14.1 Often, when a film is declared in market reports as a „hit‟, the producers as well as the distributors brings in intermediaries to divert some of the profits. However, as the intermediaries are introduced only for the purpose of manipulation of income, a close scrutiny of the agreements with them would generally reveal discrepancies in dates and other material particulars. A distributor might acquire world rights or the rights for a particular territory. He might then show that he has raised finances by selling those rights to sub-distributors, for a part of his territory. Such sales offer scope for manipulation by way of bringing in unaccounted funds, as also for passing of the profits of the distribution on business to benami parties.
Therefore, the finances brought in by a distributor, by way of advances from his sub-distributors, require very close scrutiny.
14.2 Sometimes, a film which flops on exhibition is purchased on minimum guarantee basis by a
distributor who may have otherwise suffered losses in earlier years. The loss on the new film acquired by him will only increase his earlier losses. In order to help a near relative or a sister concern having
substantial income from their other business including distribution of feature films, the distribution rights of the flop film are transferred to such relative or sister concern so as to reduce the incidence of taxation in their hands. Such distribution rights are transferred after the film is screened and its results are known. A scrutiny of agreements between the producer and the distributor, and that between the distributor and his sub-distributor with particular reference to the dates of such agreements and the dates when these were registered with the Motion Pictures‟ Association will reveal the real state of affairs.
14.3 In case of commercially successful films, there is a tendency to pass on distribution rights to a benamidar, or to a dormant distributor, who is financially derelict due to past losses. Such distributors can accommodate huge profits against previous losses on the payment of small commission. In the case of a leading film production company, whose management also controlled a film distribution company formed for distribution of their own films, several successful films were transferred for exploitation and distribution to a limited company, owning a cotton textile mill, under the control of the same group. The said company was incurring huge business losses. It had to approach the High Court for permission to get the object clause of the Memorandum of Association amended, so as to authorise the carrying on the business of distribution of films. In another case, a leading producer sold the world distribution rights of some of his good films on an outright basis, for a nominal account, to a nonresident. The alleged purchaser in turn sold the films to the real and ultimate distributors for the appropriate prices. Thus an evidence was created that the bumper profits on the resale of these films accrued to the nonresident. However, the AO was able to establish that the deal was, in fact, struck between the producer and the ultimate distributors directly, and the intermediary, was, therefore, interposed solely to evade tax.
14.4 Therefore, in the case of a resale of rights or the creation of a sub-agency, it is important to examine the correspondence that passed at the negotiating stage between the parties concerned. The first
payments to the producer, as also the first deposits from during the production stage, are important and reliable indication of the party who has genuinely acquired the rights. It is also helpful to ascertain as to whom the publicity material, etc. were delivered by the producer in the beginning. Such publicity material is the starting point for the distributor to enter the market, and secure deposits from the exhibitors. It will, further, be useful to ascertain from the Indian Motion Picture Distributors‟ Association, whether the alleged distributor was a member of their association at the relevant time. The members of this
association enjoy certain privileges and facilities which a genuine distributor would be anxious to secure.
Collection of information from film magazines assumes importance in the case of distributors also, as these give definite and reliable information about films from the stage of the announcement of production.
14.5 In view of the short life of a film even in the hands of distributors, Rule 9 B of the I T Rules specifies the amortisation procedure to be followed for amortising the cost of distribution rights of a film. For the purpose of this Rule, the cost of acquisition of a feature film means the amount paid by a distributor to the film producer or any other distributor under an agreement for acquiring rights of exhibition. In case of such acquisition, being on minimum guarantee basis the cost of acquisition means the amount agreed to be paid as minimum guarantee. However, the cost does not include expenditure incurred by the film
distributor on preparation of positive prints of the film or for its publicity. In computing the profits arising to a distributor form the distribution of a film, deduction in respect of cost of acquisition is allowed as per Sub-rule (2) to (4). The rights for distribution are generally acquired for a specified period. The major part of the revenue comes in initial weeks of the first release of the film. There are instances where a film producer fails to give delivery of the film due to it is being incomplete. In such cases, the distributor‟s claim for deduction of the advance amount paid by him to the producer assumes importance. The purchase is not complete till delivery of prints of the film is given by the producer to the distributor.
