SERVICE TAX ON COPYRIGHT SERVICES

[Dr. Sanjiv Agarwal]

Service tax has been imposed on specified copyright services rendered to any person by any other person by the Finance Act, 2010 with effect from a notified date. The gross amount charged from any person for use of such copyright services or total consideration received in relation to such services shall be chargeable to service tax.

Meaning of Copyright

Finance Act, 1994, as amended does not define copyright but section 65(105) (zzzzt) refers to copyright as defined in the Copyright Act, 1957

Accordingly, section 13 provides for works in which copyright subsists. It states as under -

Works in which copyright subsists.-

(1) Subject to the provisions of this section and the other provisions of this Act, copyright shall subsist throughout India in the following classes of works, that is to say,­

(a) original literary, dramatic, musical and artistic works;

(b) cinematograph films; and

(c) sound recording.

(2) Copyright shall not subsist in any work specified in sub-section (I), other than a work to which the provisions of section 40 or section 41 apply, unless,-

(i) in the case of a published work, the work is first published in India, or where the work is first published outside India, the author is at the date of such publication, or in a case where the author was dead at that date, was at the time of his death, a citizen of India;

(ii) in the case of an unpublished work other than work of architecture, the author is at the date of the making of the work a citizen of India or domiciled in India; and

(iii) in the case of work of architecture, the work is located in India.

Explanation-In the case of a work of joint authorship, the conditions conferring copyright specified in this sub-section shall be satisfied by all the authors of the work.

(3) Copyright shall not subsist-

(a) in any cinematograph film if a substantial part of the film is an infringement of the copyright in any other work;

(b) in any sound recording made in respect of a literary, dramatic or musical work, if in making the sound recording, copyright in such work has been infringed.

(4) The copyright in a cinematograph film or a sound recording shall not affect the separate copyright in any work in respect of which or a substantial part of which, the film, or, as the case may be, the sound recording is made.

(5) In the case of work of architecture, copyright shall subsist only in the artistic character and design and shall not extend to processes or methods of construction.

Copyrights are governed by the Copyright Act, 1957. Copy rights subsists throughout India in certain classes of works i.e., original literary, dramatic, musical and artistic works; cinematograph films and sound recording. Copyright has been defined in Section 14 of the Copyright Act, 1957 as under -

Copyright means the exclusive right subject to the provisions of this Act, to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof, namely: -

(a) in the case of a literary, dramatic or musical work, not being a computer programme -

 (i) to reproduce the work in any material form including the storing of it in any medium by electronic means;

(ii) to issue copies of the work to the public not being copies already in circulation;

(iii) to perform the work in public, or communicate it to the public (iv) to make any cinematograph film or sound recording in respect of the work;

(v) to make any translation of the work;

(vi) to make any adaptation of the work;

(vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi);

(b) in the case of a computer programme -

(i) to do any of the acts specified in clause (a);

(ii) to sell or give on hire, or offer for sale or hire any copy of the computer programme, regardless of whether such copy has been sold or given on hire on earlier occasions;

(c) in the case of an artistic work -

(i) to reproduce the work in any material form including depiction in three dimensions of a two dimensional work or in two dimensions of a three dimensional work.

(ii) to communicate the work to the public;

(iii) to issue copies of the work to the public not being copies already in circulation;

(iv) to include the work in any cinematograph film;

(v) to make any adaptation of the work;

(vi) to do in relation to an adaptation of the work any of the acts specified in relation to the work in sub-clauses (i) to (iv);

(d) in the case of a cinematograph film -

(i) to make a copy of the film including a photograph of any image forming part thereof;

(ii) to sell or give on hire or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions;

(iii) to communicate the film to the public;

(e) in the case of a sound recording -

(i) to make any other sound recording embodying it;

(ii) to sell or give on hire, or offer for sale or hire, any copy of the sound recording, regardless of whether such copy has been sold or given on hire on earlier occasions;

(iii) to communicate the sound recording to the public.

It is also provided in Section 16 that no person shall be entitled to copyright or any similar right in any work, whether published or unpublished, otherwise than under in accordance with the provisions of the Act or of any other for the time being in force, but nothing in this section shall be construed as abrogating any right or jurisdiction to restrain a breach of trust or confidence.

Copyright is an Intellectual Property Right (IPR) already recognized in the Finance Act, 1994 since 2004. Intellectual property right services were brought into service tax net by the Finance Act, 2004 but it specifically excluded all types of copyrights. Copyright is an intangible property right arising out of intellect.

Copyrights are exclusive rights which can be in the form of -

(a) original literary, dramatic, musical or artistic works,

(b) cinematograph films,

(c) sound recording.

Thus, so long as a singer or a script writer or a film producer makes any original creation, it will remain outside the ambit of service tax but the moment it is given for making a movie for commercial purpose, it will be taxed. However, service tax would be charged only if granting of such copyrights is for a consideration. If the creator himself exploits the creation, there will be no service tax but if he sells or transfers the same for commercial usage, it will attract service tax. Thus, film producers will be liable to pay service tax for letting TV channels broadcast their movies or radio station will have to pay for playing copyright music. Thus, telecast and broadcast content involving copyright will become taxable.

