TMI Blog2013 (7) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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). The impugned levy is a tax on service and in terms of the definition of taxable service under section 65 (105)(zzzzt), it means any service provided or to be provided to any person by any other person and two types of such services are contemplated one being transferring temporarily and the other being permitting the use or enjoyment of copyright. Therefore, the impugned levy is not a levy of tax on the "transfer of the right to use the goods", but, on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6575, 15259, 16461 and 17223 of 2013 - - - Dated:- 26-6-2013 - R. Banumathi And T. S. Sivagnanam,JJ. For the Petitioners : Mr. M. Venkatachalapathy, Mr. M. Sriram, Mr. N. Prasad, Mr. N. Inbarajan, Mr. K. Vaitheeswaran, Mr. Ravi, Mr. T. T. Ravichandran For the Respondents : Mr. V. Sundareswaran CGSSC for Union, Mr. S. Kanmani Annamalai, Mr. R. Anand Kumar, Mr. Velayutham Pichaiya, Mr. N. Ramesh ORDER R. Banumathi,J. Challenge in these writ petitions is the vires of the provision Section 65(105)(zzzzt) of the Finance Act bringing within the ambit of 'service tax' certain forms of income generated from temporary transfer or permitting the use or enjoyment of, any copyright as defined in the Copyright Act, 1957(14 of 1957) except the rights covered under Section 13(1)(a) of the said Act. 2. Introduction - Service Tax on Copyrights: 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 propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. 7. Writ Petitions and the averments thereon:- 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. 8. Case of writ petitioners is that Section 65(105)(zzzzt) is beyond the legislative competence of the Union of India. Under the constitutional scheme, for the demarcation of taxing powers between the Centre and the State, levy of sales tax/value added tax on goods, which includes the transfer of right to use any goods is the exclusvie taxing domain of the States and various States are currently trading intangibles li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se or enjoyment of copyright became a taxable service by insertion of Section 65(105)(zzzzt) in the Finance Act, 1994. While completing transfer or right to use any goods, where the original owner completely foregoes the title of a copyright may be considered the sale of goods, temporary transfer or right to use or enjoy copyright for specified purposes are not covered under Entry 54 of Listl II, which is certainly a service provided by the person, who is the holder of copyright. Service tax is a levy on the charges received from temporary transfer or for confirmation of right to use or enjoy copyright and Union of India is well within its rights to charge and collect service tax on transactions not amounting to sale. 11. Further, according to respondents, what is sought to be taxed is only the consideration of service charges received for value addition of assignment of temporary right or permission to use the copyright. Referring to various judgments of the Supreme Court, it is averred that Supreme Court upheld the legislative competence of the Parliament to levy service tax under residuary Entry 97 of List I of VII Schedule and necessary constitutional amendments were made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution was inserted to give extended meaning to the definition of sale and that Parliament has not divested its power to levy service tax. It was submitted that service tax imposed by the Union under Entry 97 of List I was upheld by the Hon'ble Supreme Court. Learned counsel submitted that various transactions between the producer and the distributor and the distributor and sub-distributor or exhibitor (theatre owner) is the value addition to the movie and service tax imposed on those activities is only levy on the value addition. The learned counsel submitted that temporary transfer of copyright or permission to use or enjoyment are not covered by Entry 54 of List II or Entry 92A of List I. Placing reliance upon in the cases of Tamil Nadu Kalyana Mandapam Association case (2004) 5 SCC 632; Association of Leasing and Financial Services Companies case (2011) 2 SCC 352; All India Federation of Tax Practitioners case (2007) 7 SCC 527 and Gujarat Ambuja Cements Limited case (2006) 3 SCC 1, the learned counsel submitted that the Hon'ble Supreme Court upheld the levy of service tax under Entry 97 of List I. It was submitted that the impugned levy of service tax on temporary transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s constitute heterogeneous spectrum of economic activities, covers wide range of activities, such as management, banking, insurance, hospitality, consultancy, communication, administration, entertainment, research and developmental activities forming part of retailing sector. Economics hold the view that there is no distinction between the consumption of goods and consumption of services as both satisfy the human needs. (See ALL INDIA FEDERATION OF TAX PRACTITIONERS AND OTHERS v. UNION OF INDIA AND OTHERS, (2007) 7 SCC 527 = [(2007) 9 VST 126 (SC)]. 