2010 (6) TMI 181 - AT - Service Tax

Stay- Intellectual Property Service- Alcoholic beverages got manufactured under agreement. Agreement indicating terms directed by the appellant. Know how in the form of specifications and formulae supplied for manufacture of beer by using raw material and following quality standards as specified by appellant and manufacturer required to use brand name of appellant and obliged to pay specified amount as net proceeds. Held that- transaction similar to brand licencing agreement. Prima facie payment made as consideration for transfer of intellectual property and Service Tax payable thereon. Pre-deposit of Rs. 75 lakhs directed.

Summary

Issues Involved:
1. Waiver of pre-deposit and stay of recovery in respect of service tax, interest, and penalties.
2. Classification of the service under "franchise" or "intellectual property service".
3. Validity of dual classification of services under Section 65A of the Finance Act, 1994.
4. Interpretation of the agreement dated 11-4-2007 between the appellant and FIPL.

Detailed Analysis:

1. Waiver of Pre-deposit and Stay of Recovery:
The appellant sought waiver of pre-deposit and stay of recovery for service tax, interest, and penalties confirmed by the Commissioner in two separate orders. The first order confirmed a demand of Rs. 50,26,438/-, and the second confirmed a demand of over Rs. 1.10 crores, both under the proviso to Section 73(1) of the Finance Act, 1994.

2. Classification of Service:
The impugned demand of service tax was alternatively classified under sub-clause (zze) or sub-clause (zzr) of Clause 105 of Sec. 65 of the Finance Act, 1994, as "franchise"-related service or "intellectual property service". The Commissioner based this classification on an agreement dated 11-4-2007 between the appellant (SKOL) and FIPL, which described the transaction as a "contract-manufacturing and sale-agreement". The Commissioner concluded that the arrangement was either a "franchise" or a transfer of "intellectual property".

3. Validity of Dual Classification:
The appellant argued that the dual classification by the Commissioner violated Section 65A of the Finance Act, 1994, which mandates that a taxable service should be classified under the most specific description. The appellant cited the Board's Circular No. 51/13/2002 dated 7-1-2003, which clarified that service tax could be levied only once under one heading.

4. Interpretation of the Agreement:
The agreement required FIPL to manufacture 'SKOL beer' using SKOL's formulae and specifications, with SKOL retaining ownership of the brand name and intellectual property. FIPL was to pay SKOL "net proceeds" of Rs. 27 per case, exclusive of various taxes and duties. The appellant contended that the agreement did not assign any "representational right" to FIPL, making the demand under "franchise service" unsustainable. They also argued that there was no transfer of "intellectual property" as SKOL retained ownership and merely permitted FIPL to use the brand name.

Commissioner's Findings and Tribunal's Decision:
The Commissioner found that the transactions resembled a "brand licensing arrangement" rather than a "contract manufacturing arrangement". The Tribunal agreed that the classification under two different headings was incorrect but upheld the classification under "intellectual property service" based on the agreement's terms. The Tribunal noted that FIPL's payment of Rs. 27 per case to SKOL was constant and not related to profit-sharing, indicating a consideration for the transfer of intellectual property.

Conclusion:
The Tribunal concluded that the appellant should pay service tax under sub-clause (zzr) of Clause 105 of Sec. 65 of the Finance Act, 1994. The appellant was ordered to pre-deposit Rs. 75 lakhs within four weeks, with a waiver of pre-deposit and stay of recovery for penalties and the balance amount of service tax upon compliance.