No Service Tax if no monetary consideration charged for Services

Moti Talkies Vs Commissioner of Service Tax (CESTAT Delhi)

The issue under consideration is whether the department is correct in charging service tax on various services provided to the film distributors by the assessee without charging any consideration.

The appellant, M/s. Moti Talkies is the owner of a cinema hall and is engaged in the business of exhibiting films in its theatre. The copyright over the films is owned by the distributors. The appellant enters into agreements with the film distributors to obtain such copyrights under which the right to exhibit the films is transferred to the appellant, either temporarily or in perpetuity, depending upon the nature of the agreements between the parties. The Department is of view that appellant was providing various services to the film distributors and received charges in the garb of sharing cum theatre hire but did not discharge the service tax liability.

The agreements that have been executed between the appellant and the distributors confer rights upon the appellant to screen the film for which the appellant is making payment to the distributors. The distributors are not making any payment to the appellant. Thus, no consideration flows from the distributors to the appellant for the alleged service.

CESTAT states that service tax is levied on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another. Though, ―renting of immovable property‖ is a declared service under section 66E of the Finance Act, then too under section 67(1) of the Finance Act, the value shall, in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him. The appellant is not receiving any payment to the distributor and, therefore, no service can be said to have been provided by the appellant.

Hence accordingly the appeal is allowed.

FULL TEXT OF THE CESTAT JUDGEMENT

Agreements entered into between distributors and the Appellant, who is an exhibitor for screening pictures, have been considered to be agreements for ―renting of immovable property‖ as defined under section 65 (90a) of the Finance Act 19941 by the Department and accordingly, show cause notices have been issued to the Appellant demanding service tax. The demands made in the show cause notices have been confirmed by the Additional Commissioner (Adjudication) and the appeal filed by the Appellant to assail the said order has been dismissed by the Commissioner (Appeals). It is the dismissal of the appeal by the Commissioner (Appeals) by order dated 12 July 2016, that has led to the filing of this appeal.

2. The appellant is the owner of a cinema hall situated at Chandni Chowk, New Delhi and is engaged in the business of exhibiting films in its theatre. The copy right over the films is owned by the distributors. The appellant enters into agreements with the film distributors to obtain such copy rights under which the right to exhibit the films is transferred to the appellant, either temporarily or in perpetuity, depending upon the nature of the agreements between the parties.

3. An investigation was carried out by the Department and a view was entertained that the appellant was providing various elements of interconnected services to the film distributors like lending of theatre for exhibition of films, manpower to manage, control and make arrangements, projector and other related equipments to screen the films, arranging power supply and providing arrangements to collect the box office collections, with predominance of ―renting of immovable property‖ services. This service of ―renting of immovable property‖ provided by the appellant to the film distributor would be taxable under section 65 (105) (zzzz) of the Finance Act for the period upto 30 June, 2012 and under section 66E (a) of the Finance Act read with section 66F (3) (b) of the Finance Act for the period from 1 July, 2012 to 31 March, 2014. The Department believed that for the said ―renting of immovable property‖ service, the appellant received charges in the garb of sharing cum / theatre hire but did not discharge the service tax liability.

4. Details of the amount demanded in the two show cause notices dated 21 April, 2014 and 20 April, 2015 are as follows:-

5. The aforesaid two show cause notices were adjudicated by a common order dated 23 February, 2016 and total demand of Rs.34,03,274/- was confirmed with interest and penalties. The demand for the period April 2008 to September, 2008 was dropped as it was found to be beyond five years and the benefit of cum-tax was also extended to the appellant. The appellant filed an appeal before the Commissioner (Appeals), which was dismissed by order dated 12 July, 2016. It is this order passed by the Commissioner (Appeals) that has been impugned in the present appeal.

6. Learned Counsel for the appellant submitted that the appellant is not providing any service to the distributors and in fact, in terms of the agreement with the film distributors, it has only been granted a copy right license in the form of ―theatrical exhibition rights, for which the appellant is making payment to the distributors as a share of the net box office collection. Thus, the very basis of the demand is incorrect since no consideration has been agreed to be paid by the distributor to the appellant. On the other hand, it is the appellant which has paid certain amount to the distributors for the grant of the copy rights. The contention is that for a provision of service to exist, there has to be a definite and identified consideration for such provision.

