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TMI Blog2020 (6) TMI 353X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordance with the processes, specifications and recipes thereof in connection with the manufacture, marketing, sale and distribution of Revlon Products would not fall in the definition of intellectual property right so as to make it taxable under section 65(105) (zzr) of the Finance Act. Appeal allowed - decided in favor of appellant. - Service Tax Appeal No. 50482 of 2017 - FINAL ORDER NO. 50683/2020 - Dated:- 8-6-2020 - HON BLE MR. JUSTICE DILIP GUPTA, PRESIDENT AND HON BLE MR. C.L. MAHAR, MEMBER (TECHNICAL) APPEARANCE: Shri A.K. Sood, Ms. Jyoti Yadav, Advocate for the Appellant Shri Vivek Pandey, Authorized Representative of the Department JUSTICE DILIP GUPTA This appeal has been filed by M/s Modi Mundipharma Beauty Products Pvt. Ltd., formerly known as Modi Revlon Pvt. Ltd., to assail the order dated 23 December, 2016 passed by the Commissioner, Service Tax, Delhi-II on the two show cause notices issued to the Appellant. In regard to the first show cause notice dated 26 December, 2012, the Commissioner has confirmed the demand of service tax amounting to ₹ 5,06,62,452/- for the period 2007-08 to March, 2012 under section 65(105)(zzr) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A show cause notice dated 26 December, 2012 was, however, issued to the Appellant for the period 2007-08 to March 2012 mentioning therein that a letter dated 30 August, 2012 had been received from the office of the Deputy Commissioner at Ghaziabad to inform the Department that the Appellant was receiving inward freight and intellectual property right service from a provider situated outside India but was not paying service tax on the gross value paid for receiving the said services. The Appellant was, therefore, asked to provide details of taxable/nontaxable receipts. On scrutiny of the documents provided by the Appellant, it transpired that the Appellant had made technical collaboration with foreign companies for which royalty was paid to the foreign collaborators. It was further stated that the Appellant had on the sales made by it, paid royalty to Revlon Mauritius for use of their trademark/name in India and made payment to Revlon Australia for use of their printing and stationery. The department, therefore, formed an opinion that the said activities related to intellectual property right service, which were taxable under section 65(105) (zzr) of the Finance Act. The show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... know how is not covered under the definition of intellectual property right services. In support of this contention, learned Counsel placed reliance upon decisions to which reference shall be made at the appropriate stage; (iii) Benefits from the service procured at the time when the First Agreement was executed in 1994 were not subjected to levy of service tax and when the said agreement was renewed in 2003, there was no change in the clauses of the agreement. The entire payment made and likely to be made in future under the First Agreement relates to services received much before the introduction of service tax on intellectual property right with effect from 10 September, 2004; (iv) The arrangement between the appellant and Revlon Australia is on cost sharing basis and there is complete absence of any service element between the Appellant and Revlon Australia; (v) The order has confirmed the demand on a ground not mentioned in the show cause notice and, therefore, the order deserves to be set aside for this reason alone; (vi) The demand for a substantial period that has been confirmed is barred by limitation; and (vii) Penalty nor interest could have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows: 1. DEFINITIONS. For the purpose of this Agreement, the following expressions used herein shall have the meaning hereinafter assigned to them. 1.07 Know How shall mean formulae, processes, recipes, product specifications, technical and manufacturing data, information, equipment specification, specification of raw materials, and other technical information and data necessary to manufacture Revlon Products. **** 1.10 Patents shall mean all patents and such other industrial property rights relating to the manufacture of the Revlon Products which are owned by or licensed to or are licensed hereafter to Licensor with right to sublicense including without limitation those listed on Exhibit A hereto. *** 1.12 Revlon Products shall mean (i) all cosmetic, toiletry, beauty treatment, skin care and fragrance products and lines of such products now or hereafter sold by Licensor or its Affiliates in any country of the world under the brand names identified in Exhibit B ( Category I Products ); (ii) all cosmetic toiletry, beauty treatment, skin care or fragrance products hereafter acquired by Licensor or its Affiliates ( Acquired Produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evlon Products consistent with the terms of this Agreement. 6 PATENTS 6.01 No Infringement. Licensor declares that to the best of its knowledge no patents or other similar industrial property rights of third parties in the Territory shall be infringed by the use of the Know How by Licensee pursuant to this Agreement. 6.02 Notices. Licensee shall notify Licensor in writing of any claims, demands, actions, suits and proceedings made on or against it for infringement of any patent or industrial property rights by reason of Licensee's use in the Territory of the Know How. Licensor shall have the sole right and responsibility for the defense thereof, and Licensee shall assist Licensor in such defense as Licensor may reasonably require. 7. CONSIDERATION AND TAXES. 7.01 Royalty. In consideration of the grant of license rights to it hereunder, Licensee shall pay to Licensor during the subsistence of this Agreement a royalty of 5% net of taxes, of its Net Sales per annum (the Royalty ). 