14.6 Some distributors also claim deduction u/s 80 HHC in respect of the income earned by them from sale proceeds of films in the overseas territories. Most distributors claim deduction under this Section on the ground that “sale” of overseas rights constitute “sale of goods”. However, there were conflicting views on the validity of this claim. This issue has finally been set at rest by the decision of the ITAT Mumbai
Bench in the case of A.G. Nadiadwala, where it has been held that the benefits of this Section are not available to these persons since the films do not constitute “goods‟ and there is no „sale” as contemplated by provisions of Section 80HHC. In fact, these transactions merely involve lease of the rights of exhibiting the said films for a limited period, after the expiry of which, the ownership rights revert back to the
distributor. However, the position has undergone change w.e.f. 1.4.2000, with the introduction of Section 80 HHF.
14.7 Where a film distributor claims write-off of the advance made by him to the producer of the film, it should be allowed only if
- the advance is actually an advance paid by him, and is not to be recovered from the exhibitor,
the advance for which interest is charged, is made by a distributor carrying on a money-lending business and one of the terms is that the distribution rights of the film are to be given to the money lender.
the advance is made by a distributor who has made it his business to advance such loans to acquire distribution rights and to sell them later.
Such claims should not be allowed as an admissible deduction in the assessment of the distributor if -
the advance is made for an outright purchase of a film, where it is not the business of the distributor to resell films.
the advance is made in consideration of the distributor getting the rights of distribution, the amount to be recouped from the rent received from the exhibitor and the excess to be shared by distributor and the producer.
Since, however, arrangements differ from distributor to distributor, each case will have to be decided with reference to its own facts, bearing in mind the broad principles set forth above.
14.8 Distributors invariably enter into written arrangements with cinema owners regarding the manner of sharing the takings. The film is given either on a fixed hire, or the takings are shared in agreed
proportions between the parties. The major share always goes to the distributor, for first-run of the films. It is advisable to examine such agreements for some of the important stations, and to cross-verify whether the receipts shown, accord with the terms of the agreement.
14.9 It is also necessary to examine the receipts on distribution rights and exhibition abroad. For this purpose, it may become necessary to see the correspondence and trace the party who made the initial payment to the distributor for controlling the „overseas circuit‟. Ordinarily, the party making the initial payment is the real distributor. A comparison of the prices paid by the purchaser, for the same territory, for different films, should also set the AO thinking about the reasons for the lesser prices charged for particular films. The AO has also to know what type of films i.e., costume films, family dramas, fantasies, etc. are in demand in a particular country, so as to check the reasonableness of the sale price shown for the film.
14.10 Accounting Standard AS-9 of ICAI provides a framework for revenue recognition in India. Most agreements for film distribution are in the garb of a lease arrangement, to get over problems relating to sales tax complains. Income from distribution is linked to the release of the movie. The terms of
agreement provide the legal basis for the recognition of income. After the initial life of a film, it is generally released for a fixed number of years or for fixed amounts per period. If collection of money is certain and there are no further commitments from the producer, there is a legitimate reason to recognise the entire amount as receipts in the first year itself. This is a basic principle of GAAP accounting, which is widely followed for income in the nature of royalty. Unless the producer keeps some commitments to be discharged during the term of the agreement, like delivery of positives, income really can be recognised upfront.
14.11 Amortisation of cost and valuation of closing stock are two very difficult accounting issues in the film business. In a company where multiple films are being produced, the accounting system needs to identify cost of each project, which has to be accumulated over various accounting periods. The cost of any abandoned project is often routed through the Profit and loss account, as a trading loss. Regular revenue cost (like office cost) and cost specifically related to the project, are charged to the revenue account every year.
EXHIBITORS
15.1 Exhibitors include those cinema owners who run their own cinema halls and lessees who have taken cinema halls on lease. Top theaters in major cities who have acquired a reputation, and who have the capacity to attract audiences in a way that can influence the market reports of a new film are much in demand by distributors. They, often demand „on money‟ from distributors. In other cases the exhibitors pay „on money‟ to distributors for getting the rights to run a successful film in their theaters. Both these payments are not recorded, and either way these come out of inflated expenses. Daily receipts from the box office can be easily verified. What should, however, attract the Assessing Officer‟s notice is whether any deposit or advance was paid to the film distributor for booking the film and how it is accounted for and finally adjusted. It is also useful at times, to pick up the printer‟s bills for the printing of ticket books and to verify these with the books issued to the cashier and cross-check the same with the serial numbers in the daily report of sale of tickets.
15.2 The agreement between the exhibitor and distributor should be examined to ascertain how certain expenses are to be shared and it should be checked whether the sharing of expenses has really been done accordingly.
