2005 (2) TMI 8 - AT - Service Tax

Service Tax Foreign company transfer technology to Indian company on payment of royalty Service tax not sustainable

Summary

Issues:
1. Whether service tax is applicable on the amounts paid by the respondents to the foreign company for transfer of technology.
2. Whether the demand raised by the department is justified based on the terms of the agreement.
3. Whether the provisions of Articles 5 and 6 of the agreement can be invoked to demand service tax.

Detailed Analysis:
1. The appeal was against the demand of service tax on amounts paid by the respondents to the foreign company for technology transfer. The joint venture company entered into a 'Technology Licence Agreement' with the French company for the manufacture and sale of products in India. The Commissioner (Appeals) set aside the demand, stating that the foreign company did not render any taxable service to the respondents, and Rule 6 of the Service Tax Rules 1994 was wrongly invoked for the tax demand.

2. The department's demand was based on the transfer of technology as a taxable service, but the agreement did not mention any service. The Tribunal found that the demand was on the payment made for technology transfer, not for any service. The show cause notice did not refer to Articles 5 and 6 of the agreement for demanding service tax. The Revenue's attempt to use these articles for taxation was deemed unjustified as they did not provide for taxable technical assistance or consultancy.

3. Articles 5 and 6 of the agreement did not support the demand for service tax. Article 5 mentioned technical assistance provided by the foreign company, but the cost was borne by them, and the limit of assistance was not extended at the respondents' cost. Article 6 only covered training of the respondents' engineers abroad, not taxable technical assistance. The demand based on these articles was considered unfounded as the original basis for tax demand was the technology transfer and royalty payment, not technical assistance.

In conclusion, the Tribunal dismissed the appeal, upholding the decision of the Commissioner (Appeals) that the demand for service tax on royalty paid for technology transfer was not justified. The Tribunal found that the grounds raised by the Revenue were beyond the scope of the show cause notice, and Articles 5 and 6 of the agreement did not support the taxation of technical assistance.