The **Bombay High Court has ruled that licensing a feature film or web series does not become "Information Technology Software" merely because the studio handed over master video files using encrypted hard drives or secure digital download links. According to reports from Rediff Moneynews, a bench of Justices M S Karnik and Sandesh Patil held that the mode of delivery remains irrelevant to tax classification, with the court stating there is no statutory basis to equate digital content with software. The court emphasized that there is nothing on record to show how a cinematographic film, described as a passive audio-visual work incapable of execution, manipulation or interactivity, could ever satisfy the statutory definition of 'information technology software'. The court observed that the method used to transmit the content cannot determine its tax treatment, establishing a crucial precedent for digital content classification under GST.
The state tax department had raised a tax demand of ₹79.7 crore for the period between financial years 2017-18 and 2020-21, claiming that delivering film content through digital links or hard disks brought the transaction under IT software services. As reported by Rediff Moneynews, tax authorities had treated the transactions as licensing of IT software under Services Accounting Code (SAC) 998340, attracting 18 per cent Goods and Services Tax (GST). The dispute concerned the classification of copyright licensing of films, with the court noting that whether the content is transmitted physically through hard disks or electronically, the mode of delivery cannot determine classification. Between July 2017 and March 2021, Dharma Productions licensed theatrical, satellite, and digital streaming rights for its films to various distributors and television networks.
According to the court judgment passed on September 10, Dharma Productions and Dharmatic Entertainment filed a plea challenging the demand, arguing they were licensing intellectual property rights in cinematographic films under SAC 997332, which attracted 12 per cent GST during the relevant period. The court emphasized that there is nothing on record to show how a cinematographic film, described as a passive audio-visual work incapable of execution, manipulation or interactivity, could ever satisfy the statutory definition of 'information technology software'. The bench held that whether the content is transmitted physically (hard disks) or electronically, the mode of delivery cannot determine classification, adding that there was no statutory basis to equate digital content with software. The court dismissed the state's objection regarding the availability of an alternative remedy before the tribunal, noting that when administrative authorities act by fundamentally misinterpreting statutory definitions, the High Court's constitutional writ jurisdiction under Article 226 is available to correct injustice.
The origins of the dispute date back to October 5, 2020, when the Maharashtra State GST department initiated search and inspection proceedings under Section 67 of the MGST Act against Dharma Productions Pvt. Ltd. and Dharmatic Entertainment Pvt. Ltd. During their inquiry, tax officials examined the operational steps involved in delivering the movies, rather than sending physical film reels in metal canisters—an obsolete practice in modern filmmaking. The studio transferred master copies through password-protected external hard disks or sent high-speed, encrypted download links. The tax department issued show-cause notices asserting that Dharma had misclassified its business, arguing that transferring digital video files over internet servers or encrypted drives amounted to supplying "Information Technology Software" under SAC 998340, which carried an 18% GST rate. The tax department demanded the 6% rate differential across four years of production revenue, issuing assessment orders that totaled ₹79.7 crore, excluding interest and penalties. Dharma challenged the assessment orders before departmental appellate authorities, but their pleas were rejected, prompting them to file writ petitions directly before the Bombay High Court.
