2015 (1) TMI 187 - AT - Service Tax

Demand - Consulting Engineer Service - levy of tax on Development expenses - Taxability of royalty amount on receipt basis - Held that - As regards the development expenses, the fact that these expenses were incurred by the appellant in India and were not paid to SII, proves that no service has been rendered to the appellant. - The Commissioner s order is very vague and without reasoning. We have no hesitation in holding that service tax is not payable on the development expenses. Regarding royalty - Held that - Measure of taxation does not determine the nature of taxation. But the pertinent fact of this case is that whereas the show cause notice was issued in September 2003, the royalty on account of technical services for the years 2000-2001 and 2001-2002 was paid in 2004. This fact has been also certified by the Chartered Accountant and not controverted by Revenue. The service tax provisions under the Service Tax Rules, 1994, as applicable during the period in dispute, clearly provided that service tax is payable when the value of taxable services is received. The relevant provisions in law was Rule 6(1) which stated that service tax is payable when payments are received towards the value of taxable services. Therefore, clearly service tax was not leviable on royalty paid for the years 2000-2001 and 2001-2002. Having held that the royalty was on account of providing technical services in India and such technical services are clearly covered under the Consulting Engineering Services, tax is leviable for the year 1999-2000 agreed to by both sides. The amount of service tax payable at the rate of 5% which was the prevailing tax rate at that time, works out to ₹ 2,89,777/-. - Decided partly in favour of assesse.

Summary

Issues:
1. Demand of service tax on royalty and development expenses.
2. Interpretation of the Technology Licensing Agreement.
3. Applicability of Consulting Engineer Service.
4. Tax liability on royalty payments.
5. Imposition of penalty.

Analysis:

1. Demand of service tax on royalty and development expenses:
The appeal was filed against an order demanding service tax on royalty and development expenses. The Commissioner confirmed the demand on royalty for specific years and on development expenses incurred by the appellants. However, the Tribunal held that service tax is not payable on the development expenses as they were incurred by the appellants in India and not paid to the other party. The order lacked reasoning, and the Tribunal found no basis for demanding service tax on these expenses.

2. Interpretation of the Technology Licensing Agreement:
The Technology Licensing Agreement involved the transfer of technical knowhow and services. The agreement specified payment of a lump sum for technical knowhow and royalty based on net sales for technical services. The Tribunal analyzed the agreement's provisions and determined that technical services were indeed provided to the appellants, including training, machinery selection, commissioning, and testing. The agreement's terms supported the payment of royalty for these services.

3. Applicability of Consulting Engineer Service:
The appellants argued that the royalty paid was not leviable to service tax and that they were not covered under Consulting Engineer Service. However, the Tribunal disagreed, stating that the royalty was paid for technical services covered under Consulting Engineering Services. The Tribunal clarified that the measure of taxation does not determine the nature of taxation and held that service tax was leviable on the royalty for specific years.

4. Tax liability on royalty payments:
The Tribunal determined that service tax was not payable on royalty payments for certain years as per the relevant provisions of the Service Tax Rules. The tax liability was established for one specific year based on the prevailing tax rate, and the Tribunal calculated the amount payable accordingly.

5. Imposition of penalty:
Regarding the penalty, the Tribunal found that the tax liability under Consulting Engineer Service or Intellectual Property Service was not clear, indicating a lack of clarity in the matter. Consequently, the Tribunal concluded that this was not a suitable case for imposing a penalty and decided against it.

In conclusion, the appeal was disposed of with specific determinations on the demand for service tax, interpretation of the agreement, applicability of Consulting Engineer Service, tax liability on royalty payments, and the imposition of penalties. The Tribunal's detailed analysis and conclusions provided clarity on each issue raised during the proceedings.