By Lucy Rana and Shantam Sharma
Few questions sound more technical, or carry more commercial weight, than how a transaction is classified for tax. For the producers and studios that license films for theatrical, satellite, digital and other exploitation, a reclassification of that licensing as a supply of “information technology software” moves the rate of GST and, with interest and penalty, can turn an accounting label into a very large liability. In Dharma Productions Pvt. Ltd. v. State of Maharashtra, a Division Bench of the Bombay High Court addressed that question directly, and held that a film is not software.
The dispute
Dharma Productions and Dharmatic Entertainment, as producers and original copyright holders, licensed the theatrical, satellite, digital and other rights in their films to distributors. For the financial years 2017-18 to 2020-21, they classified these transactions as the licensing of intellectual property rights in goods other than information technology software, paying GST at 12 percent. Following investigation, the State GST authorities reclassified the transactions as the licensing of information technology software, attracting 18 percent, and confirmed a substantial demand with interest and penalty through a series of orders in original, rectification orders and orders in appeal. The producers challenged those orders before the High Court.
What the Court held
The Division Bench allowed the petitions. Its reasoning runs along four main lines.
First, on the nature of the supply, the Court found a fundamental distinction between digital content and software. The statutory definition of information technology software contemplates a representation of instructions, data, sound or image recorded in a machine-readable form that is capable of being manipulated or provides interactivity to a user. The Court found that a cinematographic film is a passive audiovisual work and does not satisfy those attributes merely because it is transmitted electronically. A cinematographic film is a passive audiovisual work; it is not capable of execution or interactivity, and it does not become software merely because it is transmitted digitally. The authorities, the Court held, had failed to apply the statutory definition and had not explained how a passive film could qualify as software.
Second, on classification, the Court pointed to the scheme of service codes itself. The code for licensing services for the right to broadcast and show original films (SAC 997332) is distinct from the code for computer software and databases (SAC 997331), and it corresponds directly to the producers’ transactions. To subsume the licensing of film copyright within “software” was, the Court held, a manifest and unreasoned error of law.
Third, on the mode of delivery, the Court rejected the attempt to make the manner of transmission the decisive factor. Whether a film is delivered on an encrypted hard disk or electronically, classification must depend on the dominant nature and essential character of the supply, which is the licensing of copyright in a film, not on how it is delivered. The Court also rejected the Revenue’s reliance on the concept of “online information database access and retrieval” services, which had been raised for the first time in an affidavit before the Court and found no place in the show-cause notices or the orders, and on the “aspect theory”, which operates in the field of legislative competence and has no application to the classification of a single supply under a single statute.
Fourth, on the quality of the adjudication, the Court found that the orders in original substantially reproduced the show-cause notices, almost verbatim, without independent analysis of the producers’ detailed submissions, and that the orders in appeal did not cure the defect. Mere reproduction of facts, submissions or case law, the Court held, is not a reasoned adjudication.
Writ jurisdiction, and the outcome
The Revenue had objected that the petitions should not be entertained because a statutory appeal lay to the GST Appellate Tribunal. The Court held that the dispute involved an error of law going to the root of jurisdiction, apparent on the face of the record, rather than disputed questions of fact, and that there was no functional GST Appellate Tribunal at the relevant time. On that footing, and relying on Supreme Court authority, it entertained the writ petitions. Rather than remit the matter to the adjudicating authority, the Court, finding the jurisdictional errors apparent on the record, allowed the petitions and set the impugned orders aside, with no order as to costs. This was a final quashing of the orders, not a remand.
Why this matters for the media and entertainment industry
The decision is significant well beyond the two producers before the Court. The entire content economy now moves digitally, and tax authorities have, in several contexts, treated digital delivery as a reason to recharacterise a supply. This judgment draws a clear line: digital transmission does not convert copyright content into software, and the classification of a licensing transaction must follow its essential character. For film producers, studios, streaming and broadcast platforms, and content distributors, the reasoning is a useful anchor against reclassification of content licensing as a software or technology supply, and a reminder that the correct service code, and the statutory definition, must be applied rather than assumed. It is also a reminder, for any party facing a tax demand, that an adjudication which merely repeats the notice, without engaging the taxpayer’s case, is vulnerable, and that a pure error of law going to jurisdiction can be tested in the writ court.
Frequently Asked Questions
cinematographic-film-licensing
No. The Bombay High Court held that a cinematographic film is a passive audiovisual work, not information technology software, and does not become software because it is supplied digitally. The licensing of film rights corresponds to the service code for broadcasting and showing rights in original films, not the code for computer software.
No. The Court held that classification depends on the dominant nature and essential character of the supply, not the mode of transmission. A film delivered on an encrypted hard disk or electronically remains a licensing of copyright in a film.
The producers had applied the rate for licensing of intellectual property rights in goods other than information technology software (12 percent), while the Revenue sought the rate for information technology software (18 percent). The Court set aside the reclassification to software. Rates, entries and service codes should be checked against the applicable notifications as they stand.
Can a GST classification dispute be taken to the High Court by writ despite an alternative remedy?
The Court entertained the writ petitions because the dispute involved an error of law going to the root of jurisdiction, apparent on the record, and not disputed questions of fact, and because there was no functional GST Appellate Tribunal at the relevant time. Whether a writ lies in any given case depends on its own facts.
Because they reproduced the show-cause notices almost verbatim without independent analysis, did not apply the statutory definition of information technology software, and relied on grounds raised belatedly or legally inapplicable, such as the online-database-access concept and the aspect theory. Mere reproduction of facts and submissions, the Court held, is not a reasoned adjudication.
The Dharma Productions decision provides significant guidance on a question that the digital shift had made genuinely contestable: a film is still a film, and the licensing of its copyright does not become a software supply merely because the file travels down a wire. For an industry whose transactions increasingly move through digital channels, the judgment reinforces that GST classification must follow the essential character of the supply rather than the mode by which it is delivered.
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