Economic Laws Practice (ELP) and Naik Paranjpe & Co have respectively represented Bollywood film studios PVR Pictures and Reliance Big Entertainment in filing a writ petition to challenge the imposition of service tax on copyright transfers, which was introduced by the Finance Act 2010 on 1 July 2010.

The law firms filed two writ petitions in the Delhi High Court today (7 July), claiming that the new rule that makes transfers of copyrights in cinema films or sound recordings subject to a service tax of 10.3 percent is contrary to existing case law and India's constitution.

Naik Paranjpe partner Ameet Naik and Rishi Agarwala, appeared on behalf of Reliance Big Entertainment with senior counsel S Ganesh.

Naik said that the new service tax on copyright transfers would apply whenever a producer acquired a right in a movie or when a distributor sold rights to theatre exhibitors or to satellite channels.

He added that the tax would apply to all the big distribution companies and some of the distributors themselves, which would put a large burden on the entire value chain in the entertainment industry.

According to the Naik, the act of a temporary transfer of copyright or permitting the use of copyright in a cinematograph film or a sound recording is merely a transfer of right in relation to 'goods' akin to any other property and the same cannot be considered to be rendering of service.

There is no value addition in temporary transfer of copyright or permitting the use of copyright in a cinematograph film or a sound recording, which Naik contends is covered by the Delhi High Court in Home Solutions Retail India Ltd. vs. Union of India (2009 (158) DLT 722) wherein it was held that service tax is a value added tax and is a tax on the value addition provided by some service provider.

PVR Pictures was represented by ELP partner Tarun Gulati.

"Copyrights are intangible property and are liable to VAT, charging service tax on the transfer of copyrights is a clear transgression of the powers of the states to levy tax on the sale and purchase of goods," said Gulati in a press release. "The industry will not be able to survive if this duality of taxation is not done away with."

The petitions will be heard on August 2 for interim relief by the Delhi High Court as the service tax on copyrights will only become effective on August 5, said Naik.

This is the third challenge relating to service tax reported by Legally India. In May the Delhi High Court stayed the recovery of service tax on immovable property.

Click here to read an in-depth analysis and criticism of the other provisions of the Finance Act 2010 service tax provisions in Legally India's latest Legal Pulse.