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TMI Blog2022 (8) TMI 927X X X X Extracts X X X X X X X X Extracts X X X X ..... ect to intellectual property rights from the brand owner appellants. It is seen that it is the brand owner himself who is using his own brand and technical know-how albeit the manufacturing activity is outsourced to the Contract Bottling Units. The ultimate beneficiary of the technical know-how are the intellectual property if any for that matter is the appellant themselves and therefore, it is incorrect to say that there is any transfer of temporary leasing of intellectual property. Therefore, the entire case of the Department is based on a false surmise. The issue is no longer res integra and is decided in favour of the appellants. The Apex Court has decided a similar case in respect of THE COMMISSIONER CENTRAL EXCISE, MEERUT VERSUS M/S. BDA PVT. LTD. [ 2015 (11) TMI 1585 - SC ORDER] holding that in such cases, the brand owner does not give any right to the TMU to use his brand. Thus, the Department has not made out any case against the appellants for demand of service tax on Intellectual Property Services. The Revenue has filed appeals contesting the valuation for the purpose of levy of service tax adapted by the appellants - the appellants are not liable to pay servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ORDER 3 Appeals No. ST/386-388/2010 are filed by the appellant-assessee M/s. United Spirits Limited (M/s USL) and 3 Appeals No. ST/389-391/2010 are filed by Revenue. All of them arise out of three SCNs, issued to the appellants, and decided by OIO.NO.49-51/2009 dated 27.11.2009, passed by The Commissioner of Service Tax, Bangalore. 2. Briefly stated the facts of the case are that M/s USL is engaged in the business of manufacture and sale of Indian Made Foreign Liquor (IMFL), under various brand names, such as McDowell No.1, Signature, Single Malt, Golden Grape Brandy, Bagpiper etc; M/s Herbertson Limited ( HL ), also engaged in similar business, was amalgamated with M/s USL with effect from 01.04.2005, by a court sanctioned scheme, with effect from 17.10.2006. M/s USL was getting some of its products manufactured in distilleries and bottling units owned by outsiders; these distilleries/bottling units are known, either as contract bottling units (CBU) or Tie-up manufacturing units (TMU); in accordance with the regulatory requirements, these CBUs/TMUs, in addition to the production, also undertook the responsibility of selling the IMFL on behalf of the appellant; the TMUs unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he extended period of limitation is applicable; assessee is liable to penalty under Sections 76, 77 and 78 of Finance Act 1994. 2.2. Aggrieved by the impugned order confirming the demand of ST holding that the activity is liable to service tax and to the extent indicated below, the appellant is now in appeal before the Hon ble Tribunal and their appeals No ST/386-388/2010; Revenue has also filed the appeals No. ST/389-391/2010.against the impugned order on the ground that the service tax is leviable on the entire amount paid by the CBU to the brand owner and the impugned order confirming demand only on 2% of NSR (Net sale realization) is erroneous. 3. Shri G. Shivadass, Sr. Advocate, Learned senior Counsel, assisted by Shri K. S. Ramesh, Advocate and Shri Rishab, Advocate appeared for M/s USL. Learned Senior Counsel submits that the IMFL manufactured by the appellant fall under the category of alcoholic liquor for human consumption and are the subject matter of legislative powers of the State under Entry No 53 of List II of the Seventh Schedule to the Constitution.; accordingly, the respective State Governments are empowered to frame rules and regulations for the manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant; risk and reward of business lies with the licensee; there is no dispute regarding taxability of this aspect. 3.2. under the agreements for manufacture of IFML, the appellant will bear all the cost of production; directs the contract bottling unit to procure the Raw/Packing materials from specified sources and at the price negotiated by the Brand Owner; in some of the cases the Brand owner himself supplies the Special Spirits; the brand owner will either directly pay the suppliers of these goods to the CBUs, or reimburse the payments made by the CBUs; the brand owners also depute their technical staff to the CBUs so that they are in a position to supervise and control the manufacturing activity so as to meet their exact specifications; CBU is paid job charges known as bottling fee/ Retention fee. He submits that the liquor so manufactured is invoiced by the CBU on account of the brand name owner; sales proceeds are credited to a joint bank account in the name of both the CBU and the brand name owner, but the account is operated by the brand name owner only through their personnel; in case where the Bank Account is in the name of CBU s, the account is operated by Brand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and Income from Brand Franchise ; Service tax is sought to be levied on this income treating the same as value of Intellectual Property Services rendered by the appellant to the CBUs / Tie up units, whereby the CBUs / Tie up units were allegedly allowed to use the brand names owned by the appellant. 4. Learned senior counsel takes us through the statutory definitions of intellectual property service during the relevant period and submits that the Appellant have not at all rendered intellectual property service; the alleged intellectual property in this case are the various brand names, owned by the appellant, which are governed by the provisions of the Trade Marks Act; transactions in intellectual property are in the nature of either absolute transfer of right over the intellectual property or licensing them for use, with specified conditions; the person receiving such licence from the owner of the intellectual property would exploit such intellectual property for his commercial use and from out of the revenue generated by him through such exploitation, an agreed portion will be paid back to the owner of the intellectual property, normally in the form of royalties; the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbined reading of the agreements between the appellant and the CBUs/Tie up units, it must be concluded that the appellant never transferred the right to use the IPR in favour of the CBUs/Tie up units and effective control over the IPR were never given to CBU s/Tie up Units. 