Commissioner of Service Tax Vs McLeod Russel (India) Limited (CESTAT Kolkata)
Summary: The CESTAT Kolkata dismissed the Revenue’s appeal against the order dropping the Service Tax demand on royalty and licence fees paid by M/s. McLeod Russel (India) Limited to M/s. Borelli Tea Holdings Ltd., U.K., under an agreement dated 26.04.2004. The foreign company had granted the respondent a non-exclusive, non-transferable licence to use its patents and trademarks for manufacture/production of tea and export thereof, against royalty and/or licence fees calculated at 1.5% and 1% of net sales.
Revenue contended that the respondent had obtained Intellectual Property Rights and was liable to pay Service Tax under the Reverse Charge Mechanism. The Tribunal noted that the relevant trademarks and patents were not registered in India. Relying principally upon its decision in Munjal Showa Ltd. v. Commissioner of C.Ex. & S.T., Delhi (Gurgaon), the Tribunal held that for an Intellectual Property Right to fall within the taxable IPR service provisions under the Finance Act, 1994, the right had to be recognised under a law for the time being in force in India. The Tribunal reproduced and followed the reasoning that unregistered trademark, patent and other intellectual property rights were outside the scope of taxable IPR service under Section 65(105)(zzr) read with Section 65(55a) of the Finance Act, 1994.
The Tribunal also relied upon the reasoning in Chambal Fertilizers & Chemicals Ltd. and other decisions concerning foreign intellectual property not registered under Indian law. Since the rights obtained by McLeod Russel were not registered in India and therefore were not governed by any Indian law for the time being in force, the royalty or licence fee paid to the foreign principal was held not taxable in India. The Revenue’s appeal was accordingly dismissed and the impugned order was upheld.
Cases Discussed / Relied Upon
- Munjal Showa Ltd. v. Commissioner of C.Ex. & S.T., Delhi (Gurgaon) — 2017 (5) G.S.T.L. 145 (Tri.-Chan.)
- Chambal Fertilizers & Chemicals Limited v. CCE, Jaipur-I — 2016 (45) S.T.R. 118 (Tri.-Del.)
- Rochem Separation Systems (India) Private Limited v. Commissioner of Service Tax, Mumbai-I — 2015 (39) S.T.R. 112 (Tri.-Mum.)
- Whirlpool of India Limited v. C.C.E. & S.T., Delhi — 2016-VIL-57-CESTAT-DEL-ST
- Tata Consultancy Services Limited v. C.S.T., Mumbai — 2015-TIOL-2370-CESTAT-MUM = 2016 (41) S.T.R. 121 (Tri.)
- Asea Brown Boveri Ltd. v. C.C.E. & S.T., Bangalore — 2016-VIL-480-CESTAT-BLR-ST
- Reliance Industries Ltd. v. C.C.E. & S. Tax, Mumbai — 2016-TIOL-1654-CESTAT-MUM = 2016 (44) S.T.R. 82 (Tri.)
FULL TEXT OF THE CESTAT KOLKATA ORDER
Revenue is in Appeal against the impugned order. The facts of the case are that the Respondents had entered into an agreement on 26.04.2004 in relation to the trade mark with a foreign company named and styled as M/s. Borelli Tea Holdings Ltd., U.K., who have no offices in India. In terms of the said agreement M/s. Borelli Tea Holdings Ltd. granted to the Respondent non-exclusive, non-transferrable licence allowing use of its patents and trade marks for manufacture/production of tea and export thereof. In consideration for the granting of patents and trade marks, the Respondents have been paying M/s. Borelli Tea Holdings Ltd. a royalty and/or licence fee @ 1.5% and 1% of their net sales. Revenue is of the view that the Respondents have obtained intellectual property rights therefore the Respondent is liable to pay Service Tax on the said amount of royalty paid to their foreign service provider under Reverse Charge Mechanism. In that circumstances a Show Cause Notice was issued to the Respondent which was adjudicated and demands were dropped. Against the said Order, the Revenue is in Appeal.
2. The Ld.Authorized Representative for the Revenue submitted that the activity undertaken by the Respondent duly qualify under Intellectual Property Rights defined under Section 65(55A) of the Finance Act, 1994. Therefore, the Respondent is liable to pay Service Tax.
