Transfer of Technical Know-How falls under IPR Service & Liable to Service Tax only if IPR Registered under Indian Law: CESTAT [Read Order]

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Chandigarh has held that the transfer of Technical Know-How falls under Intellectual Property Rights (IPR) service and shall be liable to Service Tax only if the IPR is registered under Indian Law.

The issue pertains to two appeals, one filed by the Assessee, Schneider Electric India Pvt. Ltd. and the second, by the Revenue, Commissioner of Service Tax, Delhi arising from the order-in-original passed by the Commissioner of Central Excise.

The Assessee was engaged in the manufacture of electrical articles and is registered with the service tax department.

Two show cause notices (SCNs) were issued to the assessee by the Commissioner of Central Excise based on an audit conducted by the officers of the Directorate General of Audit for non-payment of service tax under Section 66A of the Finance Act, 1994, on the royalty amounts paid to a France-based company for the transfer of technical know-how, which falls under IPR Service.

The Commissioner of Central Excise passed an order-in-original, confirming a total demand of Rs.5,33,80,931/- for both periods but granted cum-tax benefit to the assessee and set aside the demand prior to 18.04.2006.

The revenue filed an appeal challenging the cum-tax benefit.

The assessee, represented by Ms. Priyanka Rathi, Ashwani Chandrasekharan and Shri. Vikrant Kackria argued that the order passed by the Commissioner is not sustainable as it failed to consider the facts, applicable law, and binding judicial precedents on identical issues.

The assessee contended that the transfer/acquisition of know-how is not liable to Service Tax under IPR Service, as know-how is not an IPR within the meaning of Service Tax law.

The assessee also highlighted Notification No. 17/2004-ST which grants exemption from payment of service tax to the extent Research and Development (R&D) cess is paid, and also provided the evidence of R&D Cess payments.

The assessee highlighted that the Commissioner of Central Excise had incorrectly held that the deduction is available only for service tax paid under Section 66 and not under Section 66A, contrary to the decision of CESTAT in the case of Rochem Separation Systems (India) P. Ltd. v. CST.

The assessee also cited Circular No. 80/10/2004-ST, which clarified the scope of taxable entry for the transfer of technology and levy of service tax.

The assessee emphasised that there was no suppression on their part with the intent to evade payment of service tax.  Also clarified that they relied on previous decisions that held that the demand cannot be sustained on limitation when the entire proceedings are revenue neutral.

The Assessee further argued that they had a bona fide belief that no service tax was payable on the acquisition of know-how and contended that invoking the extended period of limitation and imposing a penalty is not sustainable when a bona fide belief exists and interpretation issues are involved.

The Revenue, Commissioner of Service Tax, represented by Shri Rajeev Gupta and Ms. Swati Chopra submitted that the decisions relied upon by the Assessee have been challenged before the Supreme Court and the appeals have been admitted.

The revenue also cited the decision in UOI vs. West Coast Paper Mills Ltd., suggesting that the present case should be kept in abeyance until the Supreme Court decides on the matter.

The CESTAT focused on whether the royalty paid by the assessee for the transfer of technical know-how falls under IPR Service and liable to service tax.

The two-member bench consisting of Mr. S. S. Garg (Judicial Member) and Mr. P. Anjani Kumar (Technical Member) held that for IPR to be taxed under service tax, it should be registered under Indian law. As the technical know-how in question was not registered under Indian law, it was held that the transfer of know-how is not liable to service tax under IPR Service.

The bench also cited various decisions that have consistently held that know-how is not an IPR within the meaning of service tax law and, consequently, its transfer is not subject to service tax.

Regarding the appeal filed by the Revenue challenging the cum-tax benefit given to the assessee, the CESTAT observed that service tax under reverse charge is revenue neutral, and cum-tax benefit is applicable in such cases.

In result, both the appeals filed by the Assessee and the Revenue were decided in favour of the Assessee.

To Read the full text of the Order CLICK HERE

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