4.2. Learned senior counsel submits that under Section 65(105)(zzr) is Taxable service should be provided to any other person by the holder of intellectual property rights in relation to intellectual property; service which could be charged to tax are those services which are provided in relation to intellectual property services and not the intellectual property services itself; appellant has not provided any service to the CBUs in relation to intellectual property services; he relies on the decision of Delhi High Court in the case of M/s. Home Solutions retail India 2011(21) STR-109 (Del); the said decision has not been overruled by any decision and therefore relevant; the definition of taxable service has not been amended even after the said decision of Delhi High Court; he further relies on the decision of the Hon ble Maharashtra Sales Tax Tribunal, in the case of M/s Diageo India (P) Limited VS. The St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rections only (as per clause 2 (n)); sale proceeds will be deposited in an account to be operated by the appellant s personnel and the CBUs are entitled to retain only the retention money; trademarks are the appellant s property and the CBUs cannot claim any right, title or interest therein; the extent of control being exercised by the appellant over the CBUs / Tie up units is evident from facts and various provisions contained in the Agreement for Tie up manufacture; it s important to note that the appellants are incurring many expenses relating to the activity of manufacture of IMFL by CBUs. 5.1. Learned senior counsel submits that the Commissioner has failed to appreciate that in all such cases of manufacture for Brand owner, there has to be an agreement permitting use of such intellectual property rights and such agreements have been entered into in terms of Section 48 (2) of the Trade Marks Act 1999; permission granted by the appellant is for the limited purpose of enabling the CBU to manufacture; merely because the Licensing agreements or Usership agreements permit the CMUs/CBUs to use the same for manufacture of IMFL for the Brand owner and some consideration is payable b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acturing activity falls within the purview of State Excise; the appellant have absolute control over manufacture of IMFL, right from the stage of procurement of raw-material till dispatch; they exercise complete control over quality, packing, labelling, records of production/dispatch/ sales etc. sale proceeds are channelled through bank accounts, controlled and operated appellants; Statutory levies, i.e., State Excise Duty/franchise fee, brand registration fee etc., are paid/ reimbursed by the appellant; CBU retains the EDP including retention amount and balance amount is transferred to the appellant; appellants have absolute control over supply of finished products, which are either supplied to State owned Corporations or the open market as per individual State policies; The effective constructive ownership of the IMFL so manufactured /bottled at the CBUs, vest with the appellants. He submits that in respect of Brand Licensing Arrangement (for Packaged Drinking Water) manufacturing activity falls within the purview of Central Excise; appellants wield no control over production of Packaged Drinking Water; brands are licensed to a Contract Bottler who manufactures and markets Packa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de technical knowhow, technical assistance by way of providing their trained and experienced personal to the CBUs for complete supervision of the production quality control, packing etc; said activity is liable to service tax; this finding is not legally sustainable for the following reasons; During the relevant time, service tax was leviable on the specified activities defined as taxable service defined as, under Section 65(105)(zzr), Any service provided or to be provided to any person, by the holder of intellectual property in relation to intellectual property service ; intellectual property service was defined, under Section 65(55b), to mean (a) transferring temporarily, or (b) permitting the use or enjoyment of intellectual property and intellectual property; in terms of Section 65(55a) intellectual property means any right to intangible property, namely trademarks, designs, patents or any other similar intangible property under any law for the time being in force, but does not include copy right; technical knowhow for manufacture of IMFL or deputing the personnel for supervision of production was not recognized as an intellectual property or the activity; techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements, as agreed upon by the parties is 2% of net sale realization; commissioner on the basis of elaborate findings concluded that the said 2% of NSR shall be the value of taxable service; since the principle issue of taxability of the disputed service has been decided by the Tribunals against the revenue, the question of deciding this aspect separately may not arise; Government of India while explaining the issue before the GST Council in its 39th meeting, relied on the /valuation instruction 332/17/2009-TRU dated 30.10.2009 and clarified that the surplus profit earned by the brand owner being in the nature of business profits falls within the purview of direct tax and not liable to service tax; even GST is not leviable on the said surplus; therefore, the contention of the revenue that the entire amount received the brand owners is liable to be subjected to service tax is not legally sustainable; revenue appeals requires to be rejected. 