GST on movie co-production

[ROHIT GOEL]

Parties A and B have entered into contract to co-produce a movie in 50-50 basis. Both parties shall have equal rights in the movie. The revenue would also be shared equally by way of an escrow arrangement.

However, entire production cost will be borne by A while B will reimburse A for 50% of expense. Assuming that this reimbursement to A by B will be liable to GST, whether this would be treated as permanent transfer of Intellectual property rights and thus taxable@12% or taxable under residual services head@18%.

Please provide your views.

[Rajagopalan Ranganathan]

Sir,

Under GST the taxable event is supply. in your case what is supplied by A to B or B to A. I understand that only money is reimbursed by a to B. Therefore in my opinion there is no taxable supply between A and B. Hence no gst is payable on the transaction between A and B.

[ROHIT GOEL]

Dear Rajgopal Ji,

Thank you for your response. As per agreement b/w the two parties, B will get 50% rights in the movie upon such payment. Would it amount to obtaining an interest in the IP?

[KASTURI SETHI]

Q.Would it amount to obtaining an interest in the IP ?

A. If we read the legal definition and meaning of 'escrow', it will not amount to interest.

[Shilpi Jain]

You could have the MoU between A and B in such a way that it is a Joint venture where the manpower, equipment, know how etc will be bought in by A and the money will be bought in by B. In such a case no GST on the reimbursement as it takes character as a JV investment.

[ROHIT GOEL]

Dear experts,

The MOU is indeed phrased in a manner that the two parties will contribute 50% each of the total cost of production. But 100% expense will be first incurred by A and B will thereafter provide his share of 50% to A, as per agreed schedule.Both parties shall have equal rights in the movie.

So firstly A will claim expense of 100 in his books and claim ITC on it and then receive 50 from B. If he does not pay GST on 50 wouldn't the ITC claim of 100 be incorrect as ITC on share of B would not be in furtherance of business of A.

in my opinion, it would be better if both parties form a separate entity in which case, amount will be a investment not taxable to GST

[ROHIT GOEL]

In continuation, I also feel that Circular no. 35/9/2018-GST may also provide guidance on this issue. Illustration B thereof:

"There are 4 members in the JV including the operating member and each one contributes ₹ 100 as part of their share. A total amount of ₹ 400 is collected. The operating member thereafter uses its own machine and performs exploration and production activities on behalf of the JV."

Comments in Circular:

".....In Illustration B, the operating member uses its own machinery and is therefore providing ‘service’ within the scope of supply of CGST Act, 2017. This is because in this scenario, the operating member is recovering the cost appropriated towards machinery and services from the other JV members in their participating interest ratio."

In our case, A is first incurring expenditure on his own account and thereafter recovering share of B.

[Himansu Sekhar]

The circular speaks that a member will provide service to the JV as a taxable person and will have separate regn. The JV has a separate regn. The invoice issued by the member to the JV will be the ITC document for the JV. then the JV will raise invoice to the customer. Your issue is separate.

AI Summary

Taxable supply under GST: reimbursement in co-production may be a supply affecting GST liability and ITC entitlement. Whether B's reimbursement to A is a taxable supply depends on substance: if payments are investments in a joint venture or to a separate entity, they are not taxable; if A recovers costs as consideration for providing services or rights to B, the recovery may be a taxable supply and affect GST liability and input tax credit claims.