Sales Tax Review

April  2007

Important Trade Circulars

No. DDQ-10-2007/Adm-5/78 

Gentlemen/Sir/Madam,

            The Finance Minister, Maharashtra State, in his Budget Speech in March,2000 announced to bring under tax, the transactions involving copyrights.  Following this announcement, two separate amendments were made.  The Bombay Sales Tax Act,1959 was amended to provide for the levy of tax @ 4% on the sales of copyrights.  Similarly, the Lease Act was amended to provide for the levy of tax @ 4% on the lease of copyrights.  Now, the State of Maharashtra has shifted to the ‘value added’ taxation system.  With the introduction of the Maharashtra Value Added Tax Act,2002 w.e.f. 01/04/2005, the erstwhile Bombay Sales Tax Act,1959 as well as the Lease Act stand repealed. Hence, these transactions would now attract VAT.

2. The cinematographic films are mostly distributed by way of lease and technically, the lease is of the copyrights in the film. The film is produced by producers and through distributors/sub-distributors/theater owners, it is exhibited in theaters.  Here, right to use copyright (of film exhibition i.e. broadcasting) is given by producers to distributors/sub distributors and by them, in turn, to theater owners or directly to theater owners. In return, producers receive consideration in various forms, say, minimum guarantee, outright lease rentals, part refundable advance etc. In this case, it is very clear that, the consumer for the producer is the distributor/sub-distributor /theater owner or if  it is released by the distributor/sub-distributor to the theatre owner, the latter is the consumer for the former to whom the right to use/exhibit the film is given.  Thus, relation between  any two of them is of Principal to Principal.  Since all ingredients of sale as per the Sale of Goods Act, such as existence of seller and buyer, contract of sale and consideration are present, the transaction gets covered for taxation under the purview of the MVAT Act,2002. Broadly speaking, the film industry is functioning on 4 types of agreements as follows :-

1. LICENCE ON OUTRIGHT BASIS

icence of exhibition granted on outright basis for a specific period authorizes the distributor to release the picture in the contracted territory and retain with himself all the realizations of the film, irrespective of its fate.  The producer is not responsible to give any compensation in case of any  failure  of the film or ask for any account or demand any share from the income, if the film succeeds at the box office during the contracted period.

2. LICENCE ON MINIMUM GUARANTEE BASIS

In respect of the licence agreement on minimum guarantee basis for a specific period, the distributor is entitled to release and exhibit the film in the contracted territory and in the first instance, recover his investments from the realizations of the film and also recover his settled ratio of commission- generally 20% to 25% - and after these recoupments,  share further realizations in the ratio of 50: 50 between the producer and the distributor.  Further in case of Licence on minimum guarantee, the rights are given for a period of two to three years and these rights may also be reissued after the initial period of agreement expires.

3. LICENCE ON PART MINIMUM GUARANTEE AND PART REFUNDABLE ADVANCE BASIS

When the Licence is granted to the distributor on part minimum guarantee and part refundable advance basis, the producer is liable to refund the refundable advance amount, if within a fixed period, the film does not fetch the total amount of minimum guarantee amount and refundable advance amount.

4. LICENCE ON PURELY REFUNDABLE ADVANCE BASIS

If the Licence is on purely refundable advance basis, the producer is liable to refund the unrecouped refundable advance in the given period as mentioned in the agreement.

3. A representation was made by The Film & Television Producers GUILD of India Ltd. regarding the applicability of VAT on the film and television industry. The following clarification is issued in pursuance of the various queries posed by the Trade:-

Query-1.  In the context of the film and television industry, who is the consumer from whom the VAT liability can be realized?

 

Reply         The film is produced by producers and it is exhibited in theatres through distributors/ sub-distributors/ theater owners,. In this case, right to use copyrights is given by the producer to distributors / sub-distributors/ theater owners. Here, it is very clear that for the producer the consumer is the distributor/sub-distributor/ theater owner to whom the right to use / exhibit the film is given.  If the rights are given to a distributor who, inturn, transfers it to a sub-distributor or theater owner, then it is another transaction where the sub-distributor or theater owner becomes the consumer for the distributor.  It is pertinent to note that the transfer of the right to use copyright culminates with theater owner or exhibitor.