7. Learned Authorised Representative of the Department has, however, supported the impugned order and has contended that it does not suffer from any illegality.

8. To examine the contentions advanced by learned Counsel for the appellant and the learned Authorised Representative of the Department, it would be necessary to examine the two agreements executed between the appellant, as owner of the cinema hall, and the distributors of the films. The relevant clauses of one such agreement dated 27 May, 2009 executed between the appellant and a distributor called R.S. Enterprises are as follows:-

“This Article of agreement made and entered herein Delhi between R.S. Enterprises Delhi (referred as Distributors as party of 1st part) and the under mentioned Exhibitor (referred as party of the 2nd part) for screening the picture/s on the terms and conditions mentioned hereunder and overleaf:

M/s. Moti Talkies Station: Delhi.

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3. That exhibitor hereby agrees and undertakes to make all payment/s in the name of Distributor (10) Ten days before from the date of release either in Cash, Demand-Draft or Pay-Order payable at Delhi or as desired by the distributor in writing Payment is the essence of the contract.

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6. In case any show/s is/are curtailed for what-so-ever reasons it may be, the Theatre Hire shall stand reduced proportionately.

[emphasis supplied]

9. The relevant provisions of another agreement dated 24 October, 2013 entered into between appellant and a distributor, called, Yaman Enterprises are reproduced below:-

EXIBITOR AGREEMENT

“This agreement (“Agreement”) made and entered herein at Delhi between YAMAN ENTERPRISES (REFERRED AS “Distributor”) and the under mentioned Exhibitor (referred as Exhibitor) for the screening the Film on the terms & conditions mentioned hereunder:

Exhibitor :MOTI CINEMA Through : Kirat Desai Location: Delhi Circuit: DELHI/U.P.

1. The distributor hereby irrevocably assigns, in perpetuaty, to the exhibitor, on an exclusive basis, the “theatrical exhibition rights on 2D on 35MM Physical Print format and 1.5 K/2K Digital Format” to the Licensed Theatre(s) only at the Location (and not outside) as mentioned above or as per details in annexure-1 only in relation to the above mentioned Film. No other rights whatsoever shall be deemed to be assigned here under.

2. Net Box Office Collection (NBOC) shall be calculated as gross box office receipts, less entertainment tax (if applicable), news reel expenses, as applicable and municipal show tax (if applicable).”

[emphasis supplied]

9. Reference can also be made to an agreement dated 23 November, 2011 entered into between the appellant and Vishal Entertainment and the relevant clauses are as follows:-

“AGREEMENT IS SUBJECT TO THE APPROVAL OF OUR PRINCIPAL:-

Article of agreement made and entered herein Delhi between VISHAL ENTERTAINMENT CORPORATION Delhi (referred as Exhibitors as party of 1^st part) and the under mentioned Exhibitor (referred as party of the 2^nd part) for screening the picture/s on terms and conditions mentioned hereunder and overleaf:

MOTI CINEMA         Station Delhi                                            Through: Phone:

1. That Exhibitor hereby agrees and undertakes to abide by all the TERMS & CONDITIONS, whether PRINTED/TYPED OR IN AND-WRITTEN. No further dispute can be arisen over beyond these terms & conditions.

2. That the exhibitor has agreed to provide Daily Four (4) shows at normal usual show timing i.e. (12.30 Noon, 3.30 Matinee, 30 Evening and 9.30 Night)

3. That exhibitor hereby agrees and undertakes to make all payments/in the name of Distributor as mentioned above either in CASH/DEMAND-DRAFT OR PAY-ORDER, payable at DELHI or as directed by the distributor in writing. PAYMENT IS THE ESSENCE OF THE CONTRACT.”

[emphasis supplied]

11. It is more than apparent from a bare perusal of the aforesaid agreements that they have been entered into between the appellant as an exhibitor and the distributors for screening of the films on the terms and conditions mentioned therein. The payments contemplated under the terms and conditions either require the exhibitor to pay a fixed amount or a certain percentage, subject to minimum exhibitor share or theatre share of effective shows in a week.

12. It is in the context of the aforesaid agreements that it has to be examined whether the appellant is providing service of ―renting of immovable property‖ to the film distributors by way of renting its theatre for screening of films owned by the distributors.

