Media And Entertainment Industry India Tax Landscape - Deloitte

Media and entertainment industry India tax landscapetransmission by satellite. Subsequently,the High Court held that payments fortransponder fees are royalty under thedomestic tax laws in view of the aboveretrospective amendment. In case such payments are made to nonresidents, the Revenue authorities areadopting a position that the amendeddefinition of royalty is applicable evento the tax treaty and, accordingly,transponder fees received by nonresidents are taxable in India under thetax treaty. The Tribunal held that the paymentsfor transponder fees are taxable asroyalty even under the tax treaty whilerecently another High Court has ruled infavour of the taxpayer holding that theParliament cannot amend internationaltreaty unilaterally. The High Courthas further ruled that payment fordigital broadcasting services through atransponder should not be consideredas royalty. Accordingly, one needs towait and watch the developments in thisspace.Indirect tax on transponder fees Satellite companies located in India payservice tax on transponder fees receivedfrom broadcasting companies. However,in cases where such satellite companiesare situated outside India, the taxabilityof the transaction needs to be analyzedfrom the perspective of Place of Provisionof Services Rules, 2012 (POPS Rules). Interestingly, a question was raisedbefore the Court as regards VATapplicability on such transponder fees.The High Court held that since theagreement was entered into withinKarnataka, there was a ‘transfer of rightto use goods’, namely ‘space segmentcapacity of the transponder’ in a satellite,thereby, qualifying as ‘deemed sale’ and08liable to VAT. Thus, the issue again boilsdown to applicability of VAT vis-à-visservice tax on transponder fees.Foreign telecasting companies A foreign broadcaster telecasting itschannel in India is mandatorily requiredto appoint an Indian company as itsrepresentative in view of the guidelinesissued by the Ministry of Information andBroadcasting. Such foreign broadcasters earnadvertisement and subscriptionrevenues from India. The Tribunal heldthe broadcaster (USA company) tohave a dependent agent permanentestablishment in India and, accordingly,considered its advertisement revenuestaxable in India. Additionally, the matterwas sent back to the Revenue authoritiesto examine whether subscriptionrevenues are taxable as royalty. Taxability of foreign broadcasters hasbeen a matter of litigation between theRevenue authorities and taxpayers inseveral cases. The decision mentionedabove is the most recent developmenton this front. In such cases, another issue arisesregarding the profits attributable toIndia in case the foreign broadcasterhas a permanent establishment in India.Earlier based on a Circular issued by theCBDT, 10% of advertisement revenues ofthe foreign broadcaster (after reducingcommission payments) were consideredas taxable income in case such foreignbroadcaster did not have a permanentestablishment in India. This Circular wassubsequently withdrawn in the year2001.Media and entertainment industry India tax landscapeDirect-to-home service Direct-to-home (DTH) service hastwo aspects – service aspect andentertainment aspect. There are twoseparate and distinct taxable events inrespect of each of the two aspects. Service tax is payable on serviceaspect. Since DTH providesperformances, films or programmesto viewers, the State Governmentalso levies entertainment tax on suchservice. Thus, DTH service provideris also subject to dual taxation beingservice tax and entertainment taxleading to a dual tax burden upon theindustry.Set-top boxes Sale of set-top boxes has beena litigative matter as to whetherconsideration should be included inthe service portion of DTH service oronly VAT should be applicable as saleof goods. In some of the judicial decisions, theHigh Courts held that sale of set-topboxes should attract VAT and notservice tax. There are also disputeswith regard to inclusion of set-top boxvalue for the purpose of entertainmenttax levy. In the recent Union Budget 2016-17,customs duty on digital head-endsand set-top boxes is reduced to 10%.This is a positive development for DTHand cable operators and could lead toreduction in prices of set-top boxes.Entertainment tax In most of the States in India,cable operators are liable to payentertainment tax and questions wereraised as to whether such tax paid isto be included in the value of taxableservice for the purpose of dischargingservice tax liability. The Central Board of Excise andCustoms (CBEC) has clarified thatentertainment tax collected and paidto the Government would not beincluded in the value of taxable service,provided the cable operator indicatesthe entertainment tax element on thebill raised upon the customer.PrintForeign news agencies/newspapers Foreign news agency or newspaper/magazine/journal houses typicallyhave a presence in India to facilitatecollection of news from India. Income of such foreign news agencyor newspaper/magazine/journalhouses should not be taxable in Indiawith respect to activities confined tocollection of news and views in Indiafor transmission out of India based onan exemption under the domestic taxlaws. From a tax risk managementperspective, it is of outmostimportance that the activities inIndia of such foreign news agency or09

