In the case of M/s Whirlpool of India Ltd. Vs. CCE & ST, New Delhi, it was held that the onus to prove that the assessee was providing any exempted services is on department before invoking Rule 6 and further it was held that only such intellectual property rights which are covered under Indian law in force alone are chargeable to service tax under IPR service.
Facts of the Case
The appellant, apart from manufacturing goods, is also engaged in providing taxable services. It is also registered as input service distributor. The adjudicating authority confirmed the impugned demand essentially on the following grounds:
(i) No service tax was paid on the technology transfer fee by the Appellant which was taxable under “intellectual property rights service”.
(ii) The appellant utilized excess CENVAT Credit during the period of April, 2007 to March 2008 and is liable to pay the excess amount of credit taken as per the provision of Rule 14 of CCR read with Section 73 of the Act, based for the following reasons:
a. That the Appellant is providing taxable as well as exempted services and has not maintained separate accounts for dutiable and exempted services.
b. The exception provided under Rule 6(6) of the CCR is not applicable in case services are cleared for export under the Export of Services Rules, 2005.
c. The Appellant is not authorised to avail credit of more than 20% of Service Tax payable on taxable services for the period April 207 to March 2008.
(iii) The deduction of R&D cess by the Appellant from service tax paid on brand fee under IPR services for the period of 2007-08 was not admissible.
Contentions of the Assessee
The appellant has contended that:
(i) The impugned order is based on non-application of mind. It does not specify what were exempted services rendered by it.
(ii) While confirming the demand under intellectual property rights service the Commissioner did not give any finding on the various submissions of the appellant.
(iii) The technology transfer fee was paid to Whirlpool USA for receiving technical know-how which is not covered in the taxable category of intellectual property rights service.
(iv) Commissioner did not take into account that the benefit of notification 17/2004-ST was admissible in respect of R&D cess paid on technical transfer fee.
(v) Extended period is not invocable as there was no suppression or wilful misstatement and there is no finding that there was any wilful mis-statement or suppression with intent to evade service tax.
(vi) An order passed without taking into account the contentions of the appellant is bad in law as has been held in the case of CCE Vs. Sheetal International – 2010 (259) ELT 165 (Supreme Court).
(vii) The appellant was not providing any exempted services and therefore there were no requirement for maintaining separate account and so there was no limit of 20% on utilisation of CENVAT credit and the Commissioner has acknowledged this fact and still confirmed the demand.
(viii) Technology transfer fee is not liable to service tax under the definition of IP service and detailed submissions of the appellant were not taken into account while confirming the demand under this head. The agreement between Whirlpool Corporation, USA and the appellant clearly shows that it was an agreement for technology transfer and not for intellectual property. As per the agreement the purpose was supply of technology/information available with Whirlpool USA and therefore does not fall within the scope of intellectual property right. It was paying service tax on the brand fees under intellectual property rights service.
(ix) R&D cess has been paid on technology transfers and the service tax on the brand fee under intellectual property rights service was rightly paid after deduction of such R&D cess in terms of Notification 17/2004-ST as is evident from the language of the said notification.
(x) As in the extended period of limitation is not invocable in the present case as there was no wilful misstatement or suppression of facts, the demand is time-barred. The demands on technical transfer fee and relating to R&D cess were similarly raised earlier in a show cause notice dated 17/10/2008 for the period 2005 06 and 2006 07 and therefore the extended period cannot be invoked as in respect of these two components of demand, Revenue was already aware of the facts.
Contentions of the Department
The department contended the following:-
(i) In the ST 3 returns filed by the appellant for the period April 2007 to September 2007 and October 2007 to March 2008 it mentioned to be providing taxable service as well as exempted service.
(ii) Services exported are to be treated in exempted services.
(iii) Technology transfer agreement is enforceable under the Indian law (contract act) and therefore would be covered under IP service.
(iv) R&D cess paid in respect of technology transfer fee cannot be offset against the service tax paid under intellectual property rights service on the brand fees paid by the appellant.
Held by Hon’ble CESTAT
The Hon’ble CESTAT stated that as regards the component of demand pertaining to excess utilisation of CENVAT credit (beyond 20%) on the ground that the appellant provided taxable as well exempted services and did not maintain separate accounts, and therefore utilisation of CENVAT credit was in excess of what was permitted in terms of Rule 6 of the CENVAT Credit Rules 2004, the appellant has vehemently pleaded that it was not providing any exempted service at all and no such service has been identified in the show cause notice which we find is borne out from the perusal of the show cause notice. The adjudicating authority in its order has recorded the following finding with regard to this issue:
“The SCN has not specified as to which services are taken as exempted and which services are taken as taxable. Only when it is proved that the noticee was providing exempted as well as taxable services that it can be held guilty of availing and utilizing CENVAT credit of service tax in excess of 20% of Service Tax paid on taxable service. Mere averment in the SCN cannot lead the adjudicating authority in deciding the case against the Noticee. The SCN has to come up with specific details of such allegation. However, this view of the adjudicating authority has not been accepted in review in noticee’s similar case for previous period. In view of the foregoing and guided by the principal of judicial discipline, I am bound to adopt the views taken in review by the Committee of Chief Commissioners and hold that the notice is providing exempted service along with taxable services and hence, they were not permitted to avail/utilise in excess of 20% of Service Tax paid on taxable services since they were not maintaining separate records.”