13. Prior to 1 July 2012, the definition of ―renting of immovable property” under Section 65 (90a) of the Finance Act is as follows:-

“Section 65 (90a): ―renting of immovable property‖ includes renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course or furtherance of business or commerce but does not include—

(i) renting of immovable property by a religious body or to a religious body; or

(ii) renting of immovable property to an educational body, imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching centre.

Explanation. 1 —For the purposes of this clause, ―for use in the course or furtherance of business or commerce‖ includes use of immovable property as factories, office buildings, warehouses, theatres, exhibition halls and multiple-use buildings.

Explanation 2 —For the removal of doubts, it is hereby declared that for the purposes of this clause ―renting of immovable property‖ includes allowing or permitting the use of space in an immovable property, irrespective of the transfer of possession or control of the said immovable property.”

14. “Taxable service”, prior to 1 July 2012 under section 65 (105) (zzzz) of the Finance Act means:

65 (105) (zzzz): ―any service provided or to be provided to any person, by any other person, by renting of immovable property or any other service in relation to such renting for use in the course of or for furtherance of, business or commerce.

Explanation(1) xxxxxxxxxxxxx

Explanation(2) xxxxxxxxxxxxx

15. Thus, for the appellant to be providing any taxable service to the distributor prior to 1 July 2012 it is necessary that the service provided should be by renting of immovable property or any other service in relation to such renting for use in the course of or for furtherance of, business or commerce. ―Renting of immovable property‖ has been defined under section 65(90a) of the Finance Act to include renting, letting, leasing, licensing, or other similar arrangements of immovable property for use in the course or furtherance of business or commerce.

16. It is very difficult to even visualise that the appellant is providing any service to the distributor by renting of immovable property or even any other service in relation to such renting. The agreements that have been executed between the appellant and the distributors confer rights upon the appellant to screen the film for which the appellant is making payment to the distributors. The distributors are not making any payment to the appellant. Thus, no consideration flows from the distributors to the appellant for the alleged service.

17. The Commissioner (Appeals), has, however, concluded that the appellant is providing ―renting of immovable property service to the distributor and the observations are as follows:-

6.4 The moot question to be decided in the case is whether it can be construed that the exhibition rights given on account of these agreements, in fact is an absolute right of the said film to the effect that the screening is not on behalf of the distributor. The Appellant has stated that in the present case, the copyright has been temporarily transferred by the distributor to the Appellant and that by exploiting the copyright in the nature of Theatrical Right to screen the film for public view, which copyright the Appellant had obtained from the distributor for a consideration, the Appellant had done the screening of the films in its theatre on its own account as its business activity; that such screening is not for or on behalf of any person, including the distributor; that the entire revenue in the nature of ticket sales is the income of the Appellant and against the said ticket sales, the Appellant is incurring the expenditure in the nature of payment to the distributor, payment of show tax/entertainment tax etc. It is on record that the Appellant vide their submission had stated that the film distributors entered into agreement with them to screen the movies in the theatre under two different situations. In the first situation the agreement was to screen the film in the theatre for a specified number of shows and in the second situation though the agreement was for minimum period of shows but the only difference was that in this case the distributor would assign the theatrical exhibitions rights on specific format/parameter in perpetuity and on exclusive basis. Further, in Para 31.9 and 31.10 of the impugned order, the Adjudicating Authority while discussing the agreement between the Appellant and M/s Ashwin Enterprises dated 27.05.2009 has referred to clause no. 8, 13 and 18 of the said agreement. I have carefully gone through the said agreement which has been made available along appeal memorandum and find that clause no. 8, 13 and 14 are relevant.

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From the above conditions it can simply be construed that the effective control and possession of right remained with the distributor so far as screening/non-screening of the film is concerned. Further, the conditions delineated in the agreement makes it incumbent upon the Appellant that he cannot arbitrarily dis-continue the screening and that he will have to compensate for any loss and damage. Therefore, the Appellant‘s contention that the transaction of the distributor granting to the Appellant the license to exploit the Theatrical Rights in films is on Principal to Principal basis cannot be acceded to because the distributor has not granted the license thereby allowing the Appellant to screen the film on his own in as much as the fact that the sole and absolute option to screening or to withdraw the screening at any time lies with the distributor only. Further, the Appellant has also contended that the entire revenue in the nature of ticket sales is his income and he is incurring the expenditure in the nature of payment to the distributor, payment of show tax/entertainment tax, etc.