20. During 1994-95, a new concept of Service Tax was introduced by imposing tax on services of Telephones, General Insurance and Stock Broking and the list has increased since then. Chapter V of the Finance Act, 1994 defines assessee to mean the person responsible for collecting the service tax. The Service Tax was defined to mean tax chargeable under Chapter V. Taxable Service was defined to mean any service provided by stock brokers to an investor in connection with sale or purchase of securities listed by a recognised stock exchange; services rendered by the subscriber of the telegraph authority and services rendered by insurer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the temporary transfer or permitting the use or enjoyment of the copyrights and the vires of sub-clause (zzzzt) of Section 65(105) is the contentious issue in these writ petitions. Now we have to examine as to whether the petitioners are right in contending that the service tax sought to be levied is a tax on deemed sale of goods leviable under Entry 54 of List I and the Parliament lacks power to levy service tax invoking the residuary Entry 97 of List I. 25. For proper appreciation of the arguments advanced, it is necessary to refer to the meaning of copyright with reference to Cinematograph films and also the definition of the relevant provisions in Copyright Act. Section 2(f) defines Cinematograph Film as under: 2(f) cinematograph film means any work of visual recording on any medium produced through a process from which a moving image may be produced by any means and includes a sound recording accompanying such visual recording and cinematograph shall be construed as including any work produced by any process analogous to cinematography including video films. Section 2(ff) deals with communication to the public, which reads as under: 2(ff) communication to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... films, as per which copyright shall subsist until sixty years from the beginning of the calendar year next following the year in which the film is published. 29. Point No.1:- Re.contention : That the taxable event under sub-clause (zzzzt) of Section 65 (105) is covered by Article 366 (29A) sub-clause (d):- Contention of petitioners is that Copyright is considered as transfer of right to use the goods, which is a sale in terms of Article 366(29A) read with Entry 54 and not a service. Mr. Prasad, learned counsel for the petitioner has invited our attention to the brief history of levy of tax on films and historical background of the Constitution 46th Amendment Act, 1982 inserting Clause (29A) to Article 366 of the Constitution to impose tax on the transfer of right to use any goods, thereby to avoid tax evasion by devices by way of lease adopted by the Producer and the Distributor. 30. Mr.K.Vaitheeswaran, learned counsel for the petitioners drawing our attention to the decision of this Court in A.V.Meyyppan Vs. Commissioner of Commercial Taxes, Board of Revenue, Madras and another, (20 STC 115) submitted that the temporary transfer of copyright is considered as a transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of India was amended in 1982 by the Constitution (46th Amendment) Act, 1982. From the statement of objects and reasons, we find that the concept of deemed sale is brought in by the Constitution (46th Amendment Act) in the context of imposition of sales tax and that the words transfer, delivery or supply of goods are referred to in the second limb of Clause (29A) of Article 366 of the Constitution to broaden the tax base. Clause (29A) of Article 366 reads as under: (29A) tax on the sale or purchase of goods includes (a) a tax on the transfer, otherwise than in pursuance of a contact, of property in any goods for cash, deferred payment or other valuable consideration; (b) a tax on the transfer of property in goods (whether as goods or in some other form) invoked in the execution of a works contract; (c) a tax on the delivery of goods on hire purchase or any system of payment by instalments; (d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (e) a tax on the supply of goods by any unincorporated association or body of persons to a member th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of right to use the goods regardless of whether the goods are delivered for use. Levy of tax is not on use of goods, but on the transfer of the right to use the goods. Article 366(29A) of the Constitution permits tax on sale of goods and within its ambit, transfer of right to use the goods. While completing transfer or right to use any goods (where the original owner relinquishes his copyright) may be considered as sale of goods, temporary transfer of right or a mere transfer of right to use or enjoy copyright for specified purpose(s), is certainly a service provided by the person, who is the holder of copyright. As held by the Supreme Court in B.S.N.L. Case [(2006) 3 SCC 1], it is a nature of transaction that will determine the taxability in each case. 36. In 20th Century Finance Corporation Limited Vs. State of Maharashtra, (2000) 6 SCC 12 = (2000) 119 STC 182 (SC), the Hon'ble Supreme Court laid down the principles for determining the situs of lease sale transaction. The Hon'ble Supreme Court has held that the situs of lease sale lies in the State where the agreement is executed if the goods are available for delivery. The Hon'ble Supreme Court further held that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spective 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , various States have enacted legislation in terms of VAT/Sales Tax Act. States have exercised