High Court Holds Cinematographic Film Licensing Cannot Be Treated as IT Software Merely Because Content Is Delivered Digitally:

Dharma Productions Pvt. Ltd. and Dharmatic Entertainment Pvt. Ltd. are engaged in producing, developing and financing cinematographic films, web series and other audio-visual content. As producers and original copyright holders, they own copyright in their films and enter into Rights License Agreements with distributors for commercial exploitation of theatrical, sound, satellite and digital rights. The dispute concerned FYs 2017-18 to 2020-21, when Entry 17(i) and Entry 17(ii) of Notification No. 11/2017-Central Tax (Rate) carried different GST rates. The petitioner had classified the licensing transactions under Heading 9973, particularly SAC 997332, and discharged GST at 12%. The department, however, treated the transactions as licensing of Information Technology Software taxable at 18%.

Search and inspection proceedings were initiated under Section 67 of the Maharashtra GST Act. Subsequently, proceedings under Sections 74 and 73 of the CGST Act were initiated, resulting in Orders-in-Original dated 5 April 2021 and 6 April 2021. The petitioners' appeals were later rejected by Orders-in-Appeal dated 17 March 2025 and 19 March 2025.

The Court noted that Entry 5(c) of Schedule II to the CGST Act treats temporary transfer or permitting the use or enjoyment of intellectual property rights as a supply of services. However, the Court found that the relevant rate notification itself consciously created separate entries for intellectual property rights relating to goods other than IT software and IT software.

The Court observed that the explanatory notes to SAC 997332 expressly cover licensing services for reproducing, distributing or incorporating entertainment, including original films. In contrast, SAC 997331 is concerned with computer programs, program descriptions, supporting materials and databases. Thus, the existence of a specific entry for cinematographic films was material to the classification dispute.

According to the Court, classification of a single supply under a single statute must be determined by the dominant nature and essential character of the supply, rather than merely by its mode of transmission. The Court noted that the GST Council had recognised the overlap between the 12% entry under Heading 9973 and the 18% entry relating to film distribution services and had recommended regularisation of the tax position for the earlier period.

The Bombay High Court concluded that the authorities had proceeded on the fundamentally erroneous premise that licensing of copyright in cinematographic films amounted to licensing of Information Technology Software. The Court further found that the Orders-in-Original substantially reproduced the allegations contained in the show cause notices without independently dealing with the petitioners' submissions. Accordingly, holding that the orders suffered from jurisdictional errors apparent on the face of the record, the Bombay High Court allowed Writ Petition Nos. 2029 of 2025 and 2184 of 2025 in terms of the prayer clause and quashed the impugned proceedings.