SERVICE TAX ON FILM SCREENING

[Mr. M. GOVINDARAJAN]

                        From the inception of service tax nearly 106 services have been added in the service tax net.   In addition to the interpretation of the definition of the services viz, 'Business Auxiliary Services' and 'Business Support Services' is bringing more services in the service tax net.  Further the Department is striving hard to bring many a service in the ambit of the definition of the above two services.

                        One such is film screening.  The film industry is providing $2billion plus.   The said industry is now cheered because of getting three Oscar awards.  Shri Bipta Sapra, Associate Director, Ernst & Young told that screening of movies in a threatre is not a specified taxable service.   However, the wide scope of business support service was resulting in interpretational disputes.   Some tax officials wanted this arrangement also to be brought under the ambit of service tax, arguing that the theatre owners provide 'business support service' to the distributor which was a taxable service.

                        Requests were made from the field officials asking to clear the air on the tax provisions applicable in case of film screenings and whether theatre owners were required to pay service taxes on amounts received from film distributors.  Diversified 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'.  Another view is that such activity falls under the category of 'Business Support services'.  The Board came with a circular clarifying the issue in C.B.E.&C Circular No. 109/3/2009-ST, dated 23.2.2009. 

                        The matter has been examined by the Board.   A producer of a movie sells the rights of showing the movies in a region to a distributor.  Thereafter the distributor is making agreements with the theater owners.  The agreement made between the distributor and the theater owner is to be examined because the agreement is of various types.   Examination of agreement is highly required to determine whether any tax liability arises on the activities undertaken by a theatre owner and a distributor.  

                        The Board analyzed the various types of agreements as under:

§         The distributor leases out the hall for screening of the movie.   In this agreement the theater owner gets a fixed rent from the distributor.   The profit or loss from exhibiting the film is borne by the distributor.   In this case the theater owner provides the taxable service of 'Renting of immoveable property for furtherance of business or commerce' and is accordingly liable to pay service tax;

§         The contract is made between the theater owner and the distributor on revenue sharing basis.  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 such case the two contracting parties act on principal-to-principal basis and one does not provide service to another.   In such arrangement the activities are not covered under service tax and no body is liable to pay service tax;

§         The theater owner buys the print or CD of the film on payment of a fixed price and thereafter screens it in his theater.   In this transaction also the service tax is not liable to pay since this nature is of sale of goods.

§         The Board analyzed further for the question when  the service will become Business Support Service. A theater owner and a distributor commonly make arrangements between them that the theater owner screens the movie for fixed number of days.   The proceeds earned through the sale of tickets go to the distributor but the theatre owner receives a fixed sum depending upon the number of days  of screening.  The distributor in such arrangements is doing the work of advertising, displaying of posters etc.,  A fixed amount contracted is given to the theatre owner by the distributor irrespective of the fact whether the movie runs well or not.   There is no rental agreement between the theater owner and the distributor in this case.  This has been viewed as the theater owner provides 'Business Support Service' to the distributor.   By definition 'Business Support Service' is a generic service of providing 'support to the business or commerce of service receiver'.   The principal activity is to be undertaken by the client while assistance or support is provided by the taxable service provider.   In this case the theater owner screens or 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.  Hence this activity cannot fall under 'Business Support Service'.

The Board clarified that screening of a movie is not a taxable service except where the distributor leases out the theater and the theatre owner get a fixed rent in which service provided by the theater owner would be categorized as 'Renting of immovable property for furtherance of business or commerce' and the theater owner would be liable to pay tax on the rent received from the distributor.   The Circular further provided that the facts of each case and the terms of contract must be examined before a view is taken.

                        The clarifications issued by the Board bring extra cheer to the film industry.  It puts to rest all the disputes and is a welcome one for the Entertainment industry.