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The conditions mentioned hereinabove and contained in the agreement under consideration and further submission of the Appellant recorded on the body of the impugned order clearly show that the observation made in the impugned order that the loss if any is to be borne by the Appellant himself and therefore the said clause not only defines the logic of partnership but also that of revenue sharing because the net box office collection sometimes may be less than the minimum guarantee fee. The Appellants are paying a fixed amount of hire charges and other charges such as minimum guarantee charges, interest and default, payment of distributor‘s share as is agreed upon for the screening of a film subject to other conditions and therefore it cannot be said that the amount required to be paid by him is on account of expenditure due to him consequent to sale of tickets. Further, the Appellants has also contended that the terms of the agreement should be read in entirety and that the impugned order has not brought forward any clause of the agreement which can prove that the screening of the films is being done on behalf of the distributor. As discussed above, I have thoroughly gone through all the conditions of the agreement between the Appellant and M/s. Ashwin Enterprises, and I find that the sole option to screen/withdraw the screening/ also screening the same movie in other theatres simultaneously/fixing time slots etc. lies with the distributor only and therefore it can be said that the absolute right with regard to effective control/ possession of the screening are not transferred to the Appellant. Further, the onus to bring forth the particular clause which could have adduced that the screening of the movie/ film is not being done on behalf of the distributor was on the Appellant but they failed to do so. This shows that by virtue of the proper interpretation of the entire agreement and the clauses contained therein by the original authority, the Appellant has not been able in challenging/ denying/ confronting the said observation with some concrete evidence, as such their plea cannot be accepted.

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From the above it can be seen that so far as screening of movie by allotting the space in a theatre is concerned, the issue with regard to its classification under Renting of Immovable Property Services stands settled by virtue of the above Circular. However, with regard to confusion relating to provision of Business Support Service, I have gone through page 155 of the Appeal which contains an agreement of the Appellant with M/s Yaman Enterprises. I have carefully gone through the said Agreement and find that the same is dated 13.06.2013 which means that the Agreement has been put to action after 01.07.2012 when the service are categorized as declared services and bundled service with pre-dominance of Renting of Immovable Property Services.”

18. It is not possible to accept the reasonings given by the Commissioner (Appeals) for confirming the demand of service tax under “renting of immovable property‖ for the simple reason that the appellant has not provided any service to the distributors nor the distributors have made any payment to the appellant as consideration for the alleged service. In fact, the appellant who has paid money to the distributors for the screening rights conferred upon the appellant. The Commissioner (Appeals) completely misread the agreements entered into between the appellant as an exhibitor of the films and the distributors to arrive at a conclusion that the appellant was providing the service of ―renting of immovable property‖.

20. In regard to the period from 1 July 2012 to 31 March 2014, it would be pertinent to refer to section 65 B (41) of the Finance Act which defines ―renting’ as follows:-

65B (41) ―renting‖ means allowing, permitting or granting access, entry, occupation, use or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property;

21. The relevant portion of section 65 B (44) of the Finance Act, which defines ―service‖, is as follows:-

“65 (44) “service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-

(a) an activity which constitutes merely,-

(i) A transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

(ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or

(iii) A transaction in money or actionable claim;

(b) A provision of service by an employee to the employer in the course of or in relation to his employment;

(c) Fees taken in any Court or Tribunal established under any law for the time being in force.

Explanation (1) – xxxxxxxxxxxxxxxxx

Explanation (2) – xxxxxxxxxxxxxxxxx

Explanation (3) – xxxxxxxxxxxxxxxxx”

22. The relevant portion of section 66E of the Finance Act which deals with ―declared services” is as follows:-

“Declared Services.

66E. The following shall constitute declared services, namely:-

(a) Renting of immovable property;

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23. The position in law does not change with effect from 1 July, 2012 because even under section 66B of the Finance Act, service tax is levied on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another. Though, ―renting of immovable property is a declared service under section 66E of the Finance Act, then too under section 67(1) of the Finance Act, the value shall, in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him. The appellant is not receiving any payment to the distributor and, therefore, no service can be said to have been provided by the appellant.

24. Thus, for all the reasons stated above, the impugned order dated 12 July, 2016 passed by the Commissioner (Appeals) cannot be sustained. It is, accordingly, set aside and the appeal is allowed.