The Bangalore bench of the Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ) has set aside the service tax demand as it is not applicable on training and coaching services provided outside India. The bench held that the appellants were exempt from paying service tax since the training and coaching services were provided outside of India, since this is not covered by Rule 3(1)(ii) of the Rules.
The appellant, GE BE Pvt. Ltd. is a private limited company registered as a 100% EOU with Customs Commissionerate, Bangalore. They are also registered as service providers under the categories of Intellectual Property Services, Maintenance and Repair Service, Technical Testing and Certification, Business Auxiliary Service etc.; under the Finance Act 1994. During the course of special audit, the audit officers noticed that the appellant had paid certain amount as royalty to their parent company M/s. Medical Systems Global Technology (GTC) for transfer of technical knowhow.
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On scrutiny of the collaboration agreement entered by the appellant with their parent company, it was noticed that they have a contract for using intellectual property services with effect from 01.01.2007. As per the collaboration agreement recitals the collaborator that is the appellant desires to have license from M/s. General Electric company through GTC to use entity intellectual property and GE intellectual property to GE entities.
Since they had paid an amount of Rs.10,30,29,433 as royalty amount for the period from January 2007 to March 2009, the said service being considered as intellectual property service under section 65(55a) they were liable to pay service tax as the recipient of service under Rule 2(1) (d)(iv) of Service Tax Rules 1994 and hence show-cause notice dated 16.07.2009 was issued. The same was adjudicated by the Commissioner confirming the service tax demand of Rs.1,20,97,716 being the service tax amount for the period January 2007 to March 2009 and equivalent amount of penalty was also imposed under section 78 of the Finance Act 1994 along with penalty of Rs. 1000 in terms of Section 77 of the Finance Act, for not furnishing the correct details in the ST3 Returns filed by the appellant.
Counsel on behalf of the appellant submitted that the appellant had entered into a collaboration agreement dated 01.01.2007 with General Electrical Company and GE Medical Systems Global Technology Company by way of which the appellant had obtained a nonexclusive, nontransferable right and license to use GE intellectual property of the foreign company for the purpose of technology benefit.
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Under the agreement, the appellant had received a license to use the technical know-how from the foreign company and as a consideration for the license to use the said intellectual property, the appellant had made a payment of royalty to the foreign company. It was submitted that no patents trademark copyright and design licensed under the agreement were registered under any Indian law during the said time which has been certified by GE Medical Systems Global Technology Company LLC Inc vide their certificate dated 30.08.2009.
The appellant had submitted all the details including balance sheets for the preceding 3 financial years wherein specific disclosures about royalty payments were made pursuant to the audit proceedings based on the audit report SAR No. 76/2007-2008 in February 2008 where the audit report was issued for specific objection regarding nonpayment of service tax on royalty payments which the appellant did not accept.
The department has confirmed the demand of service tax on such payments under the category of intellectual property service by treating the activity of licensing the know-how as service rendered by the foreign company. Referring to the definition of intellectual property service and to the clarification issued by the TRU, it is submitted that the technical know-how was not recognized as intellectual property in India therefore the royalty paid to the foreign company to procure the license to use the said know how cannot be considered as service under intellectual property service in terms of the Finance Act 1994.
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Also relied on various other judgments where the Tribunals have consistently held that Know-how provided by way of licensed by the foreign company to the Indian company is not in the nature of intellectual property service under the Finance Act
1994 and therefore, the demands cannot be sustained.
It was further submitted that the appellant has not suppressed any facts with an intention to evade payment of duty since they are registered service provider who has been paying the service tax due and the fact that they had received the license to use technical know-how from the foreign company was not suppressed at any juncture.
The appellant had been making payment of royalty and duly making the payment on R&D Cess on the royalty paid, thus the department had complete knowledge of the transactions and their inaction at the time of discharge of service tax cannot be a ground to allege suppression. It is also stated that on 14.12.2007 the appellant had intimated the department on the royalty payments made by them but the show-cause notice was issued only in July 2009 which is clearly time barred and also the fact that the issue is an interpretational in nature the question of suppression does not arise.
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The authorized representative on behalf of the revenue reiterating the findings of the commissioner submits that the appellant he is liable for surface tax under intellectual property service as discussed by the commissioner in the improved order. Hence the impugned order needs to be sustained and the appeal is to be dismissed.
The only issue to be decided is whether the royalty payments made by the appellant for receiving the technical know-how are liable to service tax under the category of intellectual property service as defined under Section 65(55a) of the Finance Act, 1994.
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’ so as to come under the purview of taxable service. Thus, there would not be any service tax on permanent transfer of IPRs.
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A two member bench of Dr. D.M. Misra, Member (Judicial) and R. Bhagya Devi, Member (Technical) viewed that know-how is not recognized as Intellectual Property law by any Indian Law for the time being in force. In fact knowhow is the undisclosed information cited by the Department clarification dated 10-9-2004 as example of intellectual property right not covered by any Indian law. The transaction in the present case was for know-how, which is in the nature of property, no service was provided by the foreign companies.
In various decisions the Tribunal held that there cannot be any Service Tax on technical know-how. The CESTAT held that the appellants were exempt from paying service tax since the training and coaching services were provided outside of India, since this is not covered by Rule 3(1)(ii) of the Rules. The bench set aside the impugned order and allowed the appeal.
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