Supreme Court upholds CESTAT order: Special effects & 3D conversion not ‘video-tape production’ services

Supreme Court upholds CESTAT order: Special effects & 3D conversion not ‘video-tape production’ services

States the assessee was entitled to exemption under the Export of Service Rules, 2005, and Service Tax Rules, 1994

The Supreme Court has upheld the order of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) that the 3D conversion services provided by the assessee, do not come in the ambit of ‘video-tape production’ under Section 65(120) of the Finance Act, 1994.

The services included special effects, post-production, digital asset management, content, and digital restoration.

While adjudicating the service tax demand raised on the assessee, the CESTAT observed there was no evidence that the material received by the assessee, Prime Focus Ltd, from its clients, was recorded in video or that at any time the assessee handled video as media.

Thus, the tribunal held that the assessee was entitled to exemption, as it had exported services in accordance with the Export of Service Rules, 2005, and Rule 6A of Service Tax Rules, 1994.

The bench comprising Justice BV Nagarathna and Justice Ujjal Bhuyan upheld the CESTAT order after referring to the definitions of ‘video production agency’ and ‘video-tape production’ under the Finance Act.

It remarked that services such as editing, cutting, and coloring could be handled only after recording any program, event, or function on a magnetic tape or any other media or device was done.

Prime Focus is a pioneer in visual effects and 3D technologies. It is engaged in conversion from 2D to 3D, imparting special effects, post-production service, and digital restoration service. These were business support services/information technology software services. Thus, the activity was entitled to exemption as ‘exports’ under Rule 3 of the Export Service Rules.

In the show-cause notice issued to the assessee, the revenue department claimed that the activities conformed to Section 65(105)(zi) of the Finance Act, as the provider/assessee was a video production agency. It claimed it was not ‘exports’ unless the whole, or part, of the performance, was undertaken outside India prior to 1 July 2012. The department thus raised a demand for service tax for the relevant assessment years.

The adjudicating authority (AA) upheld the findings of the revenue department. It concluded that the activities would fall within the ambit of ‘recording of any program’ in Section 65(120) of the Act. It defined video-tape production, and the assessee was a provider of the related service prior to 1 July 2012. However, after that period, the service was not rendered within the country, and hence, not taxable.

The CESTAT held that the classification of the service adopted by the AA (concurring with the proposal in the show-cause notice) was not in consonance with the intent of Section 66 of the Finance Act, which deals with the charge of service tax. The tribunal stated that the activity would not fall under the ambit of video-tape production under Section 65(120) of the Act.

The tribunal observed that the inclusive leg of the definition in Section 65(120) pertained to the post-recording activity on video or transfer to another media by the provider of service to qualify as video-tape production. However, there was no evidence that the material received by the assessee was recorded in video or that the assessee handled video as media.

Thus, the enumeration of ‘taxable services’ enumerated in Section 65(105) of the Act, prior to 1 July 2012, recognized segregation from other services. The enumerated ‘taxable services’ permitted staged incorporation of several components of end-to-end activity in a specific sector at different times.

The CESTAT stated that the assessee exported services in accordance with the Export Service and Service Tax Rules for the relevant periods. Therefore, it was entitled for exemption as exports.

Meanwhile, the revenue department argued before the Supreme Court that the analysis of the definition of ‘video production agency’ and video-tape production, as claimed by the tribunal, was incorrect.

On the other hand, the assessee contended that in the definition of ‘video-tape production’, the recording process of any program, event, or function on any device and service was of significance. If the process of recording was absent, rendering a service would not arise.

While upholding the decision of the CESTAT, the Top Court held, “On a conjoint reading of the definitions of the ‘video production agency’ and ‘video-tape production’, we find that services such as editing, cutting, and coloring, happens only after recording is done of any program, event or function on a magnetic tape or other media or device. This is clear from the use of the words ‘services relating thereto’ and such a video-tape production when done by any professional videographer or commercial concern engaged in the business of rendering such services is a ‘video production agency’.”

Referring to Notification No. 4/2001-ST, dated 9.7.2001, the Bench stated, “Having regard to the expressed words ‘services relating thereto’ and the circular dated 09.07.2001, paragraph ‘2’, we find that the tribunal rightly interpreted the Sections. It is needless to observe that the definitions are relevant only till 01.07.2000.”