their powers to levy a tax on the intra-State sale of goods in terms of Entry 54 of List II of the Seventh Schedule and the Government of Tamil Nadu has also enacted Tamil Nadu Value Added Tax Act. 40. Goods is defined in Section 2(7) of Sale of Goods Act, 1930 and in number of decisions, Supreme Court held that the goods used in Entry 54 of List II has to be interpreted liberally. Contention of learned counsel Mr.Prasad is that under the provisions of Tamil Nadu Value Added Tax Act, when the State Government levies VAT, Union of India cannot resort to residuary powers of Legislation under Entry 97 of List I to legislate for the levy of taxes on service and the residuary power to Entry 97 is available only if such power is inter alia not reserved in favour of the States under any Entry enumerated in List II. 41. Reiterating the same submissions, Mr.Vaitheeswaran, learned counsel submitted that Copyrights are classified as intangible property and are accordingly treated as goods for levying VAT on the transfer of copyrights. The learned counsel further submitted that many States like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment is competent to levy such tax; (ii) it amounts to tax on sale and purchase of goods and therefore is beyond the competence of Parliament, particularly in view of the definition of tax on sale and purchase of goods contained in Article 366(29A)(f) of the Constitution. Observing that in the matters of taxation laws, the Court permits greater latitude to pick and choose objects for rates on taxation and has a wide discretion with regard thereto and upholding the levy of tax on catering services provided by Mandap keepers, in the case of Tamil Nadu Kalyana Mandapam Association v. Union of India and others (2004) 5 SCC 632, the Hon'ble Supreme Court held as under: 51. Taxable services, therefore, could include the mere providing of premises on a temporary basis for organising any official, social or business functions, but would also include other facilities supplied in relation thereto. No distinction from restaurants, hotels, etc. which provide limited access to property for specific purpose. 52. It may be noted that in recent times the service sector has grown phenomenally all over the world and, therefore, it was recommended by Dr. Raja Chelliah Committee in the early ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... social or business function. A mandap-keeper apart from proper maintenance of the mandap, also provides the necessary paraphernalia for holding such functions, apart from providing the conditions and ambience which are required by the customer such as providing the lighting arrangements, furniture and fixtures, floor coverings, etc. The services provided by him cover method and manner of decorating and organising the mandap. The mandap-keeper provides the customer with advice as to what should be the quantum and quality of the services required keeping in view the requirement of the customer, the nature of the event to be solemnised, etc. In fact the logistics of setting up, selection and maintenance is the responsibility of the mandap-keeper. The services of the mandap-keeper cannot possibly be termed as a hire-purchase agreement of a right to use goods or property. The services provided by a mandap-keeper are professional services which he alone by virtue of his experience has the wherewithal to provide. A customer goes to a mandap-keeper, say a star hotel, not merely for the food that it will provide but for the entire variety of services provided therein which result in providi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said supremacy and identified the same as a potential region to collect indirect taxes. Moreover, it has been a well-established judicial principle that so long as the legislation is in substance, on a matter assigned to a legislature enacting that statute, it must be held valid in its entirety even though it may trench upon matters beyond its competence. Incidental encroachment does not invalidate such a statute on the grounds that it is beyond the competence of the legislature (Prafulla Kumar v. Bank of Commerce, AIR 1947 PC 60). Article 246(1) of the Constitution specifies that Parliament has exclusive powers to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule to the Constitution. As per Article 246(3), the State Government has exclusive powers to make laws with respect to matters enumerated in List II (State List). In respect of matters enumerated in List III (Concurrent List) both Parliament and State Governments have powers to make laws. The service tax is made by Parliament under the above residuary powers. 