Tax Follows the Real Service, Not the Promotional Clause

When Marketing Spend Becomes a Tax Question

The Supreme Court's order in Commissioner of CGST And Central Excise Mumbai Central Versus Zee Entertainment Enterprises Limited. - 2026 (8) TMI 652 - SC Order , is extremely short. The Court has simply condoned the delay, found no good ground to interfere with the CESTAT Mumbai order dated 20.01.2026, and dismissed the Civil Appeal filed by the Revenue. However, the importance of the case lies in the detailed 23-page CESTAT Mumbai order reported as Zee Entertainment Enterprises Limited Versus Commissioner of CGST & Central Excise Mumbai Central CGST & Central Excise Commissionerate - 2026 (1) TMI 1519 - CESTAT MUMBAI.

The dispute arose under the Service Tax regime for the period from April 2016 to June 2017. Zee Entertainment Enterprises Limited was engaged, among other activities, in broadcasting and operating television channels. It had entered into agreements with film producers, copyright holders and artists to acquire music and song video rights. After acquiring these rights, it commercially exploited them through distribution, monetisation and related promotional activities.

The Department treated the marketing and promotion expenditure incurred by Zee as consideration for a taxable service allegedly provided to the film producers or assignors. According to the Department, Zee had agreed to promote and market the assigned works and therefore had rendered a taxable service. The adjudicating authority confirmed a service tax demand of Rs.5,54,34,783/- along with interest and penalties. The CESTAT set aside the demand. The Supreme Court has now refused to interfere with that conclusion.

The First Question Is Whether There Is a Service at All

The heart of the controversy was the definition of "service" under Section 65B(44) of the Finance Act, 1994. After 01.07.2012, the Service Tax regime moved to the negative list system. Under Section 66B, service tax was leviable on the value of all services, other than those specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another.

Section 65B(44) defined "service" to mean any activity carried out by a person for another for consideration, subject to exclusions. This definition contains three essential ingredients. There must be an activity. That activity must be carried out by one person for another. There must also be consideration for that activity. Unless these elements exist, taxability cannot be created merely by using broad expressions such as promotion, marketing, obligation or expenditure.

In Zee Entertainment, the CESTAT examined the agreements carefully. Zee had acquired music and song video rights from film producers or other assignors. During the contractual period, Zee became the holder of those rights and commercially exploited them. The marketing and promotion activities were undertaken to enhance the commercial value of the rights acquired by Zee itself. Therefore, the Tribunal found that Zee was not acting as a service provider to the assignors. It was acting for itself as the holder of the acquired rights.

Own-Account Promotion Is Not Service to Another

A business may incur expenditure that indirectly benefits another person, but indirect benefit alone does not create taxable service. The law requires an activity by one person for another. If the activity is primarily for one's own commercial benefit, it does not automatically create a service provider-service recipient relationship.

Zee promoted music and song videos to monetise the rights acquired by it. Any incidental benefit to the film producers or assignors did not change the legal character of the activity. The Tribunal also recognised that promotion of music is not the same as promotion of films, as songs and music videos are consumed independently through digital platforms, music channels and other media.

The Agreement Must Be Read for Its Real Commercial Character

The Department had relied heavily on the agreement. According to the Department, the agreement required Zee to incur marketing and promotional expenses. It was therefore argued that Zee had undertaken an obligation for the benefit of the assignors. The CESTAT did not accept this reading.

A contract must be read as a whole. No clause can be lifted out of context and converted into a taxable service. The agreements contained various commercial terms, including assignment of rights, minimum guarantee, revenue share, recoupment, royalties, deliverables, marketing, reporting and accounting. Taken together, these clauses showed a commercial arrangement for the transfer and exploitation of music rights, not an independent agreement to provide a marketing service to the assignor.

The Tribunal found that the consideration paid by Zee was for acquiring rights. The marketing expenditure was part of the commercial mechanism for exploiting those rights. It was not consideration received by Zee for rendering a service to the assignors. This approach is important for all tax disputes involving complex commercial contracts. The substance of the arrangement must be identified before tax is imposed.

Declared Service Cannot Be Presumed From Every Obligation

The Department also invoked Section 66E(e) of the Finance Act, 1994. This provision treats as a declared service an agreement to refrain from an act, to tolerate an act, or to do an act. The adjudicating authority held that Zee had agreed to do an act, namely to incur marketing and promotional expenditure, and therefore the activity was taxable as a declared service.

