In a significant ruling on GST classification of cinematographic film rights, the Bombay High Court has held that licensing of copyright in films by the original producer does not qualify as ‘Information Technology Software’ and squarely falls under SAC 997332, taxable at 12% prior to 1 October 2021. The Court clarified that cinematographic film, being a passive audio-visual work incapable of manipulation or interactivity, does not satisfy the statutory definition of ‘Information Technology Software’ under Explanation 4(v) of the Rate Notification, which requires the content to be capable of being manipulated or providing interactivity to a user.
Going further, the Court explained that the scheme of Classification of Services separately lists SAC 997331 (licensing of computer software and databases) and SAC 997332 (licensing for the right to broadcast and show original films). The existence of a specific SAC for cinematographic films demolishes any attempt to subsume film licensing within ‘software’. At the same time, the Court also pointed out that whether content is delivered physically on encrypted hard disks or transmitted electronically, the mode of delivery cannot determine classification, which must turn on the essential character of the supply, not the technology of transmission.
The Division Bench comprising Justice M. S. Karnik and Justice Sandesh D. Patil observed that the impugned orders proceeded on a fundamentally erroneous premise that licensing of copyright in cinematographic films amounted to licensing of ‘Information Technology Software’. The Court noted that the orders did not engage with the statutory definition of ‘Information Technology Software’ under Explanation 4(v) of the Rate Notification, which requires the content to be a representation of instructions, data, sound or image capable of being manipulated or providing interactivity to a user. A cinematographic film, being a passive audio-visual work, could not satisfy this definition.
The Court further observed that the Scheme of Classification of Services itself distinguishes SAC 997331 (licensing of computer software and databases) from SAC 997332 (licensing for the right to broadcast and show original films), and the impugned orders failed to explain how these two distinct SACs were being collapsed into one. The Court also noted that the CBIC Circular dated 11 October 2024 and Circular 236/30/2024-GST regularised the long-standing ambiguity in classification of theatrical rights on an ‘as is where is’ basis for the period 1 July 2017 to 30 September 2021, and that this benefit could not be selectively withheld from the upstream producer-licensor while being extended to the downstream distributor-exhibitor.
The Court further observed that the Aspect Theory had no application to classification of a single supply under a single statute, and that the mode of delivery (physical hard disk or electronic transmission) could not determine classification, which must turn on the essential character of the supply.
Briefly, Dharma Productions and Dharmatic Entertainment, both film production companies, challenged the orders passed by the Assistant Commissioner of State Tax. The dispute covered FYs 2017–18 to 2020–21, with the tax demand (including interest and penalty) totalling approximately Rs. 12.11 crores.
The core issue was whether the licensing of copyright in cinematographic films by the producer (as original copyright holder) to distributors was taxable at 12% GST under Entry 17(i) of Notification No. 11/2017 (licensing of IP rights in goods other than IT Software) or at 18% GST under Entry 17(ii) (licensing of IT Software). The petitioner had consistently classified its supply under SAC 997332 (licensing for the right to broadcast and show original films) and paid GST at 12%.
The revenue alleged misclassification, contending that the supply was an IT Software service under SAC 998340 attracting 18%, relying partly on a statement of the petitioner’s Post-Production Head regarding digital transmission of content.
