IPR Licensing Cannot be Treated as Franchise Service: CESTAT Grants Relief to Reckitt Benckiser [Read Order]
The Tribunal ruled that royalty payments under licensing agreements constitute IPR services and not franchise services.
![IPR Licensing Cannot be Treated as Franchise Service: CESTAT Grants Relief to Reckitt Benckiser [Read Order]](https://images.taxscan.in/h-upload/2025/12/17/2112838-ipr-licensing-treated-franchise-service-cestat-relief-reckitt-benckiser-taxscan.webp "IPR Licensing Cannot be Treated as Franchise Service: CESTAT Grants Relief to Reckitt Benckiser [Read Order]")
The Chandigarh Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT), has held that a mere licensing arrangement for the use of intellectual property rights cannot be reclassified as a franchise service for the purpose of levy of service tax, and that denial of exemption on such reclassification is unsustainable. Reckitt Benckiser Private Limited, engaged in...
The Chandigarh Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT), has held that a mere licensing arrangement for the use of intellectual property rights cannot be reclassified as a franchise service for the purpose of levy of service tax, and that denial of exemption on such reclassification is unsustainable.
Reckitt Benckiser Private Limited, engaged in the manufacture and sale of fast-moving consumer goods including drugs, was registered under the service tax law for various taxable services, including Intellectual Property Service. The company had entered into licensing agreements with its overseas group entities, under which it was granted non-exclusive rights to use intellectual property rights for the design, manufacture, distribution, marketing, and sale of products in India.
The appellant discharged service tax on royalty payments under the reverse charge mechanism by classifying the services as Intellectual Property Service. It also paid research and development cess under Section 3 of the Research and Development Cess Act, 1986, and accordingly availed exemption from service tax to the extent of cess paid, as permitted under the applicable exemption notification. These details were consistently disclosed in the service tax returns.
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The dispute arose when the department took the view that the services received were not intellectual property services but were classifiable as Franchise Service. On this basis, a show cause notice was issued proposing denial of exemption and recovery of service tax. The adjudicating authority confirmed a service tax demand of ₹8.49 crore for part of the period while dropping other portions of the demand on limitation and statutory changes.
The appellant, represented by Krati Singh and Khushbu Sood, argued that the issue was already settled in its own case by the same tribunal for an earlier period, where identical licensing agreements were examined and held to be classifiable as Intellectual Property Service and not Franchise Service. It was contended that the department could not take a contradictory view for a subsequent period involving the same facts.
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It was further argued that the essential element of a franchise, namely the grant of a representational right whereby the franchisee loses its independent identity and represents the franchisor, was entirely absent. The appellant retained its own corporate identity, controlled its manufacturing, marketing, and pricing decisions, bore advertisement costs, and even had the right to sub-license. The licensors did not exercise significant control over its operations.
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The appellant also submitted that the exemption notification applied to any taxable service provided by the holder of intellectual property rights in relation to the temporary transfer or permission to use such rights, irrespective of the precise taxable service classification. Additionally, it was argued that extended limitation was not invocable as all facts were disclosed in returns and the dispute involved interpretation of law.
The revenue, represented by Siddharth Jaiswal and Narinder Singh, defended the impugned order and argued that the agreements indicated elements of franchising rather than mere licensing. Further, since the earlier tribunal order in the appellant’s own case was under challenge before the Supreme Court, the issue had not attained finality and should not be followed.
The bench comprising Judicial Member, S. S. Garg, Member, and Technical Member P. Anjani Kumar, held that the controversy was squarely covered by the tribunal’s earlier decision in the appellant’s own case on identical facts. The bench reiterated that classification as Franchise Service requires the grant of a representational right, under which the franchisee represents the franchisor and effectively loses its individual identity in dealings with the outside world.
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On examining the licensing agreements, the tribunal found that they merely granted rights to use intellectual property for manufacturing and marketing products, while ownership of the intellectual property remained with the licensors. The appellant continued to operate independently, without significant control by the licensors, and clearly disclosed itself as the manufacturer of the goods. These features were inconsistent with a franchise arrangement.
The tribunal also rejected the argument that pendency of an appeal before the Supreme Court automatically nullified the binding nature of the earlier tribunal order, noting that no stay had been granted.
Accordingly, it held that the services were correctly classified as Intellectual Property Service and that the appellant was entitled to the benefit of exemption linked to payment of research and development cess. The service tax demand, interest, and penalties were therefore set aside and the appeal was allowed.
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