2025 (12) TMI 765 - AT - Service Tax

Revenue-sharing MOU held self-service, not taxable advertisement sale of space or time u/s 65(105)(zzzm)

CESTAT Chennai allowed the appeal and set aside the impugned order, holding that the revenue-sharing MOU between the appellant and the advertising entity ... Non-payment of service tax - Sale or Space or Time for Advertisement service - revenue sharing arrangement - MOU between the appellant and Noel Outdoor, Chennai - enforceable contract or not - HELD THAT:- An MOU that is enforceable in a court of law is a contract. The Hon’ble Apex Court in DLF Universal Ltd. & Anr. Vs Director, Town, and Country Planning Department, Haryana & Ors. [2010 (11) TMI 1086 - SUPREME COURT], stated the principle involved in the interpretation of contracts holding that 'It is not the intent of a single party; it is the joint intent of both the parties and the joint intent of the parties is to be discovered from the entirety of the contract and the circumstances surrounding its formation.' From the MOU it is seen that both parties undertake responsibilities jointly towards the successful implementation of the scheme for their mutual interest and benefit. The amount received by the appellant is not fixed and depends upon the gross revenue earned. Such an agreement is not between two principals but are in the nature of self service to maximize the profit and thus increase their own individual share of the same, on a percentage basis. No payment is made by one to the other for a specific activity. One party does not provide a service to the other and both have their own areas of rights and responsibility for this joint working of the MOU. Hence there is no “service receiver” / “service provider” relationship between the entities. The minimum amount guaranteed to the appellant does not take away from the fact that the joint intent of both the parties to the MOU is to work together for mutual benefit. Hence in terms of the judgment in the case of Magus Construction [2008 (5) TMI 18 - HIGH COURT OF GAUHATI], an activity carried on by a person for himself or for his own benefit, cannot be termed as “service rendered.” A similar issue relating to self-service on a revenue sharing basis between a distributor/producer and an exhibitor of films came up for consideration before a Coordinate Bench of this Tribunal at Allahabad, in M/s. PVS Multiplex India Pvt. Ltd. Vs Commissioner of Central Excise, Meerut-I [2017 (11) TMI 156 - CESTAT ALLAHABAD]. The Bench decided that the activity was not taxable and hence the appellant was not liable to pay service tax on the payments made to the distributors for screening the films. Thus, the activity of the appellant as per the MOU cited above would not be exigible to Service Tax. The impugned order is hence set aside on merits - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether, under the Memorandum of Understanding granting advertising rights in a mall on a revenue-sharing basis, the arrangement constituted a taxable service of 'sale of space or time for advertisement' attracting service tax on the appellant's revenue share. 1.2 Whether the revenue-sharing arrangement under the Memorandum of Understanding created a 'service provider'-'service receiver' relationship between the parties, so as to amount to provision of 'service' for service tax purposes. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Nature of the MOU-based revenue-sharing arrangement - existence of 'service' and 'service provider-service receiver' relationship; taxability under 'sale of space or time for advertisement' service Legal framework (as discussed) 2.1 The Court referred to the principle of purposive interpretation of contracts laid down by the Supreme Court, namely that a contract is to be interpreted according to its purpose, which reflects the joint intent of the parties at the time of formation, discerned from the entirety of the contract and surrounding circumstances. 2.2 The Court relied on the Gauhati High Court's exposition of 'service' and 'service provider' under the Finance Act, 1994, emphasizing that: (a) 'Service' is an act of helpful activity or rendering assistance to another; it is an intangible commodity involving human effort and does not involve mere supply of goods. (b) There must be two distinct entities: a 'service provider' rendering taxable service to a 'service receiver'; an activity carried out by a person for himself or for his own benefit cannot be termed as 'service rendered'. (c) The burden of registration and payment of service tax is on the person who provides 'taxable service' to any person. 2.3 The Court also relied on Tribunal decisions (subsequently affirmed by the Supreme Court) dealing with revenue-sharing arrangements between film distributors/producers and multiplexes, wherein such arrangements were held not to constitute taxable services because there was no service provider-service receiver relationship but a mutual, revenue-based collaboration ('self-service'). Interpretation and reasoning 2.4 The Court examined the Memorandum of Understanding between the appellant (mall owner) and the advertising company, noting that: (a) The advertising company was given advertising rights for the entire mall, and the gross advertising revenue was shared between the parties (initially 80% to advertising company and 40% to appellant during a grace period, and thereafter 50:50). (b) Revenue share payable to the appellant was not a fixed amount but depended on the total advertising revenue. (c) The MOU imposed distinct responsibilities on each party: - The advertising company was responsible for entire investment in advertising products, marketing of display units, installation, maintenance, and collection of advertising revenues from clients. - The appellant was responsible for granting access to the mall for installation, maintenance and exhibition of display units, deciding and providing advertising space locations, and providing necessary electricity. (d) The advertising company undertook to maintain a minimum occupancy level (with a guarantee/compensation clause) for the benefit of the arrangement as a whole. 2.5 On a holistic reading of the MOU, the Court found that: (a) Both parties were collaborating for the successful exploitation of the mall's advertising potential, acting for their mutual interest and benefit. (b) The arrangement was based on revenue sharing, not on a fixed consideration paid by one party to the other for a defined service. (c) Each party had its own rights and responsibilities, and their efforts were directed at maximizing the common revenue pool from which each derived a percentage share. 2.6 Applying the legal test for 'service' and 'service provider-service receiver' relationship, the Court held that: (a) The arrangement was 'in the nature of self service to maximize the profit and thus increase their own individual share of the same, on a percentage basis'. (b) There was no identifiable 'service' rendered by one party to the other for consideration; instead, both parties were jointly engaged in an activity for their own benefit. (c) No payment was made by one party to the other for a specific activity as consideration for a service; the sharing of gross advertising revenue was not in the nature of consideration for a taxable service but the outcome of a joint commercial enterprise. (d) As there was no 'service provider' and no 'service receiver' in the sense required by the Finance Act, 1994, the essential precondition for levy of service tax was absent. 2.7 The Court drew support from earlier Tribunal decisions concerning similar revenue-sharing/joint-exploitation arrangements (film exhibition cases), which had held that such activities are not taxable as they amount to self-service, and noted that the Supreme Court had expressly approved that view. Conclusions 2.8 The Court concluded that the activity carried out under the MOU was a collaborative, revenue-sharing arrangement without a service provider-service receiver relationship, and did not amount to provision of 'sale of space or time for advertisement' service by the appellant to the advertising company. 2.9 Consequently, the appellant's activity was not exigible to service tax; the demand of service tax, interest and penalties confirmed on that basis was unsustainable on merits. 2.10 The impugned order was set aside and the appellant was held entitled to consequential relief in accordance with law.