A recent decision of the high court in Chennai on the levy of service tax on software sale has made the Union finance ministry hopeful of a similar verdict in the case of copyright services.
The government is involved in several court cases with some leading production houses over its move to levy service tax on copyright services such as sale of music rights, sale of direct-to-home rights, and screening of films.
In a recent decision, the Madras HC upheld the legislative authority to levy service tax on software services by the Centre. A finance ministry official said parallels could be drawn in the two cases, as sale of both copyright and software was temporary.
"The Madras High Court has said there is a service element in the sale of software. Like copyright services, software services also involves the right to use. One does not become owner of the software and cannot manipulate or alter it," said a finance ministry official, requesting anonymity.
However, Tarun Gulati, partner, Economic Laws Practice, lawyers to some of the producers in the case, said the two were not similar.
"What we have argued is different. Even if there is a service element in sale of copyright, it gets subsumed in the value of goods. It's already embedded there," he said.
Service tax on copyright, which came into effect in June, may add up to Rs 200 crore to the government's tax kitty by the end of the financial year in March 2011. The Centre is expecting revenue of Rs 300-400 crore (Rs 3-4 billion) annually by levying service tax on sale of copyright in the coming years.
The tax, however, may be heavy on end-consumers, who will have to pay an additional 10 per cent on their movie tickets.
For instance, when a producer such as Yash Raj Films sells the rights to a distributor such as Eros, the transaction will be taxed and the tax paid will be passed on further in the chain to the cinema hall/music company/television channel/telecom company and finally the customer.
PVR Pictures, Balaji Telefilms, Yash Raj Films, UTV Motion Pictures and Reliance Big Entertainment had challenged the tax.
They said it was beyond the Centre's power under the Constitution and would lead to dual taxation.
The producers argued that copyrights are treated as goods and the transfer of copyrights are treated as sale of goods, which falls within the domain of taxation by states under Article 246.
In a counter-affidavit, revenue department had said temporary transfer of right to copy in a limited manner would be chargeable to service tax.
