The Madras High Court has upheld the levy of service tax on income generated from temporary transfer of rights to use cinematographic films. This means that service tax has to be paid for distribution of films and selling of rights to television. Such “temporary transfer” or permission to use the films for specified periods is considered commercial activity.

The Union Government brought in an amendment providing for levying tax on such services. This was challenged by producers and distributors of films in the Madras High Court.

They contended that the levy of service tax on transfer of copyright, which should be considered “goods,” was transfer of the right to use the goods, amounting to a sale. There was no service element and that temporary transfer of copyright should not be subjected to service tax. They also said Value Added Tax/Sales Tax had been imposed on such transaction.

Upholding the constitutional validity of the levy, the Bench comprising Justices R. Banumathi and T.S. Sivagnanam said, “We hold that the variant modes of business transactions between the producer and distributor, distributor and sub-distributor or area distributor or exhibitor (theatre owner) are not sale of goods. From the production of the cinematograph film till it is exhibited, there are a host of commercial activities. Service tax is a value added tax that applies to business transactions for a consideration involving commercial activities.

Explaining further, the judges said a producer exploits a film in many ways. Even though the copyright of the film is assigned to a distributor for a specific area for a limited period, the producer reserves his right to exploit the film in other media. “So long as the transaction does not amount to sale or permanent transfer, it is only a temporary transfer of copyright or permit for its use by another person for a consideration. The service provider is the producer who owns the copyright and the service receiver is the distributor who temporarily owns the copyright of the film.”