Royalty for technical know-how is not consulting engineer service, and tax liability cannot arise without a taxable service relationship.

Royalty paid for technical know-how and use of technology was treated as consideration for supply of know-how, not as payment for consulting engineer service. The Tribunal noted that earlier rulings had held such royalty does not, by itself, create a service relationship with the foreign collaborator, and the Indian recipient cannot be fastened with service tax liability merely as an authorised agent because the royalty was stated to be net of taxes. For the period before 16 August 2002, those earlier decisions were applied, and the tax demand and consequential penalties were held unsustainable.

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Issues: Whether royalty paid for technical know-how and use of technology could be treated as consideration for taxable consulting engineer service, and whether the recipient could be fastened with service tax liability and penalties as an authorised agent of the foreign collaborator.

Analysis: The contract was for supply of technical know-how and the royalty was paid for use of technology and know-how. The Tribunal noted that earlier decisions had held that such royalty payments do not amount to payment for services to be provided by the foreign collaborator, and that the Indian recipient cannot be treated as the authorised representative of the foreign company merely because the royalty was stated to be net of taxes. The applicable period was prior to 16-8-2002, and the earlier Tribunal rulings were treated as governing the controversy.

Conclusion: The demand of service tax and the consequential penalties were not sustainable.

Final Conclusion: The appeal was allowed and the impugned order setting aside the tax demand and penalties was restored in favour of the assessee.

Ratio Decidendi: Royalty paid for technical know-how, by itself, does not constitute consideration for consulting engineer service, and the recipient cannot be treated as liable for service tax merely as an agent in the absence of a taxable service relationship.

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