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TAXABILITY OF INTELLECTUAL PROPERTY SERVICES |
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TAXABILITY OF INTELLECTUAL PROPERTY SERVICES |
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Service tax has been imposed on intellectual property services rendered by holder of an intellectual property right by the Finance Act, 2004 with effect from 10th September, 2004. The gross amount charged to any person in relation to intellectual property services is chargeable to service tax, i.e. services provided by holder of intellectual property rights to any person. Intellectual properties are the creation of the human mind and human intellect and that's why such assets are called intellectual property. Intellectual properties help to sustain the leadership, initiative and investment of holders with technical know-how and successful marketing ideas that foster huge commercial returns. On legislative framework, in a country like India, intellectual property finds its recognition in entry No. 49 in the Union List of Seventh Schedule under . Patents Act, 1970 . Copyright Act, 1957 . Trade & Merchandise Marks Act, 1958 . Trade Market Act, 1999. Meaning of Intellectual Property Right Section 65(55 a) defines "intellectual property right" to mean any right to intangible property, namely, trade marks, designs, patents or any other similar intangible property, under any law for the time being in force, but does not include copyright". Intellectual property rights (IPRs) are intangible property rights arising out of intellect. Intellectual property refers to the results or benefits arising out of application of intellect which may be in the form of any design, patent, trade mark, invention, formula, goodwill, etc. IPRs refers to the rights arising out of creation of intellectual property enjoyed or owned by its owner. The rights can be relinquished, delegated, shared, sold, assigned or transferred, whether temporarily or permanently. IPR's do not include copyright which are covered under Copy right Act. Intellectual property rights are the rights granted by state to provide parties or persons to encourage creativity of mind like artistic or literary work, invention, marks, symbols etc. IPRs provide creators with certain rights which in turn have commercial value. Ideas, knowledge, processes, invention, designs etc. are today important part of trade. IPRs could relate to following - Patents - New technical concepts, inventions Copyright - Text, graphics, software, data compilations, art, music Trade marks - Brands (Product/Service) image and reputation Confidential Information - Ideas, information, know-how etc. Design Rights - Form and appearance, decoration Trade mark has been defined under Section 2(zb) of the Trade Marks Act, 1999 as under - "'trade mark' means a mark capable of being represented graphically and which is capable of distinguishing the goods or services of one person from those of other and may include shape of goods, their packaging and combination of colours; and - (i) in relation to Chapter XII (other than Section 107), a registered trade mark or a mark used in relation to goods or services for the purpose of indicating or so as to indicate a connection in the course of trade between the goods or services, as the case may be, and some person having the right as proprietor to use the mark, and (ii) in relation to other provisions of this Act, a mark used or proposed to be used in relation to goods or services for the purpose of indicating or so to indicate a connection in the course of trade between the goods or services, as the case may be, and some person having the right, either as proprietor or by way of permitted user, to use the mark whether with or without any indication of the identity or that person, and includes a certification trade mark or collective mark". Mark has been defined under Section 2(m) of the Trade Marks Act, 1999 as under- "'mark' includes a device, brand, heading, label, ticket, name, signature, word, letter, numeral, shape of goods, packaging or, combination of colours or any combination thereof". Design has been defined under Section 2(d) of the Designs Act, 2000 as under- "'design' means only the features of shape, configuration, pattern, ornament or composition of lines or colours applied to any article whether in two dimensional or three dimensional or in both forms, by any industrial process or means, whether manual, mechanical or chemical, separate or combined, which in the finished article appeal to and are judged