MARCH 2, 2010  

Budget targets cine industry through Service Tax

By D B Bhaskara Sharma

ONE of the new services proposed in the Budget, 2010, assumes importance by its scope and impact especially on cash rich cine industry. Quite often we hear stories in the media that such and such film was sold for substantial amount in crores; the audio rights were sold to a recording company for a hefty sum etc. With competition among TV channels for acquiring telecasting rights for new films the producers are minting money even on such selling of telecasting/broadcasting rights. This apart the film producers have also found out new ways of making money through selling right to use the film concepts for merchandise (recent example being ‘3 Idiots').

Though transfer of right to use of IT software (which is also a copyright protected under copyright act) has been brought under service tax in the year 2008, the transfer of copyright in respect of other creative works protected under copyright act has so far not been taxed, perhaps the government wanted to encourage creativity especially in the field of literary, dramatic and musical works. Cinematograph film work which is also considered as one form of creative work enjoyed this immunity form service tax imposition. However, as cine industry is seen to be cash rich since substantial amounts being made by producers out of selling copyright , the government perhaps wants to collect its pound of flesh through imposition of service tax by this commercially exploitable creative works from other forms listed at Section 13(1)(a) of Copyright Act.

The provisions relating to this new service (as given at (zzzzt) of Finance Act, 1994 proposed in the Finance Bill, 2010) read as follows:

Taxable service means –

(zzzzt) to any person by any other person , for

++   transferring temporarily; or

++   permitting the use or enjoyment of

any copyright defined in the Copyright Act, 1957 except the rights covered under sub-clause (a) of Clause (1) of Section 13 of the said Act.

As the proposed changes in Finance Act, 1994 has a link to Copyright Act, 1957, for better appreciation of the above provisions related provisions of the Copyright Act, 1957 are extracted as under:

Relevant definitions as given in Section 2 of the Act

(dd) "broadcast means communication to the public –

 (i) by any means of wireless diffusion, whether in any one or more of the forms of signs, sounds or visual images; or

 (ii) by wire, and includes a re-broadcast;

++   cinematograph film includes the sound track, if any, and "cinematograph" shall be construed as including any work produced by any process analogous to cinematography;

Explanation.--For the purposes of this clause, "video films" shall also be deemed to be work produced by a process analogous to cinematography.

(ff) "Communication to the public" means communication to the public in whatever manner, including communication through satellite;

(w) “record " means any disc, tape, perforated roll or other device in which sounds are embodied so as to be capable of being reproduced there from, other than a sound track associated with a cinematograph film;

(x) 'recording “means the aggregate of the sounds embodied in and capable of being reproduced by means of a record;

(y)”work “means any of the following works, namely –

(i) a literary, dramatic, musical or artistic work;

(ii) a cinematograph film;

(iii) a record;

Section 13- (1) Works in which copyright subsists.

    Subject to the provisions of this section and the other provisions of this Act, copyright shall subsist throughout India in the following classes of works, that is to say –

    (a) Original literary, dramatic, musical and artistic works;

(b) Cinematograph films ; and

    (c) Records.

Section 14: Meaning of copyright.

(1) For the purposes of this Act, "copyright" means the exclusive right, by virtue of, and subject to the provisions of, this

(c) in the case of a cinematograph film , to do or authorise the doing of any of the following acts, namely;

 (i) to make a copy of the film;

 (ii) to cause the film, in so far as it consists of visual images, to be seen in public and, in so far as it consists of sounds, to be heard in public;

 (iii) to make any record embodying the recording in any part of the sound track associated with the film by utilising such sound track;

 (iv) to communicate the film by broadcast;

(d) in the case of a record, to do or authorise the doing of any of the following acts by utilising the record, namely –

 (i) to make any other record embodying the same recording;

 (ii) to cause the recording embodied in the record to be heard in public ;

(iii)to communicate the recording embodied in the record by broadcast;

As could be seen from the above provisions of the Copyright Act it is clear that government seeks to exclude from service tax ambit only the transfer of copy right with regard to sub-clause (a) of clause (1) i.e a literary, dramatic or musical work and transfer of all other copyright (listed at (b) and (c) of Section 13) will now be subject to service tax.

Transfer of Cinematograph film rights by the film producers having been covered under Section 13(1) (b) would attracts service tax once the Finance Bill becomes an Act. The following are some of the means by which the film producers normally transfer copyright temporarily for enjoyment or for commercial exploitation:

All the above transfer would now constitute a service and leviable to service tax.

TRU letter dt. D.O.F. No.334/1/2010-TRU dated 26 th February 2010 mention as follows with regard to this new service :

“7.3. The first category of copyright has been kept out of the tax net while the second and third categories of copyrights are being made taxable under this service. A cinematographic film means any work of visual recording on any medium (emphasis added) produced through a process from which a moving image may be produced. The same may be accompanied with sound reproduction also. Both the recording of the cinematographic film and the accompanying sound track are the property of the producer, who can temporarily transfer it or permit its use by another person for a consideration. It is this activity, which is being taxed under this service. It would have an impact on the royalty payments on both imported and indigenously produced films when the producer/right holder allows such use to another person, say the distributor.

7.4. Similarly, song, its music, lyrics and composition also enjoy the copyright protection to its owner who can commercially exploit it in the manner stated above. Normally, the copyright of music vests in the composer and the copyright of music recorded vests in the producer of the sound recording. It is possible that a lyricist or a singer may hold copyright for the words of a song or the song itself. Merely allowing that song to be recorded is a copyright, which would fall under category (a) of section 13 of the Copyright Act and thus would not be subject to service tax. However, after the performer has transferred his rights to a sound recording company, the sound recording company acquires the copyright mentioned in category (c) of section 13 supra. It is the transfer or allowing use of this right, which would be subjected to tax under the new service.”

Though this write up is confined to cinematograph films, it appears that as per the definition of this new service it is seen that it may even cover all other areas – like selling video clippings by broadcasting firms to other agencies, selling of copyright of functions like awards functions, Sports event by the organizers of such events and host of all such activities.

So far we see film producers and cine actors only in the corridors of Income Tax Department may be in future the central excise authorities can also have a close glimpse of them by summoning them to their offices.

(The views expressed are personal)