TMI Blog2019 (6) TMI 110X X X X Extracts X X X X X X X X Extracts X X X X ..... the matter and should be purely legal in nature. Instances of such illegality may be culled from several judgements of the Supreme Court to be (a) a challenge to the constitutionality or vires of a statutory provision (b) a bar of limitation (c) assumption of jurisdiction by the officer where none exists (iii) patent and apparent illegality in the framing of the order, in contravention of the statutory provisions in play. The applicable provisions in question straddle two statutes the Finance Act 1994 levying Service tax and The Copyright Act 1957. The interpretation and interplay adopted by the Revenue is wholly contrary to the basic scheme of the statutes, particularly the CR Act, and if such interpretation is left untouched, the purport and scheme of both statutes would stand distorted. It is on the aforesaid premise that the writ petitions have been filed. Whether the petitioners are correct in their averments and allegations against the Revenue is a different matter. However, one thing is clear. The lis before the Division Bench is entirely different from the lis projected before me. Taxability of IPR and copyright service - HELD THAT:- In the present case, there is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 018, 5131 & 1199 of 2019 & WMP Nos. 35098, 17040 & 34134 of 2018 & 5849 & 1351 of 2019 - - - Dated:- 16-4-2019 - Dr. Justice Anita Sumanth For the Petitioner : Mr. Joseph Prabhakar, Mr. AR.L.Sundaresan, Sr. Counsel, for, Ms. Radhika Chandrasekhar For the Respondent : Mr. V.Sundareswaran, Senior Panel Counsel., Mr. G.Syed Noorullah, Standing Counsel, Ms.Seetha Lakshmi, Standing Counsel. COMMON ORD R These five writ petitions challenge a show cause notice/orders-in-original issued by the Service Tax Department to producers/purchasers of cinematograph films who have assigned some part of their copyright in the cinematograph films to television channels, invoking the provisions of the Finance Act, 1994 (in short Act ), relating to Intellectual Property Right service. 2. Heard the detailed submissions of Mr.Joseph Prabakar, for Vendhar Movies, (WP Nos. 30085 of 2018), Super Good Films Private Limited (W.P.No.14425 of 2018) and Wunderbar Films Private Limited (W.P.No.29206 of 2018 W.P.No.5131 of 2019), Mr.AR.L.Sundaresan, learned Senior Counsel, for Ms.Radhika Chandrasekhar, learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copyrights subsist: (a) Original literary, dramatic, musical and artistic work; (b) Recording of cinematograph films; (c) Sound recordings. The works referred to in (a) have been kept outside of the tax net and only those works referred to in (b) and (c) have been made taxable under service tax law. 7. The petitioners are engaged in the production of cinematograph films. In the regular course of business, the petitioners enter into various agreements with distributors, exhibitors and television channels assigning to them exclusive rights for broadcast and exhibition of various cinematograph films, both produced as well as purchased by them. The rights include satellite television broadcast, direct to home broadcast, direct satellite service, terrestrial television broadcast and all other rights connected therewith including exhibition of the film by means of wireless diffusion and by wire for communication to the public through television broadcast. 8. The salient features of the arrangements entered into by the petitioners with distributors/exhibitors are common across the writ petitions and broadly set out below. The narration to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been discharged in full. Some of the assignment agreements state that the same are revocable . This, by itself, does not militate against the assignments being permanent, since the revocability of the agreement is only in cases where the consideration for the assignment was to be paid in instalments and conditional upon there being a default committed by the assignee in effecting such payment. Subject to the satisfaction of the aforesaid condition, the transfer/assignment of the copyright is irrevocable. Thus it is only to protect against a default in payment by the assignee that the petitioners had provided for revocability of the agreement, as, in the alternative, the transfer of copy right would have been completed without the petitioners having received the full consideration in respect thereof. Several provisions of the CR Act are referred to in extenso by learned counsels for the petitioners in support of their submissions as above and I will detail them in the paragraphs to follow. In some cases the petitioners have raised the plea of limitation. According to them, the issue in question w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opyrights in the same cinematograph film with themselves. According to Mr.Sundareswaran, this renders the transfers temporary in nature. Moreover the assignment, in all cases, is perpetual and in many cases, is for 99 years. Since the provisions of the Act provides for a period of 60 years as being the life of a copyright, the transactions in question do not constitute permanent transfers. The respondent also states that the transactions are not in tandem with the provisions of Section 21 of the Act. According to the respondent, the use of the word perpetual in the agreement is only a sham, designed to camouflage the true intent of the petitioner which is to enter into a temporary transaction. Thus, the transactions are vitiated as being colourable. The Assessing Authority relies substantially upon the decision of the Division Bench in the case of AGS Entertainment Private Limited v. Union of India (2013) (32) STR 129 (Mad.). According to him, the perpetual transfer as per agreement is not an absolute transfer for the reason that the transfer of legal right to copyrigh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing decisions:- (i) 2011 (269) ELT 9 (Mad.) (United Bleachers Ltd. V. CEGAT, Chennai) (ii) 2015 (37) STR 679 (Mad.) (T.T.Krishnamachari Co. v. Union of India) (iii) Commissioner of Customs v. M/s.Sri Vasavi Gold Bullion Pvt. Ltd., CMA No.813/2016, dated 08.08.2017 (DB) (Madras High Court) (iv) 2014 (35) STR 68 (Royal Bank of Scotland N.V. v. Commissioner of Customs and Central Excise, Noida) (DB) (Allahabad) (v) 2017 (7) GSTL 202 (Commissioner of Service Tax v. DLF Golf Resorts Ltd.) (DB) (P H) (vi) M/s. JSK Film Corporation, Rep. by its Sole Proprietor, J.Sathish Kumar v. The Additional Commissioner of Service Tax and two others (W.P.Nos.28384 28385 of 2017) dated 07.11.2017 (DB) (Madras High Court). 