15.3 In big cities tickets of premier shows of successful feature films are often sold at a premium. Often sale of tickets in black market is also organised by the exhibitor. However, the proof of receipt of this money is not easy to come by. In several cases action u/s 132 have yielded seizure of records relating to receipt of „on-money‟.
15.4 It is a common practice with theatre owners to let out their cinema halls to outside exhibitors.
However, in many instances such outsiders are only benamidars, relations or employees of the owners and this device is used to split up the income. It is desirable to scrutinise agreements between the parties in order to ascertain whether the hirers are genuine parties engaged in the film exhibition business. There is also a possibility of omitting receipts from morning shows or from hiring of theatre to outsiders. Receipts from refreshment stall hire, cycle stands and other concessions should be particularly verified. There is a widespread practice of understating receipts from canteen contractor(s) and vehicle-shed contractors.
These contractors are generally not assessed. Looking to the location and reputation of a cinema house, if the receipts from the contractor appear to be understated, enquiries should be made by examining the contractor.
15.5 Publicity expenses incurred by exhibitor require thorough scrutinised. Besides, the payments to staff need verification. It has to be seen whether their names were intimated to the Shops and Establishment Department or only bogus staff has been shown on the rolls.
15.6 Expenses are sometimes inflated by debiting fictitious commission for procuring films from
distributors. In a case the exhibitor had claimed payment of commission to close relations of the partners on the ground that these persons were instrumental in negotiating the exhibition rights of films with the distributors. Contract agreements allegedly entered with these persons were produced. Scrutiny revealed that the letterheads of the assessee firm on which these so called agreements were written bore
telephone numbers in five digits which were in fact introduced in that city after the date of the agreement.
These agreements were clearly fabricated at a later date and were not genuine. Enquiries made from one of the distributors whose picture had been screened at the assessee‟s cinema hall confirmed that the negotiations for the screening were conducted directly with the assessee without any intermediaries.
15.7 Repairs to theatre buildings and replacement of furniture should attract the attention of the AO.
Entries for such expenditure towards the closing date of the accounts should be checked to decide their genuineness, and, to ascertain whether these are of capital nature. If the repairs were substantial, the closing of the theatre for some days might be one of the indicators. The frequency of such expenses from year to year might also provide a clue to the genuineness or otherwise of the claim. Another problem is that capital expenditure is incurred on the theatre buildings by the lessee-exhibitors and such expenses are then either claimed as revenue expenditure or a claim for depreciation is put forward. The claim requires a study of the various clauses of the lease, which will clearly bring out, as to whose responsibility it was to effect repairs. Any claim for depreciation in respect of the capital expenditure incurred by the lessee, has to be disallowed, since the lessee is not the owner of the assets concerned. The same applies to the lessees of studios and laboratories. Also, sometimes, important renovations are made to buildings and furniture without showing the correct expenditure in the books.
15.8 Some exhibitors earning substantial income adopt the device of ostensibly acquiring distribution rights in obscure films to reduce their profits. The genuineness of such „purchases‟ should be scrutinized with great care. The business of the film exhibition gives a steady income and usually there are no business hazards, such as bad debts. As such, any losses claimed by film exhibitors would justify a detailed probe.
15.9 Multiplexes : Typically, film exhibition centres particularly in the metros have to compete with various other avenues of entertainment available to the public at large. The only way to pull people back to the theatres is to make theatres attractive, comfortable and equipped with the latest amenities, thereby offering the audience more than what they expect out of a theatre. Since in a multiplex more than one movie is screened at any given time, a potential viewer finds it very difficult to go home without seeing a movie even though it may not be the one he came to see. Multiplexes have the potential to radically alter the entertainment business in time to come Multiplexes provide the luxurious amenities of the modern-day theatre; multiple screen choices, state-of-the-art technology, ergonomic seating. eye-catching architecture and top of the line cafes and food courts. Now with various State governments announcing tax holidays for cineplex (multiple movie theatres) projects, more multinationals are preparing a foray into India. The Gujarat Government has announced a seven year entertainment tax holiday for such projects.
15.10 Exhibitors with brand image : Certain theatres are in the process of creating a brand image. The idea is to offer excellent facilities, thereby enhancing the viewing pleasure and attracting a regular clientele to the branded theatre chains. They can then leverage the brand image with corporates and garner advertising, independent of the movie being screened.