As cinema theaters owner, are we liable to pay Service Tax on screening of film?
The cost to a service recipient has increased in recent past on account of the tax burden which is passed on to the end-user. In a country where more than half the population is cinema crazy, passing on the burden of Service Tax on the cinemagoers is not an issue that can be ignored. With the increase in demand of small screens or mini theaters throughout the country, the number of screens has increased multifold.
After the multiplex boom, mini theaters are on a rise in two tire and three tire cities. The question that as to whether the activity of screening of film supplied by a film distributor would fall under any of the taxable services and accordingly, whether the theater owners are required to pay service tax on amount received by them from distributors has opened a Pandora box of possibilities of taxing such services. Divergent views have been expressed on this issue.
One view is that the activity of screening of films supplied by a film distributor falls under the taxable service category of "renting of immovable property"; while an alternative view is that such activity falls under the category of 'Business Support Service'.
The Ministry of Finance, examined these issues in detail when approached by the stakeholders. Normally a producer of a movie sells the rights of showing the movies in a region to a distributor. The distributor in turns enters into agreement with theater owners. This agreement can be of different types. Thus, it is necessary to examine different types of arrangements under which a movie is screened, in order to determine whether any tax liability arises on the activities undertaken by a theater owner and a distributor.
On examination of various types of arrangements normally entered into between a theater owner and a distributor one finds that in this industry the film distributors and cinema theater owners have devised different arrangements under different circumstances. Under one type of arrangement, the distributor leases out the hall for screening of the movie. Here, the theater owner gets a fixed rent from the distributor.
The profit or loss from exhibiting the film is borne by the distributor. In such a case, the theater owner provides the taxable service of 'Renting of immovable property for furtherance of business or commerce' and is liable to pay service tax as per the clarification issued vide Board Circular No. 109/03/2009 dated 23.02.2009. However, the Hon'ble High Court of Delhi in the case of Home Solution Retail India Ltd vs. UOI & ORS (STO 2009 Del 825) has held that taxable service in relation to renting of immovable property is taxable rather than renting itself.
Another type of arrangement is where the contract between the theater owner and the distributor is on revenue sharing basis i.e. a fixed and pre-determined portion i.e. percentage of revenue earned from selling the tickets goes to the theater owner and the balance goes to the distributor. In this case, the two contracting parties act on principal-to-principal basis and one does not provide service to another. In absence of service provider and recipient relationship in such arrangement, the activities are not covered under service tax.
The Board further examined yet another type of arrangement where the theater owner buys the print/CD of the film on payment of a fixed price and thereafter screens it in his theater and clarified that this transaction is also not subject to service tax being in the nature of sale of goods. The arrangement most commonly entered into between a theater owner and a distributor is that the theater owner screens the movie for fixed number of days under a contract.
The proceeds earned through sale of tickets go to the distributor but the theater owner receives a fixed sum depending upon the number of days of screening. In this arrangement, the advertisement and display of posters etc. is done by the distributor. Under this arrangement, the fixed amount contracted is given to the theater owner by the distributor irrespective of the fact whether the movie runs well or not.
However, there is no rental arrangement between the theater owner and the distributor as in earlier discussed arrangements. Initially the Department had expressed a view that in this arrangement, the theater owner provides 'Business Support Service' to the distributor and hence is liable to pay service tax on the fixed amount received by the theater owner. The Ministry examined the said matter and vide their Circular dated 23.02.2009 clarified that by definition 'Business Support Service' is a generic service of providing 'support to the business or commerce of the service receiver'. In other words, the principal activity is to be undertaken by the client while assistance or support is provided by the taxable service provider.
In the instant case, the theater owner screens/exhibits a movie that has been provided by the distributor. Such an exhibition is not a support or assistance activity but is an activity on its own accord. That being the case such an activity cannot fall under 'Business Support Service'.