Royalty for Exclusive 99-Year Trademark Use Qualifies as Deemed Sale, Not Taxable as Service: CESTAT [Read Order]

Bajaj Resources Private Limited, the appellant, had entered into an agreement with its wholly owned subsidiary, Bajaj Corp Limited, granting it exclusive, worldwide rights to use its registered trademarks for a period of 99 years. In return, the appellant received royalties based on a percentage of the subsidiary’s annual net sales turnover.

Initially, service tax was paid on these royalty amounts under the category of Intellectual Property Services. The appellant later claimed that the transfer of such long-term, exclusive rights should be treated as a deemed sale under Article 366(29A)(d) of the Constitution and therefore should not attract service tax.

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The department issued a show cause notice demanding tax on the royalty, arguing that the transfer was not a sale but a declared service as per Section 66E(c) of the Finance Act, 1994. The appellant also filed for a refund of service tax already paid, amounting to ₹79,52,935. Both the tax demand and the refund claim were rejected by the Commissioner (Appeals), leading the appellant to approach the CESTAT.

The appellant’s counsel argued that the agreement was not a simple license for use, but a complete transfer of the right to use the trademarks, leaving no residual control with the original owner for the 99-year term. They relied on the Supreme Court judgment in BSNL v. Union of India to show that the agreement fulfilled the conditions for a transfer of the right to use goods, making it a deemed sale. The royalty received was outside the scope of service tax.

The department counsel countered that the trademarks remained the property of Bajaj Resources and the agreement was more in the nature of a license, not a sale. It argued that such licensing transactions were specifically recognized as declared services liable to tax. The department also submitted that since the royalty invoices showed service tax and it was collected from the subsidiary, the appellant was not entitled to a refund due to the doctrine of unjust enrichment.

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The two-member bench comprising Justice Dilip Gupta (President) and Hemambika R. Priya (Technical Member) examined the agreement closely and found that the transfer gave Bajaj Corp full and exclusive use of the trademarks for 99 years, with Bajaj Resources retaining no operational control.

The tribunal held that this arrangement constituted a deemed sale under Article 366(29A)(d) and did not fall within the definition of service under Section 65B(44). Therefore, the service tax demand was set aside.

The tribunal also held that since the service tax was collected from the subsidiary and there was no evidence that it was refunded or reversed, the refund claim was rightly rejected under the principle of unjust enrichment. The appeal against the tax demand was allowed, while the appeal seeking refund of already paid tax was dismissed.

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