Synopsis The authors continuing their coverage of transactions which have been subject of levy of dual taxation of sales tax and service tax, have in this feature discussed about taxability of film distribution rights in light of recent decision of AGS Entertainment Pvt. Ltd.(Mad.). The authors discuss and concur with the views of the Court that in case of temporary transfer of film distribution rights, what is transferred is only the ‘use of the goods i.e. copyright in films’ and not ‘transfer of right to use goods’, so such transaction shall be subject to service tax and not sales tax.
Introduction
The Hon’ble Supreme Court in case of Association of Leasing and Financial Services Companies vs. Union of India & others (2 SCC 352) has observed as under;
“Today, with the technological advancement, there is a very thin line which divides a sale from service.”
In this scenario, it is very difficult to decide as to which tax will apply to the transaction/s i.e., VAT or Service Tax. One such issue arose in respect of film distribution agreements.
The film producers and distributors were under an impression that on their agreements for distribution of films with distributors, as well as between distributors and sub distributors or with theatre owners etc., they are liable to tax under State Value Added Tax Act.
However, Service Tax department also claimed tax on the said transaction under sub-clause (zzzzt) of clause (105) of section 65 as ‘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 the clause (1) of section 13 of the said act.’
The film producers and distributors challenged the levy of Service Tax before the Hon’ble Madras High Court. The Hon’ble Madras High Court has now delivered judgment in AGS Entertainment Pvt. Ltd. & Others (Writ Petition no. 29398 of 2010 & others dated 26.6.2013.)
Facts
In the Writ Petition, the Hon’ble Madras High Court has raised following issues for its consideration.
“17. Upon consideration of the rival contentions and averments in the Writ Petitions and counter statement, the following points arise for consideration in these Writ Petitions:-
1. Whether the taxable event provided under Section 65(105)(zzzzt) of the Finance Act, 1994 is covered by Article 366 (29A)(d), which is a “deemed sale of goods”?
2. Whether the Petitioners are right in contending that the levy of service tax on “temporary transfer or permitting the use or enjoyment of copyright“ provided u/s. 65(105)(zzzzt) of the Finance Act, 1994 is covered under Entry 54 of List II and whether it amounts to transgression by Parliament into the exclusive domain of the State Legislature?
3. Whether the Petitioners are right in contending that the copyright is goods and transfer of copyright of cinematograph films is only delivery of goods for consideration and is absolute transfer and no service element is involved?
4. Even assuming that there is an element of service involved in the nature of transaction done by the Petitioners, should the dominant intention of the transaction being transfer of goods has to be only taken into consideration?
5. Whether the Petitioners are right in contending that Parliament has no authority to dissect a composite transaction as in the case of the Petitioners and levy service tax?
6. Whether Section 65(105)(zzzzt) levying service tax on the temporary transfer or permitting the use or enjoyment of copyright is ultra vires the Constitution.”
The Hon’ble Madras High Court referred to a number of judgments about validity of levy of Service Tax and levy of tax on deemed sale by way of ‘transfer of right to use goods’. As stated above, the argument of producers was that their agreements were for transfer of right to use goods and not for rendering services. The argument of the department was that allowing temporary use was falling under the service category.
Judgments referred For arriving to the meaning of sale by way of ‘transfer of right to use goods’, amongst others, the Hon’ble Madras High Court referred to the judgment of the Hon’ble Supreme Court in case of 20th Century Finance Corporation Ltd. vs. State of Maharashtra (119 STC 182). Hon’ble High Court quoted the following paragraphs from the above judgment:
“26. Next question that arises for consideration is, where is the taxable event on the transfer of the right to use any goods. Article 366(29-A) (d) empowers the State Legislature to enact law imposing sales tax on the transfer of the right to use goods. The various sub-clauses of clause (29-A) of Article 366 permit the imposition of tax thus: sub-clause (a) on transfer of property in goods; sub-clause (b) on transfer of property in goods; sub-clause (c) on delivery of goods; subclause (d) on transfer of the right to use goods; sub-clause (e) on supply of goods; and sub-clause (f) on supply of services. The words and such transfer, delivery or supply … in the latter portion of clause (29-A), therefore, refer to the words transfer, delivery and supply, as applicable, used in the various sub-clauses. ………..
In our view, therefore, on a plain construction of sub-clause (d) of clause (29-A), the taxable event is the transfer of the right to use the goods regardless of when or whether the goods are delivered for use. What is required is that the goods should be in existence so that they may be used. ……….
27. Article 366(29-A)(d) further shows that levy of tax is not on use of goods but on the transfer of the right to use goods. The right to use goods accrues only on account of the transfer of right. In other words, right to use arises only on the transfer of such a right and unless there is transfer of right, the right to use does not arise. Therefore, it is the transfer which is sine qua non for the right to use any goods. If the goods are available, the transfer of the right to use takes place when the contract in respect thereof is executed. As soon as the contract is executed, the right is vested in the lessee. Thus, the situs of taxable event of such a tax would be the transfer which legally transfers the right to use goods. In other words, if the goods are available irrespective of the fact where the goods are located and a written contract is entered into between the parties, the taxable event on such a deemed sale would be the execution of the contract for the transfer of right to use goods. But in case of an oral or implied transfer of the right to use goods it may be effected by the delivery of the goods..”
