2005 (12) TMI 560 - AT - Service Tax

Summary

Issues Involved:
1. Whether the technical know-how fee/royalty paid by the respondents to their foreign collaborators falls under the purview of service tax.
2. Whether the agreement between the respondents and their foreign collaborators constitutes a transfer of technology or a service transaction.
3. Examination of the definitions and interpretations of "royalty" and its tax implications.
4. Analysis of relevant case laws and their applicability to the current case.

Detailed Analysis:

1. Service Tax on Technical Know-How Fee/Royalty:
The primary contention of the Revenue is that the technical know-how fee/royalty paid by the respondents to their foreign collaborators should attract service tax. The show cause notice issued on 10-9-2003 suggested that these payments could be considered as a service received by the respondents, thereby attracting service tax. However, the Commissioner (Appeals) observed that the agreement between the parties did not indicate any invoices for engineering services, and the payments were solely related to royalty as per the agreement. Thus, the demand for service tax based on these royalty payments was set aside.

2. Agreement Analysis - Transfer of Technology vs. Service Transaction:
The Commissioner (Appeals) concluded that the royalty payments were for the transfer of technology, which is considered a transfer of property, not a service. This was supported by the Tribunal's decision in M/s. Navinon Ltd. v. Commissioner of Central Excise, Mumbai-VI, where it was held that such payments are for the transfer of property and not for services rendered. The CESTAT observed that there was no reliable evidence to prove that the royalty payments were for services rather than for the transfer of technology.

3. Definition and Interpretation of "Royalty":
The term "royalty" was defined based on the Concise Oxford Dictionary, indicating that it refers to payments for the use of intellectual property such as patents, trademarks, or know-how. The Tribunal emphasized that royalty payments are distinct from payments for services and are more akin to fees for the use of intellectual property.

4. Relevant Case Laws:
The respondents relied on several Tribunal decisions to support their case:
- Navinon Ltd. v. Commissioner of Central Excise, Mumbai-VI: Payments of royalty are not for services but for the use of property.
- Bajaj Auto Ltd. v. Commissioner of Central Excise and Customs, Aurangabad: Royalty payments for the right to use trademarks are not subject to service tax.
- M/s. Samsung Electronics Co. Ltd. v. Commissioner of Central Excise, Noida: Know-how, patents, and trademarks are intellectual properties, and trading in them is not a service but a transfer of property.
- Yamaha Motors (India) P. Ltd. v. CCE, Delhi-IV: Transfer of intellectual property does not constitute a consultant-client relationship but a seller-buyer relationship.

The Revenue cited the following High Court judgments:
- V. Shamughavel (Dr.) v. Commissioner of Central Excise, Chennai-II: The court held that services rendered by a consulting engineer, including valuation of immovable property, fall under the purview of service tax.
- M.N. Dastur & Company Ltd. v. Union of India: The court held that services rendered by consulting engineers are taxable under the Finance Act.

Conclusion:
The CESTAT concluded that the Revenue did not provide sufficient evidence to prove that the royalty payments were for services rendered by the foreign collaborators. The agreement indicated a transfer of know-how involving royalty payments. The Commissioner (Appeals) correctly determined that the demand for service tax on these payments could not be sustained. Consequently, the appeal filed by the Revenue was dismissed.