Madras High Court Orders: In a case filed by SPM Arts LLP against the film production company Shri Abishek Pictures and its partner, Abhishek Venkat Nama, the Madras High Court has ordered the two to pay jointly and severally ₹1.22 crore to SPM Arts LLP regarding the non-payment of GST on the dubbing rights of the Telugu film, ‘Saakshyam.’ It brings out the significance of tax provisions in contracts and the financial implications that enterprises could suffer due to GST collection/ accounting not being deposited to the government in cases of such agreements.
The dispute emerged out of a business contract made on February 5, 2018, where SPM Arts LLP had entered into a contract for exclusive rights for dubbing of the film in Hindi language and other languages of India other than Tamil, Telugu, Kannada and Malayalam. The total consideration for the same was ₹7.50 crore including GST.
As per the reported order, SPM Arts LLP had paid the entire amount as consideration, but a part of the total GST applicable was not deposited by the producer. It led to tax proceedings against the rights holder as well as a commercial recovery suit in the Madras High Court.
The case has value because it highlights how a disagreement between the parties regarding contractual taxes can become a significant commercial liability despite the payment of the agreed consideration by the buyer.
Background of the Saakshyam Dubbing Rights Agreement
Saakshyam is a Telugu film produced by Shri Abishek Pictures and released on 27th July 2018. SPM Arts LLP, a company in the business of buying and selling film copyrights and rights, signed a contract with the production company for exclusive dubbing rights.
SPM Arts LLP got the permission to dub the film into Hindi and other Indian languages, but not into Tamil, Telugu, Kannada and Malayalam under the deed of assignment dated February 5, 2018. The consideration for the assignment agreed to was ₹7.50 crore inclusive of GST and tax deducted at source (TDS).
SPM Arts LLP said it had paid the producer the entire consideration prior to the release of the movie. But the tax portion was not entirely paid, the plaintiff’s suit alleges. According to the producer, he paid ₹37.50 lakh in GST on one invoice, and the remaining amount of around ₹42.86 lakh was not paid.
The buyer of the rights was later held liable to various proceedings initiated by the GST Department, which were based on a demand much greater than the liability for the outstanding tax component of the unpaid tax.
How the Unpaid GST Dispute Escalated
Things were complicated by the issuance of a GST show cause notice to SPM Arts LLP in September 2022 for outstanding tax liabilities. GST authorities issued a demand of around ₹4.36 crore with reference to various transactions, including the Saakshyam dubbing rights transaction. Prior to the appellate authority, SPM Arts LLP filed an appeal against the demand and deposited the sum of ₹43,60,000, which is ten per cent of the demand.
The company argued that it had paid all the monies due under the contract, and the producer was liable for the appropriate GST. The tax proceedings continued, and SPM Arts LLP had filed a commercial suit against the producer and its partner for recovery of ₹1,22,66,092. The disputed GST, interest, and penal interest over the alleged default were included in the claim.
Plaintiff also requested interest at the rate of 24% per annum. The main argument was that the buyer should not be responsible for the producer not paying the taxes according to their agreement.
Key Legal Issue Before the Madras High Court
The main question for the Court was whether the producer and its partner were contractually required to cover the tax arrears and other amounts of the GST that were not deposited by them. The dispute also highlighted an important distinction between an obligation under contract and a statutory liability. GST may be payable or deposited under a commercial agreement. The tax department does have a statutory remedy to collect the unpaid tax, however, and it is not always possible to prevent tax department intervention through a private arrangement.
Hence, despite a producer agreeing to pay GST under a contract, the other party might be liable to a tax action by the tax authorities if such statutory conditions are not met. The Court needed to review the agreement, invoices, payment history and correspondence to see if the defendants acknowledged the responsibility for paying the GST and if the plaintiff had met its burden to prove a claim for payment of the GST.
The court in Madras has given its findings and observations in the case. The court in Madras has made its findings and observations in the case. The documentary evidence submitted by SPM Arts LLP, such as the deed of assignment, invoices and proof of payment, along with a letter from the producer, accepting to pay the GST, was reviewed by the Madras HC.
The Court concluded that the contractual liability for the said GST payment would be that of Shri Abishek Pictures and its partner. SPM Arts LLP had paid the agreed consideration, and the remaining tax had been unpaid by the defendants, leading to proceedings against the plaintiff.
The Court then concluded that the plaintiff was entitled to recover the GST arrears, interest, and penal interest from the defendants, who are responsible under the agreement. The ruling is in line with a fundamental rule of the business world: a party who performs its contractual obligations can take legal action against the party who is not performing its contractual obligations.
The Court, however, did not find that the GST Department has lost the power to recover the tax from SPM Arts LLP. It specifically outlined that the authorities could pursue a claim against the plaintiff under the existing law, subject to the result of an appeal. The decision therefore did not jeopardise the tax department’s own statutory authority but merely affirmed the buyer’s contractual rights to recover.
Madras High Court’s Findings and Observations
The Madras High Court partly decreed the commercial suit and directed Shri Abishek Pictures and Abhishek Venkat Nama to jointly and severally pay ₹1.22 crore to SPM Arts LLP. The Court also imposed interest of 24% per annum from the date of filing of the suit till the date of the decree. There was to be interest at 6 per cent per annum after the decree until the amount was realised.
The defendants were also ordered to pay the expenses of the proceedings, including the cost of the GST authorities impleaded in the proceedings. The order is significant as it has financial implications beyond the unpaid GST amount. When a commercial tax dispute goes unresolved, interest and litigation costs can considerably add up to the amount payable.
Madras High Court Orders: Final Order, ₹1.22 Crore Plus Interest
Partly ruling in favour of them, the Madras High Court ordered Shri Abishek Pictures and Abhishek Venkat Nama to pay ₹1.22 crore to SPM Arts LLP, jointly and severally. The Court also directed interest on the money from the date of the filing of the suit till the decree. Following the Decree, interest was to accrue at 6% per annum until it was realised. Costs of the suit were also imposed on the defendants, including the costs incurred by the GST authorities impleaded in the proceedings.
It is important to note that the order matters since the financial repercussions of the unpaid GST amount go beyond that. When a commercial tax dispute is unresolved, the interest and litigation costs can be a significant portion of the total cost paid. It is also crucial to note that the Court’s judgment was to recover damages from the producer and its associate. The direction was not to pay ₹1.22 crore straight to SPM Arts LLP, as the government would do so.
What the Judgment Means for Businesses and Film Producers
The ruling would be of use to businesses engaged in film production, copyright transfer, licensing, distribution and other transactions where GST is applicable.First, it is important that the contracts make it clear who is responsible for charging, collecting, depositing and reporting GST. When a tax demand occurs, there can be disagreements as to who will be responsible for the tax due under vague provisions.
Secondly, a business can’t automatically presume that as soon as they receive payment or they issue an invoice, the corresponding GST is being paid. Suitable tax documentation and tax reconciliation process are critical.Thirdly, when the agreement imposes the obligation for the seller/service provider to pay GST, buyers should ensure that there is documentary proof of tax compliance. Contractual indemnity provisions can also be used to help mitigate losses if there is a tax default, but it depends on the terms of the Contract and the applicable law.
Fourth, assignment deed, invoice, payment confirmations, GST returns and written correspondence should be kept by both parties. These documents can prove invaluable in the event of a court tussle.Lastly, companies need to be aware that even if the allocation of tax falls outside the contract, the tax authorities have the powers to take action under the statute. A recovery claim against its counterparty may be merited, but still it may be necessary to respond to proceedings brought by the tax department in its own right.