Services in the Form of Receipt of Patent Registered Outside India are not liable to Service Tax

Intas Pharmaceuticals Ltd Vs C.S.T.-Service Tax (CESTAT Ahmedabad)

The CESTAT, Ahmedabad in Intas Pharmaceuticals Ltd. v. C.S.T.-Service Tax, Ahmedabad And Another [Service Tax Appeal No. 12716 of 2014 dated November 02, 2023] held that the services in the form of receipt of patents registered outside India are not liable to pay service tax.

Facts:

Intas Pharmaceuticals Ltd. (“the Appellant”) entered into a “Technology Transfer and Licensing Agreement” with M/s Eugenex Biotechnologies GmbH, Switzerland for the purpose of development and commercialization of recombinant human erythropoietin (EPO). He pointed out that the agreement envisages the transfer of a cell clone that produces recombinant EPO and the provision of the technology, know-how, Trade secrets, etc.

The Appellant entered into a “Technology Know-how Transfer Agreement” with M/s Biocam Ltd., UK. The said agreement envisaged the transfer of technology, and technical know-how relating to protocols for fermentation and purification to obtain pure G-CSF.

The Revenue Department contended that the transaction was under the category of import of ‘Intellectual Property Service’ and sought to charge service tax on a reverse charge basis in terms of Section 66A of the Service Tax Act, 1944.

The Appellant contended that the patent/ technologies transferred to the assessee were not registered in India and the introduction of a negative list of Services with effect from July 01, 2012, only the Intellectual Property Rights covered under the Indian Law were chargeable to Service Tax.

Issue:

Whether Services in Forms of Receipt of Patent Registered Outside India is liable to Service Tax?

Held:

The CESTAT, Ahmedabad in Service Tax Appeal No. 12716 of 2014 held as under:

• Observed that, in the case of Reliance Industries Ltd. 2016 (44) STR 82 (Tri. Mum.), it was held that there was no evidence to suggest that the patents of the foreign companies were registered under the Patent Act of India and any services in the forms of receipt of patent registered outside India was not liable to Service Tax.
• Directed that, the technology has been imported from abroad and no evidence of any protection under any law for the time being in force in India has been produced by Revenue. In these circumstances, no demand can be made under the head of “Intellectual Property Service‟.
• Held that, Services in the Form of Receipt of Patent Registered outside India are not liable to Service Tax.

FULL TEXT OF THE CESTAT AHMEDABAD ORDER

This appeal has been filed by Intas Pharmaceuticals Limited against demand of service tax on reverse charge basis in respect of Technology Transfer Analysis and Agreement entered with M/s Eugenex Biotechnologies GmbH, Switzerland.

2. Learned Counsel for the appellant pointed out that they had entered into “Technology Transfer and Licensing Agreement” with M/s Eugenex Biotechnologies GmbH, Switzerland on 01.12.2006 for the purpose of development and commercialization of recombinant human erythropoietin (EPO). He pointed out that the agreement envisages transfer of a cell clone that produces recombinant EPO and provision of the technology, know how, Trade secrets etc. The appellant has agreed to pay an amount of Euro 3,00,000 and royalty every year from 2007-08 to 2010-11. The appellant had also entered into “Technology Licensing and Supply Agreement” with M/s SunBio Inc., South Korea on 01.11.2003 for development, manufacture and marketing of PEG-GCSF in India. This agreement also envisaged transfer of technology, analytical methods and similar information related to PEG products and pegylation for allowing the use of said technology, the appellant paid an upfront amount of USD 1,50,000/- and royalty every year from 2007-08 to 2010-11. The appellant also entered into a “Technology Know-how Transfer Agreement” with M/s Biocam Ltd., UK on 25.06.2001. The said agreement envisaged transfer of technology, technical know-how relating to protocols for fermentation and purification to obtain pure G-CSF. The appellant paid an amount of USD 2,70,000/- and royalty every year for the period 2007-08 to 2010-11 for this.

3. Learned counsel pointed out that the Revenue sought to classify these transaction under the category of import of „Intellectual Property Service‟ and sought to charge service tax on reverse charge basis in terms of Section 66A of the Service Tax Act, 1944. A show cause notice was issued to the appellant which was adjudicated and a demand of service tax of Rs. 49,01,798/- was confirmed under Intellectual Property Right Service. Penalty under Section 76, 77 and 78 was also imposed. The appellant challenged the said order before Commissioner (Appeals) who by the impugned order set aside the demand and penalties imposed is respect of services received from M/s SunBio Inc., South Korea and M/s Biocam Ltd., UK. However in respect of the agreement with M/s Eugenex Biotechnologies GmbH, the demand of service tax was confirmed under the head of Intellectual Property Service.

