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2016 (1) TMI 442 - AT - Service TaxLevy of service tax on the royalty under reverse charge mechanism - Intellectual Property Service - scope of the work namely - The appellant demonstrates and imparts training to the customers who use their software for their own use under specific lock code system. The master key of the locking code system is entirely in the possession of M/s.Fluent Inc.; they are the owners of the said mater key. - Held that - the appellant are a wholly owned subsidiary of Fluent Inc. USA. It can hardly be expected that a company will transfer its intellectual property right to its wholly owned subsidiary. Specific clauses of the Agreement clearly show that the appellant cannot disclose transfer or otherwise make available any software products or copies thereof to others. The appellant is only authorised to retain the trade mark of Fluent Inc which are provided by the latter. Fluent Inc. products sold by the appellant can bear the markings of Fluent Inc. The appellant is merely distributing marketing and supporting set of computer programme known as FI software. There is absolutely no indication of any transfer of intellectual property right on a plain reading of the Agreement. Neither do we find any hidden or deeper meaning in the Agreement which would indicate transfer of intellectual property right. Demand of service tax is set aside - Decided in favor assessee.
Issues:
1. Liability to pay service tax on royalty amount under reverse charge mechanism. 2. Interpretation of the Agreement between the parties. 3. Classification of the service provided under intellectual property service. 4. Applicability of service tax under different categories. 5. Imposition of penalties under Sections 78 and 77. Analysis: Issue 1: Liability to pay service tax on royalty amount under reverse charge mechanism The appellant filed an appeal against the order-in-original passed by the Commissioner of Central Excise, Pune, holding them liable to pay service tax on royalty amount under the reverse charge mechanism. The Commissioner based the liability on Rule 2 (1) (d) (iv) of the Service Tax Rules, 1994 read with Section 66A of the Finance Act. The appellant contested this liability. Issue 2: Interpretation of the Agreement between the parties The Tribunal analyzed the clauses of the Agreement between the appellant and M/s.Fluent Inc. USA to understand the nature of the relationship and services provided. The Agreement outlined the distribution, marketing, and support of computer software known as FI software. It was noted that the Agreement did not involve the transfer of intellectual property rights to the appellant. Issue 3: Classification of the service provided under intellectual property service The Commissioner classified the services provided by the appellant as falling under the category of Intellectual Property Service, as defined under Sections 65 (55a) and Section 65 (55b) read with Section 65 (105) (zzr). The Tribunal scrutinized the statutory provisions related to intellectual property services and found that the services provided did not align with the definition of intellectual property service. Issue 4: Applicability of service tax under different categories The Commissioner held that the service provided was not covered under the Copyright Act, 1957, but was classified as an intellectual property service. The Tribunal disagreed, emphasizing that the Agreement did not involve the transfer of intellectual property rights and that the services provided were limited to distribution, marketing, and support of software. Issue 5: Imposition of penalties under Sections 78 and 77 The Commissioner imposed penalties under Section 78 as well as under Section 77. However, the Tribunal set aside the demand for service tax, leading to the conclusion that the question of imposing penalties did not arise. In conclusion, the Tribunal set aside the impugned order, allowing the appeal with consequential relief, if any, in accordance with the law. The judgment highlighted the importance of interpreting agreements accurately and applying statutory provisions correctly in determining tax liabilities related to intellectual property services.
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