SERVICE TAX & MOVIE THEATRES
The question whether the activity of screening of film / movie (as supplied by film distributors) by theatre / multiplex owners would be covered under any of the taxable services, and whether it would be liable to service tax or not has always remained an issue. Numerous contradictory views have been expressed by the experts in this regard. Some are of the view that the aforesaid activity would fall under the category of “Renting of immovable property for the furtherance of business or commerce”. While, others viewed that it would fall under the category of “Business Support Service.”
The issue has been examined by the Central Board of Excise & Customs (CBEC) whereby, finally they came out with much awaited clarification in this regard vide Circular No. 109/03/2009 dated 23/02/2009.
The highlights of this Circular are outlined below:
- Types of agreements in this regard:
It is commonly known that normally a movie producer sells the rights of screening the movie in a particular region to a distributor. Thereafter, the distributor enters into agreement with theatre owners. Such agreements can be of various categories. Thus, each category needs to be examined carefully to determine whether any Service Tax liability arises out of such agreements or not.
Some of the commonly found agreements are discussed hereunder:
(1) Leasing agreements: Under such agreements, the distributor leases out the hall for screening of the movie. Further, the theatre owner here gets fixed rent from the distributor. Any profit / loss arising there from is borne by the distributor. A view has been framed that this category falls under the taxable service of “Renting of immovable property for the furtherance of business or commerce” and is therefore, liable to service tax.
(2) Revenue sharing agreements: Here, the agreement between theatre owner and the distributor is such that a percentage of revenue realized from selling tickets goes to the theatre owner, while the balance goes to distributor. Here, as both the parties act on principal-to-principal basis and as one does not serve another, such agreements are not liable to service tax.
(3) Agreement in the nature of sale of goods: Under this agreement, the theatre owner buys the print of the film by payment of fixed price. Thereafter, the theatre owner screens the movie for the number of days he wants to. The said transaction being in the nature of sale of goods, cannot be subjected to service tax.
(4) Agreement to screen the movie for fixed period: This is the most commonly entered agreement between the theatre owner and the distributor. Under such agreements, the theatre owner screens the movie for fixed no. of days under a contract. The proceeds earned through sale of tickets is passed on to the distributor and the theatre owner receives a fixed sum depending upon the no. of days of screening. The expenditure on posters, etc. is borne by the distributor. Further, the theatre owner gets fixed amount contracted irrespective of the fact whether the movie runs well or not. But there is no rental agreement as stated under (1) above. A view in this regard is that the theatre owner here provides “Business Support Service” to the distributor and hence is liable to service tax thereon.
The CBEC after examining the matter and after considering various types of agreements entered into clarified that screening of a movie would not fall under any of the taxable service & hence would not be subjected to service tax except where the distributor takes the theatre on lease & the theatre owner gets a fixed rent. In such cases, the agreement would fall under the category of “Renting of immovable property for the furtherance of business or commerce” & therefore, the theatre owner would be liable to service tax accordingly on the amt. recd. from the distributor.
In cases where some of the dept. officials viewed the agreement as “Business Support Service”, the CBEC clarified as under:
“Business Support Service” is a service of providing ‘support to the business or commerce of the service receiver’. Meaning thereby, the principal activity is to be undertaken by the client while support / assistance is provided by the taxable service provider. Further, in the agreement referred to in (4) above, the theatre owner screens a movie that has been provided by the distributor. Such an exhibition is not a support or assistance activity but an individual separate activity in its own accord. Hence, such cases would not fall under the category of “Business Support Service” & consequently would not be subjected to service tax.
Although CBEC clarified that except for the category “Renting of immovable property for the furtherance of business or commerce”, movie theatres would not be subjected to service tax, the current position is that the Hon. Delhi HC has already held service tax on commercial rentals to be unconstitutional.
The said Delhi HC judgment was pronounced by Justice B.D. Ahmed on 18/04/2009. The major arguments on the part of appellants were that renting does not involve any service, and that the Central Govt. was not empowered to levy tax on transfer of rights in immovable property, which is a state subject as per the Constitution of India. The govt. pleaders on the other hand argued that renting of property by itself was a service and hence taxable. The court turned down contentions of the government justifying that service tax is a sort of value added tax and so far as renting of commercial property is concerned; it could not view any value addition and therefore, could not be regarded as a service.
Considering the present scenario, I am of the opinion that service tax on movie theatres has been done away. Hence, we can conclude that movie theatres in respect of the activity of screening of film / movie cannot be subjected to service tax.
Source: Relevant Circulars / Judgments
CA. APURVA MEHTA