2005 (4) TMI 340 - AT - Service Tax

Consulting Engineer - Technical Collaboration Agreement - Whether the exchange between the parties, in terms of the Technical Collaboration Agreement, was providing consulting engineering service and payment for it or exchange of intangible property - HELD THAT - A perusal of the Agreement brings out the character, content and consideration for the relationship. The recital reproduced above brings out that the Japanese company owns technical information, trade marks and other intellectual property rights such as design, patent and utility models relating to motorcycle and parts and that the Indian company is desirous of acquiring such knowledge, patent, design, trade mark owned by that Japanese company. Clauses 9, 10 and 11 also clearly show that the Agreement was for licensing the transfer of intellectual property rights. Article 2 relating to grant of license makes it clear that what is being done is the grant of an exclusive non-transferable and indivisible license. The teaching service part covered by Article 5 speaks of personnel instructions and training carried out by the personnel of the foreign collaborator in order to make them understand or become familiar with the technical information . Thus, the teaching element also forms part of transfer of know-how. Article 7 relating to payment also mentions the consideration for the payment as Technical Information and Intellectual Property Rights and Trade- marks to be used in connection with products and parts . Thus, the consideration is not for any consultancy service rendered. It is for the transfer of intellectual property. The relationship between the parties is not one of consultant and client; but seller and buyer of assets. In Bajaj Auto Limited v. CCE, Aurangabad 2004 (10) TMI 11 - CESTAT (MUMBAI) this Tribunal held that royalty for right to use trade mark is a transaction in property and no consultancy or advice is involved, and same is not liable to Service tax. To the same effect is the decision of this Tribunal in the case of Aviat Chemicals Pvt. Ltd. v. CCE (Service Tax), Mumbai 2004 (6) TMI 2 - CESTAT, NEW DELHI . The decision of this Tribunal in the case of Trans Weigh (India) Ltd. 2004 (5) TMI 4 - CESTAT, MUMBAI , which has been relied upon by the Revenue, is also not of any assistance to the Revenue inasmuch as, in that case, the appellant who was a manufacturer of machinery was also rendering technical services towards installation, erection etc. of the machine and amounts were being charged for that service. It is in that factual situation that the Tribunal held that the consultancy service rendered attracted Service tax. This judgment only supports the proposition that, if a manufacturer undertakes consultancy in addition to manufacture, it will be liable to tax in regard to the service rendered. It has no application to where the agreement is, as in the present case, for transfer of intellectual property and no consultancy service is rendered. Further, the value of incidental advice, if any, cannot be cut out and subjected to service tax. Thus, the impugned order is set aside and the appeal is allowed.

Summary

Issues:
1. Whether the Technical Collaboration Agreement between the parties constitutes consulting service attracting Service Tax.
2. Whether the payment made under the Agreement falls under the category of consulting engineer service.
3. Whether the Agreement involves the exchange of intangible property or provision of consulting engineering service.

Analysis:
1. The appellant company entered into a Technical Collaboration Agreement with a Japanese company for manufacturing motorcycles in India. The agreement involved the transfer of technical information, intellectual property rights, and trademarks. The Commissioner held that the agreement amounted to consulting service, attracting Service Tax. The appellant's claim for a refund was denied, leading to the present appeal challenging the order.
2. The appellant argued that the agreement was primarily for the transfer of assets and not for consulting services. They highlighted that the Japanese company was transferring existing assets and not providing consulting as a Consulting Engineer. The appellant contended that even if some advice was involved, the agreement should not be dissected into parts for taxation purposes.
3. The Tribunal analyzed the Agreement and found that it primarily focused on the transfer of intellectual property rights rather than consulting services. The clauses of the Agreement clearly indicated the licensing of technical information and intellectual property. The relationship between the parties was deemed as that of a seller and buyer of assets, not a consultant-client relationship. Various definitions of royalty were presented during the hearing to support the contention that the payment under the Agreement was for the use of intellectual property rights, not for consulting services.
4. The Tribunal referred to previous judgments where it was held that royalty payments for the use of technology or trademarks do not attract Service Tax as they involve transactions in property, not consultancy services. The Tribunal differentiated cases where manufacturers provided consultancy services in addition to manufacturing from cases involving the mere transfer of intellectual property. Based on the analysis, the impugned order was set aside, and the appeal was allowed.