Thereafter, High Court referred to the scope of section 65(105)(zzzzt) about ‘temporary transfer’ under Service Tax in para -37 as under;
“37. Section 65(105)(zzzzt) seeks to tax viz., “temporary transfer or permitting the use or enjoyment” of copyright which is a service provided by the producer/distributor/exhibitor. Service Tax is a levy not on the “transfer of right to use the goods” as described under Article 366(29A) sub-clause (d); but on the temporary transfer” or “permitting the use or enjoyment” of the copyright as defined under the Copyright Act, 1957. In the case of Sales Tax Act, there would be “transfer of right to use the goods”. Whereas under the Service Tax Act what is levied is temporary transfer/enjoyment of the goods. The pith and substance of both enactments are totally different. “Temporary transfer” or “permitting the use or enjoyment of the copyright” is not within the State’s exclusive power under Entry 54 of List II. Therefore, there is no merit in the contention that the taxable event provided under Section 65(105) (zzzzt) is covered by Article 366(29A)..”
Regarding nature of transaction about transfer of right to use goods, Hon’ble High Court referred to the judgment in case of B.S.N.L. vs. Union of India (2006)(3 SCC 1) and quoted the following paragraphs.
73. No transfer of right to use:- As held by the Supreme Court in the decision of B.S.N.L. vs. Union of India, (2006) 3 SCC 1, to constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes:
a. There must be goods available for delivery;
b. There must be a consensus ad idem as to the identity of the goods;
c. The transferee should have a legal right to use the goods – consequently all legal conse-quences of such use including any permissions or licenses required therefor should be available to the transferee;
d. For the period during which the transferee has such legal right, it has to be the exclusion to the transferor – this is the necessary concomitant of the plain language of the statute – viz. a “transfer of the right to use” and not merely a licence to use the goods; e. Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.”
Observations of the High Court about nature of transaction
After referring to various different kinds of agree-ments entered into in the film industry in para-65 & 66, the Hon’ble High Court observed as under;
“65. Even though it was contended that the transaction is between the producer and the distributor and the distributor gets the absolute right over the cinematograph film, in reality, the distributor does not get the absolute rights. The distributor only gets few positive prints or cubes of the picture for the exhibition of the picture in the specified area. In other words, it is a temporary transfer of the copyright or permission to use or enjoyment for the limited period in the specified area. As rightly contended by the respondents, exclusive right of copyright ordinarily vests with the producer of the film. Even in outright assignment, the transfer is not absolute. In the case of a lease, it is for a given period. The levy of tax on any transaction is based on the criterion whether the transfer of right is permanent or temporary. So long as the producer does not fully relinquish his right over the copyright held by him, transfer of the right to use is purely temporary and in those cases, levy of service tax for such transfer of copyright would apply. The Service Provider is the Producer, who is the owner of the Intellectual Property and the service receiver is the person who temporarily gets the right to use the Intellectual Property who is the Distributor and service tax is leviable on such temporary transfer of copyright.
66. Normally, producer of a movie exploits the film in many ways i.e., assigning copyrights to distributor(s) for exhibition in theatres; or the producer himself exhibits the film by engaging the-atres; exploitation of satellite rights, T.V. channels, audio/video, etc. The right given to the distributor is restricted to exploiting the contents of the film through a film/digital format through exhibition in theatres in a specific area and for specified time. Even though the copyright of the film is assigned to a distributor for a specific area for a limited period, the producer reserves his right to exploit the film in other media. So long as the transaction does not amount to sale or permanent transfer, it is only a temporary transfer of copyright or permit its use by another person for a consideration. The Service Provider is the Producer who owns the copyright of the film and Service receiver is the
Distributor who temporarily owns the copyright of the film for consideration.”
In paras 75 & 83 Hon’ble High Court has held as under;
“75. In our opinion, none of these attributes are present in the agreement between the producer and the distributor and the distributor and the theatre owner. Even while the films were in use by the distributor/exhibitor, the same are under the effective control of the producer. The distributor is not free to make use of the same for other works like satellite rights, T.V. Channels, exploitation of song, audio/video, D.V.D. etc., The distributor can-not make use of the film according to his wishes, but there is only temporary transfer or permission to use or enjoyment for consideration as per the terms of the agreement.”
“83. Considering the nature of various arrange-ments between the producer and the distributor, distributor/subdistributor and theatre owner, we are of the view that there is only temporary transfer or permission to use or enjoyment for consideration on certain terms and conditions in a specified area. Irrespective of the arrangement of rights to the distributor to a specific area for a limited period, the producer retains the original copyrights. The sale of goods can be said to have taken place only when the producer relinquishes his right and title over the goods; but when he keeps grip over the goods transferred for temporary use or enjoyment on certain terms and conditions. When the transactions are not sale or deemed sale, the same cannot be brought under Entry 54 of List II or Entry 92A of List I.”
Conclusion
The Hon’ble High Court analysed the nature of transaction of deemed sale in relation to film distribution. It is held that unless there is case of full assignment of the copy right, whereby a producer does not retain with him any right only then can it be liable to VAT. In other words, unless it is a case of permanent assignment of the film as a whole, no liability can be attracted under MVAT Act, 2002. Today in Maharashtra, the VAT authorities are levying VAT on the film distribution agreements, considering the same as transactions of transfer of right to use goods. In light of above judgment, the said levy can be said to be illegal and unjustified. The judgment of the Hon’ble Madras High Court being under Central Enactment, it is binding on authorities in Maharashtra also. As there is no contrary judgment of the jurisdictional High Court, we hope above precedent will be followed.
