Royalty for technical know-how was not taxable as consulting engineer service, so tax, interest and penalty failed.

Royalty paid for transfer of technical know-how and related assistance was held not to be consideration for taxable consulting engineer services, because the foreign recipient was a manufacturer and not an engineering firm within the departmental definition. On that basis, the service tax demand against the recipient failed, and the agreement's withholding-tax clause did not create service tax liability. The record also did not support suppression, and once the principal levy was unsustainable, the consequential interest and penalty could not survive. The appeal was therefore allowed and the impugned orders were set aside.

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Issues: Whether royalty payments made for technical know-how, equipment, skill, expertise and services to a foreign manufacturer were taxable as services rendered by a consulting engineer, and whether the demand of service tax, interest and penalty could be sustained against the recipient.

Analysis: The agreement was for transfer of technical know-how and related assistance, with payments described as royalty based on sales. Royalty was treated as consideration for use of technology and not as payment for a service rendered by a consulting engineer. The foreign supplier was a manufacturer and not an engineering firm within the definition relied upon by the department. Service tax, being a levy on taxable services provided by a service provider, could not be fastened on the assessee on these facts, and the withholding-tax clause in the agreement did not create service tax liability. The record also did not justify invoking suppression, and once the principal levy was unsustainable, interest and penalty could not survive.

Conclusion: The demand of service tax was not sustainable against the assessee, and the consequential interest and penalty were also unsustainable.

Final Conclusion: The appeal was allowed and the impugned orders were set aside in full.

Ratio Decidendi: Royalty paid for transfer of technical know-how does not, by itself, constitute consideration for taxable services as a consulting engineer, and where no taxable service is established, the consequential demand of tax, interest and penalty cannot be sustained.

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