2016 (7) TMI 559 - AT - Service Tax

Intellectual Property Service (IPR) - IPRs covered under Indian Law in force - import of services - taxability - extended period of limitation - appellants entered into License Agreement with foreign companies and obtained rights to use the technology for manufacture in consideration of which they had paid technical know-how fees and royalty charges - period from 01.01.2006 to 31.12.2006 - The appellants state that these foreign companies transferred licensed use of their technical information, know-how and trade secrets which are not registered under any Indian law for time being in force. - Scope of Section 65(55a) of Finance Act, 1994. Held that - the subject matter(s) of transfer of various documents/drawings, designs, softwares, catalogues, technical assistance/training documents/symbol numbering system etc., done under respective agreements which are on the record of these proceedings are not covered under the definition of the subject matter(s) of transfer of various documents/drawings, designs, softwares, catalogues, technical assistance/training documents/symbol numbering system etc., done under respective agreements which are on the record of these proceedings are not covered under the definition of Intellectual Property Right as given in Section 65(55a) of Finance Act 1994 and consequently subject transfers of right to intellectual property , if any, covered by those transactions do not come within the definition of Intellectual Property Service given in Section 65(55b) of the Finance Act, 1994 and the service(s) if any, provided by the foreign companies by way of transfer of subject matter(s) under respective agreements to the appellants cannot be covered under the taxable service of Intellectual Property Service as defined under Section 65(105)(zzr) of the Finance Act, 1994 Intellectual Property Right as given in Section 65(55a) of Finance Act 1994 and consequently subject transfers of right to intellectual property , if any, covered by those transactions do not come within the definition of Intellectual Property Service given in Section 65(55b) of the Finance Act, 1994 and the service(s) if any, provided by the foreign companies by way of transfer of subject matter(s) under respective agreements to the appellants cannot be covered under the taxable service of Intellectual Property Service as defined under Section 65(105)(zzr) of the Finance Act, 1994. Demand set aside - Decided iin favor of assessee.

Issues Involved:
1. Whether the transfer of technical know-how/technology under various license agreements is covered under the taxable service of "Intellectual Property Service"?
2. Whether the transferred know-how is recognized as an Intellectual Property Right under any Indian law?
3. Whether the burden of proving that the technical know-how is an Intellectual Property Right covered under Indian law lies with the revenue?
4. Whether the issue is one of revenue neutrality?
5. Whether interest and penalties are payable?

Detailed Analysis:

Issue 1: Whether the transfer of technical know-how/technology under various license agreements is covered under the taxable service of "Intellectual Property Service"?
The Tribunal examined whether the transfer of technical know-how and technology under various license agreements falls under "Intellectual Property Service" as defined in Section 65 of the Finance Act, 1994. The impugned order confirmed the demand of service tax on the grounds that the appellants received technical know-how on a temporary basis and paid royalty, which would fall under the definition of Intellectual Property Services. However, the Tribunal noted that the agreements involved the transfer of technical information, know-how, and trade secrets, which are not registered under any Indian law.

Issue 2: Whether the transferred know-how is recognized as an Intellectual Property Right under any Indian law?
The Tribunal referred to Section 65(55a) of the Finance Act, 1994, which defines Intellectual Property Right as any right to intangible property such as trademarks, designs, patents, or any other similar intangible property under any law for the time being in force, but does not include copyright. The Tribunal found no evidence that the transferred know-how, designs, or other documents were covered under any Indian law concerning Intellectual Property Rights. The Tribunal emphasized that the transferred know-how and trade secrets were not registered under any Indian law and thus did not qualify as Intellectual Property Rights.

Issue 3: Whether the burden of proving that the technical know-how is an Intellectual Property Right covered under Indian law lies with the revenue?
The Tribunal held that the burden of proving that the technical know-how transferred to the appellant is an Intellectual Property Right covered under Indian law lies with the revenue. The Tribunal cited various case laws supporting the principle that in taxation cases, the burden of proving the necessary ingredients prescribed by the taxing provision is entirely upon the taxing authority. The Tribunal found that the revenue failed to prove that the transferred know-how was covered under any Indian law as an Intellectual Property Right.

Issue 4: Whether the issue is one of revenue neutrality?
The appellants argued that the entire issue is one of revenue neutrality, as they are entitled to take credit for the service tax paid. The Tribunal agreed with the appellants, citing various case laws that support the principle that where payment of duty results in a situation of revenue neutrality, no intention to evade payment of duty can be attributed to the person liable to pay duty.

Issue 5: Whether interest and penalties are payable?
The Tribunal held that since no service tax is payable, no interest can be levied under Section 75 of the Act. The Tribunal also noted that Section 80 provides for the waiver of penalties if the assessee proves that there was reasonable cause for the failure. The Tribunal found that the appellants had reasonable cause and thus waived the penalties.

Conclusion:
The Tribunal concluded that the transfer of technical know-how and technology under the license agreements did not fall under the taxable service of "Intellectual Property Service" as defined in the Finance Act, 1994. The Tribunal allowed the appeal with consequential benefits, if any, to the appellants. The Tribunal emphasized that the transferred know-how and trade secrets were not covered under any Indian law concerning Intellectual Property Rights and thus did not qualify for service tax under the category of Intellectual Property Service.

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