VAT on Copyrights

The use of intangible property right is also a transaction deemed to be sale of goods on which sales tax or value added tax is levied. In Vikas Sales Corporation v CCT (1996) 102 STC 106 (SC), apex court has held that rights such as trademarks, patents and rights in persona capable of transfer or transmission are included in scope of goods . In Karnataka VAT Act 2003, copyrights, software licensees and patents are included for levy of VAT. Also, in A.V. Meiyappan v CCT, Board of Revenue, Madras (1967) 20 STC 115 (Madras), high court had held that grant by way of lease of a cinematographic film amounts to sale of goods attracting the levy of sales tax.

Meaning of Taxable Service

Taxable service has been defined under section 65(105) (zzzzt) as under -

Any service provided or to be provided to any person, by any other person, for -

(a) transferring temporarily; or

(b) permitting the use or enjoyment of, any copyright defined in the Copyright Act, 1957, except the rights covered under sub clause

(a) of clause (1) of section 13 of the said Act.

The taxable services in relation to copy right services should satisfy the following conditions-

(a) service should be provided by copyright owner/ holder or any person

(b) service should be provided to any person

(c) copy right service should be for

(i) its temporary transfer, or

(ii) permission to its use, or

(iii) permission to enjoyment thereof (copyright)

(iv) copyright should not be in relation to any literary, dramatic or musical or artistic work

(ie, rights covered under section 13 (1) (a) of the Copyright Act, 1957)

The scope of taxability of copyright services would therefore, be as follows-

(a) original literary, dramatic, musical and artistic works- not taxable

(b) computer programmes and information technology - taxable under information technology software services

(c) recording of cinematographic films - taxable under copyright services

(d) sound recording - taxable under copyright services.

Cinematographic films

A cinematographic Film means any work of visual recording on any medium (emphasis added) produced through a process from which a moving image may be produced. The same may be accompanied with sound reproduction also. Both the recording of the cinematographic film and the accompanying sound track are the property of the producer, who can temporarily transfer it or permit its use by another person for a consideration. It is this activity, which is being taxed under this service. It would have an impact on the royalty payments on both imported and indigenously produced films when the producer/right holder allows such use to another person, say the distributor.

Sound Recording

Song, its music, lyrics and composition also enjoy the copyright protection to its owner who can commercially exploit it in the manner stated above. Normally, the copyright of music vests in the composer and the copyright of music recorded vests in the producer of the sound recording. It is possible that a lyricist or a singer may hold copyright for the words of a song or the song itself. Merely allowing that song to be recorded is a copyright, which would fall under category (a) of section 13 of the Copyright Act and thus would not be subject to service tax. However, after the performer has transferred his rights to a sound recording company, the sound recording company acquires the copyright mentioned in category (c) of section 13 supra. It is the transfer or allowing use of this right, which would be subjected to tax under the new service.

The taxpayers or service providers would include music companies, music distributors, owners of copyright of cinematographic films etc. It could not cover individual artists, music composers, performers, actors etc as their copyrights shall fall under clause (a) which is specifically excluded.

Department Clarification

Ministry of Finance (TRU) Letter No 334/ 1/2010 -TRU dated 26.2.2010 clarifies as follows-

"7. Services related to two types of copyrights hitherto not covered under existing taxable service 'Intellectual Property Right (IPR)', namely, that on (a) cinematographic films and (b) sound recording.

7.1 The right to temporarily transfer or permit the use of Intellectual Property Rights (IPR), namely, trademarks, designs and patents was brought under tax net in 2004. However, one of the IPRs, i.e. copyright has been specifically kept out of the purview of the tax with an intent to encourage authors and artists, as it involves creative works, such as literary work, musical work and artistic work. In Budget 2008, Information Technology (IT) Software Service was also brought under tax net, which apart from involving development, up-gradation, assistance etc. also covered the IPR aspect i.e. right to use the information technology.

7.2 The provisions of copyright are incorporated in the Indian Copyright Act, 1957. As per section 13 of the said Act, the copyright subsists in the following classes of work:

(a) Original literary, dramatic, musical and artistic works;

(b) Recording of cinematographic films;

(c) Sound recordings.

7.3 The first category of copyright has been kept out of the tax net while the second and third categories of copyrights are being made taxable under this service. A cinematographic film means any work of visual recording on any medium (emphasis added) produced through a process from which a moving image may be produced. The same may be accompanied with sound reproduction also. Both the recording of the cinematographic film and the accompanying sound track are the property of the producer, who can temporarily transfer it or permit its use by another person for a consideration. It is this activity, which is being taxed under this service. It would have an impact on the royalty payments on both imported and indigenously produced films when the producer/right holder allows such use to another person, say the distributor.

7.4 Similarly, song, its music, lyrics and composition also enjoy the copyright protection to its owner who can commercially exploit it in the manner stated above. Normally, the copyright of music vests in the composer and the copyright of music recorded vests in the producer of the sound recording. It is possible that a lyricist or a singer may hold copyright for the words of a song or the song itself. Merely allowing that song to be recorded is a copyright, which would fall under category (a) of section 13 of the Copyright Act and thus would not be subject to service tax. However, after the performer has transferred his rights to a sound recording company, the sound recording company acquires the copyright mentioned in category (c) of section 13 supra. It is the transfer or allowing use of this right, which would be subjected to tax under the new service.

7.5 As such, depending upon the nature and conditions of the contract, companies distributing music, owners of copyright of cinematographic films etc. would be prospective taxpayers. It may be noted that this taxable service will not cover individual artists, composers, performers etc. as their copyrights fall under clause (a) of Sec.13 of the Copyright Act".

Person Liable

Any person granting the permission to use or enjoyment of copyright or transferring of copyright temporarily to any other person shall be liable to pay service tax.

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