Intellectual Property Rights and Service Tax

The ingredients to levy service tax on an Intellectual Property Service are two fold. Firstly, there must be a service provided to any person, by any other person. Secondly, the service should be provided to the recipient by granting him the right to use or exploit any Intellectual Property service.

This article deals with the legal liability of service tax on Intellectual Property Rights. The article is divided into two parts. In the first part, this article will explain the types of taxable transfers when a Copyright is transferred. In the second part, this article will explain service tax liabilities when Intellectual Property Rights are transferred to or received from abroad.

Section 66 (55a) of the old Finance Act levied service tax on an Intellectual Property service where any right to intangible property such as a trademark, design, patent etc. was transferred. However, intellectual property as codified in this Section did not include copyright. Under this law, a sale of intellectual property was also considered taxable because it involved a transfer of intangible property.

Circular 80/10/2004-ST dated 17.09.2004 clarified that a permanent transfer does not qualify as rendering services. This was because, when a permanent transfer occurs, the seller of Intellectual Property is no longer the holder of any intangible property rights himself. Therefore, he does not fall under the purview of taxable service. The implication of this notification was that service tax was levied only on temporary transfers of intellectual property excluding copyright.

Notification 25/2012-ST dated 20.06.2012 exempted payment of service tax whenever the right to use was transferred temporarily relating to cinematographic films.

Finally, with the amendment-dated 1.4.2013 to Entry 15 of Notification number 3/2013-ST dated 1.3.2013, the law on levy of service tax on copyright, as it stands today, is as follows:

Service tax shall be levied on a temporary transfer or a transfer permitting the recipient to exploit or enjoy the copyright. However, whenever such a temporary transfer was done for the purposes of cinematographic films to be exhibited in cinema halls or theatres, no service tax would be imposed.

Temporary Transfer

The Madras High Court in the case of AGS Entertainment Pvt Ltd v. Union of India clarified a nuance of the above notifications. According to this judgment:

Firstly, whenever a producer gives his film to a distributor, he gives away some of his rights in the Intellectual Property. However, because the producer of the film still owns some rights and the distributor does not become the absolute holder of Intellectual Property rights with respect to the film in question, this is a temporary transfer. All temporary transfers of copyright are taxable.

Secondly, so long as a transaction is not a permanent transfer of copyright, service tax shall be levied on such a transaction.

Right to Use

A tax liability is also established when the service provider grants the recipient a right to exploit or enjoy the copyright. This right to exploit or enjoy the copyright falls under the ‘right to use’ as analysed below.

The Supreme Court case of BSNL v. Union of India,  Writ Petition (civil) 183 of 2003 Dated: 02/03/2006 laid down the ingredients of the right to use:

1. The goods must be available for delivery.

2. There must be a consensus ad item between the parties with respect to the identity of the goods

3. The recipient of such transfer must have the legal right to use such goods. (Such as licenses, permissions etc.)

4. When the recipient has the right to use the goods, it must be to the exclusion of the owner of the goods.

5. Once the owner of the goods has transferred the right to use for a period to the recipient of the transfer, the owner cannot transfer the right to use these goods to someone else for the same time period.

Later, in 2012, the Andhra Pradesh High Court in the case of G.S. Lamba & Sons v. State of Andhra Pradesh [1] clarified that the delivery of goods was not a necessary prerequisite for the transfer of the right to use to be established. The transfer of right to use goods is established as soon as the recipient is in effective control of the goods. Effective control may not always be the same as physical control.

The general rule under Section 66 of the Finance Act with respect to transfer of Intellectual Property is as follows:

Whenever there is a service provider who owns Intellectual Property and decides to transfer it to a service recipient in India, this transfer is subjected to a payment of service tax, by the service provider, at the rate of twelve percent. This holds true unless the recipient is an individual to whom the service is provided for a purpose other than business or commerce.

Service Provider located Outside India 

When there is an import of Intellectual Property i.e. when the service provider of intellectual property is located outside India and the service recipient is located within India, such a transaction is taxable. Service tax is levied as if the recipient himself provided the service in India. This holds true unless the recipient is an individual to whom the service is provided for a purpose other than business or commerce as is given in the Proviso. The government has exempted that cess paid towards import of technology in such transfers. This is based on a joint reading of Section 66A of the Finance Act, 1994 and the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006.

Service Recipient located Outside India 

When there is an export of Intellectual Property i.e. when the service provider of intellectual property is located within India and decides to transfer intellectual property to a service recipient outside India, such a transaction is not subject to the payment of service tax.

According to Rule 4 of the Export of Service Rules, 2005 any service which is taxable under clause (105) of Section 65 of the Act, may be exported without payment of service tax. Since, the above service falls under Section 105 (65) (zzzzt) of the Finance Act and is being exported in the given scenario, there is no liability to pay service tax.

[1] 2011 (1) TMI 1196

*(Author is 4^th year B.A. LLB Student of Jindal Global Law School)