2016 (2) TMI 811 - HC - Service Tax

Reverse change - the matter in issue was as to whether royalty paid/received as consideration for transfer of technology know how can form part of taxable value and whether the said issue would come within the province of rate of duty or to the value of the goods for the purpose of assessment as envisaged U/Sec. 35G is required to be considered. - Constitutional validity of sosecond proviso to Rule 6 and Rule 2(1)(d)(iv) of Service Tax Rules, 1994 - Held that - whether the royalty paid would come within the ambit and purview of service tax is a question required to be determined. Considering the judgments as referred above, so also sub section 2 of Section 35L of the Central Excise Act as introduced recently, it would be clear that the said issue will come within the scope of the terminology rate of duty for the purpose of assessment . In the light of that, the appeal U/Sec. 35G would not be maintainable. - Decided against the assessee.

Issues Involved:
1. Validity of the show cause notice demanding service tax.
2. Legality of the second proviso to Rule 6 and Rule 2(1)(d)(iv) of the Service Tax Rules, 1994.
3. Maintainability of the appeal under Section 35G of the Central Excise Act.
4. Classification of technical assistance fee and royalty under service tax.

Issue-wise Detailed Analysis:

1. Validity of the Show Cause Notice Demanding Service Tax:
The petitioner, an assessee, challenged a show cause notice dated 29th July 2002, which demanded service tax. This challenge was based on multiple grounds, including the claim that the service tax was demanded for a period prior to the effective date of the relevant provision. The court noted that the challenge to the show cause notice would not survive due to a precedent set by the Apex Court in the case of M/s Kerala State Electricity Board vs. The Commissioner of Central Excise, which held that the service recipient is liable to pay service tax and interest. Consequently, the writ petition was disposed of, allowing the challenge to be considered during the proceedings pursuant to the show cause notice.

2. Legality of the Second Proviso to Rule 6 and Rule 2(1)(d)(iv) of the Service Tax Rules, 1994:
The petitioner sought a declaration that these rules were ultra vires as they conflicted with Section 68 of the Finance Act. However, this challenge was rendered moot by the Supreme Court's decision in the Kerala State Electricity Board case, which upheld the liability of the service recipient to pay service tax. Therefore, the court did not entertain this aspect further.

3. Maintainability of the Appeal under Section 35G of the Central Excise Act:
The court first addressed the maintainability of the appeal filed under Section 35G. The respondent argued that the appeal was not maintainable as it concerned the "rate of tax," which falls under Section 35L, not Section 35G. The court examined relevant provisions and precedents, including the Karnataka High Court's decisions and the Supreme Court's ruling in Kunhayammed vs. State of Kerala. It was determined that disputes involving the classification of goods or services, or their taxability, relate to the rate of duty and should be appealed under Section 35L. Consequently, the court concluded that the appeal under Section 35G was not maintainable and disposed of the appeal with liberty to the department to file an appeal under Section 35L.

4. Classification of Technical Assistance Fee and Royalty under Service Tax:
The respondent contended that the technical assistance fee and royalty paid under an agreement with Kawasaki Heavy Industries, Japan, should not be classified as services subject to service tax. The CESTAT had previously ruled that the right to use a trademark is a transaction in property, not consultancy or advice, and thus not subject to service tax. The court noted that determining whether such payments fall within the scope of service tax involves interpreting the rate of duty for assessment purposes. The court referenced Section 35L(2), which includes the determination of taxability within the scope of rate of duty, reinforcing that such issues should be appealed under Section 35L.

Conclusion:
The court disposed of the writ petition challenging the show cause notice and the legality of certain Service Tax Rules, given the Supreme Court's precedent. The appeal under Section 35G was deemed not maintainable, with liberty granted to the department to pursue an appeal under Section 35L. The classification of technical assistance fees and royalties as services subject to tax was recognized as an issue related to the rate of duty, thus falling under Section 35L.

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