2025 (11) TMI 506 - AT - Service Tax

Revenue-sharing cinema arrangement not a lease; operator, not owner, liable for service tax; appeal allowed

CESTAT ALLAHABAD set aside the demand for service tax, interest and penalty against the appellant arising from a revenue-sharing agreement for cinema ... Recovery of service tax with interest and penalty - revenue sharing agreement - taxability on the consideration received by the appellant in lieu of handing jover the premises of Palace Cinema for the management, of cinema business and Associated Retail Activities - renting of immovable property or non-taxable service - HELD THAT:- It is observed that the appellant has not rented out the premises. He entered in a ‘revenue sharing’ with M/s Mudit Entertainment Industries Pvt. Ltd. for the said premises, there is no fix rent agreed in the agreement and the same is dependent upon the revenue generated by the portion of the said premises. It can be more, less or even his income for certain period is nil, as the payments made do not qualify to be the rent for said premises. The clause2 of the agreement clearly provides that appellant had engaged the services of M/s Mudit Entertainment Industries Pvt. Ltd. to operate and manage the said Cinema and have not given the same to them on rent. In fact the terms of the agreement are explicitly providing that the M/s Mudit Entertainment Industries Ltd., were providing the services of operating and managing the said premises (cinema hall) against a consideration which was collected by the them form the users of the facilities of cinema hall and part retained by them as provided by the conducting agreement. Thus the facts clearly establish that appellant was not the service provider but the service receiver in the case and if there was any liability to pay service tax, the same would have been on the service provider i.e. M/s Mudit Entertainment Industries Ltd. Further, in the case of M/s PVS Multiplex India Pvt. Ltd. [2024 (7) TMI 109 - CESTAT ALLAHABAD], a Division Bench of this Tribunal has held that 'From the perusal of the show cause notices which were issued to the appellant, it is quite evident that these show cause notices have been issued on the basis of the provisions of the Finance Act, 1994 as they existed before 01.07.2012, i.e. prior to introduction of levy of service tax on the services other than those specified in the negative list or exempted.' It is found that in case of such revenue sharing agreement the issue has already been decided in the above decision, there are no merits in the impugned order and the same is set aside. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts received under a revenue-sharing/'conducting charges' agreement for operation and management of a cinema amount to consideration for 'Renting of Immovable Property' service under the Finance Act, 1994. 2. Whether a revenue-sharing arrangement between a premises owner and an operator constitutes a taxable service under 'Business Support Services' (BSS) or results in an unincorporated joint venture/association of persons (AOP) such that taxable incidence differs. 3. Whether non-payment or short payment of service tax detected during audit in respect of the above receipts justifies invocation of the extended period of limitation, interest under Section 75 and penalty under Section 78 for willful suppression. ISSUE-WISE DETAILED ANALYSIS Issue 1: Characterisation of receipts under the agreement - Renting of Immovable Property? Legal framework: Service tax classification under the Finance Act, 1994; definition of 'renting of immovable property' and rules of classification under Section 66E and Section 65B; taxability depends on nature of transaction and consideration flowing for renting. Precedent treatment: Considered Tribunal precedents holding that the substance of the agreement and flow of consideration determine taxability (e.g., decisions analysing exhibitor-distributor agreements). CBEC circulars of 2009 and 2011 addressing film distribution/exhibition relationships were examined. Interpretation and reasoning: The Tribunal analysed the terms of the agreement which granted the operator the right to operate and manage the cinema on a principal-to-principal basis, with conducting charges payable by the operator to the premises owner calculated as a share of net revenues/occupancy and other revenues. The agreement fixed no deterministic fixed rent; payments were contingent, variable, and calculated as a revenue share; the operator had operational control (deciding shows, timings, ticketing and running the business) and collected revenues from users. The Tribunal found that the appellant did not hand over possession on a conventional rent basis; rather, the arrangement made the owner effectively a participant in the venture's revenue, and the owner in substance was a service recipient (receiving revenue share) rather than providing a service to the operator. Mere labelling as 'conducting charges' or revenue sharing does not convert the transaction into renting where the commercial realities show otherwise. Ratio vs. Obiter: Ratio - where an agreement confers operational control on the operator and consideration is purely revenue-sharing without fixed rent, receipts do not constitute 'renting of immovable property' attracting service tax as such. Obiter - observations on nomenclature not affecting taxability. Conclusions: The receipts under the revenue-sharing arrangement were not taxable as 'renting of immovable property.' The demand