2018 (8) TMI 1221 - AT - Service Tax

100% EOU - Intellectual Property Services - services of temporary transfer of technical know-how - Held that - Identical issue decided in appellant own case AVT MC CORMICK ING. (P) LTD. VERSUS CCE&C, COCHIN 2018 (2) TMI 1034 - CESTAT, BANGALORE , where it was held that As per Article 253 of the Constitution of India, for implementing any treaty agreement or convention with any country or any decision made at international conference etc., there should be a municipal legislation enacted for giving effect to such international agreement or treaties - demand set aside - appeal allowed - decided in favor of appellant.

Summary

Issues:
- Service tax liability on payment of royalty for technical know-how received from a foreign company.
- Interpretation of the definition of intellectual property services.
- Application of international treaties on taxation.
- Precedent of previous judgments in similar cases.

Analysis:

Issue 1: Service tax liability on payment of royalty for technical know-how
The appellant, a 100% EOU engaged in manufacturing and exporting spices, received technical know-how services from a foreign company and paid royalty for the same. The authorities issued a show-cause notice demanding service tax on these services. The appellant contested that the impugned order did not appreciate the correct position of law and failed to establish the transfer of intellectual property. The appellant argued that the right to use technical know-how can only be taxed if protected under Indian law. The Tribunal noted that the Department's argument relied on international treaties, but without a municipal legislation enacted, the tax liability could not be imposed. Citing previous judgments, the Tribunal held that the impugned order was not sustainable, setting it aside and allowing the appeal of the appellant.

Issue 2: Interpretation of the definition of intellectual property services
The appellant's counsel referred to Section 65(55a) of the Finance Act, 1994, defining intellectual property services. The counsel argued that the right to use technical know-how should be taxed only if protected under Indian law. The Tribunal considered the definition of intellectual property and the circular by the Central Government clarifying that applicable laws must be those of India. Relying on precedents, the Tribunal found that the impugned order did not establish the transfer of intellectual property, leading to the decision to set it aside.

Issue 3: Application of international treaties on taxation
The Tribunal highlighted the importance of municipal legislation for implementing international treaties related to taxation. It noted that without such legislation, tax liability could not be imposed based solely on international agreements. The Tribunal emphasized the need for clarity in show-cause notices regarding the nature of know-how availed from foreign companies to determine tax liability accurately.

Issue 4: Precedent of previous judgments in similar cases
The Tribunal considered previous judgments, including Navinon Ltd., Rochem Seperation Systems, and Thermax Ltd., which held that receiving technical know-how from a foreign company against payment of royalty does not automatically incur service tax liability. By following the ratios of these decisions, the Tribunal concluded that the impugned order in the present case was not sustainable in law, leading to the decision to set it aside and allow the appeal of the appellant.

In conclusion, the Tribunal set aside the impugned order, ruling in favor of the appellant based on the lack of clarity in establishing the transfer of intellectual property and the absence of municipal legislation implementing international treaties on taxation.