2018 (5) TMI 408 - AT - Service Tax

Intellectual property service - royalty - demerging of units - It was alleged in the show-cause notice that royalty is recoverable not only on the income from operation but from miscellaneous income like sundry balance written back, liquidated damages, fines and penalty charges, foreign exchange difference, sale of scrap, transfer and cancellation fees etc. Held that - AVL was earlier part of the appellant but demerged from the appellant in the year 2008 by a scheme of arrangement and as per the scheme of arrangement, AVL is required to pay royalty to the appellant for use of Sahara brand @ 5% of the annual turnover. - though SITV is separately registered with the Service Tax Department, but it is not a separate legal entity rather it is a division of the appellant who has discharged the service tax liability on behalf of the appellant and this does not tantamount to discharging the service tax liability of another company because the appellant and SITV form part of the same company and it is only a division of the appellant. The division of a company is not a separate company and the payment of service tax by the division would be deemed to be the payment by the company. The demand of ₹ 16,25,553/- is on account of miscellaneous income for which the appellant has not charged any royalty - Held that - the appellant had not raised any invoice for royalty on this amount We also find that during the relevant period 2007-08 and 2008-09, the tax was payable only when the service provider has received the amount as provided in Rule 6 of Service Tax Rules, 1994 - Since in this case, the appellant has not raised invoice for the royalty amount on AVL and accordingly has not received the amount, therefore, as per the provisions contained in Rule 6 of Service Tax Rules, 1994, the appellant is not liable to pay service tax on this amount. Appeal allowed - decided in favor of appellant.

Summary

Issues:
Appeal against order confirming demand for intellectual property service under Section 73(2) of Finance Act, 1994.

Analysis:
1. The appellant, engaged in providing services, had a division named M/S. Sahara India TV Network, Mumbai (SITV), which demerged from the appellant in 2008. The demerger required M/S. Aamby Valley Ltd. (AVL) to pay royalty for using the 'Sahara' brand. The appellant raised invoices on AVL mentioning that service tax would be discharged by SITV, a division of the appellant. The dispute arose when the Commissioner alleged non-payment of service tax on royalty and miscellaneous income by the appellant.

2. The appellant argued that SITV, though separately registered, is not a separate legal entity but a division of the appellant. The appellant contended that the service tax liability paid by SITV should be considered as discharged by the appellant. Citing precedents, the appellant emphasized that payment by a division is deemed as payment by the company. The Commissioner, however, maintained that the appellant is liable for service tax on AVL's incomes.

3. The Tribunal observed that AVL was required to pay royalty to the appellant as per the demerger scheme, with invoices specifying SITV as the service tax payer. The Tribunal agreed that SITV, being a division, not a separate entity, discharging service tax does not absolve the appellant's liability. Relying on case law, the Tribunal emphasized that separate divisions do not equate to separate legal entities. The demand on miscellaneous income without royalty charges was also rejected, as per Rule 6 of the Service Tax Rules, 1994.

4. Ultimately, the Tribunal held that the impugned order was unsustainable in law. The order was set aside, allowing the appeal in favor of the appellant. The judgment highlighted the legal distinction between divisions and separate entities, emphasizing that payment by one division does not discharge the tax liability of the entire company.