BrochureMediaMedia andand/ entertainmentreportentertainmenttitle goesindustryindustryhere Section IndiaIndiatitletaxtax goeslandscapelandscapehere Media and entertainment industry India tax landscapenewspaper/magazine/journal housesare limited to collection of news orviews.Service tax on news agencies/journalist Mega exemption notification, underservice tax, provides an exemptionto any service provided, by wayof collecting news, or any serviceprovided, by way of providing news toany person, by a specified person. Suchservices are exempt from payment ofservice tax. The said specified service providers areindependent journalists, Press Trustof India, and United News of India. Theabove entry makes it clear that theservice provided by stringers, bothIndian as well as foreigners would beoutside the purview of service tax.Additional depreciation Additional depreciation of 20% isallowable to taxpayers engaged, interalia, in the business of manufactureor production of an article or thing.An issue arises whether additionaldepreciation is allowable to taxpayersin the business of publishingnewspapers. The Tribunal held in favour ofthe taxpayer and concluded thatnewspapers/periodicals are distinctcommodity than paper, printing inkand other ingredients used. Sincea new commercial product comesinto existence, the process involvedfor such transformation amounts toproduction and manufacture andaccordingly, additional depreciationshould be allowed.Service tax on print media Sale of advertisement space in printmedia is not liable to service tax. ‘Printmedia’ is defined to mean newspaperand book (not including businessdirectories, yellow pages, tradecatalogues for commercial purposes).Thus, print media houses do not payservice tax on majority of advertisingrevenue earned. However, corresponding service taxexemption is not extended to theservice providers (except a few) whoprovide services to such print mediahouses. This results in additional(service tax) cost to print media houseson services availed.Newsprint Print media houses typically usenewsprint for printing newspaper andcurrently import nearly 25%-30% of thenewsprint into India. The Governmenthas exempted basic customs duty onnewsprint (from existing 5% to 0%),thereby reducing raw material cost formanufacture of paper, paperboard andnewsprint. While this could marginally reduce thecost, it could also result in newsprintbeing dumped into India by overseassuppliers and adversely impact thedomestic newsprint manufacturers.The registered newsprintmanufacturers may not be able to selltheir product competitively and therecould be large quantum of importsadding to the burning foreign exchangeoutgo issue and revenue loss to thecountry.Advertising in print As discussed earlier under broadcastsection.1011

Media and entertainment industry India tax landscapeCustoms duty on filming equipmentFilmsIndian films shot overseas It is common for Indian films to beshot in overseas jurisdictions (partlyor fully). Typically, in such cases theIndian producer contracts with a lineproducer in the respective jurisdictionto assist with the shooting and the filmproducer pays line producer fees. The Revenue authorities have taken aposition that such line producer feesamount to fees for technical servicesand taxes should be withheld by theIndian producer on such payments. The Tribunal and the Authority forAdvance Rulings have held that lineproducer fees are not in the natureof fees for technical services and,accordingly, taxes are not required tobe withheld on such payments. It may be noted that the taxability/withholding tax applicability on lineproducer fees should be evaluatedbased on the contractual terms (i.e.role/responsibilities) agreed anddocumented between the parties. Payment of line producer fees wouldalso need to be examined from aservice tax perspective (implicationsunder reverse charge mechanism forthe film producer) depending upon thenature of service and POPS Rules.Foreign films shot in IndiaIn recent times, the Indian Governmentis making efforts to promote India asa filming destination. Films such as‘Million Dollar Arm’, ‘Zero Dark 30’, and ‘AMighty Heart’ have been shot in India. Inconnection with film shooting in India, taximplications should be evaluated for filmproducers/studios, actors (in front of thecamera) and crew (behind the camera). Foreign film producers/studios2 :Income of foreign producers shouldnot be taxable in India in respect ofoperations confined to shooting of afilm in India for transmission out ofIndia based on an exemption under thedomestic tax laws. Foreign actors: Taxability of foreignactors are covered under Article 17 oftax treaties (Taxation of entertainersand sportsperson). Income frompersonal activities, as such, performedin India (i.e. performance in India)should be taxable in India irrespectiveof whether or not such actor is anemployee. In case performance incomeof such actor accrues not to the actorbut to another person/entity, suchincome should still be taxable in India[Article 17(2)]. This is an anti-avoidancemeasure included in tax treaties. Foreign crew would include behind thescene technicians. Taxability of theirincome should be evaluated based oncriteria such as nature of services, legalform of entity, presence/period of stayin