Query

1. The client of the Querist is an ex-director of M/s. Modern Cinema & Technology (I) Pvt. Ltd., (hereinafter “Modern Cinema”) a private limited company registered under the Companies Act, 1956. Modern Cinema is in the business of equipment leasing and movie distribution and is registered under the Maharashtra Value Added Tax Act, 2002.

2. An Assessment Order has been passed against Modern Cinema under the Maharashtra Value Added Tax Act, 2002 on 27-9-2013 raising a total demand of ` 11,65,208/- for the Financial Year 2011-12. The Assessment Order notes that due tax is being paid on the rentals received from the lease of equipments by Modern Cinema to various theatres and the Assessing Authority has not contested Modern Cinema’s tax treatment of the same.

3. On the other hand, no sales tax was being paid on the “Movie Distribution Charges”. The Assessing Authority has demanded tax on the same with consequent demand of interest and penalty under the Act. The Querist broadly seeks an opinion on whether these Movie Distribution Charges are amenable to sales tax/VAT under the Maharashtra Value Added Tax Act, 2002.

4. A brief factual matrix, relevant to the controversy pertaining to the Movie Distribution Charges, is set out herein-below:

Brief Facts

5. Modern Cinema provides services of movie distribution to the Producers/Distributors of cinematographic films. The Querist has informed me that the following transactions take place as between the Producer, Distributor, Modern Cinema and one M/s. Media Technology :

   1. The Producer and Distributor now a days are
      mostly the same. However, in some cases the Producer will be
      different from the Distributor. In those cases, the Distributor gets
      a distribution rights from the Producer.

   2. Since most Producers/Distributors do not have
      advanced technology for advanced encoding and decoding of film
      content on digital media, they engage third party service providers
      like M/s. Media Technology which has the requisite technology.

   3. The Producer/Distributor gives the film content
      to Media Technology who encode it on a secure digital format in a
      hard disk. A “Key Delivery Message” is also generated at this time
      which is like a password to decode the film content.

   4. Media Technology then sends the hard disk to
      Modern Cinema, which subsequently makes copies of the same. The Key
      Delivery Message is not given by Media Technology to Modern Cinema
      at this stage.

   5. Based on the instructions of the
      Producers/Distributors, Modern Cinema downloads the film content at
      the specified theatre from the hard disk copy to the QUBE server
      which is installed in the theatre.

   6. As and when the Producer/Distributor gives the
      “Release Order”, Media Technology gives the Key Delivery Message to
      Modern Cinema, who then uses the Key Delivery Message to decode the
      film content and to allow it to be broadcast by the theatres.

   7. Modern Cinema raises tax invoices on the
      Producer/Distributor and the Producer/Distributor pays the “Movie
      Distribution Charges”. Modern Cinema is charging service tax and not
      sales tax/VAT on these Movie Distribution Charges.

6. I have been informed that there is no written contract between Modern Cinema and the Producers/Distributors.

7. The Querist has forwarded an agreement between Media Technology and Modern Cinema for lease of the “QUBE server”. Modern Cinema rents out the QUBE server from Media Technology and installs it in various theatres and uses this QUBE server to download film content from the hard disk copy as outlined in Para 5(v) of this opinion. Media Technology charges certain rentals to Modern Cinema and recovers sales tax/VAT on those rentals from Modern Cinema. Since, no liability to sales tax can arise directly on this transaction in the hands of Modern Cinema and the Assessment Order has also not sought to assess these rentals to tax in hands of Modern Cinema, this particular transaction of lease of QUBE server between Media Technology and Modern Cinema is not relevant in so far as the question of taxability of Movie Distribution Charges goes.

Opinion

8. I have gone through the documents and papers forwarded to me by the Querist. I have also seen the Assessment Order dated 27-9-2013 and the Show Cause Notice 10-9-2013 along with the report of the Business Audit Officer. The facts noticed therein, on the basis of which the Assessment Order is passed, are broadly similar to what has been set out in the summary in Para 5. At some places, the Assessment Authority seems to have been confused about the various transactions and facts, but those are irrelevant for most part as far as the question of Movie Distribution Charges goes.

9. The Assessment Order suffers from an obvious fallacy. The taxable event of “sale of goods” under the Sales Tax laws has to fulfil the criterion laid down in the general law relating to the sale of goods in India. Sales Tax can be charged on the sale of goods “by the seller to the buyer” and “for a price” under the Maharashtra Value Added Tax Act, 2002. The sale price is generally taken as the taxable value under the Act.

10. In the present case, the Movie Distribution Charges are paid by the Producer/Distributor to Modern Cinema for the services provided by it to the Producer/Distributor. The Assessment Order makes a bald assumption that the Movie Distribution Charges are consideration for “sale of software packages” or “sale of copyright” without really making any necessary findings of fact to support such conclusions.

11. It is apparent that no software package is being sold by Media Technology to the Producer/Distributor. Similarly, no sale of copyright has taken place. Modern Cinema did not have any copyright in the film content or any other rights which the Copyright Act recognises
    qua cinematographic films. Modern Cinema simply could not have sold what it never had.

12. The Producer is the author and first owner of all rights in the cinematographic work. Sometimes, the Producer grants “distribution rights” to the Distributor which are needed to distribute the cinematographic works without infringing the copyright of the Producer. Indeed the Copyright Act, 1957 does not contemplate that a complete third party service provider like Modern Cinema can get any copyright in a cinematographic work at all unless the Producer/Distributor gives the same to it in the first place. Consequently, the proposition that a third party service provider like Modern Cinema could have sold a copyright to a Producer or Distributor is absurd and lacks all commercial sense.

13. The Assessing Authority has, thus, treated the existence of monetary consideration as conclusive of an assumed sale without bothering to investigate whether such sale took place – or could have taken place – at all.

14. The Assessing Authority has wrongly relied on the provisions of Schedule Entry 39 (and as I will have to presume), the notification issued under that entry. In fact, the callous attitude of the Assessing Authority is apparent from the fact that he has quoted the provisions of the notification issued under Schedule Entry C-39 without noting the amendments to the same in the year 2011 which are relevant for the period 2010-11. Furthermore, the very fact that the Assessing Authority sought to alternatively tax the Movie Distribution Charges under two distinct heads of “sale of software packages” and “sale of copyright” is indicative of the fact the Assessment Order is nothing but a determined attempt to simply assess the Movie Distribution Charges to tax for the sake of it.

15. To conclude, I am of the firm opinion that, since Modern Cinema did not have any copyright which it could sell, there could be no sale of copyright by Modern Cinema to anyone, much less to the Producer or the Distributor. Therefore, no liability for sales tax/VAT arises
    qua the Movie Distribution Charges.