The CESTAT rejected this approach. Section 66E(e) cannot be invoked merely because a contract contains obligations. Almost every commercial contract contains obligations. A buyer agrees to pay. A seller agrees to deliver. A distributor agrees to maintain standards. A franchisee may agree to advertise. A licensee may agree to promote a product. If every contractual obligation were treated as a declared service, the provision would become limitless.

For Section 66E(e) to apply, there must be a specific agreement where the very object is to do an act, refrain from an act, or tolerate an act for consideration. There must be a clear link between the agreed act and the consideration. In Zee Entertainment, the marketing expenditure was not consideration for a service supplied to the assignors. It was part of Zee's own commercial exploitation of acquired rights. Therefore, the declared service entry could not be applied.

Flow of Money Is Not the Same as Consideration

The assessee relied on CBIC Circular No. 178/10/2022-GST dated 03.08.2022. Although issued under GST, the circular discussed principles equally relevant to the earlier Service Tax concept of declared service. It clarified that an agreement to do an act, abstain from doing an act, or tolerate an act cannot be presumed merely because there is a flow of money from one party to another.

This principle has great practical value. Tax authorities sometimes begin with the receipt or accounting entry and then search for a taxable service. But taxability cannot be built backwards in this manner. One must first identify the taxable activity, the supplier, the recipient, and the consideration. Only then can the receipt or expenditure be tested for tax.

In the present case, the Department treated marketing expenditure as if it were consideration for a service. The Tribunal held that this was unsustainable. If there is no service in the first place, valuation becomes irrelevant. A figure in a contract or an amount spent by a party cannot become taxable value unless it is linked to a taxable service.

The Sony Music Line Supplied Strong Support

The assessee relied upon the decision in Sony Music Entertainment India Private Limited Versus Commissioner of CGST, Mumbai West - 2024 (7) TMI 308 - CESTAT MUMBAI. That case involved similar facts relating to music rights and marketing expenses. The Tribunal in Sony Music had held that such activities were not liable to Service Tax.

Sony Music's principle is that when an assessee acquires music rights and then spends money to promote and monetise them, the activity is for its own business benefit. It is not a service to the original rights holder merely because the original rights holder may also gain from successful promotion.

This line of reasoning is particularly important for media, entertainment, digital content, licensing and rights-management businesses. In such industries, commercial arrangements often include minimum guarantees, revenue sharing, recoupment, marketing commitments and promotional obligations. These features must be understood in their commercial context. They cannot be mechanically split and taxed as separate services unless the statutory ingredients are present.

Section 66E(e) Has a Controlled Scope

The CESTAT also referred to decisions dealing with Section 66E(e), including M/s BALAJEE LOHA LTD Versus COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX-RAIPUR - 2025 (6) TMI 186 - CESTAT NEW DELHI , M/s. Oil & Natural Gas Corporation Ltd. Versus Commissioner of Central Goods & Service Tax, Dehradun - 2025 (3) TMI 969 - CESTAT NEW DELHI , and M/s South Eastern Coalfields Ltd. Versus Commissioner of Central Excise and Service Tax, Raipur - 2020 (12) TMI 912 - CESTAT NEW DELHI.

The principle emerging from these decisions is that Section 66E(e) does not tax every payment or obligation arising from a contract. It applies only where the agreement itself is for doing, refraining from, or tolerating an act for consideration. A contractual obligation or business expenditure cannot be treated as a taxable service unless it meets the basic requirement of an activity carried out for another person for consideration under Section 65B(44).

Commercial Benefit to Another Is Not Enough

The Tribunal's reasoning also finds support from the principle in PHILIPS INDIA LTD. Versus COLLECTOR OF CENTRAL EXCISE, PUNE - 1997 (2) TMI 120 - Supreme Court . In that case, the Supreme Court considered advertising expenses in a manufacturer-distributor arrangement and recognised that such expenditure may be incurred in furtherance of the commercial interests of both sides without changing the basic nature of the transaction.

The CESTAT also referred to McDonalds India Private Limited Versus Principal Commissioner of Service Tax Delhi-I - 2019 (9) TMI 1141 - CESTAT NEW DELHI , where advertisement expenses incurred by franchisees were not treated as consideration paid to McDonalds merely because the brand may also have benefited.