India, relevant tax treaty provisions.Based on the above, the foreign filmproducers/studios are required toundertake Indian tax compliances(such as withholding tax on payments)and contractual arrangements shouldbe structured appropriately to avoid/mitigate tax risks.2. Individual not citizen of India, firm which does not have any partner citizen/resident of India, company which does not have anyshareholder citizen/resident of India12Media and entertainment industry India tax landscape The Admission Temporaire/TemporaryAdmission (ATA) Carnet permits dutyfree temporary admission of goodsinto a member country. The list ofexempted products includes filmingequipment. However, there is nocorresponding customs notificationgranting exemption on import offilming equipment on lines of ATACarnet. Film production equipment is veryexpensive and is not easily availablein all countries, thereby compellingthe film producers to import themon temporary basis on lease for thepurpose of producing the film. Customsduty cost significantly increases burdenof tax on film producers.Film co-productionsAt times, a film is co-produced by twoor more parties. In such a situation, oneshould evaluate the issue of associationof persons (AOP). The implication ofbeing treated as an AOP is that this isconsidered a separate entity for taxpurposes. The term “AOP” has not beendefined under the tax laws. The CBDThas recently clarified3 in the contextof engineering, procurement andconstruction contracts/turnkey contractsthat an arrangement with the followingattributes would not constitute an AOP: Each member is individuallyresponsible for executing its part ofwork through its own resources andbears the risk for its scope of work. Each member earns profits/incurslosses based on performance within itsscope of work4 Men/materials used for an area of workare under the risk and control of therespective members. Control and management is notunified and common managementis only for inter-se co-ordination foradministrative convenience.Though the above Circular is issued inthe context of turnkey contracts, theguidance should be considered whilestructuring film co-productions. Theremay be additional factors/aspects thatshould be considered for this issue basedon the factual matrix of each case.Film distribution rights Film distribution typically involves grantof license i.e. film distribution rights.The film intellectual property continuesto be owned by the film producerunder this model. The definition of royalty underthe domestic tax laws includesconsideration for transfer of all orany rights (including grant of license)in respect of any copyright, literary,artistic or scientific work including filmsor video tapes for use in connectionwith television or tapes for use inconnection with radio broadcasting,but not including consideration forthe sale, distribution or exhibition ofcinematographic films. On a reading of the above definition,one would observe that considerationfor “sale, distribution or exhibition” of“cinematographic films” is excludedfrom the royalty definition. The key issues are as follows: first,what constituents a “cinematographicfilm”, and second, whether license ofdistribution rights amounts to “sale,distribution or exhibition” for thepurpose of the above exclusion. Thereare decisions of the High Court andthe Tribunals on this issue – most ofthese decisions are in favour of thetaxpayer, dealing with the exclusion toroyalty definition (i.e. sale, distributionor exhibition).3. Circular does not apply to related parties4. Members may contract price at gross-level only to facilitate billing convenience13

Media and entertainment industry India tax landscapeMedia and entertainment industry India tax landscape At times, a comprehensive agreementis entered into covering various modesof film distribution for a lump sumconsideration. It may be advisable fortaxpayers to bifurcate the considerationfor various distribution rights from a taxrisk management perspective.such arrangements, but on the natureof transaction involved. As a result, ithas been clarified that service tax wouldbe applicable on exhibition of films bythe exhibitor, whether on a principalto-principal basis or on behalf of thedistributor/sub-distributor/producer oron revenue sharing basis.Indirect tax on film distribution rights Temporary transfer or permitting use orenjoyment of any IPR is liable to servicetax. Grant of license for theatrical releaseof film is exempted from service tax,whereas grant of license of non-theatricalright being television right, internet right,etc. by producers attracts service tax. IPR such as trademarks, copyrights aretypically treated as ‘goods’ under theState VAT legislations and therefore theirtransfer/license of distribution rightsattracts VAT. The above results in dual taxation andfurther exempt income may entailsignificant reversals of cenvat creditadding cost to the business. Also, typically VAT paid on licensing of IPRis not available as credit to the licenseeunder the State VAT laws, making it moreexpensive for business.Exhibition of films Producers, distributors, sub-distributors,exhibitors of films enter into differentkinds of arrangements in relationto exhibition of movies. Thesearrangements are either entered intoon a principal-to-principal basis (wherefilms are exhibited by