Amortisation of cost of production/cost of acquiring distribution rights of films - Assessments of film producers/distributors - General guidelines for allowance thereof
Circular No. 92 was issued by the Central Board of Direct Taxes on 18 September 1972. Its subject is Amortisation of cost of production/cost of acquiring distribution rights of films - Assessments of film producers/distributors - General guidelines for allowance thereof.
This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.
Lays down amortisation rules for feature film costs, classifying films by cost of production including positives and the producer's advertisement expenses: class A at Rs. 35 lakhs and above, class B between Rs. 10 lakhs and Rs. 35 lakhs, and class C below Rs. 10 lakhs. A case study showed class A films running more than two years, so their cost is written off 60 per cent in the first year, 25 per cent in the second and 15 per cent in the third, on a time basis, and those percentages are not to be departed from. Class B and C films, whose effective life was found to be about a year, may have the whole cost allowed in the year of production if released in the first half of the accounting year; if released in the second half, the film is valued at 50 per cent of cost at the end of that year and the balance is written off in the next. A distributor's cost of acquiring distribution rights is treated the same way as a producer's cost of production. On an outright sale of the film for all territories the entire cost is allowed in the year of sale whatever the class, and a distributor who bought outright and sells outright is taxed on the profit after deducting what he paid for the exploitation rights. Where an A class film is disposed of on a mixed basis, part on minimum guarantee and part on outright sale, the cost is allowed outright in the proportion that outright sale receipts bear to total receipts, the balance being amortised on the class A time basis. The Board's earlier circulars of 9-4-1959 and 4-10-1969 stand modified accordingly.
The Board reconsidered the amortisation of feature film production costs, the effective life of a film depending on many factors, chiefly the market value of the stars, which is reflected in the cost of production.
Amortisation of cost of production/cost of acquiring distribution rights of films - Assessments of film producers/distributors - General guidelines for allowance thereof
1. Attention is invited to Board’s Circular No. 4 (XI-3)D, dated 9-4-1959, as modified by Circular No. 30, dated 4-10-1969 [Clarifications 3 and 4] on the above subject.
2. The Board has reconsidered the question relating to the amortisation of the cost of production of a feature film. The effective life of a feature film depends on many factors, the most important among them being the market value of the stars acting in the films, which in turn is reflected in the cost of production.
On the basis of cost of production, the feature films can be categorised into three classes :Class
Cost of production including cost of positives and advertisement expenses incurred by the producer
A
Rs. 35 lakhs and above.
B
Between Rs. 10 to 35 lakhs.
C
Below Rs. 10 lakhs.
3. Normally feature films are disposed of by a producer either under the minimum guarantee formula or by way of outright sale. Under the minimum guarantee system a minimum amount is guaranteed to be paid to the producer by the distributor. In addition, a right to participate in the overflow is also retained by the producer. Overflow represents the amount which is arrived at after the distributor has recouped the minimum guaranteed amount and his commission. In the case of outright sale, the producer transfers all his rights of exploitation of the feature film to the distributor for a lump sum consideration.
4. An actual case study of the films in A class was undertaken. Feature films produced with the cost of production of Rs. 35 lakhs and above were found to have a run of more than 2 years. The Board has, therefore, decided to revive the amortisation formula for such films under which the value of the film will be depreciated by 60 per cent in the first year, 25 per cent in the second year and 15per cent in the third year on time basis as elucidated in Board’s Circular dated 9-4-1959 referred to in para 1. The percentages are not to be deviated from and are to be followed in allowing cost of amortisation of A class feature films.
5. The effective life of feature films in B and C categories was found to be normally of one year. It has, therefore, been decided by the Board that the entire cost of production may be allowed in the very first year of production if the film was released in the first half of the accounting year. In case the film was released in the later half of the accounting year, the value of the film should be taken at 50 per cent of the cost of production at the end of that accounting year and the balance 50 per cent should be adjusted in the second year.
6. The Board has also decided that the cost of acquiring distribution rights should be treated in the hands of the distributor in the same way as the cost of production is treated in the hands of the film producer, the rates of the allowance and the manner being as indicated in paras 4 and 5 above.
7. If the producer sells the film outright for all the territories, the entire cost of production should be allowed as a deduction in the year of the sale irrespective of the category to which the film belongs. If the distributor after having acquired the film by way of outright purchase sells the film outright to another person in the first or subsequent years, he would be assessable on the profits made on that transaction by allowing the deduction for the price which he had paid to acquire the exploitation rights.
8. In cases where the producer or the distributor disposes of the exploitation rights of an A class film on mixed basis, i.e., some territories on minimum guarantee and others on outright sale, the deduction for the cost of production should be effected in the same proportion as the amount of outright sale bears to total receipts. The remaining balance of the cost of production should be amortised on lines indicated in para 4 above. If, for example, the cost of production of an A class film is Rs. 40 lakhs and the exploitation lights for three territories are disposed of for Rs. 20 lakhs on minimum guarantee basis, and the remaining territories for Rs. 25 lakhs by way of outright sale, the cost of production should be amortised on the following basis :Cost of production
Rs. 40 lakhs
Minimum guaranteed amount
Rs. 20 lakhs
Outright sale
Rs. 25 lakhs
Rs. 45 lakhs
25 : 45 = X : 40 =
Rs. 22, 22,222
Therefore, the outright deduction from the cost of Rs. 40 lakhs would be Rs. 22,22,222. The balance amount i.e., Rs. 40 lakhs less Rs. 22,22,222, should be amortised on time basis as indicated in para 4.
9. Board’s circulars referred to in para 1 above stand modified to the extent indicated above.
Circular : No. 92 [F. No. 201/5/71-IT (A-II)], dated 18-9-1972.
In an assessment of a producer or distributor where the write-off of film cost in the year of release is restricted.
An A class film costs Rs. 40 lakhs. Three territories go on minimum guarantee for Rs. 20 lakhs and the rest are sold outright for Rs. 25 lakhs, total receipts Rs. 45 lakhs. Cost allowed outright is Rs. 25 lakhs of Rs. 45 lakhs applied to Rs. 40 lakhs, that is Rs. 22,22,222, and the balance of the cost is amortised at 60, 25 and 15 per cent over three years.
Source: the Income Tax Department’s own published text — its page for this instrument.