46. In GUJARAT AMBUJA CEMENT LTD v. UNION OF INDIA [(2005) 4 SCC 214], the Writ Petitioners were customers or clients of Goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gers carried by road or on inland waterways. It is clear that the State Legislatures are authorised to levy taxes on goods and passengers by this entry. It is not on all goods and passengers that taxes can be imposed under this entry; it is on goods and passengers carried by road or on inland waterways that taxes can be imposed. The expression carried by road or on inland waterways is an adjectival clause qualifying goods and passengers, that is to say, it is goods and passengers of the said description that have to be taxed under this entry. Nevertheless, it is obvious that the goods as such cannot pay taxes, and so taxes levied on goods have to be recovered from some persons, and these persons must have an intimate or direct connection or nexus with the goods before they can be called upon to pay the taxes in respect of the carried goods. Similarly, passengers who are carried are taxed under the entry. But, usually, it would be inexpedient, if not impossible, to recover the tax directly from the passengers and so, it would be expedient and convenient to provide for the recovery of the said tax from the owners of the vehicles themselves. (See also Sainik Motors v. State of Raja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 65(41)(k) refers to service to a client by a manpower recruitment agency, Section 65(41)(o) refers to service by pandal or shamiana contractors and so on. The rate of service tax has been fixed under Section 66. Section 67 provides for valuation of taxable service for the purposes of charging tax. The provision for valuation of service rendered by clearing and forwarding agents has been dealt with under clause (j) and service provided by goods transport operators has been provided under clause (l) [subsequently renumbered as clause (m-a)]. These clauses read respectively as under: 67. (j) in relation to service provided by a clearing and forwarding agent to a client, shall be the gross amount charged by such agent from the client for services of clearing and forwarding operations in any manner; 67. (m-a) in relation to service provided by a goods transport operator to a customer, shall be the gross amount charged by such operator for services in relation to carrying goods by road in a goods carriage and includes the freight charges but does not include any insurance charges; 30. As far as clause (j) is concerned it does not speak of goods or passengers, nor of car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... challenged by the owners of kalyana mandapams/mandap-keepers. By virtue of the 1997 amendment service provided to a client by mandap-keepers including the services if any rendered as a caterer was treated as a taxable service. The challenge, inter alia, was that service tax on mandap-keepers was colourable legislation as the said tax was not on service but was in pith and substance only a tax on the sale of goods and/or a tax on land. The writ petition filed before the Madras High Court was rejected and the constitutionality of the levy was upheld. It was then urged before this Court by the appellants that Entries 18, 14 and 54 of List II covered the levy in question and, therefore, resort could not be had to Entry 97 in List I of the Seventh Schedule of the Constitution. It was held by this Court that although certain items of the service might have been referable to any other entry, the service element was the more weighty, visible and predominant. Therefore, the nature and character of the levy of the service tax was distinct from a tax on the sale or hire-purchase of goods and from a tax on land. 47. In ALL INDIA FEDERATION OF TAX PRACTITIONERS v. UNION OF INDIA, (2007) 7 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al status of the levy, namely, service tax. The nomenclature of a levy is not conclusive for deciding its true character and nature. For deciding the true character and nature of a particular levy, with reference to the legislative competence, the court has to look into the pith and substance of the legislation. The powers of Parliament and State Legislatures are subject to Constitutional limitations. Tax laws are governed by Part XII and Part XIII. Article 265 takes in Article 245 when it says that the tax shall be levied by the authority of law. To repeat, various entries in the Seventh Schedule show that the power to levy tax is treated as a distinct matter for the purpose of legislative competence. This is the underlying principle to differentiate between the two Groups of entries, namely, general entries and taxing entries. We are of the view that taxes on services is a different subject as compared to taxes on professions, trades, callings etc. Therefore, Entry 60 of List II and Entry 92C/97 of List I operate in different spheres. 48. In ASSOCATION OF LEASING AND FINANCIAL SERVICES COMPANIES VS UNION OF INDIA AND OTHERS (2011) 2 SCC 352, the controversy pertained to the va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed becomes assessable to sales tax which position has resulted in avoidance of tax in various ways. Thus, we find from the Statement of Objects and Reasons that the concept of deemed sale is brought in by the Constitution (Forty-sixth Amendment) Act, only in the context of imposition of sales tax and that the words transfer, delivery or supply of goods is referred to in the second limb of Article 366(29-A) to broaden the tax base and that as indicated in the Report of Law Commission prior to the judgment of this Court in Gannon Dunkerley's case, (AIR 1958 SC 560 = 1959 SCR 379) works contract was always taxed by the States as part of the word sale in Entry 48/54 of List II. 50. The object behind enactment of Article 366(29-A) is to tax the composite price so that the full value of the hire-purchase price is taxed and to avoid the judgment in K.L. Johar's case whose implication was to narrow the tax base resulting in seepage of sales tax revenue. It is in that sense splitting of the contract needs to be understood. Thus, it cannot be said that Parliament divested itself of the power to levy service tax vide enactment of the Constitution (Forty-sixth Amendment) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asure of tax for the purposes of calculating the value of taxable services under Section 67 of the Finance Act, 1994. Thus, a financial lease would come within financial leasing services in terms of Section 65(12)(a)(i). 