2008 (7) TMI 44 - AT - Service Tax

Royalty for Technology Transfer Not Taxable as Consulting Engineer's Service

The Appellate Tribunal CESTAT, NEW DELHI held that royalty charges paid by the Respondent to a foreign company for technology transfer did not constitute ... Agreement for transfer of technology with foreign company, MEI – agreement is not for engineering consultancy, but only for obtaining right to use certain technology, developed and patented by MEI, by paying royalty at an agreed rate - held that such knowhow fee/royalty paid to a company, is merely a transaction in intellectual property, not a consultancy or advice and therefore service tax under ‘consulting engineer’s service’ head would not be attracted – revenue’s appeal dismissed Issues:Whether royalty charges paid by the Respondent to a foreign company for technology transfer constitute a taxable service attracting service tax liability.Analysis:The main issue in this appeal before the Appellate Tribunal CESTAT, NEW DELHI was whether the Respondent, who had an agreement for knowhow transfer and technical collaboration with a foreign company, was liable to pay service tax on the royalty charges paid for the technology transfer. The Revenue contended that the amount paid as royalty was essentially a technical assistance fee falling under the category of consulting engineer's service. On the other hand, the Respondent argued that the agreement was for the transfer of technology, granting them a license to manufacture certain products in India, and that previous tribunal judgments supported their position that such royalty payments did not constitute consulting engineer's services.The Tribunal carefully examined the agreement between the Respondent and the foreign company and concluded that it was not an agreement for engineering consultancy but rather for granting the right to use certain technology for manufacturing specific products in India. The Tribunal referenced several previous judgments where it was established that royalty payments made for the right to use technology developed by a company did not fall under the purview of consulting engineer's services. Therefore, the Tribunal held that no consulting engineer's service was received by the Respondent, and there was no error in the impugned order. Consequently, the Revenue's appeal was dismissed by the Tribunal.This judgment clarifies the distinction between royalty payments for technology transfer and consulting engineer's services, providing a clear precedent that such royalty payments are not subject to service tax liability under the category of consulting engineer's services. The decision underscores the importance of analyzing the nature of transactions and agreements to determine the applicability of service tax, particularly in cases involving technology transfer and intellectual property rights.