Tuesday, August 28, 2012

Service Tax Case Study: Animation Film Services to Charitable Organisation

Relevant Facts of the case

·         A charitable organisation took technical support and assistance, in return for monetary consideration, from a firm to make an educational animation film.

·         The contract was entered into in the Financial Year 2011-12.

·         A major portion of the consideration in return for services received was paid in the period from March 2012 to 30th June 2012. However, some payments have also been made after 30th June 2012.

Applicability w.e.f. 1st July 2012

With effect from 1st July 2012, all services, except those which are specifically stated in the negative list are chargeable to service tax. Therefore, the services of making a 3D animation film for the charitable institution will be chargeable to service tax after 01.07.2012.

Applicability prior to 1st July 2012

Section 65(36c) of the Finance Act, 1994 as amended: "Development and supply of content" includes development and supply of mobile value added services, music, movie clips, ring tones, wall paper, mobile games, data, whether or not aggregated, information, news and animation films.

Section 65(105) (zzzzb) of the Finance Act, 1994 as amended: “Taxable service” means any service provided or to be provided to any person, by any other person in relation to development and supply of content for use in telecommunication services, advertising agency services and on-line information and database access or retrieval services.
From the above definition of “taxable service”, it seems that the intent of the government in introducing this service is to tax the value added services provided only by telecom service providers, advertising agencies, on-line information and database access or retrieval services such as internet or web-site service providers.

Point of Taxation

Notification No. 18/2011-ST, dated 1st March 2011 brought the Point of Taxation Rules 2011, which came into force from 1st April 2011, and state:

For the purposes of these rules, unless otherwise stated, “point of taxation‟ shall be determined in the following manner, namely:-

(a) a provision of service shall be treated as having taken place at the time when service is provided or to be provided; and

(b) if, before the time specified in clause (a), the person providing the service issues an invoice or receives a payment, the service shall, to the extent covered by the invoice or the payment made thereof, be deemed to have been provided at the time the invoice was issued or the payment was received, as the case may be, whichever is earlier.

Explanation- For the purposes of this rule, wherever any advance, by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance.

Explanation 2- For the purposes of this rule, in respect of services taxable under section 66A of the Act, the point of taxation under clause (b) shall be the date on which the invoice is received, or the payment is made, as the case may be, whichever is earlier.

Therefore, it is clear that the time of provision of service will be the earliest of the following dates:
1.       date on which service is provided (or to be provided)
2.       date of invoice
3.       date of payment received


Since the contract was entered into in the Financial Year 2011-12, and it is assumed that the invoice for the full amount was raised before 1st July 2012, in our opinion, the technical assistance and support services provided in relation with making a 3D animation film are not chargeable to service tax.

Such opinion is provided on the following basis:
1.       Service tax was not chargeable on the abovementioned service before 1st July 2012.
2.       The earlier of the following two events occurred on a date before 1st July 2012:
a.       Invoice raised of full amount against the services provided.
b.   Providing of whole of such service for which payment is being made.