service

provider and was not involved in the export of film software,

nothing had been exported out of India by the assessee and it

was not the producer of software, since shooting of the film

was done entirely by the foreign parties who produced the film

with the aid and assistance of the assessee company and no

ownership right in the film or its software vested in the

assessee company.

3. In the appeal filed by the assessee/appellant, CIT(A)

held that the assessee company was involved in producing and

export/transfer of film to foreign countries for a consideration

received in India in convertible of foreign exchange and,

therefore, was entitled to the benefit of Section 80 HHF of the

Act.

4. While allowing the appeals filed by the Revenue, the

Tribunal, inter alia, held that it was neither a case of export

nor of transfer by any means, out of India, of any film software,

and that it was a case where certain services were rendered to

the foreign clients for shooting films in India and the negatives

were handed over to them in India, which did not involve any

export or transfer of film software.

5. Section 80 HHF of the Act, to the extent it is relevant,

provides that where an assessee 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, the deductions specified in

the Section will be allowed, while computing the total income of

the assessee. Therefore, the only question relevant to these

appeals is as to whether the appellant company was engaged

in the business of export or transfer, out of India, of any film

software, television software, etc. during the assessment years

in question. The export or transfer of prescribed software can,

however, be by any means, so long as it constitutes export or

transfer out of India.

6. A copy of the agreement of the assessee with Italgest

Video SRL was filed before the Tribunal and it was stated that

the agreements entered into by the assessee with the foreign

clients are similar.

7. While returning a finding of fact in favour of the

Revenue, the Tribunal, inter alia, noted as under:

"8.2. The responsibility of the assessee was in respect of crewing and casting, production of equipment, negotiation with the personal etc. The foreign party has been termed to be the producer. These services did not confer any proprietary right on the assessee in the product, i.e., the film negatives, which were the sole property of the aforesaid Italgist Video. The assessee received production fees as per paragraph 6 of the agreement. It has already been mentioned that the film had to be handed over to the agent of Italgist in India, who would carry it to a place outside India and exhibit after receiving approval from the Indian Embassy. The agreement, to

our mind is one of providing assistance in shooting the films and ultimately does not lead to transfer of any film or software from the assessee to the Italgist Video. There was no provision that the assessee will be responsible for losses in case the negative was not found satisfactory by Italgist Video. Thus, the agreement cannot be said to be one for transfer of film software by any means outside India by the assessee to Italgist Video.

8.3. Coming to the agreement with Sign + Media Service Gm BH and Company, the obligations of the assessee are contained in paragraph 3, which reads as under:

"Article 3: Obligations of Kas KAS as a party hereto commissions hereto CP as the other party hereto with the complete organization for this film production to theextent to such activities are carried out of India. Resposible Executive - Producer of these three documentaries in India is Ms. Aruna Har Prasad & Kalyan Mukherjee from KAS. Ms. Aruna Har Prasad & Kalyan Mukherjee will be in charge of the entire production coordination on location in association with the two Authors - Mrs. Thomas Uhlmann & Mrs. Anja Freyhoff as well as the line producer from CP, Mr.Georg Lise."

8.4. Under this agreement also, the assessee did not acquire any proprietary right in the film software as the agreement was for providing various services for production co- ordination at various places in India. The subject matter of the films was authored by foreigners and Mr.George Lise was the line producer. Therefore, we are of the view that it is neither a case of export or transfer by

any means out of India of any film sofrtware................................................... .................................................................. ......................................................... In this case the assessee was rendering service for production of films, which were handed over to the agents of the customers in India. The expenses were incurred on behalf of the clients and no proprietary right got vested in the assessee. Although the assessee was required to render satisfactory services, the risk and reward remained with the clients. The handing over negatives in India neither involved export nor transfer by any means, outside India.......................................................... .................................................................. .................................................................. In the instant case there has been no sale of the film software off the shelf. That is also not the case of the assessee. It is a case where certain services were rendered to foreign clients for shooting films in India, and the negatives were handed over to them in India. The services may involve the use of assessee's expertise in the process of production. We have already seen that this activity neither involves export nor transfer of film software by any means outside India by the assessee and everything was handed to the clients in India............................................................ ...................................................

8.5. The invoices produced by the assessee show nil value. We are of the view that this fact goes against the assessee as it shows that there was no export etc. by the assessee and it was the case of sending or transmitting of the film software by the client from India to a place outside India with no transactional value. Further, mere allotment of IEC does not ipso-facto leads to the conclusion that

the assessee transferred software outside India. This issue has to be decided on the basis of agreement between the assessee and the client............................................................. .................

8.6. In a nut-shell, it is held that the instance case is one of rendering multi- farious services for production of films by foreign companies in India and handing over the negatives to them in India. This does not involve export or transfer outside India by any means of any film software by the assessee..............."

