In a recent ruling, the Madras High Court has ruled that the service tax must be levied considering contract-specific basis between the service provider and the recipient. The bench was dealing with levying tax on assignment of certain rights in the cinematograph films as representing temporary transfer or permitting use or enjoyment of intellectual property i.e., copyright in the instant case.
The Revenue filed an appeal against M/s. Wunderbar Films Private Limited, a company engaged in the production of cinematograph films. In the ordinary course of its business, the company entered into various agreements with distributors, exhibitors, and television channels, assigning certain or all copyright rights for the broadcast and exhibition of films it either produced or acquired.
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The company argued that the impugned notices and orders improperly levied service tax on both temporary and perpetual copyright transfers. It contended that service tax applies only to temporary transfers or permissions to use copyright under the Copyright Act, 1957, and perpetual transfers, being permanent, fall outside its scope, making the tax demand jurisdictionally invalid.
However, the revenue submitted that the agreements of perpetual transfers are a sham and a make believe arrangement to escape the levy under the Service Tax Act. It was their further case that the transfer of copyright is temporary in nature thereby attracting the charge under the Finance Act 1994.
Justices R. Mahadevan and Mohammed Shaffiq observed that “the question as to whether a particular transaction would attract the levy of Service Tax as constituting a taxable service within the meaning of 65(105)(zzzzt) prior to 01.07.2012 or Section 66B read with Section 65B(44) and Section 66E(c) w.e.f. 01.07.2012 ought to be determined on the basis of the contracts entered into between the service provider and the recipient. One cannot generalize the transactions nor determine the liability without examining the contracts individually for the rights/ obligations flowing therefrom may vary from contract to contract.”
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The bench added that this would be evident by the very fact that some of the contracts have been treated by the respondents in the writ appeals as representing temporary transfers thereby attracting the levy of Service Tax, while other contracts are understood by the respondents as resulting in perpetual transfers i.e., permanent and not temporary, thus outside the purview of levy of Service Tax.
The court set aside the observations made by the Judge that imposed restrictions on the adjudicating authority’s powers. It remanded the cases, allowing the petitioners to submit fresh objections within four weeks. The adjudicating authority was directed to independently and objectively adjudicate the matters, free from the earlier court’s observations, and issue a fresh order within four weeks of receiving the objections.
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