13. The relevant clauses of the Second Agreement executed between the Appellant and Freya Holdings are as follows: SECOND AGREEMENT (Between the Appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame Revlon in its corporate name, Modi-Revlon Private Limited, subject to the limitations on use set forth in this Agreement, including Section 8.02 and 8.08 hereof. Upon execution of this Agreement, Licensee shall deliver to Licensor or such party as may be designated by Licensor a duly executed irrevocable Power of Attorney of the Licensee in the form attached as Exhibit C ( Power of Attorney ) and such other document as would enable Licensor or such designated party to take all such steps as may be required by law to enable it immediately to amend the corporate charter of Licensee to change its name in accordance with the provisions of Section 8.02 hereof. Licensor shall not grant any rights to manufacture or sell any cosmetic, toiletry, beauty treatment, fragrance or skin care product to which Licensor obtains rights to any third party with respect to the Territory without first offering such product to Licensee under this Agreement. 8 Trademarks. 8.01 Limited Use . (a) Licensee will use the Licensed Marks only in such form and manner as is specifically permitted hereby or otherwise approved for use by Licensor. Licensee shall use the Licensed Marks strictly in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e mark or service name is pending or threatened to be filed; (vii) use of the Licensed Marks does not infringe the rights of third parties; and (viii) no consent of third parties is necessary for Licensee to use the Licensed marks or, if any such consent is necessary, such consent has been obtained by RML. 14. It clearly transpires from the First Agreement executed between Revlon Mauritius and the Appellant that Revlon Mauritius possessed technical know how, information, data, processes, formulae, experience and skill required for the manufacture, distribution and sale of Revlon Products and the Appellant desired to obtain the aforesaid. The Agreement sets out the terms and conditions. The know how has been described in clause 1.07 of the Agreement to mean formulae, processes, recipes, product specifications, technical and manufacturing data, information, equipment specification, specification of raw materials, and other technical information and data necessary for manufacture of Revlon Products. Revlon Products have been defined in Clause 1.12 of the Agreement. Clause 2 deals with License Grants. Under clause 2.01, Revlon Mauritius granted to the Appellant the exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d royalty to Revlon Mauritius for use of their trademarks/ name in India and also paid certain amount to Revlon Australia for use of their printing and stationery. The said activities related to intellectual property right service which was taxable under section 65(105)(zzr) of the Finance Act. 18. It then states; Whereas M/s Modi Revlon Pvt. Ltd. have made foreign technical collaboration to various foreign companies for which royalty was paid to foreign collaborators. The foreign collaborators provide technical advice, drawings, designs etc. M/s Modi Revlon Pvt. Ltd. has paid royalty on sale to M/s Revlon Mauritius Limited for use of their trade mark/name in India and paid to Revlon Australia Pvt. Ltd. for use of their printing Stationer. The said party also paid for design development of M/s Revlon South Africa Pvt. Ltd. for the year 2007-08 to 2011-12. The said activities were related to intellectual property service and were taxable under section 65(105)(zzr) of the Finance Act, 1994 read with section 66A of the Finance Act, 1994 but they did not pay service tax on said service as service recipient. xxxxx xxxxxx xxxxxx Whereas it appears that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nferred upon the Appellant the exclusive right to use know how in any plant approved by Revlon Mauritius in connection with the manufacture, marketing, sale and distribution of Revlon products. Royalty under the First Agreement, it needs to be noted, was not paid for use of trademark/name of Revlon Mauritius in India, but the show cause notice mentions that royalty was paid to Revlon Mauritius for use of trademark/name. It is under the Second Agreement executed between Freya Holdings and the Appellant that the Freya Holdings had granted the exclusive license to the Appellant to use the trademarks and all other intangible rights. However, it does not provide for payment of any consideration for this purpose. It also needs to be noted that the term trademark has not been used in Clause 2 of the First Agreement and the term know how has not been used in Clause 2 of the Second Agreement. The first show cause notice, therefore, proceeds on an absolutely wrong footing. 22. A show cause notice is the foundation on the basis of which any demand can be confirmed and it is trite to state that no demand can be confirmed on the basis of an allegation not made in the show cause notice. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y deliberately in order to fasten tax liability upon the Appellant did not make a mention of the Agreements in the show cause notice. 28. A perusal of the first show cause notice indicates that it was the letter dated 30 August, 2012 that was sent by the Deputy Commissioner of Central Excise at Ghaziabad to the Commissioner at Delhi that led to the issuance of the show cause notice. This letter dated 30 August, 2012, though mentioned as (RUD-1) is not on the record of the Appeal and it has been stated by learned Counsel for the Appellant that it was not provided to the Appellant with the show cause notice. It is for this reason that when the Appeal was heard on 20 September, 2019, learned Authorized Representative of the Department sought time to place the entire records available with the Department that led to the issuance of the show cause notice, including the letter dated 30 August, 2012. On 15 October, 2012, learned Authorized Representative of the Department sought further time to trace out the files and place the letter. Learned Counsel for the Appellant, however, placed the letter submitted by the Appellant to the Deputy Commissioner at Ghaziabad demanding a copy of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available with the Authority issuing the show cause notice, but for reasons best known to the Authority, they have not been referred to in the show cause notice. 