12. I have heard all learned counsel exhaustively on the question of maintainability. As far as the question of maintainability and alternative remedy is concerned, it is all too well settled that where a legal infirmity is pointed out and established, there is no fetter on this Court to consider the validity or otherwise of such ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Applying the ratio of the decisions of the Supreme Court, we hold that the Parliament is well within its legislative competence in levying service tax resorting to Entry 97 of List I. 15. The issue be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their own words and the offending portion of the impugned show cause notice and two orders of assessment, the rationale of which would extend in common to all petitioners, are extracted below:- Extract from Show Cause Notice dated 17.09.2018 in W.P.30085 of 2018: . . . . 10. Summary In view of the foregoing it appears that, Vendhar Movies is a cinema production company engaged in producing films and engaged in purchase, market and distribution of films; It was started in August 2012 with two partners viz Shri Madhan and Shri Balagurunathan and later during November 2015, Shri Balagurunathan had withdrawn from the partnership and Shri Madhan became the sole proprietor of Vendhar Movies; They are the absolute copyright holder engaged in transfer of Copyrights for the films produced by them in respect of satellite rights, audio rights, FMS rights, etc. and also temporarily transferred or permitted the use/enjoyment of copyrights of the film for various satellite channels; Vendhar Movies have produced two films, viz Thillu Mullu 2 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18 in W.P.29206 of 2018: . . . . 5.4. From the above provisions of the Acts and from various clauses of the agreement it is clear that the activities of the assessee falls under the Copyright service. However in order to know the taxability of the service the nature of such transfer has to be decided. In Copyrights of Cinematographic films, the producer of the film make commercial exploitation of these rights in many ways including but not limited to theatre rights (both distribution exhibition), Satellite Television rights, DVD rights, dubbing and remake rights. Further, these rights will be granted to various people simultaneously for exploitation in different regions, each active in one or more regions and need to be licensed those separately. A transaction constitutes permanent transfer of copyright only in a case where entire copyright (all modes of commercial exploitation) is transferred or leased to the exclusion of all persons including owner of such copyright. On perusal of the agreements, it is seen that, the entire bundle of rights is not transferred as the copyright is capable of being exploited by different entities for earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in Section 65(105)(zzr) of the act, the Department clarified as follows: A permanent transfer of intellectual property right does not amount to rendering of service. On such transfer, the person selling these rights no longer remains a holder of intellectual property rights so as to come under the purview of taxable service. Thus, there would not be any service tax on permanent transfer of IPRs. (Circular No.80/10/2004-S.T., dated 17-9-2004 para 9.2). The same proposition applies to copyright which is another form of intellectual property right. Thus, permanent transfer of copyright will not amount to rendering of service and therefore, will be excluded from the purview of service tax. 23.0. In fact the defence of AGS is also on these lines. It has been argued that the assignment of copyright is on permanent basis and since it is not a temporary transfer, no service tax is payable. 23.1. I proceed to examine the contention below. I find that it is relevant to examine whether the transfer is permanent or temporary not on the basis of the agreements churned out by the parties bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer is permanent can be drawn because the assignment agreement provided for much more no. of years than protected by copyright. 23.4. In the agreements also nowhere it has been stated that by way of assignment the owner relinquished their copyright in favour of the assignee. AGS, it appears, feel that he can simply evade service tax merely by putting assignment for perpetuity under the misguided notation that such an agreement should be a sale and not lease as applied to goods/property. I therefore find that there is merit in the argument given by DGCEI that AGS has simply stated that the transfer is permanent without intending to do so in as much as he continues to be the owner of the intellectual property/copyright. I find that what is applicable to goods cannot be blindly applied to intellectual property and any assignment agreement of such an intellectual property for perpetuity to blindfold it to be a sale of goods only proves AG s intention to evade. Therefore even by way of assignment for perpetuity also the title does not get transferred to the assignee as can be seen from the agreements of assignment. In the absence of explicit statemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h AGS is also a party. Therefore AGS cannot also claim that the matter involves interpretation of law and therefore penalty is not applicable. Even after the same, AGS deserves to be penalized under section 78 of the Finance Act, 1994. Further AGS is also liable to penalty under Section 77 of Finance Act, 1994 as they failed to take registration and comply with other provisions of the services tax law. 18. Taxability of IPR and copyright service has to be strictly within the contours and prescription of section 65(105)(zzzzt) of the Act read in tandem with the relevant