founded on that classification could not be sustained. Issue 2: Whether the arrangement constituted a taxable Business Support Service (BSS) or an unincorporated joint venture/AOP altering tax incidence Legal framework: Definition of 'Support services of business or commerce' (BSS) and the taxable services provisions; law on unincorporated associations/AOPs and treatment of services between members and the association; tests for joint venture/partnership under case law (control over strategic/financial decisions, sharing of profits/risks). Precedent treatment: The Tribunal relied on earlier Division Bench decisions and authoritative pronouncements (including analysis in Mormugao Port Trust and subsequent Tribunal Bench orders) which held that public-private and revenue-sharing PPPs or joint ventures where parties act as co-venturers do not amount to a service relationship between co-venturers; liability to service tax cannot be imposed as if one partner provided a service to another. The Tribunal also followed Division Bench decisions holding that exhibition arrangements where the exhibitor exercises independent discretion and pays the distributor are not BSS provided by the exhibitor to the distributor. A Supreme Court decision applying the Tribunal's reasoning in a reported dispute was noted as affirming the Tribunal's view in a comparable factual matrix. Interpretation and reasoning: The Tribunal examined features indicative of a joint venture/independent principal-to-principal dealing: independent operation of the business by the operator, revenue risks borne by parties, absence of a quid pro quo service relationship where one party renders defined services to the other for a fixed consideration, and allocation of profits/losses. It held that where the arrangement is in substance a revenue-sharing venture (partners contributing resources and sharing profits) the relationship lacks the essential element of a taxable service (intention to render service and fixed quid pro quo). The CBEC Circular 2009 supports that screening/exhibition per se is not a BSS and is not taxable unless characterized as renting with fixed rent; the later 2011 Circular's hypothetical treatment of unincorporated joint ventures was considered but not held to override the principles established by case law in the factual matrix before the Tribunal. Ratio vs. Obiter: Ratio - revenue-sharing arrangements that create co-venturer relationships where parties act as entrepreneurs sharing profits/risks are not in themselves taxable as BSS or as services provided by one co-venturer to another; classification must look at substance and flow of consideration. Obiter - discussion of applicability limits of the 2011 Circular where no AOP emerges as a distinct person. Conclusions: The arrangement was not a taxable BSS and did not create a liability on the premises owner to pay service tax as service provider; where the operator exercised independent control and paid the distributor/operator, the owner was not a service provider. The Tribunal followed earlier Bench decisions and the principle that mere revenue sharing does not establish a service relationship. Issue 3: Applicability of extended limitation, interest and penalty for suppression Legal framework: Self-assessment obligations, provisions for extended period of limitation where suppression or willful misstatement is found, interest under Section 75 and penalty under Section 78; requirement of establishing suppression with intent. Precedent treatment: Principles that extended limitation and penalty require proof of suppression/intent; where classification itself is in dispute and taxpayer's position is supported by tribunal precedent and CBEC guidance, invocation of extended period must be carefully justified. Interpretation and reasoning: The Tribunal observed that the demand arose from classification of receipts as taxable renting/BSS. Given the factual finding that the arrangement was revenue-sharing with operational control by the operator and in light of Tribunal and Supreme Court precedents and relevant CBEC Circular explaining that screening is not taxable except where fixed rent exists, the Tribunal concluded that the short payment resulted from a contested classification rather than deliberate suppression of material facts with intent to evade tax. Audit detection of non-payment does not ipso facto establish suppression. Consequently, extended limitation, interest and penalty premised on willful suppression were not sustained. Ratio vs. Obiter: Ratio - extended limitation and penalty for suppression cannot be sustained where the primary liability itself is not established because the transaction is not a taxable service on the facts and where established legal authorities support the taxpayer's position. Obiter - comments on interplay of circulars and retrospective application were ancillary. Conclusions: Invocation of extended limitation, interest and penalty for willful suppression was not justified on the facts; the demand based on short payment was set aside accordingly. Overall Disposition The Tribunal set aside the demand, interest and penalty: the receipts under the revenue-sharing conducting agreement did not constitute 'renting of immovable property' or a taxable BSS; the arrangement was to be treated on its true commercial substance (revenue sharing/operation by the operator), and earlier Tribunal and Supreme Court affirmations supporting that view were followed. The appeal was allowed and the impugned order was set aside.