Transfer of technical know-how and patent under slump sale is not leviable to service tax

Gharda Chemicals Limited Vs Commissioner of Central Excise & ST (CESTAT Ahmedabad)

CESTAT Ahmedabad held that transfer of technical know-how and patent etc. are in pursuance to the slump sale and not by way providing the service do not fall within the definition of “Scientific and Technical Consultancy Service” and “Intellectual Property Service”. Accordingly, demand of service tax not sustainable.

Facts- The appellant was engaged into polymer business through its Polymer division located at Panoli, district Bharuch. The Appellant intended to sell the said Division as a going concern, accordingly they had entered into a Sale and Purchase agreement with M/s Solvay Specialties India Pvt. Ltd. (M/s SSIPL) for sale of the division on a going concern basis for a lump sum consideration of Rs. 169,34,95,385/-.

During the course of scrutiny of agreement, it appeared that they entered into agreement for transfer of all propriety invention, design, idea process, methods, right of Patent and other technical know-how in terms of sale and purchase agreement. During the course of scrutiny of documents/ records submitted by the M/s SSIPL it was also observed that Polymer Division of Appellant was completely transferred to M/s SSIPL for a consideration of Rs. 1,69,34,95,385/-. Further the valuation report showed the value of Goodwill/ Brand, patent & technical know-how and other assets reflected the total valuation of the company at Rs. 1,69,34,95,385/- Whereas as per valuation report M/s Gharda Chemical Limited it appears that they sold the Polymer Division along with Services associated with for operation of plant and maintenance of quality of polymers. However they did not mention the bifurcation of value of service as well as Assets thereof as above on the sale and purchase agreement 9th May 2006 (Completion Memorandum) executed with M/s SSIPL. Whereas it appears that on 14.10.2005 the appellant and M/s SSIPL entered into a supplemental agreement which contain schedule I to XII along with Annexure A&B. On scrutiny of the said schedule-IV, it was observed that products Sr. No. 01 to 03 have already been registered patents and Sr. No. 4 is for patent already applied and Sr. No. 5 is for patents being applied for. Therefore the technical knowledge supplied for manufacturing if unregistered products as appearing at Sr. No. 4 and 5 comes under Technical Know how, and comes under purview of taxable service of category “Intellectual Property Services [Section 65(105)(zzr)]. It was contended that in the instant case Appellant has supplied their own invention and scientific discovers without clarification and bifurcation of the value in the sale and purchase agreement thereof. Statement of both the company personnel was recorded by the department.

A show cause notice dated 21.10.2011 came to be issued where-under service tax amount of Rs. 4,20,99,688/- was demanded from the appellant u/s. 73 of the Finance Act, 1994 along with interest on the taxable value of Rs. 34,39,51,700/- received against the transfer of patent and technical know-how and the penal provisions as provided u/s. 76, 77 and 78 of the Finance Act, 1994 have also been invoked in the show cause notice. Commissiner confirmed the said demand. Accordingly, appellant preferred the present appeal.

Conclusion- We also find that so far as providing of intellectual property service is concerned, from the definition of said service it is clear that there is rendering of service only if there is temporary transfer of some intellectual property or permitting its use. In the present matter from the facts of the case there does not seem to be any temporary transfer of intellectual property. In the present case whole Polymer division itself was sold by the Appellant to M/s SSIPL as going concern.

We are of the considered opinion that the disputed transaction of appellant will not fall within the definition of “Scientific and Technical Consultancy Service” and “Intellectual Property Service” as stated in Section 65(92) and Section 65(55b) of Finance Act, 1994.

Hence in the present matter all such transfer including the transfer of technical know-how and patent etc. are in pursuance to the slump sale and not by way providing the service. Therefore in our view demand of service tax not sustainable on such type of transactions.