3. Heard both sides and considered the submissions.
4. During the course of arguments it was found that the trade mark patent were not registered in India in any law for the time being in force. The similar issue has been dealt by this Tribunal in the case of Munjal Showa Ltd. v. Commissioner of C.Ex. & S.T., Delhi (Gurgaon) [2017 (5) G.S.T.L. 145 (Tri.-Chan.)], wherein the facts are as under:-
“2. The facts of the case are that assessee-appellant is registered with the service tax department under the category of GTA/IPR/Consulting Engineering services and paying service tax thereon and they are also engaged in the manufacturing of struts, shock absorbers, front forks, gas spring window balancers, etc., M/s. Showa Corporation, Japan entered into a contract with the appellant-assessee on 11-3-2002, in which the Industrial Property Right i.e. Patent, Utility model, Brand Service, Design, Trademark, Symbol were transferred to the assessee-appellant and percentage of the amount of sale was to be paid as royalty. The Revenue is of the view that the said transfer of technical know-how is covered under Intellectual Property Right services. Therefore, the appellant-assessee is liable to pay service tax under reverse charge mechanism with effect from 10-9-2004 when the said services came into the service tax net.”
5. Tribunal has observed in the said case as under:-
“6. On careful consideration of the submissions of both sides, we find that the Design, Trademark, Symbol, Brand Service have not been registered in India. Therefore, whether the royalty paid by the appellant-assessee under Industrial Property Right agreement is liable to service tax under Intellectual Property Rights service or not. For better appreciation of Intellectual Property Right, the definition of the same is reproduced :-
Section 65. Definition. – In this Chapter, unless the context otherwise requires, –
(55)(a) “intellectual property right” means any right to tangible property, namely, trademarks, designs, patents or any other similar intangible property, under any law for the time being in force, but does not include copyright.
“intellectual property (55)(b) service” means, –
(a) transferring, {temporarily} whether permanently or otherwise; or
(b) permitting the use or enjoyment of, any intellectual property right.
(105)(zzr)“taxable service” means any service provided or to be provided to any person, by the holder of intellectual property right, in relation to intellectual property service.
7. On going through the said provisions of the Act, we find that, to tax under service tax, under Intellectual Property Rights, such rights should be registered with Trademark/Patent authorities. It is a fact on record that such trade mark is not registered in India. Moreover, the C.B.E. & C. Circular dated 17-9-2004 relied upon by the ld. AR is having no help to the Revenue as it has been clarified that the taxable service include only such Intellectual Property Rights except Copyright that are prescribed under the law for the time being in force, as the term ‘time being in force’ implies that, as are applicable in India, and Intellectual Propertyrights covered under Indian law in force alone are chargeable to service tax and Intellectual Property Rights like Integrated Circuits or Undisclosed Information would not cover under the taxable services. Admittedly, Trade Mark rights which have been used by the appellant-assessee are not registered in India, therefore, the same are not liable to tax under IPR service, in the light of the decision in the case of Chambal Fertilizers & Chemicals Limited (supra), wherein this Tribunal has observed as under :-
“5. We have heard both sides and examined theappeal records. The only point for decision is that whether or not the appellant received taxable service under the category of ‘Intellectual Property Right service’ during the relevant period. The admitted facts of the case are that the technical know-how, engineering design licence involved in these agreements with foreign service providers are not registered in India under Indian law. However, the original authority held that registration of IPR under Indian law is only for obtaining protection from its infringement. He observed that the levy of tax is not dependent on the fact of such registration. We find that such conclusion is not legally tenable and is beyond the scope of taxable service as defined in Finance Act, 1994 :
“Section 65(105)(zzr) of the Act defines in the taxable IPR service tax as under :
“Taxable service” means any service provided or to be provided to any person by the holder of intellectual property right, in relation to intellectual property service;
Section 65(55a) of the Act defines ‘Intellectual Property Right’ to mean as under :
“Intellectual Property Right” means any right to intangible property, namely, trade marks, designs, patents or any other similar intangible property, under any law for the time being in force, but does not include copyright”
6. The IPR as defined should be a right under any law for the time being in force. The legal position on this issue has been examined by various decisions of the Tribunal which are as under :
(a) Rochem Separation Systems (India) Private Limited v. Commissioner of Service Tax, Mumbai I – 2015 (39) S.T.R. 112 (Tri.-Mum.) [para 8];
(b) Whirlpool of India Limited v. C.C.E & S.T., Delhi – 2016-VIL-57-CESTAT-DEL-ST [para 7];
(c) Tata Consultancy Services Limited v. C.S.T., Mumbai – 2015-TIOL-2370-CESTAT-MUM = 2016 (41) S.T.R. 121 (Tri.) [para 4.1];
(d) Asea Brown Boveri Ltd. v. C.C.E & S.T., Bangalore – 2016-VIL-480-CESTAT-BLR-ST [para 6.7.1];
(e) Reliance Industries Ltd. v. C.C.E. & S. Tax, Mumbai – 2016-TIOL-1654-CESTAT-MUM = 2016 (44) S.T.R. 82 (Tri.) [para 2].