the exhibitor onhis/her own account) or on behalf of thedistributor/sub-distributor/producer, oron a revenue sharing basis. CBEC has clarified that levy of servicetax would not depend on the nature of14Film incentives Governments of certain countries offergrants/subsidies (film incentives) forshooting of films in that country. Theissue which arises is regarding the taxtreatment of such grants/subsidies i.e.whether grants/subsidies should beconsidered as income or reduced fromcost of production of the film. The cost of production has to be reducedby subsidy received by the film producerunder any scheme from the Governmentas per the Rules. One needs to considerwhether the term “Government” in theRules includes foreign governments also. If this is not the case, considering thespecific nature of rebate (which wouldbe based on evaluation of such filmincentive scheme), an issue arises thatwhether one may still reduce this fromthe cost of production. For the purpose of service tax, anysubsidy or grant disbursed by theGovernment cannot form part of thevalue of taxable service, unless suchsubsidy or grant directly influences thevalue of such service.Deduction for cost of production offilms Rules 9A and 9B deal with deductionof expenditure for production of films.Said Rules refer to exhibition of films ona commercial basis and are silent on themodes of such exhibition.15

Media and entertainment industry India tax landscape The Tribunals have held that modesof exhibition should not be limited totheatrical but include other modes suchas television. With the growth of digital business andadvent of new revenue streams, this is animportant issue which the film industry isgrappling with.Abandoned films Deduction of cost of production of filmscertified for release by the Board of FilmCensors is available as per Rule 9A. Incase of films abandoned, a certificate forrelease from the Board of Film Censors isnot received. The CBDT has clarified that cost ofproduction of abandoned films shouldbe treated as a revenue expenditure anddeduction allowed under Section 37 ofthe Income-tax Act, 1961 (Act) i.e. generalbusiness expenditurePost-production fees At times, post-production work includingVFX is outsourced to a foreign companyand the Indian film producer pays postproduction fees to such foreign company. The issue which arises in such casesis whether such post-production feesamounts to fees for technical servicesunder the relevant tax treaty/domestictax laws and accordingly triggeringwithholding tax applicability. This would depend upon the specificservices provided, documentation of thesame in the contract, and the relevanttax treaty provisions as regards theprovisions of fees for technical services.Post-production in India India is increasingly becoming theoutsourced post-production serviceprovider to many foreign film producers.16Generally, the content is temporarilyimported into India for carrying outpost-production activity. On completionof such activity, the processed content isre-exported for its use outside India. On import of the content in tangiblemedia, customs duty becomes payableand service tax is applicable on the valueof post-production services rendered.This is contrary to other back-officeservice activities carried out in Indiawhere export benefit is provided, therebymaking Indian post-production sectorless competitive.Tax clearance certificate Individuals (e.g., foreign film actors), notdomiciled in India, who visit India forpurposes of business/profession andearn income from a source in India,are required to obtain a tax clearancecertificate from the Revenue authoritiesbefore departing India.Media and entertainment industry India tax landscape Various transactions/activitiesattract different types of indirecttaxes. In most cases, taxes paid onprocurements are not available ascredit while paying taxes on therevenues. For instance, service tax(levied by Central Government)charged by technicians to the produceris not available as credit while makingpayment of VAT (levied by StateGovernment) on grant of distributionrights by the producer.AdvertisingEqualisation levy A film producer is required to furnisha prescribed statement (Form No52A) outlining the details of expensesincurred. Such statement is required tobe submitted per film per year within 30days from the end of the financial year orcompletion of film, whichever is earlier. An equalisation levy of 6% is introducedin respect of online advertisementand digital advertising space (or anyother facility or service for the purposeof online advertisement) paymentsto non-residents, who do not havea permanent establishment in India.This levy is to be deposited by residentpayers and non-residents payershaving a permanent establishment inIndia. It may be noted that the term “filmproducer” has not been defined underthe tax laws and this issue is aggravatedby the new business models. Consideringthis, a clarification from the Governmentis required. Equalisation levy is

and entertainment market. The global Media and entertainment industry is expected to touch a market size of USD 2.14 trillion in 2020. The United States of America's Media and entertainment industry is the world's largest and is expected to be valued at USD 723 billion by 2018. Media and entertainment is one of the sectors identified by the