FULL TEXT OF THE CESTAT AHMEDABAD ORDER

1. The brief facts of the case are that the appellant was engaged into polymer business through its Polymer division located at Panoli, district Bharuch. The Appellant intended to sell the said Division as a going concern, accordingly they had entered into a Sale and Purchase agreement 14.12.2005 with M/s Solvay Specialties India Pvt. Ltd. (M/s SSIPL) for sale of the division on a going concern basis for a lump sum consideration of Rs. 169,34,95,385/-. During the course of scrutiny of agreement, it appeared that they entered into agreement for transfer of all propriety invention, design, idea process, methods, right of Patent and other technical know-how in terms of sale and purchase agreement 14.12.2005. During the course of scrutiny of documents/ records submitted by the M/s SSIPL it was also observed that Polymer Division of Appellant was completely transferred to M/s SSIPL on 9^th May, 2006 on a consideration of Rs. 1,69,34,95,385/-Further the valuation report 28.02.2006 issued by the M/s Anmol Sekhri & Associates showed the value of Goodwill/ Brand, patent & technical know-how and other assets reflected the total valuation of the company at Rs. 1,69,34,95,385/- Whereas as per valuation report M/s Gharda Chemical Limited it appears that they sold the Polymer Division along with Services associated with for operation of plant and maintenance of quality of polymers. However they did not mention the bifurcation of value of service as well as Assets thereof as above on the sale and purchase agreement 9th May 2006 (Completion Memorandum) executed with M/s SSIPL. Whereas it appears that on 14.10.2005 the appellant and M/s SSIPL entered into a supplemental agreement which contain schedule I to XII along with Annexure A&B. On scrutiny of the said schedule-IV, it was observed that products Sr. No. 01 to 03 have already been registered patents and Sr. No. 4 is for patent already applied and Sr. No. 5 is for patents being applied for. Therefore the technical knowledge supplied for manufacturing if unregistered products as appearing at Sr. No. 4 and 5 comes under Technical Know how, and comes under purview of taxable service of category “Intellectual Property Services [Section 65(105)(zzr)]. It was contended that in the instant case Appellant has supplied their own invention and scientific discovers without clarification and bifurcation of the value in the sale and purchase agreement thereof. Statement of both the company personnel was recorded by the department.

2. A show cause notice dated 21.10.2011 came to be issued where-under service tax amount of Rs. 4,20,99,688/- was demanded from the appellant under Section 73 of the Finance Act, 1994 along with interest on the taxable value of Rs. 34,39,51,700/- received against the transfer of patent and technical know-how and the penal provisions as provided under Section 76, 77 and 78 of the Finance Act, 1994 have also been invoked in the show cause notice. The matter came to be adjudicated by the Learned Commissioner, who vide his impugned Order-In-Original No. 25/ST/Commr./Surat-II/2012 dated 17.12.2012 confirmed the demand made in the show cause notice. The appellant is before us against the aforesaid impugned order-in-original.

3. Shri Niraj Bagri, learned Counsel for the appellant submits that as per the definition of scientific or technical consultancy services the service tax liability arise only when there is temporary transfer of intellectual property right. Board vide circular No. 80/10/2004 dated 17.09.2004 clarified that “a permanent transfer of intellectual property right does not amount to rendering of service. On such transfer the person selling these rights no longer remains a ^„holder of intellectual property right‟ so as to come under the purview of taxable service. Thus there would not be any service tax on permanent transfer of IPRs”. Though the said circular has been rescinded, it will still apply as it was in force when the impugned transaction had taken place.

4. He also submits that in the instant case there has been permanent transfer of technical know-how or any intellectual property as the whole Polymer Division itself was sold by the Appellant to M/s SSIPL as going concern. Hence all such transfer including the transfer of technical know-how and patent are in pursuance to the agreement for sale. Thus it is amply clear that the transaction of transfer of ^„patent and technical know‟ which is in nature of sale cannot be subjected to service tax.