54. There are different types of financial leases, namely, a tax-based financial lease, a leverage lease and an operating lease. In the present case, there is no adjudication of the matter. The appellant(s) approached the High Court directly without proper adjudication by the competent authority under the Finance Act, 1994. Even in the matter of allocation between the principal and finance/interest charges, adjudication under the Act was warranted which has not been done. One must also bear in mind that Article 366(29A) is essentially sales tax specific. It was brought in to expand the tax base which stood narrowed down because of certain judgments of this Court. That is the reason for bringing in the concept of deemed sale under which tax could be imposed on mere delivery on hire-purchase [See Clause (c)] which expression is also there in the second limb of the said article. 50. As regards the power of the Parliament under Entry 97 List I, it was held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered. Such amount is credited to the capital account of the lessor/hire-purchase service provider. It is the interest/finance charge which is treated as income or revenue and which is credited to the revenue account. Such interest or finance charges together with the lease management fee/processing fee/documentation charges are treated as considerations for the services rendered and accordingly they constitute the value of taxable services on which service tax is made payable. 60. In fact, the Government has given exemption from payment of service tax to financial leasing services including equipment leasing and hire-purchase on that portion of taxable value comprising of 90% of the amount representing as interest, i.e., the difference between the installment paid towards repayment of the lease amount and the principal amount in such installments paid (See Notification No. 4/2006 - Service Tax dated 1.3.2006). In other words, service tax is leviable only on 10% of the interest portion. (See also Circular F. No. B.11/1/2001-TRU dated 9.7.2001 in which it has been clarified that service tax, in the case of financial leasing including equipment leasing and hire-purchase, will be le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act:- (i) to make a copy of the film including a photograph of any image forming part thereof; (ii) to sell or give on hire or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the film to the public. 53. The Sales Tax Law applies when there is sale/purchase of goods. Therefore to attract Value Added Tax, whether as normal sale or deemed sale, the transaction should be in relation to goods. The legislative competence is to be seen with reference to the object of the levy viz., temporary transfer of copyright or permitting the use or enjoyment. All the writ petitioners are producers/distributors of Cinematograph film. Producer transfers the copyright of the film to the distributor or exhibitor. The distributor in turn transfers copyright to the sub-distributor/area-distributor/ exhibitor. There are various modes of transaction in the film industry. It is therefore required to be seen whether those transactions between the producer and the distributor, distributor and sub-distributor or exhibitor are normal sale or deemed sale or temporary transfer of copyright, permitting to u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating) where such supply of service is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made. ..... To the same effect, is the definition of sale under Section 2(g) of Central Sales Tax Act. 56. State of Tamil Nadu charges transaction of sale or transfer of use of copyright under Section 3 of Tamil Nadu Value Added Tax Act read with Serial No.70 of Part-B of First Schedule to the Act. Serial No.70 in Part-B reads as under:- PART B [See sub-section (2) of Section 3] (Goods which are taxable at the rate of 4 per cent) Sl. No. Description of the goods Commodity Code Number 70. Intangible goods like Copyright, Patent, REP licence 2070 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Distributor Sub-Distributor Exhibitor Theatre-owner There are various modes of transactions in the film industry. 61. The distributor purchases the theatrical distribution rights from the producer for exhibiting the film in a defined territory. The distributor performs functions such as: 1. part-financing of film (in case of minimum guarantee/ advance based purchase of film rights) 2. localised marketing of film 3. selection of exhibition halls 4. managing the logistics of physical print distribution. 