solely by the eye; but does not include any mode or principle of construction or anything which is in substance a mere mechanical device, and does not include any trade mark as defined in clause (v) of sub- "Brand name" or "Trade name" has been assigned meaning under Chapter Note 12 of the Chapter 71 in Central Excise as: 'Brand name' or 'trade name' means a brand name or a trade name, whether registered or not, that is to say, a name or a mark, such as symbol, monogram, logo, label, signature, or invented word or writing which is used in relation to such specified services for the purpose of indicating, or so as to indicate a connection in the course of trade between such specified services and some person using such name or mark with or without any indication of the identity of that person. Patent has been defined under Section 2(m) of the Patents Act, 1970 as a patent granted under the Act. Dictionary meaning of patent is a license to an individual or an organization conferring a right or title for a set period, especially the sole right to make, use or sell some invention. Patentee is a person or organization that obtains or holds a patent for something. Copyrights are governed by the Copyright Act, 1957. Copy rights subsists throughout India in certain classes of works i.e., original literary, dramatic, musical and artistic works; cinematograph films and sound recording . Intellectual property right, thus implies the following basic ingredients - (a) it is a right (b) right should be to intangible property (c) intangible property could be a patent, design, trademark or any other intangible property (d) such intangible property should be recognized under any law in force (e) IPR excludes a copyright. Meaning of Intellectual Property Services Section 65(55b) defines "intellectual property service" as under - "intellectual property service" means - (a) transferring, temporarily; or (b) permitting the use or enjoyment of, any intellectual property right". IPR services would cover both - permitting the use or enjoyment of IPR or temporary transfer of IPR. IPR service would, therefore, include both - transfer of an IPR on temporary basis and allowing the use of an IPR or right to enjoy IPR to some one else, other than the owner or holder of an IPR. IPR service would mean - (a) permanent transfer of IPR (only prior to Finance Act, 2005) (b) transfer of IPR, which may not be a permanent transfer (say, assignment of an IPR for a fixed term) (c) permitting the use of IPR (d) permitting to enjoy the IPR. Meaning of Taxable Service Taxable Service has been defined under Section 65(105)(zzr) to mean any service provided or to be provided to any person, by the holder of intellectual property right, in relation to intellectual property service. A taxable service should meet the following conditions - (a) service should be provided to any person (b) service should be provided by the holder of IPR (c) service should be any service in relation to IPR. (d) IPR should be transferred temporarily or permitted to use without transfer. (e) IPR should not pertain to copyright. (f) Such IPR should be recognised under Indian laws. According to Circular No. 80 dated 10th September 2004, a permanent transfer of intellectual property right does not amount to rendering of service. On such transfer, the person selling these rights no longer remains a ''holder of intellectual property right'' so as to come under the purview of taxable service. Thus, there would not be any service tax on permanent transfer of IPRs. The definition also stands amended by the Finance Act, 2005 w.e.f. 15.06.2005. According to clarification issued vide Circular No. 80 dated 10th September, 2004, intellectual property emerges from application of intellect, which may be in the form of an invention, design, product, process, technology, book, goodwill etc. In India, legislations are made in respect of certain Intellectual Property Rights (i.e. IPRs) such as patents, copyrights, trademarks and designs. The definition of taxable service includes only such IPRs (except copyright) that are prescribed under law for the time being in force. As the phrase "law for the time being in force'' implies such laws as are applicable in India, IPRs covered under Indian law in force at present alone are chargeable to service tax and IPRs like integrated circuits or undisclosed information (not covered by Indian law) would not be covered under taxable services. In Araco Corporation v. CCE, Bangalore (2004 - TMI - 221 - CESTAT (BANGALORE) where the appellants had transferred the technical