The Bombay High Court has quashed a GST demand of more than ₹79.7 crore against Dharma Productions and Dharmatic Entertainment, ruling that cinematographic films cannot be classified as "information technology software" simply because they are delivered digitally.
A bench comprising Justices M.S. Karnik and Sandesh Patil passed the judgment on September 10 while hearing petitions filed by Dharma Productions Pvt Ltd and Dharmatic Entertainment Pvt Ltd challenging GST demands for the financial years 2017-18 to 2020-21.
Why was Dharma Productions asked to pay Rs 79.7 crore?
The dispute was related to the classification of copyright licensing of films under GST.
The tax authorities had classified the transactions as licensing of information technology software under Services Accounting Code (SAC) 998340 and imposed GST at 18 per cent.
Dharma Productions and Dharmatic Entertainment argued that the transactions involved licensing of intellectual property rights in cinematographic films under SAC 997332. During the period in question, this category attracted 12 per cent GST.
Bombay High Court says films are not software
The court rejected the tax department's argument that the digital delivery of a film could change its GST classification.
The bench observed that a cinematographic film is a passive audio-visual work and cannot be executed, manipulated or interacted with like software.
The court noted that there was no basis to classify a film as information technology software merely because it was supplied through digital means.
The court also said that the mode of delivery cannot determine the classification of a supply.
Whether a film is delivered through an encrypted hard disk or electronically through a digital link, its classification must depend on the essential character of the supply, the court held.
Court sets aside GST orders
The GST authorities had argued that Dharma Productions should first approach the GST Appellate Tribunal instead of directly moving the High Court.
However, the court held that the petitions were maintainable under Article 226 of the Constitution as the dispute involved an error of law going to the root of the authorities' jurisdiction.
The High Court subsequently quashed the assessment and appellate orders, effectively setting aside the GST demand of more than ₹79.7 crore against the two companies.
The judgment clarifies that the digital mode through which a film is delivered does not by itself turn cinematographic content into information technology software for GST classification.