7. It has been held that to be categorized for service tax purpose under IPR, such right should have been registered with trade mark/patent authority. In the present case, admittedly, there is no right recognized as IPR under any law for the time being in force in India. As such, there can be no provision of IPR service for tax liability on reverse charge basis.
Therefore, we hold that services received by the appellant-assessee are not covered under Intellectual Property Rights services, under Section 65(105)(zzr) of the Finance Act, 1994, therefore, no service tax is payable by the appellant-assessee.
8. In that circumstance, we hold that services received by the appellant-assessee are not covered under IPR service, under Section 65(105)(zzr) of the Finance Act, 1994. Therefore, no service tax is payable by the appellant-assessee.
9. In these circumstances, we hold that extended period of limitation is not invocable and the demand is not sustainable. We also take note of the fact that the agreement is dated 11-3-2002 whereas the levy of tax under IPR service has come into force on 10-9-2004. As the agreement is executed on 11-3-2002, prior to introduction of IPR Service, the demand of service tax is not sustainable in the light of the decision of this Tribunal in the case of Reliance Industries Limited – 2016-TIOL-1654-CESTAT-MUMBAI = 2016 (44) S.T.R. 82 (Tri.-Mum.), wherein this Tribunal observed as under :-
“Insofar as the agreement with Investa Technologies S.A.R.L. is concerned the same was entered into 14-4-2004, prior to IPR services being brought into the net of service tax with effect from 10-9-2004. The service tax itself having been rendered prior to the introduction of the levy, the mere fact that payments for the same were made on a staggered basis over a period of time cannot be ground for levying service tax merely with reference to the date on which payments were being made. We find that during the relevant period the issue as to whether a transaction is leviable to service tax and if so at what rate was required to be reckoned with reference to the date when the service was rendered and not with reference to the date on which payment is made. The law in this regard is settled by the decision of the CESTAT reported in 2008 (10) S.T.R. 243 = 2008-TIOL-283-CESTAT-AHM which was affirmed by the Hon’ble Gujarat High Court in the appellant’s own case reported in 2010 (19) S.T.R. 807 as also by the Hon’ble Delhi High Court in the case of CCE v. Consulting Engineering Services India (P) Limited – 2013 (30) S.T.R. 586. As the service in the case of Investa Technologies S.A.R.L. was rendered prior to 10-9-2004, the date when the taxing entry was brought to the Statute the mere subsequent payment in respect of services that are already being rendered cannot be brought to tax with respect to the Rule applicable on the date on which the payment was [effected].”
In that circumstance also, we hold that appellant-assessee are not liable to pay service tax. Therefore, the impugned order is modified and the demand of service tax against the appellant-assessee is set aside.
10. Consequently, the appeal filed by the Revenue is dismissed and the appeals filed by the appellant-assessee are allowed with consequential relief (if any).”
6. As it is an admitted fact that the trade mark and patent rights were not registered in India, which have been obtained by the Respondent for use in India from their foreign principal therefore the said rights were not governed by any law for the time being in force. Therefore relying on the decision of Munjal Showa Ltd. (supra) we hold that the amount paid by the Respondent as royalty or licence fee is not taxable in India. In that circumstances we do not find any infirmity in the impugned order. Therefore the same is upheld and Appeal filed by the Revenue is dismissed.
(Operative part of the order was pronounced in the open Court.)