62. Mr.Sundareswaran, the learned counsel for respondents submitted that there are three popular approaches to transfer distribution rights via distribution contracts as under: 1. Minimum Guarantee + Royalty Here, the producer sells the distribution rights for a defined territory for a minimum lump sum irrespective of the box office performance of the film. Any surplus is shared between the producer and distributor, in a pre-set ratio (typically 1:2) after deducting entertainment tax, show rentals, commission, print costs and publicity costs. Effectively, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sell his lease rights, the entire profits should first be appropriated towards the advance given by the distributor in the event of sale. The distributor is guaranteed on 10% realization or such percentage of the sale amount. d. Profit Share:- There are agreements in which the producer and the distributor operate on profit sharing basis in which the distributor is entitled to a specific percentage of the realization, in lieu of which the distributor provides upfront advance to the producer (to be adjusted) and looks to the exhibition arrangements. 64. Even if the exhibitor/theatre owner merely lets out the premises to the distributor or sub-distributor or area distributor, there are other business support services rendered by the theatre owner. The definition of business support service has been amended in 2011 by means of a Circular bearing No.148/17/2011-ST dated 13.12.2011 (bearing F.No.354/27/2011-TRU) issued by the Central Board of Excise and Customs, New Delhi to include operational or administrative assistance in any manner in its definition. The said Circular is under challenge in W.P.No.3948 of 2012, etc., batch. 65. Even though it was contended that the transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nments entered into between the producers and distributors and exhibitors and contended that the transaction is only delivery of goods for consideration and therefore service tax cannot be levied on such transaction. 68. We perused the 'Distribution Agreement' dated 21.8.2008 executed in favour of Jupiter Films (in respect of Tamil movie - Jeyam kondaan for a consideration of ₹ 35,00,000/-), produced by Sathya Jyothi Films, petitioner in W.P.No.483 of 2011. Though we are required to decide the vires of Section 65(105)(zzzzt), we refer to the said agreements for reference as a sample. By perusal of the said Distribution Agreement, it is seen that the Distribution Agreement is not mere delivery of positive prints but there are following mutual activities to be performed both by the Producer and the Distributor. Producer: Producer shall supply free of cost 10 number of colour and scope positive prints or cubes of the picture, DTS disc, blowups, photocards, audio cassettes, etc., for exhibition purposes in the said area. Producer shall announce the general release of the said picture in advance. Distributor: Distributor shall exhibit the prints of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the lease itself. That apart, the Producer retains his right to exploit through satellite, T.V. Channels, digital rights, audio rights, DVD rights, song sequences and all other rights to any of the T.V.channels. When the producer continued to retain his ownership of the film, it cannot be said that the lease amounts to transfer of right to use the goods amounting to sale within the meaning of Article 366(29A). 71. Agreement between the Distributor and Exhibitor (theatre owner):- It was submitted that agreements are also entered into between the Distributor and an Exhibitor (theatres) and the business is patterned on different lines based on commercial exigency. The distributor transfers the copyrights to sub-distributor, area distributor, exhibitor or theatre owner. This agreement can be of different types. It is necessary to examine different types of arrangements and in order to determine whether the activities undertaken by a theatre owner and a distributor is sale of goods or transfer of right to use the goods. 72. Mr.Sundareswaran, the learned counsel for respondents has submitted that by and large there are following four popular approaches to transfer exhibit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of films and exhibitors) is the subject matter of challenge in W.P.No.3948 of 2012 etc., batch). Another type of arrangement is where the contract between the theatre owner and the Distributor is on the revenue sharing basis i.e., a fixed and pre-determined, i.e., a percentage of revenue earned from selling the tickets goes to the theatre owner and the balance goes to the Distributor. The two contracting parties act on the basis of the agreement and depending on the terms of the agreement, service is provided by either side. This kind of arrangement revenue sharing arrangement between the distributor/sub-distributor/area distributor and the theatre owner is the subject matter of clarification in the impugned Circular which is under challenge in another batch. Suffice to note that the said arrangement does not fall under delivery of goods amounting to sale/transfer of right to use the goods to attract sale tax. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and no right is retained by the Producer and such rights certainly amounts to sale/ transfer of right to use the goods for which VAT is levied and in such type of transaction no service tax could be levied. Under the said agreement, the assignor assigned to the assignee exclusive copyright in respect of Satellite Television Broadcast, DTH, Direct Satellite Service, Terrestrial Television Broadcast and all other rights connected therewith for exhibition of the film through Television Broadcast for the entire world. The learned counsel for petitioner has drawn our attention to certain clauses and submitted that in respect of satellite television, DTH and all other connected rights, the Assignor/producer of the film relinquished his rights over others rights and the assignment in favour of the assignee is in perpetuity. 