2018 (12) TMI 866 - AT - Service Tax

Transfer of intellectual property right service - transfer of Goodwill - scope of definition under section 65(55b) of Finance Act,1994 - Held that - The Tribunal in the case of Alstom T D 2018 (2) TMI 148 - CESTAT CHENNAI had occasion to analyze a similar issue wherein a trademark which was registered / recognized outside India was subject to levy of service tax under IPR service. The Tribunal relied upon various decisions and held that the transfer of such trademark which has not been recognized or registered within India will not fall within the ambit of Intellectual Property Right Service. The transfer of goodwill will not fall within the definition of IPR service as stated in Section 65(55b) of Finance Act, 1994. Valuation and quantification of demand - The demand raised is based on the Transfer of Business Agreement (425.25 crores) from which the value for transfer of goodwill is derived by the department on the basis of trademark license agreement - Held that - We fail to understand how the department can base this agreement to arrive at the value of goodwill when the fee for use of trademark agreed between parties to be 8.5% of annual domestic sale made by Mobis India Ltd. There is no domestic sale of good will annually - such a valuation derived by the department for the goodwill is also without any logic or basis. Demand do not sustain - appeal allowed - decided in favor of appellant.

Issues Involved:

1. Whether the transfer of goodwill falls within the definition of "transfer of intellectual property right service" under section 65(55b) of the Finance Act, 1994.
2. The valuation and quantification of the demand for service tax on the alleged transfer of goodwill.

Detailed Analysis:

Issue 1: Definition and Taxability of Goodwill as Intellectual Property Right

The primary issue for consideration is whether the transfer of goodwill falls within the definition of "transfer of intellectual property right service" as defined under section 65(55b) of the Finance Act, 1994. The appellants argued that goodwill is not an intellectual property right and even if transferred, it would not attract the levy of service tax. They referenced the definition of "Intellectual Property Right" in Section 65(55a) of the Finance Act, 1994, which includes trademarks, designs, patents, or any other similar intangible property recognized under the intellectual property law in force in India. The appellants contended that goodwill does not fall under this definition, as it is a fluid asset dependent on various extraneous factors, unlike well-defined intellectual property rights recognized by law.

The appellants further cited the Supreme Court's observation in Ramnik Vallabhdas Madhavani Vs. Taraben Pravinlal Madhvani, which defined goodwill as the value of a business in the hands of a successor, emphasizing its dependence on the continuity of the undertaking and its reputation. They argued that there is no law in India recognizing or protecting goodwill as an intellectual property right. The department's interpretation of "any other similar intangible property" to include goodwill was deemed erroneous by the appellants, who applied the principle of "ejusdem generis" to argue that only intangible properties recognized under specific intellectual property laws in India should be included.

The appellants also referenced the Tribunal's decision in the case of Alstom T&D Ltd., which held that only intellectual property rights recognized under Indian law would be subject to service tax under the category of "Intellectual Property Right Service." Based on these arguments, the appellants contended that the levy of service tax on the alleged transfer of goodwill could not be sustained.

Issue 2: Valuation and Quantification of Demand

The second issue pertains to the valuation and quantification of the demand for service tax on the alleged transfer of goodwill. The appellants argued that they had already paid service tax on the consideration received under a separate trademark licensing agreement, which required Mobis India Ltd. to pay 8.5% of their annual domestic sales as a fee for the trademark license. The dispute in the present case arises from the Business Transfer Agreement, where the department alleged that the total consideration of ?425 crores included the value of goodwill, despite no specific mention of goodwill in the agreement.

The department based its valuation of goodwill on the trademark licensing agreement, adopting 8.5% of the total Business Transfer Agreement to arrive at a value of ?33.31 crores for the goodwill. The appellants argued that this valuation was erroneous, as the trademark licensing agreement's fee was based on annual domestic sales, which is not applicable to goodwill. Goodwill, if any, was transferred entirely along with the ongoing business to Mobis India Ltd., and thus, the valuation based on assumptions required to be set aside.

Tribunal's Findings:

Upon hearing both sides and reviewing the records, the Tribunal concluded that goodwill does not fall within the definition of "Intellectual Property Right Service" under Section 65(55b) of the Finance Act, 1994. The Tribunal noted that goodwill, though an intangible right, is not recognized as an intellectual property right under any Indian law. Goodwill is attached to an ongoing business, whereas intellectual property rights can exist independently. The Tribunal rejected the department's argument that "any other similar intangible property" would include goodwill.

Regarding the valuation and quantification of the demand, the Tribunal found that the department's valuation based on the trademark licensing agreement was without logic or basis. The fee for the use of the trademark was based on annual domestic sales, which could not be applied to the valuation of goodwill. The Tribunal held that the demand could not be sustained and set aside the impugned order, allowing the appeal with consequential relief.

Conclusion:

The Tribunal ruled that the transfer of goodwill does not fall within the definition of "Intellectual Property Right Service" under Section 65(55b) of the Finance Act, 1994, and the department's valuation of goodwill was erroneous. The demand for service tax on the alleged transfer of goodwill was set aside, and the appeal was allowed with consequential relief.

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