The Chennai bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) quashed the service tax demand on royalty charges for music directors/companies.
M/s. Universal Power Systems Private Limited the assessee against the impugned Order-in-Original No. 16/2013 dated 28.02.2013 passed by the Commissioner of Service Tax, Chennai and the period of dispute is from May 2006 to March 2011.
During the Audit of the accounts of the appellant by the Internal Audit Group, it appears that they had noticed the agreements entered by the appellant with music directors/music companies’ association for procuring ringtones and paid royalty charges at agreed rates per download.
There were separate agreements between the appellant and various mobile telecommunication operators to provide ringtones, pictures, etc., that could be downloaded by the customers from the mobile platform developed, installed, and maintained by the appellant, for which the appellant was entitled to revenue sharing at agreed rates per download by those mobile operators.
The appellant also received the royalty amount payable / paid to the music directors/music companies from the said mobile operators and had paid Service Tax under business auxiliary service on the revenue share received.
Service Tax was not payable on the royalty charges as the same was liable to be paid for the services under Intellectual Property Rights (IPR) service, that too only after the inclusion of “copyright” under IPR service which, however, was specifically excluded from the purview of IPR services prior to that inclusion, which happened in 2010.
The revenue viewed that since it was the responsibility of the appellant to create and supply ringtones from the mobile platforms and servers developed, installed and maintained by them, to the mobile operators, the expenditure incurred by the appellant, namely, royalty charges paid to the music directors/music companies was for performing taxable service.
The Commissioner, in the said Show Cause Notice, has alleged that the appellant had suppressed the facts of collection of royalty charges from their customers in the ST-3 returns filed, which fact would not have come to light but for the audit of accounts and therefore, has sought to justify the invocation of an extended period of limitation under Section 73(1) of the Finance Act, 1994.
The demands were proposed by the lower authority, holding that the payment of royalty was an expenditure incurred by the appellant on behalf of the service recipient. The differential tax has been arrived at as per Section 67 of the Finance Act, 1994 read with Rule 5 of the Service Tax (Determination of Value) Rules, 2006.
The two-member tribunal bench comprising Mr P Dinesha,(Judicial) and Mr Vasa Seshagiri Rao,(Technical) observed that the Revenue could not have proposed and confirmed the demand under Section 67 of the Act read with Rule 5 Service Tax (Determination of Value) Rules, 2006.
Since it is by virtue of the mode of computation provided here that the differential tax was arrived at and demanded, the Tribunal quashed the demand.
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