By TIOL News Service

CHENNAI, JULY 05, 2013: IN a landmark judgement the Madras High Court upheld the Service Tax on temporary transfer of copyright.

Introduction - Service Tax on Copyrights : Tracing the history of Service Tax on copyrights, the High Court observed,

When service tax was levied on 'Intellectual Property Services' namely trademarks, designs, patents or any other similar intangible property, with effect from 10.9.2004, copyright was specifically excluded from the definition of Intellectual Property Rights (IPRs). Copyright is nothing but intellectual property right which explicitly remained outside the scope of service tax just to encourage authors, artists, etc. The Finance Act, 2010 has levied service tax on transferring temporarily or permitting the use or enjoyment of any copyright except the rights covered under section 13(1)(a) of the Copyright Act, 1957.

Services of copyright are taxable with effect from 1.7.2010. With effect from 1.7.2010, sub-clause (zzzzt) of clause (105) of Section 65 defines the "Taxable Service" as:

"Taxable service" means any service provided or to be provided to any person, by any other person, for -

(a) transferring temporarily; or
(b) permitting the use or enjoyment of,

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

At the time of introduction of Finance Bill, 2012, in his Speech, Finance Minister stated that the Year 2012 is the Centenary Year of Indian Cinema and proposed to exempt the Industry from service tax on Copyrights relating to recording of Cinematograph films. The Finance Act, 2012 introduced Section 66B as the new Charging Section with effect from 1.7.2012 for the levy of service tax on all services other than those services specified in the Negative list. Notification No.25 of 2012 provided for number of exemptions effective from 1.7.2012 and Entry No.15 of the said exemption is:

"Temporary transfer or permitting the use or enjoyment of a copyright covered under clause (a) or (b) of sub-section (1) of Section 13 of the Indian Copyright Act relating to original literary, dramatic, musical, artistic works."

Notification No .25 of 2012 was amended by Notification No.3 of 2013 w.e.f . 1.4.2013 and Entry No.9 in the notification No.25/2012 is substituted as under :-

"Services provided by way of temporary transfer or permitting the use or enjoyment of copyright

(a) covered under clause (a) of sub-section (1) of Section 13 of the Copyright Act, 1957, relating to original literary, dramatic, musical or artistic works; or

(b) of cinematograph films for exhibition in a cinema hall or cinema theatre."

Thus the issue relates to the temporary transfer or permitting the use or enjoyment of copyright, except the rights covered under sub-clause (a) of sub-section (1) of Section 13 of the Indian Copyright Act for the period from 1.7.2010 to 31.06.2012 and the period from 01.4.2013 onwards since the levy of service tax on Copyright Services (Section 65(105)(zzzzt) is revived from 1.4.2013 with the exception of Section 13(1)(a) or Cinematograph films for exhibition in a cinema hall or a cinema theatre.

Writ Petitions and the averments :-

Contending that the levy of service tax on transfer of copyright, which is goods, is transfer of right to use the goods amounting to sale and no service element is involved and that temporary transfer of copyright is not exigible to service tax, writ petitions are filed challenging the vires of Section 65(105)(zzzzt) and to declare that the provisions of Section 65(105)(zzzzt) is beyond the legislative competence of the Union of India.

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 under Section 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 High Court heard elaborate arguments and considered a plethora of Supreme Court judgements and upheld the levy. Some of the contentions and rulings:

Held: On a careful analysis of the decisions of the Hon'ble Supreme Court, it is seen that the Hon'ble Supreme Court on four occasions, upheld the levy of service tax with reference to Entry 97 of List I and in all the four cases, the Hon'ble Supreme Court held that the levy of service tax falls within Entry 97 of List I. Therefore, any challenge on this aspect by the petitioners must necessarily fail .

Contention: Levy of service tax amounts to Double Taxation :-

Held : Film produced by the producer does not fetch any value unless it passes through various commercial activities including the distribution agreements and gets exhibited. As held by the Supreme Court, 'service tax' is a "value added tax', which in turn, is a 'general tax', which applies to all commercial activities involving production of goods 'cinematograph films and provision of services' from the stage of production - negative of the films are made till it gets exhibited in theatre or exploited through other media. Lot of economic/commercial activities are involved. Those commercial activities amounting to temporary transfer of copyright or permitting use or enjoyment of copyright, Parliament is well within its competence to levy 'service tax'. 'Transfer of right to use the goods' or 'permission to use the copyright' or 'enjoyment of copyright' operate in different fields. There may be overlapping. The impugned legislation cannot be held to be vitiated merely because there is overlapping and that both sales tax and service tax becomes leviable .

Contention - No element of service is involved :- Contention of Petitioners is that tax is leviable only on services provided i.e. on the value addition and there is no service or element of service in the act of temporary transfer or permitting use or enjoyment of a copyright to another for his business.

Held : The legislative competence of the Parliament does not depend upon whether any services are made available within the definition of 'taxable services' contained in Finance Act, and in a given case, 'taxable services' are rendered or not is a matter of interpretation of the statute and for adjudication under the provisions of the Statute and the same cannot affect the vires of the legislation and/ or the legislative competence of the Parliament. Therefore, the Supreme Court held that the levy of service tax on a particular kind of service could not be struck down on the ground that it does not conform to common understanding of the word 'service' so long as it does not transgress any specific restriction contained in the Constitution.

Contention - Computation is not possible :- Petitioners submitted that even assuming that there is service element, Legislature has not identified the nature of services and there is no mechanism in the legislation to identify and quantify the taxes.

Held : legislative competence is to be determined with reference to the object of the levy and not with reference to its incidence or machinery. The substance of the impugned provision must be looked at to determine whether it is in pith and substance within a particular entry, whatever its ancillary effect may be. Basis of computation and ultimate economic results cannot be a ground to challenge the vires of the impugned provision.

Conclusion :- The High Court held that:

1. The variant modes of business transactions between the producer and distributor, distributor and sub-distributor or area distributor or exhibitor (theatre owner) are not 'sale of goods' to fall under Entry 54 List II or Entry 92A List I.

2. By resorting to Entry 97 of List I Residuary Entry to levy service tax, the Parliament is within its legislative competence and Section 65(105)(zzzzt) is not ultra vires the Constitution.

3. From the production of the cinematograph film till it is exhibited, there are host of commercial activities. Service tax is the value added tax, which applies to the business transactions for consideration involving commercial activities. Over all, there is a huge rise in business of film industry and huge money is involved. The temporary transactions of copyrights or the permission to use or enjoyment of the copyright cannot be brought either under Entry 54 of List II or Entry 92A of List I.

4. Applying the ratio of the decisions of the Supreme Court, the Parliament is well within its legislative competence in levying service tax resorting to Entry 97 of List I.

(See 2013-TIOL-521-HC-MAD-ST)