2018 (8) TMI 1172 - AT - Service Tax

Intellectual Property Service - assessee paid royalty of 1.3% of the net selling price of Ceramic Fibre Products to Morgan Crucible Co. Plc. UK. - demand from 18-04-2006 - Held that - The said Agreement required the assessee to pay royalty annually to their foreign service provider, based at 1.3% of ceramic refractory fibre sales. As per the two related show cause notices dated 11.8.2008 and 02.02.2009 such payments have been made from September 2004 to December 2006 and January 2007 to December 2007 respectively. No infirmity is then found in the inclusion of Lower appellate authority in para 5.1 of the impugned order that transfer of knowhow is not a onetime affair for which royalty charges are being paid even during the disputed period. Assessee are liable to pay service tax, with interest thereon, on the Royalty charges paid, only w.e.f. 18.04.2006, i.e. after enactment of Section 66A of the Act - appeal allowed - decided in favor of Revenue.

Summary

Issues:
1. Liability of service tax under Intellectual Property Service for royalty payments made prior to 10.09.2004.
2. Demand of service tax under reverse charge from 1.1.2005.
3. Imposition of penalties under Section 76 & 78 of the Act.

Analysis:
1. The case involved the liability of service tax under the category of Intellectual Property Service for royalty payments made by the assessee prior to 10.09.2004. The department contended that the assessee is liable to discharge service tax liability under this category. The lower appellate authority modified the order to restrict the tax demand and set aside penalties imposed. The assessee argued that no tax liability should exist for services rendered before 10.09.2004. However, the Tribunal found that the agreement required royalty payments annually based on sales, and payments were made from September 2004 onwards. The Tribunal upheld the lower appellate authority's decision, stating that service tax liability on royalty charges arose only from 18.04.2006, after the enactment of Section 66A of the Act. The appeal of the assessee was dismissed.

2. The department appealed to confirm the demand of service tax under reverse charge from 1.1.2005. The counsel for the department cited legal precedents to support their position, including judgments from the Bombay High Court and the Supreme Court. The Tribunal noted the legal arguments presented but ultimately dismissed the department's appeal on monetary grounds as the amount involved was below the specified limit for filing appeals before the Tribunal. The Revenue's appeal was rejected based on the monetary limit criteria.

3. Regarding the imposition of penalties under Section 76 & 78 of the Act, the counsel for the assessee argued that if there was a liability for tax payment, the assessee could avail cenvat credit, making the situation revenue-neutral. Citing a Tribunal decision, the counsel contended that no malafide intention could be attributed to the assessee. The Tribunal agreed with the lower appellate authority's decision to set aside the penalties, considering the revenue-neutral aspect and lack of malicious intent. The penalties were not imposed, and the appeal of the Revenue was dismissed based on the monetary limits set for filing appeals before the Tribunal.

In conclusion, the Tribunal upheld the lower appellate authority's decision on the liability of service tax under Intellectual Property Service, dismissed the appeals of both the assessee and the Revenue, and set aside the penalties imposed under Section 76 & 78 of the Act.