Government of India
Ministry of Finance
Department of Revenue
Central Board of Excise and Customs
Tax Research Unit
Circular No.148 / 17 / 2011 - ST
153 North Block, New Delhi
Dated: 13.12.2011
To
Chief Commissioners of Central Excise and Service Tax (All),
Director General (Service Tax),
Director General (Central Excise Intelligence),
Director General (Audit),
Commissioners of Service Tax (All),
Commissioners of Central Excise and Service Tax (All).
Madam/Sir,
Subject: - Clarification on levy of service tax on distributors/sub-distributors
of films & exhibitors of movie - regarding.
- Representations requesting clarification on taxability of consideration
earned by the distributors/sub-distributors/area distributors of Indian &
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 have been received from certain sections of service providers in
the light of recent changes in the law and CBEC Circular No 109/03/2009 dated
23.02.2009 issued under F. No. 137/186/2007-CX.4.
- These representations have been examined. Subsequent to issuance of CBEC
Circular No. 109/03/2009 dated 23.02.2009 significant changes in the law have
taken place. Temporary transfer or permitting the use or enjoyment of, any
copyright defined in the Copyright Act, 1957 (14 of 1957), except the rights
covered under sub-clause (a) of clause (1) of section 13 of the said Act were
made taxable w.e.f. 01.07.2010 under the sub-clause (zzzzt) of Sec 65(105) by
the Finance Act of 2010. Also, for the words ‘operational assistance for
marketing’, the words ‘operational or administrative assistance in any manner’
were substituted in the clause (104c) of Sec 64 of the Act by the Finance Act,
2011, w.e.f. 01.05.2011.
- The normal business practice in the industry is that the producer of the
film, who owns the intellectual property rights of the film, temporarily
transfers the rights to a person [normally distributor or any other person] who
directly or indirectly enters into an agreement with the exhibitor [normally
theater owner] for screening of the film. There are also other variant modes of
transaction in the industry.
- In cases where distributor transfers the rights to sub-distributor, area
distributor, exhibitor or theatre owner, the distributor is liable to collect
the service tax under copyright service & deposit it with the government
exchequer. Similarly when the sub-distributer or area distributor etc further
transfers the rights to any person, he is also liable to collect the service tax
under copyright service & deposit it with the government exchequer.
- In cases where no such copyrights are transferred by the distributor or
sub-distributor or area distributor to the exhibitor or theatre owner, the same
is not chargeable to service tax under Copyright Services. However the business
transaction needs to be examined for leviability of service tax under other
heads. Depending upon the arrangement whether the theatre owner has merely let
out its premises to the distributor or is also involved in giving support
services for the business of the distributer, there can be a case of leviability
of service tax on the remuneration retained by such theatre owner under
“Business Support service” or “Renting of Immovable Property”. The definition of
“Business Support service” has been amended in Budget 2011 to include
“operational or administrative assistance in any manner” in its definition.
- It is being represented that in certain situation the distributer and the
theatre owner conduct business together and hence no service tax is leviable.
Arrangement amongst two or more entities can either be on principal-to-principal
basis or on partnership/joint/collaboration basis. In the former, the
constituent members are independent of each other and do not share any
risk/revenue/profit/loss/liability of the other while in latter the constituent
members join hands for mutuality of interest and share common risk/profit
together.
- Unincorporated joint venture, not operating on principal-to-principal basis,
will exist only if the arrangement entered into between the two independent
persons is also recognized as a person. It may be noted that the word “person”
has not been defined in the Finance Act, 1994. As per Sec 3(42) of General
Clauses Act, 1897 “person shall include any company or association or body of
individuals, whether incorporated or not”. In this regard attention is invited
to explanation to Sec 65 of the Finance Act, 1994 wherein the taxable service
includes any taxable service provided or to be provided by any unincorporated
association or body of persons to a member thereof.
- Such a joint venture is also recognized as a legal & juristic entity in the
nature of a partnership of the constituent companies by the hon’ble Supreme
Court of India in the case of New Horizons [1995 SCC (1) 478; 1994 -TMI – 83686]
wherein it was held that “the expression ‘joint venture’ connotes a legal entity
in the nature of a partnership engaged in the joint undertaking of a particular
transaction for mutual profit or an association of persons or companies jointly
undertaking some commercial enterprise wherein all contribute assets and share
risks. It requires a community of interest in the performance of the
subject-matter, a right to direct and govern the policy in connection therewith,
and duty, which may be altered by agreement, to share both in profit and losses.
The independence of joint venture as a separate legal entity, away from its
constituent members, has further been fortified in the case of M/s Gammon India
Ltd. Vs Commissioner of Customs, Mumbai, 2011-TMI - 204309 wherein the hon’ble
Supreme Court categorically denied the benefit of exemption to the JV as the
impugned goods were directly imported by constituent member.
- Thus, where the distributor or sub-distributor or area distributor enters
into an arrangement with the exhibitor or theatre owner, with the understanding
to share revenue/profits and not provide the service on principal-to-principal
basis, a new entity emerges, distinct from its constituents. As the new entity
acquires the character of a “person”, the transactions between it and the other
independent entities namely the distributor / sub-distributor / area distributor
and the exhibitor etc will be a taxable service. Whereas, in cases the character
of a “person” is not acquired in the business transaction and the transaction is
as on principal-to-principal basis, the tax is leviable on either of the
constituent members based on the nature of the transaction and as per rules of
classification of service as embodied under Sec 65A of Finance Act, 1994.
- To sum-up the above, the arrangements entered into by the distributor or
sub-distributor or area distributor etc and the exhibitor or theatre owner etc
in exhibiting the film produced by the producer, the original copyright holder,
the arrangements and their respective service tax classification is tabulated as
under:
Type of Arrangement
|
Movie exhibited on whose account
|
Service Tax Implication |
Principal –to – Principal
Basis |
Movie being exhibited by theatre
owner or exhibitor on his account –
i.e. The
copyrights are temporarily
transferred |
Service tax under copyright service to be
provided by distributor or
sub-distributor
or area distributor or producer etc, as the
case may be |
Movie being exhibited on behalf of
Distributor or Sub-Distributor or
Area
Distributor or Producer etc –
i.e. no copyrights are temporarily
transferred
|
Service Tax under Business Support
Service / Renting of Immovable Property
Service, as the case may be, to be
provided by Theatre Owner or Exhibitor |
Arrangement under
unincorporated
partnership/ joint/
collaboration basis
|
Service provided by each of the person i.e. the ‘new entity’/ Theater Owner or
Exhibitor / Distributor or Sub-Distributor or Area Distributor or Producer etc,
as
the case may be, is liable to Service Tax under applicable service head
|
- It is understood that the Circular dated 23.02.2009 has been misinterpreted
to exclude all ‘revenue sharing’ arrangements from the levy of service tax.
Remuneration or payment arrangements on basis of fixed or revenue sharing or
profit sharing or hybrid versions of these may exist. However, the nature of
transaction determines the leviability of service tax. Each case may be looked
into on its merits and decision be taken on case to case basis.
- The arrangements mentioned in this Circular will apply mutatis mutandis to
similar situations across all the services taxable under the Finance Act.
(Samar Nanda)
Under Secretary (TRU)
F.No.354/27/2011-TRU
|