 

As per agreements made by producers with distributors/theater owners, VAT is to be collected by producers from distributors/theater owners. Distributors can collect VAT from sub-distributors / theater owners / exhibitors and can claim input tax credit of VAT paid to the producer.  

                

Query-2         What will be the VAT treatment with respect to the various agreements mentioned hereinabove?

 

Reply             In view of the definition of ‘sales price’ under the MVAT Act, it is very clear that any amount of valuable consideration paid/payable to a dealer forms the part of sales price.  It also includes amounts by way of deposit, whether refundable or not, which has been received whether by way of a separate agreements or not, in connection with or incidental or ancillary to, the said sale of goods.  Hence, amount received by way of the total consideration received or receivable to the producers/distributors in respect of any of the four type of agreements will be liable to tax under the MVAT Act,2002. Neither producer nor distributor is entitled to get deduction from their total receipt/consideration (sale price) on account of any expenses incurred by them. The VAT treatment with respect to the various agreements enumerated hereinabove would be as follows :-

1. Licence on Outright Basis

In such type of  Agreement, the amounts received by the producer from the distributor as consideration for transfer of the right to use the copyright by way of exhibiting the film would be the ‘sale price’ in respect of the said transaction of lease.

2. Licence on Minimum Guarantee Basis

In such type of Agreement, the amount of Minimum Guarantee as well as the amount received by the producer from the distributor after the latter makes recoupments in respect of investments and commission, etc., would constitute the consideration / ‘sale price’ in respect of the said transaction of lease. Thus, in addition to the Minimum Guarantee amount, the amount of overflow will also be included in the sale price.  The proceeds from the realizations of the film appropriated by the distributor towards recovery of his investments and commission would not form part of the sale price of the producer.

 

In respect of the rights being reissued after the expiry of the initial period of agreement, the subsequent transaction will be treated as a separate sale. The ‘sale price’ would again be determined in terms of the amounts received by the producer from the distributor including the overflow, if any, as consideration for transfer of the right to use the copyright by way of exhibiting the film.

 

In short, the  producer as well as the distributor will be liable for tax for their gross receipts vis-à-vis the distributor and the sub-distributor/theater owner respectively.

3. Licence on Part Minimum Guarantee and Part Refundable Advance   Basis:

In such type of an Agreement, the amount of Minimum Guarantee    received by the producer from the distributor would form the consideration / ‘sale price’ in respect of the said transaction of lease.  In addition to this, the amount of Refundable Advance, if the same is not refunded by the producer to the distributor, would also form a part of the ‘sale price’.  Thus, the amount of Un-refunded Advance will also form a part of sale price. 

4. Licence on Purely Refundable Advance Basis

The ‘sale price’ for levy of VAT in such a contingency would be the amount of Refundable Advance, if the same is not refunded by the producer to the distributor. Any amount realized from the exhibition of the film and given to the producer by the distributor would be the ‘sale price’.

 

In short, in each of the above types of agreements, any amount, in connection with the use of the copyright to exhibit the film, remitted to the producer/ the distributor by the exhibitor net of refunds, if any, would form a part of the sale price.
 