9.2. Submissions on Cenvat Credit: He submits that at the outset the activity in dispute is not liable to service tax; in any case the appellant is not disputing the levy in respect of brand franchise agreements for manufacture of packaged drin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limitation would be applicable for McDowell and Company Limited; the department was aware that the appellant was getting the goods manufactured from Contract Manufacturing units/TMUS; department had also issued notices to the appellant M/s McDowell Company during the period 1997 to 2005, holding that amount paid by the CBUs to the appellant in terms of Tie up manufacturing agreements was an additional consideration for the value of food flavours sold by the appellant; CESTAT had allowed the appeal filed by appellant; Revenue had filed appeal before the Honourable SC which had remanded the matter to CESTAT; the issue is presently pending before the Honourable CESTAT in E/20274/2021; moreover, because of the prevailing ambiguity CBEC itself clarified the taxability; therefore, extended period cannot be invoked; no penalty is leviable under Section 78. 11. Smt. D. S. Sangeetha, Addl. Commissioner, Authorised Representative, appearing for Revenue reiterates the findings of the impugned order as far as the appeals filed by M/s United Spirits and others are concerned, she reiterates the grounds of appeal as far as Revenue appeals are concerned. 12. Heard both sides and perused th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contention of the Department that the appellants have rendered services relating to Intellectual Property Service as per Section 65(105)(zzr) of Finance Act, 1994; it is the contention of the Department that the appellants, by permitting the Contract Bottling Units to use their brand names and by giving the technical know-how by deputing personnel are rendering Intellectual Property Services. The appellant claims that the Department, has not appreciated the overall schemes of the agreement, going through which it would be clear that no rights have been transferred and the said CBUs cannot exploit the so called intellectual property rights for any commercial benefit; in fact, the appellants are simply getting the alcoholic beverages manufactured by them. We find that the appellant s contention is correct and it has been held in Rashtriya Ispat Ltd. Vs Commercial Tax Officer- 77-STC-182 (AP), Hon ble High Court of Andhra Pradesh held that: In our view whether the transaction amounts to transfer of right or not cannot be determined with reference to a particular word or clause in the agreement. The agreement has to be read as whole, to determine the nature of the transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause 11(d) it is specified that: payments for IMFL supplied as per the direction of McD, in the State of Jharkhand, will be collected by McD/AJANTA and AJANTA shall be entitled only to the amounts computed under clause 20 (hereinafter appearing) i.e. agreed retention . McD shall be entitled to the balance amount. This will be so even if payment is received by AJANTA directly, whereupon the excess over agreed retention shall be made over by AJANTA to McD. 15.3. It is also mentioned under Para 20(vii) Agreed Retention: Agreed retention towards investments, overheads, etc. agreed between both parties and reviewed periodically. The above items of cost will be approved in writing by McD. Such approval will be on monthly/quarterly basis. After deducting the amounts mentioned above, the balance shall be sent to McD. It is made clear that this excess amount belongs only to McD and no part can be deal or withheld for any reason whatsoever by AJANTA. 15.4. At Para 9(c) of the License Agreement, it is agreed that: the Licensee shall not be entitled to any kind of financial assistance from the Licensor. It is the responsibility of the Licensee to make independent arrangem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny intellectual property relating to the trade name, trade mark, brand name, technical know-how etc. pertaining to the goods manufactured by the Contract Bottling Units; the Contract Bottling Units are in no position to commercially exploit or to avail any financial benefit out of the above; they are paid fixed charges as per the agreements and the surplus whatever accrues to the brand owner appellant. When the transferee is not in a position to use the technical know-how etc., it cannot be said that the Contract Bottling Units have availed any services with respect to intellectual property rights from the brand owner appellants. It is seen that it is the brand owner himself who is using his own brand and technical know-how albeit the manufacturing activity is outsourced to the Contract Bottling Units. The ultimate beneficiary of the technical know-how are the intellectual property if any for that matter is the appellant themselves and therefore, it is incorrect to say that there is any transfer of temporary leasing of intellectual property. Therefore, we find that the entire case of the Department is based on a false surmise. 18. We find that the issue is no longer res integra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or demand of service tax on Intellectual Property Services. The Revenue has filed appeals contesting the valuation for the purpose of levy of service tax adapted by the appellants. In view of our discussion above, we have concluded that the appellants are not liable to pay service tax therefore the issue of valuation becomes redundant to that extent. 21. Coming to the issue of admissibility of CENVAT credit, the appellants submits that they are not disputing the levy of service tax in respect of brand franchise agreement for manufacture of packaged drinking water and soda; the Commissioner has also held that the appellant is eligible to CENVAT credit on advertising. The appellants submit that majority of the advertisements are for mineral water and soda and not for promotion of IMFL therefore the credit should be fully eligible. They further submit that the limit of utilisation of CENVAT Credit in terms of Rule 6(3) (c) is not applicable as alcoholic beverages are not excisable goods and do not fall under exempted goods and therefore, they are eligible to take CENVAT credit without limitation of 20%. However, We find that learned Commissioner observes that the appellant was not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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