2018 (2) TMI 1034 - AT - Service Tax

100% EOU - service tax and education cess on the royalty paid - intellectual property service - services of temporary transfer of technical know-how - the sole contention of the Department is that such technical know-how is recognised under international treaties to which India is a signatory and hence it is leviable to tax in India - Held that - as per Article 253 of the Constitution of India, for implementing any treaty agreement or convention with any country or any decision made at international conference etc., there should be a municipal legislation enacted for giving effect to such international agreement or treaties - also, the show-cause notice does not clearly state the nature of know-how which the appellant has availed from his foreign company. Demand not sustainable and is set aside - appeal allowed - decided in favor of appellant.

Summary

Issues:
- Appeal against the order passed by the Commissioner(Appeals) upholding the Order-in-Original with reduced penalty.
- Tax liability on services of temporary transfer of technical know-how under "intellectual property services."
- Interpretation of the definition of intellectual property under Section 65(55a) of the Finance Act, 1994.
- Applicability of service tax on the services received from a foreign company.
- Validity of show-cause notice in establishing the tax liability.
- Consideration of international treaties and municipal legislation for tax liability determination.

Analysis:

1. Tax Liability on Services of Technical Know-How:
The appellant, a 100% EOU engaged in manufacturing and exporting spices, received technical know-how services from a foreign company and paid royalty for the same. The issue revolved around whether such services fell under "intellectual property services" as defined in Section 65(55a) of the Finance Act, 1994, making the appellant liable for service tax. The original authority confirmed the demand, which was upheld by the Commissioner(Appeals), leading to the present appeal.

2. Interpretation of Intellectual Property Definition:
The appellant contended that the impugned order failed to appreciate the correct legal position and did not establish the transfer of intellectual property rights. The counsel argued that the definition of intellectual property under Section 65(55a) should be interpreted in the context of Indian laws, as clarified by a circular from the Central Government. Citing relevant case laws, the appellant emphasized that the right to use technical know-how can only be taxed if protected under Indian law.

3. Validity of Show-Cause Notice and Tax Liability Establishment:
The appellant raised concerns about the ambiguity in the show-cause notice, which did not specify the nature of the technical know-how received. It was argued that without a clear imputation of intellectual property rights, the tax liability could not be established. The appellant highlighted the necessity of a legal basis for taxing technical know-how, as supported by judicial precedents.

4. Applicability of Service Tax on Foreign Company Services:
The Department argued that technical know-how recognized under international treaties signed by India is subject to taxation in India. However, the Tribunal, citing relevant case laws, held that receiving technical know-how from a foreign company without being its authorized representative does not attract service tax liability. By following the precedents, the Tribunal concluded that the impugned order was not legally sustainable, setting it aside and allowing the appellant's appeal.

5. Consideration of International Treaties and Municipal Legislation:
In analyzing the tax liability concerning international agreements, the Tribunal referred to Article 253 of the Indian Constitution, emphasizing the requirement for municipal legislation to implement treaty agreements. The lack of clarity in the show-cause notice regarding the nature of technical know-how and the legal basis for taxing such services from a foreign company further supported the decision to overturn the previous orders.

In conclusion, the Tribunal found in favor of the appellant, setting aside the impugned order and providing consequential relief. The judgment highlighted the importance of establishing a legal basis for taxing services, particularly in the context of international agreements and the interpretation of intellectual property definitions under Indian law.