Query-3	What will be the point of  sale?
Reply	As far as producers are concerned, the point of sale will be the date as stipulated in the Agreement.  In the absence of the stipulated date, the point of sale will be the date of the first release of the film or the date of agreement, whichever is earlier.
Query-4	a) Place of applicability of VAT.
	b) Whether VAT as well as CST would be levied on the same transaction?
Reply	a) The state in which the transaction would be taxable is the place where the place of the business of the seller is perceived to be located.
	b) Either VAT or CST is payable in Maharashtra depending on whether it is local or interstate sale.
Query-5	Whether the producer is required to pay VAT for manifold processes leading to multiplicity of the same tax, i.e., VAT?
Reply	VAT is a multipoint tax but does not create multiple tax liability by way of cascading taxation.  In other words, every dealer pays tax on his sale price and gets full credit for tax paid on purchases.  Thus, even though the producer has to pay VAT on raw materials, equipments, other items etc., he has to pay VAT on his receipts and claim input tax credit  for the VAT paid on purchases.  Thus, effectively he pays tax on his value addition only.  So is the case with the downstream sales effected by the distributor to the sub-distributor/exhibitor.
Query-6	What will be the position in case of refusal of delivery/penalty by the distributors?
Reply	If the contractual amount is reduced by the distributor and is also accepted by the producer, either in writing or by action, then actual agreed amount will be considered for VAT.  However, any  penalty levied by the distributor is not eligible for deduction from sale consideration for the purpose of VAT.
Query-7	What is the rate of tax?
Reply	(a) VAT – 4%.   Copy right is mentioned at sr. no. 9 of the Notification No. VAT-1505/CR-  114/Taxation-1, dt. 1/4/2005 issued for the purposes of the schedule entry C-39 of the MVAT Act,2002. (b) CST – 4% .  As per the section 8 of the Central Sales Tax Act,1956, the declaration in form ‘C’ is mandatory in respect of “inter-state” sale.
Query-8	a) If a producer is having his registered office in Mumbai and he enters into contract with a distributor in Delhi, then what will be the tax treatment?
	b) What is Territory of States for the purposes of tax levy?
Reply	a) It will be treated as an interstate sale in the State of Maharashtra.  b) The territory of the States will be as per the territorial constitution of the States as outlined in the Constitution of India.
Query-9	a) How is set off available on purchase of copyright? b) Whether the set off of entertainment tax is available for MVAT purpose?
	Reply a) Set-off, i.e., input tax credit (ITC)  shall be admissible in respect of sale/lease of copyright, if it is resold within twelve months from the date of purchase.
	b) No set-off  (ITC) is available on payment Entertainment tax as both taxes are levied under different statutes.
Query-10	What will be the VAT treatment in cases where the producer exhibits the film without going through a distributor?
Reply	a) When a producer distributes the film himself through a chain of exhibitors, the producer has to pay VAT.  Here, it is pertinent to note that the right to use the copyright is given to the exhibitors directly by the producers.
	b) If a producer has taken a theater on rent and he exhibits the film without transfer of the right to use the copyright to the theater owner, then VAT is not applicable as there is no sale or lease of copyright to any one.
Query-11	What will be the tax treatment in the case of sale of Satellite Rights?
Reply	a) If a producer has made an agreement with the local party, then VAT is applicable being a local sale in Maharashtra.   b) If a producer has made an agreement with a dealer/person located in any State other than Maharashtra, then it will be treated as an inter-State sale from  Maharashtra.   c) If a producer has made an agreement with a foreign party, then it will be treated as an export.   Thus, the fact whether as a result of the agreement the copyright is available for exhibition,  will decide the nature of the transaction.
Query-12	What will be tax treatment in the case of sale of Audio/ Video Rights and sale of cassettes/CD/VCD etc.,?
Reply	The tax treatment in the case of sale of Audio/ Video Rights would be the same as in the present case of sale of copyright to exhibit the film. As regards, the sale of cassettes/CD/VCD, the same would be taxable @ 4% by virtue of being covered by the schedule entry C-56 of the MVAT Act, 2002.
Query-13	Whether liability of MVAT in respect of film released on or after 01/04/2005 would be retrospective in the present situation?
Reply	The liability in respect of a film released on or after 01/04/2005 would be from the date as explained in the reply to the Query in respect of point of sale (Query no. 3). In the case of dealers, who have not availed of the administrative relief (A.R.) as per G.R.s. dt. 21/05/2005 and dt. 16/10/2006 or do not avail of the administrative relief in terms of the Govt. Resolution dated 29/03/2007 for pre-01/04/2005 period, the liability for payment of tax under the B.S.T Act will arise in respect of prior periods also. This decision on administrative relief has been brought to the notice of the Trade by Trade Circular Nos. 18T of 2005 dt. 30/08/2005, No. 33T of 2006 dt. 31/10/2006 and No 30T of 2007 dt. 03/04/2007 issued by the Commissioner of Sales Tax.

4. This Circular cannot be used for legal interpretation and it is only clarificatory in nature.  If any member of the Trade has any doubt in the matter, he may refer the same to this office for further clarification.

5. You are, requested to kindly bring the contents of this Circular to the notice of the members of your Association.

Yours faithfully,
(B.C. KHATUA)
Commissioner of Sales Tax,
Maharashtra State, Mumbai.