These decisions illustrate a practical truth. Commercial arrangements often produce mutual benefit. But mutual benefit is not the same as a taxable service. The law must identify the person for whom the activity is performed and the consideration for that activity. If the activity is undertaken for the person's own business benefit, incidental benefit to another party does not create taxability.

The Demand Failed at the Threshold of Taxability

Once the Tribunal concluded that Zee's activities did not constitute a service under Section 65B(44), the demand could not survive. There was no need to examine the valuation in detail, nor was it necessary to treat the marketing expenditure as taxable value under Section 67. Valuation provisions apply only after taxability is established.

This sequence is crucial. First, decide whether there is a taxable service. Secondly, identify the consideration. Thirdly, determine the value. The Department cannot reverse this order by first identifying an amount and then assuming that it must represent taxable service.

Since the activity itself was not taxable, interest and penalties also failed. The Tribunal set aside the Order-in-Original dated 18.07.2024 and allowed the appeal. The Supreme Court's refusal to interfere gives finality to the result, although the Supreme Court order itself does not contain detailed reasoning.

The GST Lesson Needs Careful Application

Although the case belongs to the Service Tax regime, its principle remains highly relevant under GST. Under GST, taxability depends on supply. A transaction cannot be taxed merely because a contract contains obligations or because money flows between parties. There must be a supply of goods or services, or both, made by one person in the course or furtherance of business, subject to the statutory scheme.

At the same time, one distinction must be carefully kept in mind. Section 7(1)(a) of the CGST Act, 2017 refers to the supply of goods or services, or both, such as sale, transfer, barter, exchange, licence, rental, lease or disposal, made or agreed to be made for consideration by a person in the course or furtherance of business. Section 7(1)(c), read with Schedule I, brings specified activities within the scope of supply even if made without consideration. These provisions do not always expressly use the word "recipient".

However, this does not render the concept of "recipient" irrelevant to GST analysis. The definition of "recipient" in Section 2(93), the definition of "consideration" in Section 2(31), the charging provision in Section 9, the invoicing provisions in Section 31, the valuation framework in Section 15 read with Rules 27 to 35 of the CGST Rules, 2017, and the input tax credit mechanism under Sections 16 to 21 all proceed on the identification of a supply relationship. Therefore, even under GST, the Department must identify the nature of supply, the supplier, the person to whom the supply is made, and the statutory basis for taxability. The absence of the word "recipient" in Section 7 does not permit taxability to be built on mere expenditure, contractual language, or indirect commercial benefit.

Supply Cannot Be Imagined From Indirect Benefit

Under GST also, indirect commercial benefit is not enough to presume taxable supply. A distributor, licensee, franchisee, platform or group company may incur promotional expenditure for its own business, even though another person may also benefit incidentally. The real questions remain: what is the supply, who is the supplier, who is the person to whom the supply is made, and what is the consideration or statutory deeming basis?

Even in Schedule I cases, where specified supplies may be taxed without consideration, the deeming provision must be clearly attracted. Similarly, in "agreeing to do an act" or "tolerating an act" disputes, CBIC Circular No.178/10/2022-GST dated 03.08.2022 remains relevant. Taxable supply cannot be imagined merely from contractual language, flow of money, or indirect benefit.

Taxability Begins With Substance, Not Labels

The ruling reinforces that words such as marketing, promotion, recoupment, overflow, minimum guarantee or obligation do not decide taxability by themselves. The contract must be read as a whole to identify the real commercial relationship.

Zee had acquired music rights and promoted them for its own exploitation. The assignors were not its clients for marketing services, and the expenditure was not consideration for service. For officers and professionals, the discipline is clear: first identify the taxable activity, the parties and the consideration; valuation and demand can arise only thereafter.

Own-Account Expenditure Cannot Be Taxed by Assumption

Own-account expenditure does not become taxable service merely because it is mentioned in a contract, nor does promotional activity become service to another merely because another person may indirectly benefit. A contractual obligation becomes taxable only when it is linked to consideration for doing, refraining from, or tolerating an act.

The Supreme Court's refusal to interfere gives practical strength to the CESTAT's reasoning. The ruling is useful for Service Tax as well as GST disputes involving promotional commitments, marketing support, reimbursements and alleged agreement-to-do-an-act supplies. Taxability requires a real taxable service or supply, an identifiable supply relationship, and consideration or a specific statutory deeming provision.

***