4. Learned Counsel pointed out that the patent/ technologies transfer to the appellant were not registered in India. He pointed out that prior to the introduction of negative list of Services w.e.f. 01.07.2012 only the Intellectual Property Right covered under the Indian Law was chargeable to Service Tax. He relied on the clarification issued vide F.No. B2/8/2005-TRU dated 10.09.2004 to assert that only the rights which reads as under:-

9. “Intellectual property services (other than copyrights) :

9.1 Intellectual property emerges from application of intellect, which may be in the form of an invention, design, product, process, technology, book, goodwill etc. In India, legislations are made in respect of certain Intellectual Property Rights (i.e. IPRs) such as patents, copyrights, trademarks and designs. The definition of taxable service includes only such IPRs (except copyright) that are prescribed under law for the time being in force. As the phrase „law for the time being in force‟ implies such laws as are applicable in India, IPRs covered under Indian law in force at present alone are chargeable to service tax and IPRs like integrated circuits or undisclosed information (not covered by Indian law) would not be covered under taxable services.”

He vehemently argued that the agreement entered by the appellants with the foreign supplier for transfer of paten and technology are not recognized in India and are not protected by any law in India. He argued that there is no evidence to suggest that the patents of the foreign companies were registered under the Patent Act of India. He argued that any services in the forms of receipt of patent registered outside India is not liable to Service Tax. He relied on the following decisions to assert the same:

• Reliance Industries Ltd. 2016 (44) STR 82 (Tri. Mum.)
• Hindustan Aeronautics Ltd. 2020 (38) GSTL 75 (Tri. Bang.)
• Chambal Fertilizers & Chemicals Ltd. 2016 (54) STR 118 (Tri. Del.)
• Munjal Showa Ltd. 2017 (5) GSTL 145 (Tri. Chan.)

5. He further pointed out that no service tax is leviable to be paid as in all the cases the agreements were entered with the suppliers prior to 18.04.2006. He pointed out that only by virtue of the point of Taxation Rules, 2011 does the payment in respect of past contracts become liable to service tax. He relied on the decision of Tribunal in the case of Reliance Industries Ltd. 2008 (10) STR 243. The said decision of Tribunal was upheld by the Hon‟ble High Court of Gujarat 2010 (19) STR 807 (Guj.).

6. Learned Authorized representative relies on the impugned order.

7. We have considered the rival submission. We find that in the instant case demand has been confirmed in respect of royalty payments made by the appellant under the head of „Intellectual Property Service‟. In the instant case, it is not in dispute that the entire technology was imported by the appellant from abroad and no evidence of registration of the said technology under any Indian law has been produced by the revenue.

The definition of “Intellectual Property Service’ and ‘Intellectual Property Rights’ read as follows:

“a) Section 65(55a):

(55a) “intellectual property right” means 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.

b) Section 65(55b):

(55b) “Intellectual property service means, –

(a) Transferring, temporarily; or

(b) Permitting the use of enjoyment of, any intellectual property right

c) Section 65(105) (zzr) “taxable service” means any service provided or to be provided-

………

(zzr) to any person, by the holder of intellectual property right, in relation to intellectual property service.”

In this regard when the service was made chargeable to Service Tax, the following clarification was issued vide Circular No. 80/10/2004-ST dated 17.09.2004.

“9. Intellectual property services (other than copyrights):

9.1 Intellectual property emerges from application of intellect, which may be in the form of an invention, design, product, process, technology, book, goodwill etc. In India, legislations are made in respect of certain Intellectual Property Rights (i.e. IPRs) such as patents, copyrights, trademarks and designs. The definition of taxable service includes only such IPRs (except copyright) that are prescribed under law for the time being in force. As the phrase ‘law for the time being in force’ implies such laws as are applicable in India, IPRS covered under Indian law in force at present alone are chargeable to service tax and IPRS like integrated circuits or undisclosed information (not covered by Indian law) would not be covered under taxable services.”

The term ‘under any law for the time being in force’ appearing in Section 65(55a) implies that the Intellectual Property Right should be protected under any Indian law in force, and only then it become taxable service. The issue has been examined in the case of Munjal Showa Ltd. (supra) wherein following has been observed.

“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 the appeal 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].

It has been held that to be categorized for service tax purpose 7. 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.”

The said decision of Tribunal has been upheld by Hon’ble Apex Court as reported in 2023 (385) ELT 645.

8. From the above decision of Tribunal, upheld by the Hon’ble Apex Court, it is apparent that only in cases where the technology is protected by some law of India then it can be charged under the head of ‘Intellectual Property Service’. In the instant case, the technology has been imported from abroad and no evidence of any protection under any law for the time being in force in India has been produced by Revenue. In these circumstances, no demand can be made under the head of ‘Intellectual Property Service’.

9. In view of above, we do not find any merit in the order, the same is set aside and appeals are allowed.

(Pronounced in the open court on 02.11.2023)

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