provisions of the CR Act. The purpose of the charging provision under the Act is only to bring to tax income from those services that constitute a temporary transfer of IPR. The provision thus addresses, apparently, an intangible right. To that extent, the observation of the respondent in the order-in-original in the case of AGS Entertainment extracted above (paras 23.3 23.4), to the effect that the phrases permanent transfer/perpetual transfer/assigned for perpetuity etc. , are only applicable to goods and not intellectual property like copyright is clearly contrary to the very statutory p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-clauses (i) to (vi); (b) in the case of a computer programme,- (i) to do any of the acts specified in clause (a); (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme: Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental. (c) in the case of an artistic work,- (i) to reproduce the work in any material form including - (A) the storing of it in any medium by electronic or other means; or (B) depiction in three-dimensions of a twodimensional work; or (C) depiction in two-dimensions of a threedimensional work; (ii) to communicate the work to the public; (iii) to issue copies of the work to the public not being copies already in circulation; (iv) to include the work in any cinematograph film; (v) to make any adaptation of the work; (vi) to do in relation t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e effect accordingly. (3) In this section, the expression assignee as respects the assignment of the copyright in any future work includes the legal representatives of the assignee, if the assignee dies before the work comes into existence. 25. Sub-Section (2) recognizes the separate and concurrent rights of an assignor assignee in respect of the assets and underlying rights, assigned or retained, as the case may be. Section 19 stipulates the mode of assignment stating that no assignment of the copyright in any work shall be valid unless it is in writing signed by the assignor or by his duly authorised agent. 26. The provisions of Section 56 of CR Act also makes it clear that an asset comprises of several components, each holding an independent copyright in its own right. The Section states thus:- 56. Protection of separate rights.- Subject to the provisions of this Act, where the several rights comprising the copyright in any work are owned by different persons, the owner of any such right shall, to the extent of that right, be entitled to the remedies provided by this Act and may individually enforce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chestrated performance by each of the several participants, although the components may, sometimes, in themselves be elegant entities. Copyright in a cinema film exists in law, but Section 13(4) of the Act preserves the separate survival, in its individuality, of a copyright enjoyed by any 'work' notwithstanding its confluence in the film. This persistence of the aesthetic 'personality' of the intellectual property cannot cut down the copyright of the film qua film. The latter right is, as explained earlier in my learned brother's judgment, set out indubitably in Section 14(1)(c)... 30. It is thus, too well settled, that an asset, such as a cinematograph film, comprises of a bundle of rights. Setting this principle against the context and purpose of Section 65(105)(zzzzt), the right mentioned therein, relates to the right in the film as well as each of such rights comprised in the film. The interpretation accorded by the Department tends to ignore the fact that the taxable service under Service Tax Law is of any copyright denoting all rights, that which vests in film as a whole, or any of the smaller but equally important rights c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecifically using the phrase all or any of the rights comprised in the copy rights in the work . This supports the conclusion that a work may either comprise of a single right or a bundle of rights , some that may be relinquished and others that are pursued and will survive. 33. The petitioners before me all confirm that the documentation entered into by them with Television Channels specifically uses the word perpetual and this is specifically and fairly admitted by Mr.Sundareshwaran. Apparently, in such a case, the transaction clearly stands outside the ambit of service tax. The stand of the Department is that the use of the word perpetual is a mere camouflage. The Assessing Authority proceeds on the basis that the use of the words in perpetuity are not in consonance with the spirit of the agreement and is only used to disguise the actual fact that the transfer was temporary and to avoid tax. However, this is only a suspicion and nothing is brought on record to prove the allegation. 34. As regards the use of the word revocable in some agreements, the argument of the petitioners that the revocability is solely restric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt were tantamount to Royalty? 4.Whether the learned Income Tax Appellate Tribunal erred in relying upon the decision of a Coordinate Bench of the Tribunal in the Shri Balaji Communications case? 5.Whether the learned Income Tax Appellate Tribunal s findings are perverse on the facts and circumstances of the case, and therefore liable to be set aside? 37. The Division Bench was concerned with the case of an individual who was carrying on business in purchase and sale of Telugu Films and whether she was liable to deduct tax at source under Section 194-J of the Act on the amounts paid for purchase of film rights. The case of the Department was that the amount paid for purchase of film rights was of the nature of royalty liable to deduction of tax at source under Section 194-J of the Act. The rights had been transferred by the petitioner for a period of 99 years and the assessee contended that the transfer for 99 years would constitute an outright sale of all rights in the film whereas the Department contended that the copy right in the film was itself only for a period of 60 years. While deciding this issue the Division Bench o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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