‘Know How’ isn’t covered under IPR, No Service Tax applicable: CESTAT [Read Order]

The Customs, Excises, Service Taxes Appellate Tribunal (CESTAT) held that exclusive right to use the “know-how‟ in any plant in accordance with the processes, specifications, and recipes in connection with the manufacture, marketing, sale and distribution of Products would not fall in the definition of Intellectual Property Right (IPR) so as to make it taxable under Section 65(105)(zzr) of the Finance Act.

The Appellant, M/s Modi-Mundipharma Beauty Products Pvt. Ltd. is engaged in the manufacture of cosmetics and skincare products. It has its corporate office in New Delhi but its factory is situated at Ghaziabad. Two agreements were entered into by the Appellant with Revlon Mauritius Limited at Mauritius and Freya Holdings Limited at British Virgin Island. Under the agreement, Revlon Mauritius granted to the Appellant the exclusive right to use the “know-how” in any plant approved by Revlon Mauritius in accordance with the processes, specifications, and recipes thereof in connection with the manufacture, marketing, sale and distribution of Revlon products in the territory.

“Know-how‟ has been defined to mean formulae, processes, recipes, product specifications, technical and manufacturing data, information, equipment specification of raw materials, and other technical information and data necessary to manufacture Revlon products.

A show-cause notice was issued to the Appellant mentioning therein that 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 asked to provide details of taxable and non-taxable 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 a royalty to Revlon Mauritius for use of their trademark or name in India, and made payment to Revlon Australia for use of their printing and stationery.

The department formed an opinion that the said activities related to Intellectual Property Right (IPR) service, which were taxable under Section 65(105) (zzr) of the Finance Act.

The appellant contended that it had not entered into any agreement with Revlon Mauritius for use of trademark license since the agreement with Revlon Mauritius was only for providing “know-how‟. It was specifically stated that “know-how‟ was not covered in the definition of Intellectual Property Right (IPR) service.

The tribunal headed by President Justice Dilip Gupta and a Technical Member C.L. Mahar held that exclusive right to use the “know-how‟ in any plant in accordance with the processes, specifications, and recipes in connection with the manufacture, marketing, sale and distribution of Products would not fall in the definition of Intellectual Property Right (IPR) so as to make it taxable under Section 65(105)(zzr) of the Finance Act.