The film industry is a complex chain ending with the management of intellectual property rights. With the introduction of service tax on intellectual property and business-related services in the Finance Act, 1994 (act), their classification and tax liability are frequently disputed.
Manisha Singh
Partner
LexOrbis
In Play House Motion Pictures Private Limited v Commissioner of Central Excise, Customs and Service Tax before the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), the argument was whether revenue earned from film distribution and copyright assignments could be taxed as a business auxiliary service (BAS) or as a copyright service. It was also disputed that the extended period of limitation applied, allowing a demand for tax from earlier years.
The main issues were whether the exhibition and distribution of films could be treated as a BAS taxable service prior to 1 July 2012, and whether the transfer of film copyrights, in whole or in part, was a taxable copyright service as defined in section 65(105)(zzzt) of the act, from that date. The tribunal also determined whether the extended limitation period under section 73 of the act could be invoked when the taxability of such activities was a matter of interpretation.
Play House Motion Pictures engaged in the production and distribution of cinematographic films, as well as the transfer or assignment of copyright to television channels, music companies and other entities. The tax authority alleged that from 2009 to 2013, the appellant failed to pay service tax. A September 2014 show cause notice demanded BAS tax on distribution-related revenue and copyright service tax on revenue from assigning film rights.
The adjudicating authority confirmed the demand, holding that after the introduction of service tax on copyright services in July 2010, temporary transfers of film rights became taxable. It further held that under the negative list regime from July 2012, exemptions applied only to films exhibited in cinema halls. Not all of the appellant’s transactions were in this category.
Shivi Gupta
Associate partner
LexOrbis
The appellant argued that extended limitation did not apply because it did not hide the facts. All transactions were properly recorded in audited accounts and subject to income tax. The transactions involved revenue-sharing arrangements with theatre owners and permanent assignments of copyright, all of which were non-taxable as clarified in the Central Board of Excise and Customs (CBEC) circulars and court judgments. The show cause notice did not specify which sub-classification of BAS applied, making the demand untenable.
The authority maintained that the appellant’s activities were within the scope of the BAS and copyright service as defined. It pointed out that temporary transfers of copyright were taxable from July 2010 and that the exemption after July 2012 was limited. The revenue-sharing arrangements were taxable services.
The CESTAT set aside the demand. Regarding copyright service, the agreement for the Malayalam film Jawan of Vellimala was an absolute and perpetual assignment of broadcasting rights, amounting to a permanent transfer, not a temporary licence. The Copyright Act, 1957 and the CBEC’s 2004 clarification made it clear that permanent transfers of intellectual property rights are not taxable.
As to BAS, the CBEC Circular 109/3/2009-ST accepted that revenue-sharing arrangements for film screenings are not taxable services unless the theatre is leased for a fixed rent. Because no such lease existed and the show-cause notice did not specify the BAS category, the demand was unsustainable.
Regarding limitation, the taxability of the activities in question has long been debated, necessitating numerous clarifications from the board. With no evidence of wilful suppression, the extended period of limitation was inapplicable.
This decision confirms that permanent assignments of copyright are not caught by service tax, in line with board clarifications. It emphasises the importance of precise classification in show cause notices. Failure to specify the taxable category may invalidate the demand. Revenue-sharing arrangements for film exhibitions, with no fixed rent lease of theatre premises, are not BAS. Where the law is ambiguous and a number of interpretations are possible, extended limitation periods cannot be invoked without clear evidence of deliberate evasion.
Manisha Singh is a partner and Shivi Gupta is an associate at LexOrbis
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