2009 (4) TMI 113 - AT - Service Tax

Intellectual Property Rights Know How Brand Name Agreement of know how and use of brand name was entered into 1990 Held that whether payment for such services rendered is made in one lump sum or made in instalments or based on quantum of sales by the appellant on an annual basis is not relevant to consider as to when the services were actually rendered - the services were rendered in 1990 and for the said services payments were being made periodically as provided in the agreement demand of service tax along with interest and penalty set aside.

Summary

Issues:
Interpretation of service tax liability on royalty payments for Know-How services received under collaboration agreements.

Analysis:
The appellant, engaged in medicine manufacturing, entered into a collaboration agreement with a foreign company to receive 'Know-How' for manufacturing medicines. The Commissioner imposed service tax on royalty payments for the Know-How services. The appellant argued that they received the Know-How in 1990, before the introduction of service tax on Intellectual Property Rights (IPR) services in 2004. They contended that the payments made were for services already received and not taxable. The appellant also argued that the Know-How did not constitute IPR and was a one-time arrangement. The Department, however, claimed that the continuous use of the formula and Know-How constituted ongoing services. They relied on a Tribunal decision stating that recipients are liable to pay service tax when foreign companies provide services. The Tribunal analyzed the agreements and found no evidence of continuous provision of services by the foreign company. The appellant used brand names registered in their own name, indicating a one-time transfer of Know-How. The Tribunal accepted the appellant's argument that the services were rendered in 1990, and payments were made periodically as per the agreement. Consequently, the Tribunal held that no services were rendered or received during the disputed period, leading to the appeal being allowed and the Commissioner's order set aside.

This judgment clarifies the tax liability on royalty payments for Know-How services under collaboration agreements, emphasizing the timing of service receipt and the nature of ongoing services. It highlights the importance of analyzing agreements and evidence to determine the taxability of services rendered and received. The decision provides guidance on distinguishing one-time transfers of Know-How from ongoing services, ultimately impacting the applicability of service tax on such transactions.