2024 (12) TMI 839 - AT - Service Tax

100% EOU - whether the royalty payments made by the appellant for receiving the technical know-how are liable to service tax under the category of intellectual property service? - HELD THAT - The Commissioner in the impugned order purely based on transfer of technical Knowhow has held the service to be intellectual property service. This issues whether the royalty paid on transfer of technical know-how is no longer res-integra as various Tribunals have categorically held based on the definition of IPR service and in view of the clarification by the Board mere transfer of technical know-how without the law being registered/recognized in Indian laws as Intellectual Property, it cannot be considered as Intellectual Property Service. In the case of ABB Ltd. Versus Commissioner of C. Ex. S.T., LTU, Bangalore 2019 (1) TMI 1037 - CESTAT BANGALORE , the Tribunal observed 'Further we find that know-how is not recognized as Intellectual Property law by any Indian Law for the time being in force. In fact knowhow is the undisclosed information cited by the Department clarification dated 10-9-2004 as example of intellectual property right not covered by any Indian law. The transaction in the present case was for know-how which is in the nature of property, no service was provided by the foreign companies. This issue has been considered by the Tribunal in the appellant s own case which is reported in 2016 (7) TMI 559 - CESTAT BANGALORE and it was held by the Division Bench that the right to know-how does not fall in the definition of Intellectual Property Right as given in Section 65(55a) of the Finance Act and Service Tax is not leviable on the same under the Finance Act.' The impugned order is set aside - appeal allowed.

Issues Involved:

1. Whether royalty payments for receiving technical know-how are liable to service tax under the category of intellectual property service as defined under Section 65(55a) of the Finance Act, 1994.
2. Whether the appellant suppressed facts with the intention to evade payment of duty.

Issue-wise Detailed Analysis:

1. Liability of Royalty Payments to Service Tax:

The primary issue in the case was whether the royalty payments made by the appellant for receiving technical know-how from a foreign company were liable to service tax under the category of intellectual property service as defined under Section 65(55a) of the Finance Act, 1994. The appellant, a private limited company registered as a 100% EOU, had entered into a collaboration agreement with a foreign company, obtaining a non-exclusive, non-transferable right and license to use GE intellectual property. The appellant paid a royalty amount for this license, which the department categorized as intellectual property service, thereby attracting service tax under Rule 2(1)(d)(iv) of the Service Tax Rules, 1994.

The appellant contended that the technical know-how was not recognized as intellectual property under Indian law, and thus the royalty paid could not be considered as a service under intellectual property service in terms of the Finance Act, 1994. They relied on various tribunal decisions where it was held that know-how provided by way of a license by a foreign company to an Indian company is not in the nature of intellectual property service. The tribunal referred to the definition of intellectual property service, which includes only such intellectual property rights that are prescribed under Indian law. Since technical know-how is not recognized as intellectual property by any Indian law, it was concluded that the royalty payments could not be taxed under intellectual property service.

2. Allegation of Suppression of Facts:

The appellant argued that there was no suppression of facts with the intent to evade duty. They maintained that they were a registered service provider and had been paying the service tax due. The appellant had disclosed the receipt of the license to use technical know-how and had been making royalty payments, along with R&D Cess on the royalty paid. They had informed the department about the royalty payments on 14.12.2007, but the show-cause notice was issued only in July 2009, which they argued was time-barred. The appellant asserted that the issue was interpretational in nature and thus, the question of suppression did not arise.

The tribunal found that the department had complete knowledge of the transactions, and the delay in issuing the show-cause notice could not be attributed to suppression by the appellant. The tribunal noted that the issue was indeed interpretational, and therefore, the allegation of suppression was not sustainable.

Conclusion:

The tribunal set aside the impugned order, concluding that the royalty payments for technical know-how were not liable to service tax under the category of intellectual property service, as the know-how was not recognized under Indian law as intellectual property. The appeal was allowed with consequential relief, if any, as per law.

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