By TIOL News Service

CHENNAI, JULY 03, 2013: FACTS: When service tax was levied on "intellectual property services" with effect from 10.9.2004, copyright was specifically excluded from the definition of 'intellectual property rights. Normally, a producer of a movie sells the rights showing the movies in a region to a distributor. The distributor in turn enters into agreement with subscribers/theatre owners and this agreement can be of different types. By Circular No.109/03/2009 of Central Board of Excise and Customs bearing F.No.137/186/2007-CX.4 dated 23.2.2009, it was clarified that the 'screening of a movie is not a taxable service except that the distributor leases out the theatre and the theatre owner gets a fixed rent. In such case, the service provided by the theatre owner would be categorised as 'renting of immovable property for furtherance of business or commerce and the theatre owner would be liable to pay service tax on the rent received from the distributor. Insofar as 'revenue sharing arrangement, the Circular clarified that in such type of arrangement, the two contracting parties act on principal to principal basis and one does not provide service to another and in such arrangements, the activities are not covered under the service tax.

With effect from 1.7.2010, business of "licensing of copyrights" was brought within the service tax net by making amendments to the definition of 'taxable service under Clause (105) of Section 65 by introducing sub-clause (zzzzt). As per Section 65(105) sub-clause (zzzzt), service tax is leviable on any 'temporary transfer of copyright or permitting the use or enjoyment of the copyright excepting rights covered under sub-clause (a) of clause (1) of Section 13.

In Section 65, Clause (104c) of the Finance Act by the Finance Act, 2011, for the words 'operational assistance for marketing, the words 'operational or administrative assistance in any manner were substituted in Clause (104c) of Section 64.

Considering the taxing entry for "copyright services" introduced vide Section 65(105)(zzzzt) and also the amendment in Section 65(104c), Circular No.148/17/2011-ST dated 13.12.2011 was issued under Section 83 of the Finance Act read with Section 37B of the Central Excise Act issuing clarification regarding the levy of service tax on distributors/sub-distributors of films and exhibitors of movie. In the said Circular, it was pointed out that the earlier Circular No.109/03/2009 dated 23.2.2009 has been misinterpreted to exclude all revenue sharing arrangements from the levy of service tax.

In these writ petitions, the impugned circular is challenged as ultra vires the Constitution and the statute contending that the circular amounts to back door legislation and is liable to be struck down.

The High Court observed,

The Circular has examined different types of arrangements between distributor/sub-distributor or exhibitor of the movie. To ensure uniformity in levy of service tax, the Circular only clarifies the types of transactions; arrangements and service tax leviable. It only seeks to clarify the types of transactions and levy of service tax. We have now to examine as to whether any discretion still vest with the assessing authority to examine arrangements on case to case basis or he shall blindly proceed to levy service tax on all revenue sharing arrangements.

The impugned circular is a clarification on levy of service tax on distributors/sub-distributors of films and exhibitors of movie. This is in contradistinction to the circular dated 23.02.2009, which pertains to service tax on movie theatres alone. When, we examine the circular it comes to light that the need for issuing circular was on account of representations requesting clarification on taxability of consideration earned by distributors/sub-distributors/area-distributors of Indian and Foreign films in the form of revenue share from the exhibitors of the movie and on revenue retained as percentage by the exhibitors of the movie from the sale of tickets in the light of the change in the law and the misinterpretation of earlier circular dated 23.02.2009.

It is to be pointed out that the types of arrangements referred to in both the circulars i.e, 23.02.2009 and the impugned circular are only illustrative and not exhaustive. Therefore, the observations contained in the impugned circular for the purpose of issuing a clarification can at best be understood as a sample arrangement, which has come to the knowledge of the CBEC, which formed the basis for issuance of the clarification

It should be noted that the clarification was not suo-moto, but on account of request made by the association of exhibitors. The circular makes this aspect abundantly clear, since it states that there are also other varied modes of transaction in the industry. Furthermore, it is explicitly mentioned that business transactions need to be examined for leviability of service tax under other heads, which depends upon the arrangement whether the theatre owner has merely given his premises to the distributor or is also involved in giving support services for the business of the distributor. In which case, it is stated that the arrangement is leviable to service tax under business support service or renting of immovable property.

The apprehension of the petitioners that the assessing authority shall mechanically proceed to levy service tax is without any basis. The answer lies in the impugned circular, which clearly spells out that the nature of transaction is a determinative factor and that each case may be looked into on its own merits and decision taken on case to case basis. Therefore, the revenue is right in contending that the writ petitions are pre-mature.

The High Court concluded,

With more multiplexes and single theaters on rise right from cities to moffusil, there is a huge rise in business over all. The source of concept of service tax lies in economics. Huge money is involved in film industry, coupled with host of commercial activities right from the Box Office to theatrical exhibition. Having regard to the variant modes of arrangements between the distributors/sub-distributors of films and exhibitors of movie, CBEC was justified in issuing the Circular clarifying the transactions between the distributor/sub-distributor and owners of the theatres and levy of service tax and that the nature of transaction determines the leviability of service tax and decision to be taken on case to case basis. The impugned Circular No.148/17/2011-ST dated 13.12.2011 cannot be said to be beyond the powers of Central Board of Excise and Customs. The Circular does not restrict the powers of the officials to decide a particular dispute in a particular manner and the impugned circular is not violative of Section 37B. All the writ petitions are liable to be dismissed.

(See 2013-TIOL-516-HC-MAD-ST)