77. Of course, the nature of transaction in each case determines leviability of service tax. Each transaction should be considered individually to find out as to whether it is a sale or service. In this regard, it is pertinent to note that in these batch of writ petitions, when the Department sent communications to the producers informing them of the introduction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the purview of service tax. 80. Re. contention : Levy of service tax amounts to Double Taxation:- Learned counsel submitted that considering the import of feature films as goods, Customs duty is levied under Customs Act,1962 and Chapter 37 of the Customs Tariff Covers every type of Cinematograph film. The learned counsel submitted that excise duty can be levied only on goods. It was also contended that cinematograph films have been considered as excisable goods through Chapter 37 of the Central Excise Tariff Act. The learned counsel further submitted that Excise and Customs, which are wings of Ministry of Finance, have treated films as goods only and while so the same Ministry of Finance cannot levy service tax calling it as service. Therefore, it is the attempt of the petitioner to demonstrate before this Court that in respect of the same transaction if Service Tax is leviable or charged, it would amount to double taxation and the same would be not valid in law. 81. Sofar as the levy of Central Excise Duty, the taxable event is manufacture goods and so far as Value Added Tax, the taxable event is the sale of the goods. Since, both these duties are payable, it cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )]. 85. The impugned levy is a tax on service and in terms of the definition of taxable service under section 65 (105)(zzzzt), it means any service provided or to be provided to any person by any other person and two types of such services are contemplated one being transferring temporarily and the other being permitting the use or enjoyment of copyright. Therefore, the impugned levy is not a levy of tax on the transfer of the right to use the goods , but, on the service provided or to be provided for transferring temporarily or permitting the use or enjoyment of any copyright, except the rights covered under section 13(1)(a) of the Copyright Act. It is a levy which is distinct from the levy under Entry 54 of List II or Entry 92A of List I. Therefore, there is nothing wrong for Parliament to claim taxing power under Entry 97 of List I and all that is required to be shown is that that tax is not mentioned in List II or List III. Resorting to Entry 97 of List I. The Parliament brought out the amendment Section 65(105)(zzzzt) bringing the activity of temporary transfer or permission to use or enjoy the copyright for consideration under the ambit of service tax net on the service p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e professional. However, from the point of view of his client, the chartered accountant/broker is his service provider. The value addition comes in on account of the activity undertaken by the professional like tax planning, advising, consultation, etc. It gives value addition to the goods manufactured or produced or sold. Thus, service tax is imposed every time service is rendered to the customer/client. This is clear from the provisions of section 65(105)(zm) of the Finance Act, 1994 (as amended). Thus, the taxable event is each exercise/activity undertaken by the service provider and each time service tax gets attracted. Same is the view taken earlier by the Constitution Bench of Hon'ble Supreme Court in the case of Godfrey Phillips India Limited v. State of U.P. (2005) 2 SCC 515, in which, the Supreme Court observed that in the classical sense a tax is composed of two elements : the person, thing or activity on which tax is imposed. Thus, every tax may be levied on an object or on the event of taxation. Service tax is, thus a tax on activity whereas sales tax is a tax on sale of a thing or goods. 88. Film produced by the producer does not fetch any value unless it pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not transgress any specific restriction contained in the Constitution. 91. It has to be borne in mind the distinction pointed out by the Hon'ble Supreme Court in the case of Gujarat Ambuja Cement Ltd v. Union of India (2005) 4 SCC 214 i.e. (i) object of tax; (ii) instances of tax and (iii) machinery for collection of tax. The legislative competence is to be determined with reference to the object of levy and not with reference to its incidence or machinery. In Gujarat Ambuja Cement Limited case, the Hon'ble Supreme Court at Paragraph No.28 of the Judgment, summarized the principles for determining the constitutionality of statute as under:- (a) The substance of the impugned Act must be looked at to determine whether it is in pith and substance within a particular entry whatever its ancillary effect may be [Prafulla Kumar Mukherjee v. Bank of Commerce Ltd. and others (AIR 1947 PC 60, at p. 65, A.S. Krishna v. State of Madras 1957 SCR 399, State of Rajasthan v. G. Chawla (1959 Supp. (1) SCR 904, Katra Educational