Reliance Big Entertainment Pvt. Ltd., which is one of the biggest production houses in India, has challenged the constitutionality of Section 65(105), of the Finance Act, 2010 before the High Court of Delhi. Section 65(105) as follows:- unless the context otherwise requires, (105) - “Taxable service” means any service provided or to be provided, - : to any person, by any other person, for —

1. transferring temporarily; or
2. permitting the use or enjoyment of, any copyright defined in the Copyright Act, 1957, except the rights covered under sub-clause (a) of clause (1) of section 13 of the said Act.”

Through this provision parliament seeks to impose service tax on the transfer of copyright from one entity to another. Reliance is against the imposition of service tax on sale of copyrights of movies and other artistic works. A service tax of 10.3 percent will be applied every time when a copyright is transferred i.e. when a producer acquires right in a movie or a distributor sells the right to theatre exhibitors or TV channel.

The main ground of challenge by Reliance is that respective State Governments are already taxing such transactions under their 'sales tax'/VAT legislations. If the said section is imposed then Reliance and other similar companies will be at the loosing end because it will be paying two taxes of an identical nature to two different governments for the very same transaction. Surprisingly, this problem is not unique to copyrights only. The same problem is even with trademark licensing agreements.

Here distinction between sales and services holds importance because it is noted that Central government is only competent to levy taxes on ‘services’ and not on ‘sales’. On this basis it is contended by Reliance that the impugned provision deals with ‘sales’ and not ‘services’. Keeping this contention in mind if High Court fails to consider it then this case would not sustain because Parliament is competent to tax such transactions either under Entry 92 C of List I or alternatively, under Entry 97 of List I, which gives Parliament residuary powers to tax all those transactions which are not covered either under List II or III. So in order to succeed in this case, the parliament only requires to prove that the transactions are not ‘sales’ regardless of whether they are ‘services’ or not.

To support their contention Reliance has made an attempt to establish that copyrights are goods for the purposes of taxation on the basis of Supreme Court precedents and Article 366(12) where goods includes all materials, commodities, and articles. According to definition of 'tax on the sale or purchase of goods', under Article 366(29D) of the Constitution only ‘sales tax’ can be imposed on any transaction dealing with copyright.

Though on first look the case seems to be in favour of Reliance. But it is not so because Parliament only applies taxes to licenses and not on sales i.e. the provision in question applies only to 'temporary transfer' (i.e. exclusive licensing) or 'permitting the use or enjoyment' (i.e. licensing). Hence, Reliance is at the receiving end prima facie.