The Ahmedabad bench of the Customs, Excise & Service Tax Appellate Tribunal(CESTAT) has held that no service tax on lump sum fees and royalties is paid to the foreign service provider under intellectual property rights.
Crest Speciality Resins Pvt Ltd, the Appellant is a manufacturer of Unsaturated/saturated Polyester Resins and other excisable goods and also a holder of PAN-based Central Excise and Service Tax Registrations with Central Excise division at Nadiad in the state of Gujarat.
The Appellant by Agreement entered with Benasedo Spa, Italy has received the Technical know-how on payment of lump sum fees of Rs.2,94, OO, OOO/-. After making such payment to an overseas supplier, as pointed out by their Bank i.e. Oriental Bank of Commerce, the Appellant paid Rs. 14,70,000/- as Cess @ 5 % under section 3 of the Research and Development Cess Act, 1986 about all payments made for the import of Technology and intimated with a copy of Challan of payment to the Bank.
Appellant also paid a Royalty of Rs 61,96,434/- to Benasedo Spa, Italy as per their Agreement dt. 31-03-2010. The Revenue is of the view that the Total Rs.2,94, OO, OOO/- + Rs 61,96,434/- = Rs 3,55,96,434/- paid for receipt of Technical know-how Fees & Royalty paid is liable to payment of Service Tax under category “Intellectual Property Service” under Finance Act 1994.
As the Appellant had paid the R&D Cess for Rs. 14,70,000/-, exemption of Service Tax for Rs. 14,70,000/- in terms of Service Tax Notification No. 17/2004-ST as amended, was available to the Appellant which exempted taxable service about Intellectual Property Service, from so much of service tax leviable thereon under section 66 of Finance Act 1994, as is equivalent to amount of CESS paid towards import of Technology under section 3 of Research and Development Cess Act, 1986 about such intellectual property service.
The Appellant had also discharged Service Tax liability of a total of Rs. 21,96,432/- from the Cenvat Credit Account. However, the total amount of Rs 3,55,96,434/- paid to M/s Benasedo Spa, Italy by Appellant for Transfer of Technical know-how and Royalty is treated as “Taxable Value” for Intellectual Property Service, attracting Service Tax of Rs. 21,96,432/- payable by cash in GAR-7 challan. The Commissioner confirmed the Service Tax demand with interest and penalty.
Shri P. P. Jadeja, Counsel, appearing for the Appellant submitted that the demand confirmed with interest and penalty against Appellant is not sustainable. The Appellant has already debited Service Tax in question, from Cenvat Credit and intimated such payment of service tax to jurisdictional officers and reflected in periodical ER-1/ ST-3 Returns filed for the relevant period.
A permanent transfer of intellectual property rights does not amount to rendering of service. On such transfer, the person selling these rights no longer remains a ‘holder of intellectual property right’ to come under the purview of taxable service. Thus, there would not be any service tax on the permanent transfer of IPRs.
A two-member bench of Ramesh Nair (Judicial Member) and Raju (Technical member) observed that fees and Royalties paid by the appellant are towards Intellectual Property Right which is owned by a company in Italy and the same is not registered under any law in India in terms of the definition of Intellectual Property Right is given in Section 65(55a) of Finance Act 1994.
Since the Intellectual Property Right which is used by the appellant belongs to the overseas supplier and that Intellectual Property Right is not governed by any law in India, levy is not covered under the definition of Intellectual Property Right. Accordingly, the same is not taxable.
Further held that the service of Intellectual Property Rights is not covered for levy under the definition of Intellectual Property Rights service given in the Finance Act, 1994. Therefore, the transactions of payment of Fees and Royalties are not taxable.
The CESTAT set aside the impugned order confirming the demand of Service Tax with interest and Penalty and allowed the appeal.
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