Service Tax Not Payable On Revenue Sharing Arrangement Between Exhibitors & Distributors Of Films: CESTAT

The Mumbai Bench of Customs, Excise, and Service Tax (CESTAT) has held that the no service tax is payable on revenue sharing arrangements between exhibitors and distributors of films.

The bench of Justice Dilip Gupta (President) and C. J. Mathew (Technical Member) has observed that the theatre owner screens or exhibits a movie that has been provided by the distributor. Such an exhibition is not a support or assistance activity but is an activity of its own accord. The activity cannot fall under 'Business Support Service'.

The appellant/assessee, Meghraj Cinema, is a theatre owner and, in keeping with industry practice, screened films for which copyright was temporarily transferred by distributors in accordance with agreements, setting out the period and the declining share of 'net' from the box office collections for each week as consideration for each of such. Sub-distributors, such as M/s Balaji Motion Pictures Ltd. and M/s Yash Raj Film Distributor, who had entered into an agreement with the appellant for the screening of 'Shootout at Wadala' and 'Gunday' respectively, which were considered to be representative of similar transactions with others, not only negotiated the deal involving prior payment against which the earnings were transferred to the distributor beyond such advance, but also undertook to handle the promotion of the film locally.

Based on the weekly box office collection details, the sub-distributor raised invoices, representing the cost of assignment of rights, on the exhibitor at the agreed rate and the amount remaining after all payouts retained with them. It is this amount that the service tax authorities brought the levy to bear upon, besides some minor amounts that the exhibitor had segregated in their annual financials towards advertisement and transport.

The demand straddles the 'negative list' era as well as the preceding regime, and the first of the notices for Rs. 70,19,786, issued on September 29, 2014, for 2009–10 to 2012–13, charges the levy for having provided 'support service of business or commerce','selling of space or time slots for advertisement service' and 'goods transport by road service' followed by periodical demands. The penalty was also confirmed by the department.

The assessee contended that the agreements have been misconstrued for contriving a new entity born therefrom and that the circular of 2011 has been inappropriately relied upon by disregard of the clear instructions in that of 2009, as the former has not disowned the exhortation that each arrangement must be scrutinized for ascertaining the elements of service, as set out in the Finance Act, 1994, as a prelude to tax. The earlier circular was not superseded by the later, and it was posited that its binding nature should not have been lost on the adjudicating authority. Denying that there was any intent of collaboration for sharing of risk and return as to insinuate a 'joint venture'. There was no service rendered by the appellant except to cinema patrons as to warrant conformity with the description of service in Section 65(104c) or Section 65B (44) in the 'negative list' regime of the Finance Act, 1944, for which the grounds of appeal refer to explanatory communication 4 issued by the Central Board of Excise and Customs (CBEC) immediately after the service was incorporated in the Finance Act, 1994.

The department contended that the costs incurred in exhibiting any film in the collaboration between the owner of the theatre and the owner of the right to screen the film and met from the 'box office collection' represent the consideration for service rendered to the collaborative venture by each with the 'box office' as the corporeal manifestation of 'association of persons' birthed in the arrangement.

The tribunal, while allowing the appeal, observed that where the distributor, sub-distributor, or area distributor enters into an arrangement with the exhibitor or theatre owner with the understanding to share revenue and profits and not provide the service on a 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, exhibitor, etc., will be taxable services.

The tribunal held that the demand and penalty have no basis in law and must be set aside.

Counsel For Appellant: None

Counsel For Respondent: S B P Sinha

Case Title: Meghraj Cinema Versus Commissioner of Service Tax Mumbai – VII

Case No.: Service Tax Appeal No: 87269 Of 2016

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