8. We have examined the matter with reference to two

agreements filed by the appellant and entered into between the

appellant and the foreign clients.

9. The following facts emerge from a perusal of the

agreement entered into between the appellant and Italgest

Video SRL:

(i) It is Italgest Video SRL and not the appellant Kas

Movie Makers which is the producer of the film.

(ii) The appellant was required to incur expenditure

within the budget agreed between the parties and any

expenditure exceeding the approved budget required

approval of the producer Italgest Video SRL.

(iii) The producer Italgest Video SRL was responsible

for all the expenses incurred outside India, the

responsibility of the appellant was confined to the

expenses incurred in India.

(iv) The production of the film was financed by the

producer Italgest Video SRL. Receipts, invoices,

contracts and backup material were required to be

provided by the appellant to the producer Italgest Video

SRL.

(v) The payment to Robin Melville, the designated

representative of the producer in India, was to be made

by the producer Italgest Video SRL and not by the

appellant.

(vi) The appellant was entitled to a fixed fee of 2 (two)

million Indian rupees. In the event of the production of

the film getting stopped for any reason other than

breach on the part of the appellant company, it was

entitled to keep the payment received by it prior to

stoppage of the film.

(vii) It was the producer Italgest Video SRL and not the

appellant who was entitled to all the results and

proceeds derived from the production services,

including the results and proceeds of the services

rendered by the appellant.

(viii) It was the producer Italgest Video SRL who owned

all rights, including proceeds, all insurance policies in

respect of the film and the insurance policies were

subject to approval by it.

10. We also note that, as pointed out to the Tribunal, the

Profit and Loss Account of the assessee company did not show

any purchase or sale and Schedule of its Assets did not

contain any equipment for manufacture of a software.

11. The first pre-requisite condition, for export or transfer

out of India, of the prescribed software by an assessee is that

the ownership or title in the software claimed to have been

exported or transferred out of India must necessarily have

vested in him. There could not have been any export or

transfer, by the assessee company unless the ownership rights

in the software in question vested in it. In the present case,

the film was produced by Italgest Video SRL and not by the

appellant. In terms of clause 7 of the agreement, it was the

foreign client and not the appellant which owned the software

that came to be developed as a result of the services provided

by the appellant and it had no right, title or authority to

transfer it to any person. Thus, though the film was shot with

the help of the assessee, it was not owned by it and, therefore,

there could be no export or transfer of the film by the appellant

outside India, the ownership of the film being the sine qua non

for its export or transfer by the appellant.

12. The terms and conditions of the agreement show that

no sale price for the film in question was fixed. The insurance

policies under clause 9 of the agreement were owned by

Italgest Video SRL and in the event of any claim being made

with the insurance company, it is that company and not the

appellant which would have been entitled to the payment made

by the insurance company. Yet another important term which

shows that the ownership in the film vested in the foreign

client and not in the appellant company is that the expenses to

be incurred outside India were to be borne by the foreign client

and not by the appellant company. As noted earlier, the entire

expenses for the production of the film were to be borne by the

foreign client and not by the appellant. A fixed fee in terms of

clause 6 of the agreement was to be paid to the appellant. In

fact, the term stipulating the payment of a fixed fee to the

appellant company leaves no doubt that the ownership in the

film vested in the foreign client which was paying a fixed fee to

the appellant company for the production services rendered by

it. The stipulation permitting the appellant to retain the money

received by it, in the event of the production getting stopped

shows that no loss was to be incurred by the assessee in the

event of the project remaining incomplete and the entire loss

would have been of the foreign client. In fact, as pointed out to

the Tribunal, the appellant company also did not show any

sale or purchase in the Profit and Loss Account submitted by

it. This is yet another indicator that the appellant company

was paid a fixed fee for the services rendered by it and it was

not engaged in the production of the software on its own

account and, since it was not the owner, there is no question of

it transferring any such software outside India.

13. A perusal of the agreement between the appellant and

Cine + Media Services would show that the equipment for

shooting the film was brought from Germany and the appellant

company was made responsible for customs clearance for

bringing the equipment in and taking it out. Under this

agreement also, a fixed sum stated in terms of article 4 of the

agreement was to be paid to the appellant and it was foreign

client which was to bring the equipment to India for the

purpose of shooting.

14. For the reasons given in the preceding paragraphs, we

do not find any infinity in the factual findings returned by the

Tribunal. No perversity has been pointed out. The Tribunal

has correctly appreciated the law and the terms of the

agreements. Consequently, no substantial question of law

arises for our consideration. The appeal is, hereby, dismissed.

(V.K. JAIN) JUDGE

(BADAR DURREZ AHMED) JUDGE APRIL 19, 2010 RS/