2016 (10) TMI 309 - AT - Service Tax

Service tax liability - Intellectual Property Rights - whether the manufacturing/tie up based agreement entered into by the appellant-assessee with bottlers can be considered as agreement for payment of royalty by the bottlers to the appellant-assessee liable to service tax as held by the impugned order - Held that - on careful perusal of the terms of both agreements, we find that there are substantial material differences and the tie up agreement cannot be considered for service tax liability under the category of royalty payment. We find that though the lower authority noted the contents of both Board s circular dated 27.10.2008 to the effect that tie up based agreements are not covered the IPR services for service tax, he proceeded to record that in the present case manufacturing agreement are essentially same as royalty based agreement except for difference of methodology used for calculation of royalty. We also find that the lower authorities fell in error in appreciating the provisions of the terms of contract vis-a-vis the position categorically clarified by the Board on 27.10.2008 and 30.10.2009. - No service tax liability - Decided in favour of appellant

Summary

Issues:
1. Service tax liability on amounts received under manufacturing/tie-up based agreement.
2. Variations between manufacturing/tie-up based agreement and royalty based agreement.
3. Interpretation of terms of contract for service tax liability.

Analysis:
The judgment involves two appeals against the same order regarding service tax liability on royalty and manufacturing/tie-up agreements. The main issue is determining whether the manufacturing/tie-up based agreement can be considered as an agreement for royalty payment liable to service tax. The Tribunal examined the agreements and found material differences in their scope and application. In tie-up agreements, bottlers act as manufacturers under license, receiving a fixed bottling fee with expenses reimbursed separately. The profit/loss on sales accrues to the appellant, who controls the manufacturing process. The Tribunal noted that tie-up agreements do not involve fixed royalty payments, unlike royalty agreements. Despite the lower authority's view, the Tribunal emphasized the differences and clarified that tie-up agreements do not attract service tax as royalty payments.

The Tribunal referenced previous decisions on similar cases, highlighting that in manufacturing/tie-up agreements, there is no basis for service tax levy on the brand owner. Notably, the Tribunal mentioned specific cases like Diageo India Pvt. Ltd., SKOL Breweries Ltd., BDA Ltd., and Radico Khaitan Ltd., where it was held that service tax liability does not apply to brand owners in tie-up agreements. The judgment also mentioned that the Revenue's appeal in BDA Ltd. was dismissed by the Supreme Court, reinforcing the Tribunal's stance. Considering these precedents and the facts of the case, the Tribunal found no merit in the impugned order and set it aside, allowing the appeal of the assessee. Consequently, the appeal filed by the Revenue for an extended period of demand was rejected.