know how under the licence, it was held that the service falls prima facie, under the category of intellectual property services and not under consulting engineer's services. In Aviat Chemicals Pvt. Ltd. v. CCE (ST), (2004 -TMI - 145 - CESTAT, NEW DELHI), it was held that right to use trade mark is a transaction in property and not consultancy or advice and that no consultancy or advice is involved in lease or sale of trade mark as it is a transaction in intangible property. In India Pistons Ltd. v. CCE (2007) 8 STJ 276 (CESTAT, Chennai), it was held that telegraph transfer is distinct and separate from engineering consultancy service. The royalty paid to foreign collaborators in terms of technical assistance agreement entered between them was not exigible to service tax as service received was different from engineering consultancy service. [Also see Prudent Communication System Pvt. Ltd. v. Commissioner of Service Tax, (2007 -TMI - 1008 - CESTAT, BANGALOR); Colgate Palmolive Company v. CCE & C, Goa (2007) 6 STT 169 (CESTAT, Mumbai); Shore to Shore MIS Pvt. Ltd. v. CCE, Chennai (2006 -TMI - 837 - CESTAT, CHENNAI) Supply of technical know-how and royalty paid for technical know-how was not taxable as consulting engineers service. [Hindustan Hardy Spicer Ltd. v. CCE, Nasik (2006 -TMI - 1528 - CESTAT, MUMBAI)] [Also see Bharat Electronics Ltd.v. CCE (2007) 7 STT 206 (CESTAT, Bangalore); Hero Honda Motors Ltd. v. Commissioner of Service Tax (2007) 8 STJ 429 (CESTAT, New Delhi)] In Hero Honda Motors Ltd. v. CCE (2008) 13 STT 193; (2008), 10 STR 185; (2008) 13 STJ 59 (CESTAT, New Delhi), it was held that right to use trade mark on containers for lubricant oil for a consideration would be prima facie covered under IPR service and as such pre-deposit was not waived fully. In Bharat Heavy Electricals Ltd v CCE, Bhopal (2008 -TMI - 30075 - CESTAT, NEW DELHI), it has been held that transfer of right to use patented technology and brand name is taxable from 10.9.2004. In Modi Mundipharma Pvt Ltd v CCE, Meerut( 2009 - TMI - 34273 - CESTAT, NEW DELHI) , where goods were manufactured in own brand name by appellant and royalty was paid by way of deferred payment for know how received in 1990, it was held that service was rendered in 1990 when it was not taxable and payment made as per agreement only. Therefore, no IPR service was rendered in 1990 so as to be called a taxable service [Also see Switzer Instruments Ltd v CST, Chennai (2009 -TMI - 75120 - CESTAT, CHENNAI) In R.M. Dhariwal (HUF) v CCE, Pune -III (2009 -TMI - 75867 - CESTAT, MUMBAI), it was held that royalty as a consideration for transfer of trade name and formulae for manufacturer of pan masala, gutka etc was covered by intellectual property service rather them scientific & technical consultancy service . So far as service tax is concerned, transactions involving temporary transfer of IPR and grant of licence to use IPR, whether on exclusive or non-exclusive basis, are exigible to service tax. Service Tax is not levied on IPRs recognized under the Plant Varieties Act, the IC Design Act, the GIG Act, the Bio Diversity Act and Copyright Act. Service Tax is also not levied on the IPR not recognized under the Indian law. Value of Taxable Service In the event of holder of intellectual property rights assigning an intellectual property right without any consideration, the value of taxable service will be nil. The value of taxable service would be determined by holder of IPR who provides the service based on his own valuation and criteria. There cannot be any benchmark to the valuation. In case a transfer or use of an IPR attracts cess under Section 3 of the Research and Development Cess Act, 1986, the cess amount so paid would be deductible from the total service tax payable. The value of taxable service will not include the amount of cess paid towards the import of technology under Section 3 of the Research and Development Cess Act, 1986 in relation to any intellectual property right. (vide Notification No. 17/2004-ST, dated 10th September, 2004). Specific Exemption The value of taxable service will not include the amount of cess paid towards the import of technology under Section 3 of the Research and Development Cess Act, 1986 in relation to any intellectual property right. Vide Notification No. 17/2004-ST dated 10-9-2004. Person Liable A holder of an intellectual property right shall be liable to pay service tax and shall be treated as an assessee for service tax purposes.
By: Dr. Sanjiv Agarwal - December 23, 2010
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