Cinema Revenue Sharing Not Taxable as Renting of Immovable Property: CESTAT sets aside Service Tax Demand on Theatre [Read Order]

Holding that film exhibition on a revenue-sharing basis is not a taxable renting service, CESTAT Bengaluru quashed the service tax demand on Kavitha Theatre.

The Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has set aside a service tax demand raised against Theatre, holding that income earned under a revenue-sharing arrangement for exhibition of films does not amount to “renting of immovable property” under the Section 65 of Finance Act, 1994.

The Tribunal bench comprising Justice S.S. Garg [Judicial Member] and C.S. Garbyal [Technical Member] ruled that such arrangements represent a joint business model, not a taxable service.

Kavitha Theatre is engaged in the business of exhibiting cinematographic films and entered into agreements with various film distributors for screening movies at its premises. Under these arrangements, the parties agreed to share the box-office collections in a predetermined ratio, instead of the distributor paying any fixed or assured rent to the theatre owner. The income earned by Kavitha Theatre was thus directly linked to the commercial performance of the films exhibited.

The Department took the view that by allowing the distributors to screen films in the theatre premises, Kavitha Theatre was providing “renting of immovable property service” as defined under the Finance Act, 1994. On this basis, a show cause notice was issued proposing to levy service tax on the amounts received by the theatre under the revenue-sharing arrangement, along with interest and penalties.

The adjudicating authority accepted the Department’s view and confirmed the service tax demand. Aggrieved by the order of the adjudicating authority, Kavitha Theatre filed an appeal before the CESTAT challenging the classification and taxability of the revenue-sharing receipts.

The appellant stated that film exhibition under revenue sharing is a recognized industry practice whereby both sides share the business risk and reward. It wasFurther argued that there existed no service provider and service receiver relationship in order to tax service tax. The appellant largely relied on CBIC Circular dated 23.02.2009, which stated that revenue sharing agreements between theater owners and film distributors did not amount to renting of immovable properties.

The appellant further placed reliance on judicial precedents, particularly Inox Leisure Ltd. vs. Commissioner of GST & Central Excise and Service Tax, where CESTAT had held that revenue-sharing exhibition of films is not taxable, which stood affirmed by the Supreme Court when the Department appealed against such order.

The Revenue, however, maintained that the essence of the arrangement lay in permitting the use of the theatre premises for commercial exploitation and that such permission squarely fell within the ambit of “renting of immovable property service” under the Finance Act, 1994.

It was argued that the form of consideration whether fixed rent or a share in ticket collections was immaterial for the purpose of levy, as long as the theatre premises were made available to another party for consideration.

CESTAT overruled the Department’s stance and stated that revenue sharing cannot be likened to renting, particularly where no definite consideration or leasing of space takes place. As stated in the case by the Tribunal, “The theatre owner and distributor are co-adventurers in a business, and the income derived is a share in business profits, and not rent.”

The bench relied on the affirmed judgment in the case of Inox Leisure Ltd. vs. Commissioner of GST & Central Excise and Service Tax, observed that: "Now, since our highest court had approved this principle that such an arrangement will not be taxable, this question can now not be res integra.

Accordingly, CESTAT set aside the impugned order, quashed the service tax demand along with interest and penalties, and allowed Kavitha Theatre’s appeal in full.

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