Is this service taxable
RAJA
(Querist) 11 July 2009
This query is : Open
A multiplex is housing various restaurants on the revenue sharing agreement. Which means a fixed percentage of revenue is given to the multiplex owner. There is no rent payable by the tenant. Department claims that the revenue sharing is nothing but rent and other amenities/infrastructure like eletricity, water etc. provided by the owner and demands service tax on the entire income earned by the multiplex onwer by way of revenue sharing agreement. Is that correct.
Prakash Yedhula
(Expert) 11 July 2009
Regarding revenue sharing arrangements, vide a recent Circular No. 109/03/2009-ST dated 23/2/2009 , which was issued with regard to the applicability of service tax on screening of films by theatre owners, the Central Board of Excise & Customs (CBEC) has clarified that under the particular type of arrangement which typically is undertaken between the theatre owners and the distributors of films, a revenue sharing model operates whereby a fixed and predetermined portion/percentage of revenues earned from the sale of cinema tickets goes to the theatre owners and the residual portion/percentage is paid over to the distributors.
The Circular clarifies that in such a situation, the two contracting parties act on a principal to principal basis and do not provide any services to each other and consequently no service tax would apply. This is a very beneficial Circular as it upholds for the first time the economic reality that in any revenue sharing arrangement, the contracting parties do not provide services inter se to each other but merely come together to jointly undertake an economic activity and to share the economic gains resulting from such activity.
It is important to note that even where services are actually provided, the parties would typically also act on a principal to principal basis. However, in a situation of revenue sharing, the parties act on a principal to principal basis to jointly carry on an economic activity for economic gain.
The service tax authorities, in the past, have endeavoured to impose a tax on payments made over by one contracting party to another, based on the revenue sharing formula as agreed under such joint ventures. For instance, bottling arrangements typically entered into between a brand name owner and the bottler are structured in the form of joint venture agreements whereby the revenues from the sale of bottled products are shared between the bottler and the brand name owner in fixed and predetermined proportions.
Similarly, joint venture arrangements are entered into for exploring a new market for certain products or for introducing new products into a market. In such situations, the contracting parties would come together in order that the products in question are appropriately advertised, marketed and finally distributed and sold in the defined market based on a pre agreed revenue sharing formula.
In the light of the above Circular, all such arrangements would be free of service tax. Earlier, they were under challenge. It must be noted that in several of such arrangements, it will be the case that one of the two parties will hold certain intellectual or other rights which have economic value and which therefore form their contribution to the joint venture. These rights could comprise of brand names, distribution rights and so on.
The point is that given the respective economic value that either of them possess, there is a merit in their coming together for the purposes of the joint venture, in order to earn an economic return as a consequence. Hence, the fact that there are appropriate headings for taxable services in relation to intellectual property, business auxiliary and business support services, to name a few, should be of no consequence as there is no intent to provide any services of any kind by one party to the other.
Indeed, the contracting parties do not envisage any payments in regard to these respective economic value that they constitute to the venture and all that is envisaged is that the profits accruing from the joint venture would be shared in certain proportions.
