2014 (7) TMI 752 - AT - Service Tax

Interpreting Taxability of IP Royalty Services: Timing Matters

Denso Haryana (P) Ltd. Versus CCE

The case focused on the taxability of royalty for intellectual property services under Section 65(105)(zzr) of the Finance Act 1994. The Tribunal ... Intellectual property rights – transfer of technical knowhow for manufacture of automobile parts - payment of royalty each year – Held that:- This is a case involving transfer of technical knowhow for manufacture of automobile parts. The knowhow transferred was designs, engineering, data, manufacturing and process data, basic machinery and facility lay outs, testing and quality control data, production and testing equipment data including software, drawings, documents and materials relating to the products to be manufactured. So the knowhow by its very nature was not of a type which could be transferred on a continuous basis and was transferred as a onetime activity which happened in the year 2002. No proof that there was continuous transfer of technology during the relevant period namely, has been adduced by Revenue though Revenue is able to demonstrate continued payment of consideration for technology transferred based on the sales turnover of the goods manufactured using the technology already transferred. Whether tax is payable for consideration received after 10-09-2004 when the taxable event took place before 10-09-2004, the date when the activity became taxable – Held that:- Service tax being on the service rendered the liability has to be determined with reference to the time when activity took place and not with reference to the time when payment is taking place. This is the principle decided Tribunal in the case of Mundipharma Pvt. Ltd vs. CCE-[2009 (4) TMI 113 - CESTAT, NEW DELHI] with reference to the same service – Decided in favour of assessee. Issues:1. Taxability of royalty paid for intellectual property service under Section 65(105)(zzr) of the Finance Act 1994.2. Interpretation of technology transfer agreement and its implications on intellectual property service.3. Continuous use of technology and its impact on tax liability.4. Timing of tax liability for services rendered before the taxable event.Analysis:1. The primary issue in this case revolves around the taxability of royalty paid for intellectual property service under Section 65(105)(zzr) of the Finance Act 1994. The Appellant argued that a one-time transfer of technology does not constitute intellectual property service as per the Technology Transfer Agreement. The Appellant relied on the decision in Modi-Mundipharma Pvt. Ltd. vs. CCE to support their stance that continuous royalty payments do not alter the nature of the service provided under the agreement.2. The Revenue contended that the continuous use and evolution of technology resulting in changes in the manufactured product necessitate tax liability under the Finance Act 1994. The Revenue highlighted the transformation of the technology agreement over time and argued that the changing technology and resulting products demonstrate ongoing use of intellectual property service.3. The Tribunal emphasized the need to analyze whether the everyday use of technology to generate output constitutes intellectual property service under the relevant provisions of the Finance Act. The Tribunal noted that the question of daily use of technology and its impact on tax liability was not extensively addressed during the previous arguments. The Tribunal recognized the significance of determining whether continuous use of technology for seven years qualifies as intellectual property service.4. Another crucial aspect of the judgment pertains to the timing of tax liability for services rendered before the taxable event. The Tribunal deliberated on the applicability of tax for consideration received post the insertion of Section 65(105)(zzr) in 2004, despite the initial transfer of technical know-how occurring in 2002. The Tribunal cited the principle established in the Mundipharma Pvt. Ltd. case, emphasizing that tax liability is determined based on the time of the activity rather than the payment, leading to the decision to waive the pre-deposit and grant a stay on tax collection during the appeal process.In conclusion, the judgment delves into the complexities surrounding the taxability of royalty for intellectual property service, the interpretation of technology transfer agreements, the continuous use of technology, and the timing of tax liability for services rendered before the taxable event. The decision to waive the pre-deposit and grant a stay reflects a nuanced understanding of the legal principles governing intellectual property services and tax liabilities under the Finance Act 1994.