Digital Film Delivery Does Not Make It 'IT Software': Bombay HC Quashes GST Demand Against Dharma Productions

The Bombay High Court has quashed a ₹12.11 crore GST demand against Dharma Productions over licensing of copyright in cinematographic films, holding that electronic delivery of film content cannot by itself make the transaction one involving “Information Technology Software”.

A bench of Justice M.S. Karnik and Justice Sandesh D. Patil was considering whether the manner in which the films were delivered, physically through encrypted hard disks or electronically, could determine their GST classification.

“Whether content is transmitted physically (encrypted hard disks) or electronically, the mode of delivery cannot determine classification, which must turn on the essential character of the supply. Equating 'digital content' with 'software', the core error underlying the impugned orders, has no statutory basis,” the bench observed.

The dispute concerned licensing of copyright in cinematographic films for financial years 2017-18 to 2020-21, when GST law prescribed a 12% rate for licensing intellectual property rights in goods other than IT software and an 18% rate for licensing IT software.

The demand table in the judgment records tax of ₹9.99 crore, interest of ₹1.23 crore and penalty of ₹99.99 lakh, taking the total to ₹12.11 crore.

Dharma Productions produces, develops and finances cinematographic films and owns copyrights in its films. It entered into Rights Licence Agreements with distributors covering theatrical, sound, satellite and digital rights. The company classified the licensing under SAC 997332, which covers licensing services for the right to broadcast and show original films, sound recordings, radio and television programmes and the like, and paid GST at 12%.

The GST authorities, however, held that the transactions were liable to tax at 18% as licensing of IT software. They relied, among other things, on a statement recorded from Dharma's Post-Production Head concerning the digital transmission of films.

The court examined the two relevant entries under Heading 9973. SAC 997331 covers licensing the right to use computer software and databases, while SAC 997332 separately covers licensing the right to broadcast and show original films, sound recordings, radio and television programmes and the like.

“The existence of a separate, specific SAC for cinematographic films demolishes the respondents' assumption that such licensing can be subsumed within 'software',” the court held

The court noted that the impugned orders did not explain how a cinematographic film, which it described as a “passive audio visual work, incapable of execution, manipulation or inter-activity”, could satisfy the statutory definition of IT software.

It also found that the authorities had failed to properly apply the classification scheme. The court observed that the confirmation of the demand without identifying the correct SAC and explaining why the specific entry for films should give way to the software entry was a “manifest and unreasoned error of law”.

On the Post-Production Head's statement, the court held that, even taken at face value, it spoke only to the mode of transmission and did not establish that the film itself was software. No technical material, expert evidence, executable program, or software architecture had been produced to support that conclusion.

The court also noted that the statement had not been furnished to Dharma before being relied upon.

The authorities had additionally invoked Online Information Database Access and Retrieval (OIDAR) services. The court noted that this argument was raised for the first time in the affidavit-in-reply and was absent from the show cause notices, Orders in Original and Orders in Appeal.

It therefore could not be used to supplement the reasoning of the impugned orders.

The court also found the State's reliance on the Aspect Theory “misconceived”, observing that the theory concerns legislative competence and does not determine the classification of a particular supply under a single statute.

The court further noted that the GST rate was made uniform at 18% from October 1, 2021. The dispute before the court, however, related to the period before that change, when the two entries carried different rates

The court also considered CBIC's subsequent clarification concerning the classification of film-related transactions. It noted that the GST Council had recognised an overlap between entries covering motion picture distribution services and licensing of intellectual property rights in goods other than IT software, and had recommended regularisation on an “as is where is” basis.

The court found that the ambiguity was not confined to downstream distributor-exhibitor transactions.

The State had argued that Dharma should pursue the statutory appellate remedy before the GST Appellate Tribunal. The court declined to relegate the petitioners to that remedy, finding that the case involved an error of law going to the root of jurisdiction rather than disputed questions of fact.

The court also found that the Orders in Original substantially reproduced the show cause notices without independently analysing the applicable tariff entry, statutory definition and classification scheme. The appellate orders did not cure the defect.

The court therefore held that the authorities had proceeded on a “fundamental erroneous premise” by treating licensing of copyright in cinematographic films as licensing of IT software, an error of law going to the root of jurisdiction.

The writ petitions filed by Dharma Productions and Dharmatic Entertainment were accordingly allowed.

For the Petitioners: Senior Advocate Darius Shroff with Advocates Prasad Paranjape and Kevin Gogri, instructed by Lumiere Law Partners.

For the Respondents-State: Additional Government Pleader Jyoti Chavan with AGP Amar Mishra.