When a movie is transferred through software or an application, can the mode of delivery change the status of a film copyright licence into a Software-as-a-Service licence for tax classification purposes?
The Bombay High Court examined this argument while hearing petitions filed by Karan Johar-co-owned Dharma Productions against Maharashtra state GST orders dated April 5 and 6, 2021. After hearing the arguments, the court quashed the GST orders and ruled that:
“The impugned orders do not deal with the definition of ‘Information Technology Service’ at all. There is no finding, much less a finding, as to how a cinematographic film, a passive audio-visual work, incapable of execution, manipulation or interactivity could ever satisfy the statutory definition ‘information technology software’,” the Bombay High Court said in its September 10 order.
The core dispute is about how “digital” cinema should be taxed. Depending on how “digital” cinema is defined and transferred for screening in theatres or elsewhere, different tax rates could apply under the erstwhile tax regime. Before 2021, the tax rates differed as follows:
- 12% tax if cinema is not IT software: “Temporary or permanent transfer or permitting the use or enjoyment of IP right in respect of goods other than Information Technology software” [under 17(i) of the Rate Notification dated June 28, 2017].
- 18% tax if cinema is IT software: “Temporary or permanent transfer or permitting the use or enjoyment of IP right in respect of Information Technology software” [under 17(ii) of the Rate Notification dated June 28, 2017].
The tax period in dispute covers FY 2017–18 to FY 2020–21, ending before October 1, 2021, when the two competing GST rates were merged into a single 18% rate. The amount at stake was over Rs. 12 crore, including tax and penalties.
What are the arguments raised by the Maharastra GST Department? The central argument of the state officials was that the movie is software and not merely a film licence. According to the court order, some of the arguments raised by the state were:
- Cinema delivered digitally is a software: “A cinematographic film delivered in a digital format, whether through a secure link or on a hard drive, is a ‘representation of data, sound or image recorded in a machine-readable form’. This squarely falls within the definition of ‘information technology software’ as contemplated under the relevant notifications.”
- IGST Act treats the content as online information database access and retrieval (OIDAR) service: “The supply in question is, in fact, a classic example of an Online Information Database Access and Retrieval (OIDAR) service. The IGST Act defines OIDAR services as those delivered via the internet with minimal human intervention. The official GST guidance explicitly includes ‘online supplies of digital content (movies, television shows, music and the like)’ and ‘accessing or downloading of films’ within the scope of OIDAR services.”
- Producer does not use physical media: “The petitioner does not deliver physical media. The entire transaction is executed through information technology infrastructure. The TCS judgment therefore has no application in the present case.” The state was referring to the Supreme Court judgment in Tata Consultancy Services vs. State of A.P., which dealt, according to the Supreme Court, with software sold using CDs or floppy disks.
- The state invoked the ‘Aspect Theory’ and argued that taxation depends on the mode of delivery: The Maharashtra state GST officials invoked the “Aspect Theory” and argued that modern entertainment delivered through broadcasting and digital means can be taxed as services. According to the state, a transaction can have multiple aspects, such as the general “licensing of IPR” and the specific, dominant “supply of IT/OIDAR service”, defined by its technological delivery mode. The classification and tax rate, it argued, therefore depend on this “IT/OIDAR aspect”, as the supply involves digital content accessible only through information technology rather than a physical good.
So, how did Dharma Productions deliver its films? Citing a few email exchanges, Dharma argued that films were transferred physically using a hard drive, except in a few cases where electronic means may have been used. The production house further argued that this electronic means did not involve the supply of any software to the distributor.
“The delivery is effected through physical handover and at no point is any software transferred or transmitted electronically, whether by email or through an online file transfer mechanism, while delivering the content physically,” argued lawyers representing Dharma productions.
However, the court also noted a statement made by Dharma Productions’ production head. He reportedly said during the investigation that “the link to expedite the films in digital format is created in software format which is secured by password and which are clearly services.” The HC considered this to be a binding statement.
The Bombay HC’s rationale: Justices M. S. Karnik and Sandesh D. Patil based their judgment on the following arguments:
Interactivity is a core feature of software: “’Information technology software’ means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine-readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment.”
Mode of delivery cannot determine the GST classification of ‘software’: “In our opinion, whether content is transmitted physically (encrypted hard disks) or electronically, the mode of delivery cannot determine classification, which must turn on the essential character of the supply. Equating ‘digital content’ with ‘software’, the core error underlying the impugned orders, has no statutory basis.”
The HC also addressed the ‘Aspect Theory’ invoked by the Maharashtra state GST officials: “The Aspect Theory operates in the field of legislative competence, permitting different legislatures to tax different aspects of the same transaction under distinct fields of legislation and has no application to classification of a single supply under a single statute. The dominant nature and essential character of the supply, not its mode of transmission, must govern classification.”
“…this is not a disputed question of fact but an error of law going to root of the jurisdiction. The authority that assumes the power to tax a transaction by misconstruing the governing statutory entry and definition, acts without jurisdiction. If the authority acts without jurisdiction, the resultant show cause notices and orders are void ab initio.” – Bombay HC.
Addressing the AGS Entertainment case referred to by the lawyers representing the GST department, the court noted that the particular case concerned whether film-copyright licensing was a “sale of goods” or a “service” under the erstwhile VAT/Service Tax regime, and not whether it constituted “software.”
The HC dismissed the argument concerning ‘Online Information Database Access and Retrieval’ (‘OIDAR’) services, stating that there was no reference to OIDAR in the show-cause notice and that the argument had appeared suddenly in the reply affidavit.
Source from: https://www.medianama.com/2026/09/223-dharma-productions-gst-case-bombay-hc/