The adjudicating authority is thus categorical in its finding that the onus to prove that the appellant was providing any exempted services has not been discharged by Revenue. The adjudicating authority is however wholly wrong in observing that judicial discipline requires him to be bound by the views of the Review Committee of Chief Commissioners. Adjudicating authority is only bound by the orders of the superior adjudicating authority like CESTAT and the observations of the Committee of Chief Commissioners are of administrative nature and not of quasi-judicial nature to have any binding effect on adjudicating authority. Thus there is no doubt that even in the opinion of the adjudicating authority, component of demand confirmed on account of non-maintenance of separate accounts of taxable and exempted services is not sustainable.
As regards the demand under IPR service on technology transfer fee, the Hon’ble CESTAT perused the agreement relating thereto entered into between Whirlpool Corporation USA and the appellant. It is evident from the agreement that it is only for the purpose of technical assistance pertaining to products so as to allow the appellant to design, manufacture and service products, parts or subassemblies thereof and to have appellant’s parts suppliers make parts or subassemblies for appellant to be assembled into products.
It is evident that the agreement is entered for the purpose of supply of technology/technical assistance/information by Whirlpool, USA to the appellant and the remuneration received by Whirlpool, USA is only for the use of the same by the appellant. There is nothing on record that any of the said technology/technical know-how/information is registered or patented under Indian law. Only such intellectual property rights which are covered under Indian law in force alone are chargeable to service tax under IPR service. The Commissioner does not identify any Indian law under which the technology transfer and technical assistance involved in this case is covered. As is evident, the Commissioner has not taken into account the contentions of the appellant and has come to summary conclusion that technology transfer fee is liable to service tax under Intellectual Property Service.
The Hon’ble CESTAT further stated that in the case of Tata Consultancy Services Vs. Commercial Service Tax – 2015 –TIOL-2370-CESTAT-Mumbai it was held by CESTAT that intellectual property rights not covered by the Indian laws would not be covered under taxable service in the category of IP services. In the case of Thermax Ltd. Vs. Commissioner of Central Excise Pune – 2013-TIOL-1092-CESTAT-Mumbai it was held that payment for use of trade secret is not covered within the ambit of intellectual property service as there is no law governing trade secrets/confidential information in India.
Coming to the demand on account of deduction of R&D cess from service tax paid on brand fee under IPR service, the Hon’ble CESTAT noticed that notification No. 17/2004 dated 10/09/2004 states as under:
“On exercise of the powers conferred by sub-section (1) of Section 93 of the Finance Act, 1994 (32 of 1994), the Central Government being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable service provided by the holder of intellectual property right to any person, in relation to intellectual property service, from so much of the service tax leviable thereon under Section 66 of the said Act, as is equivalent to the amount of cess paid towards the import of technology under the provisions of Section 3 of the Research and Development Cess Act, 1986 (32 of 1986) in relation to such intellectual property service.”
It is evident that in terms of the above notification, service tax on IPR service is exempt only to the extent of the R&D cess paid towards the import of technology under the provisions of Section 3 of the R&D Cess Act, 1986 in relation to such intellectual property service (emphasis added). It is admitted that no service tax was paid under IPR service on the amount paid for such technology transfer which means that the appellant also was of the view that such technology transfer was not in relation to IPR service. Indeed in the preceding para, it is held that such technology transfer is not covered under IPR service. Consequently, the appellant was not eligible to deduct the R&D cess it paid on technology transfer from the service tax payable under IPR service as such technology transfer was not in relation to intellectual property service. Thus the component of impugned demand is sustainable on merit.
It is seen that the components of demand on technology transfer and with regard to R&D cess were the subject matter of an earlier show cause notice dated 17.10.2008 issued to the appellant covering an earlier period 2005-06 & 2006-07 and therefore in the light of the judgements of Supreme Court in the case of Nizam Sugar factory – 2006 (197) ELT 465 (54SC) and Pushpam Pharmaceutical Company Vs. CCE, Bombay 1995 (78) ELT 401 (SC) the extended period in the present case is not invocable which will make these components of the impugned demand time-barred because the show cause notice was issued on 05/04/2010 for the period up to March 2008.
In the light of the foregoing analysis, the appeal is allowed.