Society v. State of U.P. 1996 (3) SCR 328, D.C. Johar Sons (P) Ltd. v. STO 1971 (27) STC 120 and Kannan Devan Hills Produce v. State of Kerala (1972) 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oners contended that unless the transaction in truth represents two distinct and separate contracts and the contracts are discernible and that the State would not have power to separate the agreement to sell merely agreement to render service and impose tax on service. Placing reliance upon (2006) 3 SCC 1 [BSNL and another v. Union of India], it was contended that dominant nature test is the vital test to determine the nature of transaction. It was further submitted that in the light of the principles laid down by the Hon'ble Supreme Court, adopting dominant nature test, the temporary transfer of copyright is only a deemed sale within the meaning of Article 366(29A) and Parliament cannot dissect the element of service from dominant nature of transaction. 95. Reliance was also placed upon yet another decision of Supreme Court in (1989) 3 SCC 634 (Federation of Hotel Restaurant v. Union of India and others). In the said case, challenge was to the levy of tax under the Expenditure Tax Act, 1987 enacted by Parliament. The Act envisaged a tax at 10 percent ad valorem on chargeable expenditure incurred in the class of hotels, wherein room charges for any unit of residential acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2319) is to discourage expenditure which the legislature considers lavish or ostentatious. The object of the first would be to discourage certain types of living or enjoyment while that of the second would be to discourage people from incurring expenditure unproductive or undesirable channels. ..... The Hon'ble Supreme Court held that there is no overlapping at all and the pith and substance of the central tax could well be described as expenditure and not luxuries and the distinction is not obliterated merely because of the circumstance that both legislatures have chosen to attract the same area of vulnerability, one with a view to keep a check on luxuries and the other with a view to curb undesirable 'expenditure'. 96. In fact, an identical contention was raised before the Supreme Court in the case of ASSOCIATION OF LEASING AND FINANCIAL SERVICES v UNION OF INDIA, contending that Hire purchase and leasing is constitutionally characterised as a sale (deemed sale) by the Constitution (46th amendment) Act, and the said subject matter can be taxed only under Entry 54, list II, and it cannot be taxed under Entry 97- List I. Reliance was placed on the decision in BHA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution has been uttered by the Hon'ble Supreme Court in the Court of Bharat Sanchar Nigam Limited vs. Union of India (2006) 3 SCC 1, wherein the Hon'ble Supreme Court stated that the State cannot entrench upon Union List to tax by including the cost of services in the value of the goods. Likewise, centre cannot include the value of goods in the cost of services and matters must be decided by the dominant character of the transaction in respect of composite contracts of goods and services. It is further stated that to apply the Aspect Principle a single transaction has to have two separate economic events and only then the Parliament and the State Legislature can impose tax. Therefore, the respondents have to find a separate aspect and in the nature of transaction done by the petitioners, there are no two economic events and there is only one i.e., deemed sale. 100. In Kerala State Electricity Board vs. Indian Aluminium Company, [AIR 1976 SC 1031 at 1044], a reference has been made to the 'aspect of legislation', wherein the Hon'ble Supreme Court held a legislature while legislating with regard to matters within its competence should be deemed to know its lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction 10% of the value of lease is taken for computing the value of taxable service. In respect of works contract, Rule 2A of Valuation Rules provides for determination of computation of value of taxable service. Contention of Petitioners is that no such mechanism is provided for identifying the nature of service quantifying the value of the taxable service. Placing reliance upon (2008) 12 VST 14 (SC) (State of Chhattishgarh and others v. VTP Constructions), it was submitted that if there is no mechanism to discern the services rendered and computation thereon, the levy cannot be sustained. 104. As held by the Supreme Court, in GUJARAT AMBUJA CEMENTS LTD, the 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. Hence, the decision relied on by the learned counsel does not support the petitioners' case. 105. Mr.Sundareswaran, learned counsel for Respondents submitted that to test the validity of the provision, mode o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax is on the commercial activities involving production/temporary transfer of copyright or permission to use or enjoyment and provision of services service tax is on the host of commercial activities and provision of services involved. 110. Conclusion:- We hold that 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. 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. 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. Applyi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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