33. Learned Authorized Representative of the Department has, however, made an attempt to justify the demand by referring to certain clauses of the First Agreement and has pointed out that the license grants under clause 2 of the First Agreement is in connection with not only know how license, but patent license , improvements and maximize sales as contained in clause 2.01, 2.02, 2.03 and 2.04 of the Agreement. 34. It is not possible to accept this contention of learned Authorized Representative of the Department. In the first instance, the show cause notice does not make reference to either the patent license , improvements or maximize sales as referred to clauses 2.02, 2.03 and 2.04 of the First Agreement nor does the impugned order proceed on this basis. This apart, trademark is not mentioned in Clause 2.0 of the First Agreement. The impugned order and the submissions have to be examined only in the light of the allegations contained in the show cause notice and not beyond it. 35. A perusal of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar to trade marks , design or patents for it to be covered under any other similar intangible property under any law for the time being in force . 40. It is the submission of the learned counsel for the Appellant that the phrase law for the time being in force would mean such laws as are applicable in India and in this connection reliance has been placed upon the Service Tax Circular / Trade Notice dated 17 September, 2004. This Circular provides as follows:- 9.1 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) w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s utmost precision and dexterity by the specialized personnel in their respect fields. Any product cannot come to the stage of processing and manufacturing unless it is conceptualized and designed etc. Further, before being manufactured and marketing of the product, the intellectual property holder may seek in India the protection under various extant laws such as Design Act, 2000; Patent Act, 1970 and Trade Merchandise Act, 1958 etc. 42. Thereafter, the Commissioner examined the First Agreement between Revlon Mauritius and the Appellant and concluded that technical Know How received for production of Revlon Products has the protection and is registered under the Indian law that is The Patents Act, 1970 for the reason that the Appellant had applied under the Patents Act, 1970 for patenting the process for forming a fatty acid diester, cosmetic composition, containers and bottles. It is for this reason that the Commissioner concluded that the know how received would squarely fall within the four corners of the taxable category intellectual property service . Paragraph 28.07 of the order of the Commissioner dealing with this aspect is reproduced below:- 28.7 On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 98 CESTAT, CHENNAI) = 2010 TIOL-68-CESTAT MAD, the Hon ble CESTAT has held that payment of Royalty is liable to be taxed under Intellectual Property Services only from 10-09-2004. Therefore, the contention of the Noticee that Section 65(a) of the Act does not include the knowhow and there is no law for the time being in force in India governing Knowhow having no force stands rejected. 43. All that was required to be examined by the Commissioner was whether know how is any right to intangible property under any law for the time being in force in India for it to fall within the definition of intellectual property right and, accordingly, be taxable. The show cause notice, as discussed above, does not make any reference to patent and only makes reference to trade marks . The Commissioner was, therefore, not required to examine the matter in the light of patent or The Patent Act, 1970. 44. The contention of learned Counsel for the Appellant is that there is no law in India for the time being in force which protects know how as an intangible property right and, therefore, the grant of exclusive right to use the know how would not include such a right in the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Intellectual Property Service following conditions need to be fulfilled:- Such service provider must have a right to any intangible property namely trademarks, designs, patents or any other similar intangible property, excluding copyright. Such right over intangible property must be recognized under any India law for the time being in force. Intellectual property rights which are not covered by India law like integrated circuits or undisclosed information would therefore not be covered under the taxable services. Service provider must do one of the following: (a) Transfer of intangible property to another person. (b) Permit the use or enjoyment of the intellectual right. 7.3 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 know-how is the undisclosed information cited by the Department clarification dated 109-2004 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. V/s Commissioner of Service Tax., Mumbai-I 2017 (47) STR 179 (Tri.- Mumbai). The relevant paragraphs are reproduced below:- 4.1 Short question to be decided is whether the transfer of technical Know How received by the Appellant is a service which may be categorized under Intellectual Property Right Services . We find that the definition of Intellectual Property Right must be satisfied to term the services received by the appellant as Intellectual Property Right Services. We find no clue at all in the records as to which type of Intellectual Property Right is being assigned to the Technical Know-How received by the Appellant. It is obvious from the definition of Intellectual Property Right that the right has to be a specific Right under a specific Law. Examples are given under the definition such as the Trade Mark which is a right provided under Trade Marks Act . Similarly the right mentioned as design in the definition is a right under the Designs Act . Therefore we find that the technical Know-How received by the appellant and the royalty payment made by the appellant to Unisys is nowhere established to result from the use of any Intellectual Property Right ..... X X X X Extracts X X X X X X X X Extracts X X X X
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