5. He argued that manufacturing unit of the appellant has been subjected to Excise Audit from time to time including for the period when the said disputed transaction was undertaken. Further facts that assessee has sold the Polymer division has also been disclosed in director’s report of the audited financial results for the financial year ended on 31^st March 2006, a copy of the which was duly available with the Jurisdictional excise authorities when excise audit for the relevant period was done. Hence the facts were known to the department that appellant had sold its polymer division as going concern. Hence, proviso to Section 73(1) of Finance Act, 1994 is not applicable to the assessee.

6. Without admitting the service tax liability, he also submits that Ld. Commissioner has erred in demanding the Service tax on the value of Rs. 34,39,51,700/-. The amount received by the appellant must be treated a cum-duty value.

7. We have also heard Learned Departmental Representative Shri Tara Prakash, Deputy Commissioner (AR) who has supported the findings recorded in the order-in-original.

8. From the argument made by both sides as well as on perusal of records, we find that the main issue that arises for consideration is whether the patent and other technical know-how transferred to M/s SSIPL under sales & purchase agreement as a going concern would fall within the ambit of taxable service of “Scientific or technical consultancy Service” and ^„intellectual property right service’ as defined under Section 65 (92) and 65 (55b) of Finance Act, 1994 and liable for payment of service tax. For better appreciation, the said provisions are reproduced as below :-

“Section 65(92) : “scientific or technical consultancy” means any advice, consultancy, or scientific or technical assistance, rendered in any manner, either directly or indirectly, by a scientist or a technocrat, or any science or technology institution or organization, to any person, in one or more disciplines of science or technology”;

‘Intellectual Property Service’ is defined in Section 65(55b) of the Finance Act, as under:-

‘Intellectual property service’ means

(a) transferring temporarily or

(b) permitting the use or enjoyment of any intellectual property right.

‘Intellectual property right’ is defined under Section 65(55a) of the Finance Act, 1994 as “any right to intangible 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”.

9. We find that the impugned show cause notice alleged that transfer activity of its Polymer Division to M/s SSIPL is covered under the service category of ^„Intellectual Property Service‟ and transfer activity of technical know-how provided by the unit during transfer of its Polymer Division to M/s SSIPL is covered under the service category of ^„Scientific & Technical Consultancy Service; which are taxable service with effect from 10.09.2004 and 16.07.2001 respectively. However from the definition of ^„scientific or technical consultancy service‟ we find that there should be an advice, consultancy, or scientific or technical assistant given by person or an institution to another person. In the present matter it has not been brought out by the revenue as to what advice, consultancy or scientific or technical assistant has been given by the seller to the buyer.

10. We also find that so far as providing of intellectual property service is concerned, from the definition of said service it is clear that there is rendering of service only if there is temporary transfer of some intellectual property or permitting its use. In the present matter from the facts of the case there does not seem to be any temporary transfer of intellectual property. In the present case whole Polymer division itself was sold by the Appellant to M/s SSIPL as going concern.

11. From the above discussion, we are of the considered opinion that the disputed transaction of appellant will not fall within the definition of “Scientific and Technical Consultancy Service” and “Intellectual Property Service” as stated in Section 65(92) and Section 65(55b) of Finance Act, 1994.

12. We also noticed that during the investigation, statement of Shri Florian Rodrigues, General Manager (Finance & Account) of the unit was recorded wherein he inter-alia also stated that the entire polymer business of the unit was sold to M/s SSIPL on ongoing basis and as a slump sale, that no services were provided by the unit to M/s SSIPL. We find that the slump sale has been one of the widely used ways of business acquisition. The concept of Slump sale was incorporated in the Income Tax Act 1961 by the Finance Act, 1999 when Section 2(42C) was inserted defining the term slump sale as follows:

‘transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales’.

Hence in the present matter all such transfer including the transfer of technical know-how and patent etc. are in pursuance to the slump sale and not by way providing the service. Therefore in our view demand of service tax not sustainable on such type of transactions.

13. In view of above the impugned order is set aside and appeal is allowed with consequential relief, if any, in accordance with law.

(Pronounced in the open court on 10.04.2023)