Entertainment Tax Act Does Not Contain Mechanism To Assess Or Collect Tax On Sponsorships: Delhi High Court

The Delhi High Court has observed that the Entertainment Tax Act does not contain a mechanism for assessing and collecting tax on sponsorships.

Justice Rajiv Shakdher observed that imposition of a tax on sponsorship under the Entertainment Tax Act must fail in the absence of a specific charging provision.

“The unamended Section 2(m) of the Entertainment Tax Act did not cover sponsorship of fashion shows and sporting events so as to make it amenable to tax under Section 6,” the court said.

It further ruled that the addition of Explanation 2 to Section 2(m) with retrospective effect via an amendment in 2012 was arbitrary, harsh, unreasonable and violative of Article 14 of the Constitution of India.

Explanation 2 was added to Section 2(m) of the Entertainment Tax Act, which defines the expression “payment for admission”.

“The impugned Notification dated 01.10.2012, which amended the Entertainment Tax Act by adding Explanation 2 to Section 2(m), is, in my view, even otherwise arbitrary and unreasonable as it came into effect on 01.04.1998. It is important to point out that the unamended Act, which is an Act of 1996, was first brought into force under the Delhi Act 8 of 1997 on 08.10.1997,” the court ruled.

Justice Shakdher was answering questions to a reference after a division bench in 2017 delivered a split verdict on the issue.

About Split Verdict

The division bench passed the order in a batch of 22 pleas challenging an amendment made to the Delhi Entertainment and Betting Tax Act which taxes payments made for admission to a place of entertainment through Section 6(1).

The definition of 'payment for admission' under Section 2(m) of the Act includes any payment "connected with an entertainment, which a person is required to make... as a condition of attending, or continuing to attend the entertainment".

The impugned amendment to Section 2(m) had the effect of including sponsorship amounts under the purview of 'payment for admission'. Further, the amendments were introduced retrospectively from April, 1998.

The petitioners challenged exaction of these amounts as tax and had sought refund of the amount paid under protest.

Justice Ravindra Bhat, as he then was, had allowed the pleas, ruling that the amendment does not result in a valid levy of entertainment tax as mere amendment to the definition of 'payment for admission' cannot introduce such levy.

Justice Bhat had also opined that even if the amendment is to be held to be valid, its retrospective nature would nevertheless run contrary to Articles 14 and 265 of the Constitution of India.

Justice Deepa Sharma had upheld the amendment, observing that organizers of a sponsored entertainment event cannot be allowed to escape their liability to pay taxes simply because instead of receiving money in cash, they receive benefits in the form of services, benefits and/or goods.

The judge had observed that Form 6, as prescribed by the Delhi Entertainment and Betting Tax Rules, 1997, requires organizers of non-ticketed events to disclose the name of sponsors and advertiser and the amount received from them. This, it meant that the impugned amendment does not levy any new taxes.

Justice Shakdher allowed the petitions and sustained the reliefs granted to the petitioners in 2017. The court held that though Section 2(m)'s width and amplitude are broad, it is certainly not exhaustive as it not only includes payments which have a direct nexus to the entertainment event, but also those connected with entertainment.

“However, what must be borne in mind is that whatever the width of Section 2(m) of the Entertainment Tax Act may be, it cannot include any and every payment. Perhaps one would have to cite an extreme example to test the proposition,” the court said.

It added that sponsorship amounts cannot be construed as “payment for admission” as these are amounts that are paid not for being entertained but in lieu of the right to advertise products, brands, logos etcetera, while the entertainment activity is on.

“Thus, quite clearly, sponsorships, whether in the form of money, “value of goods supplied or services rendered or benefits provided to an organiser of an entertainment programme in lieu of the sponsors‟ right to advertise products, undertake branding was not, contrary to the argument advanced on behalf of GNCTD, implicitly embedded in the unamended provision,” the court said.

It added: “Therefore, as rightly argued on behalf of the writ petitioners, tax on sponsorship receipts would fail as neither has the charging section [i.e., Section 6] been amended, nor has a new Section been inserted like in the case of other services such as DTH service, cable network, and video services.”

Title: FASHION DESIGN COUNCIL OF INDIA v. GOVT. OF NCT OF DELHI AND ANR and other connected matters

Citation: 2024 LiveLaw (Del) 885

Click here to read order