Royalty for Transfer of Technical Know-How Cannot Be Treated as Payment for Consulting Engineer Services: CESTAT [Read Order]

The New Delhi Bench of the Customs, Excise, and Service Tax Appellate Tribunal ( CESTAT ) ruled that consideration made to a holding company for the use of business know-how was not taxable under the category of management consultancy service.

Expeditors International India Private Limited, the appellant, challenged a service tax demand on royalty payments made to its holding company. The demand was imposed under the premise that such payments constituted charges for management consultancy services.

The appellant’s counsel argued that the payments were for the use of technical know-how and not for consultancy services. The counsel submitted that such transactions are covered under cost-sharing arrangements and do not represent a service provider-recipient relationship.

The appellant’s counsel relied on rulings such as Castrol Limited vs. Commissioner of Central Excise, which held that royalty for technical know-how does not fall under management consultancy services, and Max Financial Services Ltd. vs. Commissioner of Central Excise and Service Tax where similar royalty transactions were not considered taxable under consultancy service provisions.

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The department counsel argued that the royalty payments constituted taxable services provided by the holding company and were liable under the category of management consultancy service.

The two-member bench comprising Binu Tamta (Judicial Member) and Hemambika R. Priya (Technical Member) observed that the royalty payments were solely for the transfer of know-how and not for consultancy.

The tribunal observed that previous rulings consistently held such transactions to be outside the scope of management consultancy services. The tribunal observed that the transaction did not involve any service rendering but was a contractual arrangement for technical collaboration.

The tribunal ruled that royalty payments for business know-how are not taxable under the management consultancy service category. The tribunal set aside the service tax demand on royalty payments and allowed the appellant's appeal on this issue.

To Read the full text of the Order CLICK HERE

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