Selling foreign film distribution rights in India? You’re liable to tax

We are distributors of films in India. We buy foreign film distribution rights from overseas entities and sell the same to Indian distributors as well as cinema houses. Recently, we came to know that service tax is now applicable on film distribution. Are we liable to service tax? We deal only in foreign films. We pay the overseas distributor directly in convertible foreign exchange. — Shravan

With effect from July 1, 2010, services of permitting to use of copyright in cinematographic films and sound recording are liable to service tax. The definition of taxable service is as under:
“Service 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” Section [ 65(105)(zzzzt )]

Scope of copyright: As per Section 13 of the Act, 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 recordings;

(2) Copyright shall not subsist in any work specified in sub-Section (1), 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(ii) In the case of an unpublished work other than a work of architecture the author is at the date of the making of the work a citizen of India or domiciled in India; and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 a work of architecture copyright shall subsist only in the artistic character and design and shall not extent to processes or methods of construction.

As per Circular Letter D.O.F.No. 334/1/2010-TRU, dated February 27, 2010, the scope of taxable services is as under:
The provisions of copyright are incorporated in the Copyright Act, 1957. As per Section 13, 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.

The first category of copyright has been kept out of the tax net while the second and third categories are being made taxable under this service. A cinematographic film means any work of visual recording on any medium produced through a process from which a moving image may be produced.

The same may be accompanied with sound reproduction. Both 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.

In your case, you will be covered under this category and will have to pay service tax under reverse charge mechanism as the producer of the foreign film has transferred the right to use for a consideration and under Section 66A, it is the Indian party that has to pay service tax as the service servicer.

The writer is with M Sheth & Co, a chartered accountancy firm in Mumbai and can be reached at mshethco@yahoo.co.in