2018 (12) TMI 866 - AT - Service Tax

Goodwill Transfer Not Taxable: Tribunal Overturns Service Tax Demand

The Tribunal ruled that the transfer of goodwill does not fall within the definition of 'Intellectual Property Right Service' under Section 65(55b) of the ... Transfer of goodwill - intellectual property service - intellectual property right as defined in Section 65(55a) - interpretation of 'any other similar intangible property' - Board Circular No.80/10/2004-ST - valuation and quantification of alleged IPR transferTransfer of goodwill - intellectual property right as defined in Section 65(55a) - intellectual property service - interpretation of 'any other similar intangible property' - Board Circular No.80/10/2004-ST - Transfer of goodwill does not fall within the definition of 'intellectual property service' under Section 65(55b) of the Finance Act, 1994 and hence is not taxable as IPR service. - HELD THAT: - The Tribunal held that Section 65(55a) confines 'intellectual property right' to intangible property recognised under a law in force in India; goodwill, though intangible, is not recognised as an intellectual property right under Indian law and is inherently attached to an ongoing business. Reliance on the Board Circular as extending IPR to include goodwill was rejected insofar as the Circular cannot enlarge the statutory definition to cover intangible assets not recognised by law. Decisions cited by the department (including the decision addressing depreciation of goodwill) were found inapposite because they dealt with different statutory contexts or constituted obiter observations. The Tribunal also relied on precedent reasoning that trademarks and goodwill are distinct concepts and that unregistered or unrecognised rights outside India do not fall within the statutory IPR service. Applying these legal principles, the Tribunal concluded that a transfer of goodwill is not a transfer of an intellectual property right within Section 65(55b). [Paras 5]Transfer of goodwill does not constitute 'intellectual property service' under Section 65(55b) and therefore cannot be taxed as such.Valuation and quantification of alleged IPR transfer - separate Business Transfer Agreement and trademark licence agreement - evidentiary value of balance-sheet disclosure - The departmental valuation of alleged goodwill using the trademark licence agreement (and the resulting quantification of service tax demand) is without basis and cannot be sustained. - HELD THAT: - The Tribunal observed that the Business Transfer Agreement did not separately ascribe a value to goodwill and that Mobis India Ltd.'s internal accounting disclosure of a goodwill figure did not justify the department's method of valuation. The department derived the value of alleged goodwill by applying the trademark licence fee percentage (8.5%) to the total transfer consideration, despite the licence fee being a percentage of future domestic sales and there being no basis for treating goodwill as an item yielding annual domestic sales. The Tribunal found the departmental approach to valuation illogical and unsupported by the agreements or law, and therefore the quantification of the demand based on that approach was unsustainable. [Paras 5, 6]Valuation adopted by the department for the alleged transfer of goodwill is without logic or basis and the resulting demand cannot be sustained.Final Conclusion: The impugned order confirming demand, interest and penalties insofar as they arise from treating the transfer of goodwill as an intellectual property service is set aside; the appeal is allowed with consequential relief. Issues Involved:1. Whether the transfer of goodwill falls within the definition of 'transfer of intellectual property right service' under section 65(55b) of the Finance Act, 1994.2. The valuation and quantification of the demand for service tax on the alleged transfer of goodwill.Detailed Analysis:Issue 1: Definition and Taxability of Goodwill as Intellectual Property RightThe primary issue for consideration is whether the transfer of goodwill falls within the definition of 'transfer of intellectual property right service' as defined under section 65(55b) of the Finance Act, 1994. The appellants argued that goodwill is not an intellectual property right and even if transferred, it would not attract the levy of service tax. They referenced the definition of 'Intellectual Property Right' in Section 65(55a) of the Finance Act, 1994, which includes trademarks, designs, patents, or any other similar intangible property recognized under the intellectual property law in force in India. The appellants contended that goodwill does not fall under this definition, as it is a fluid asset dependent on various extraneous factors, unlike well-defined intellectual property rights recognized by law.The appellants further cited the Supreme Court's observation in Ramnik Vallabhdas Madhavani Vs. Taraben Pravinlal Madhvani, which defined goodwill as the value of a business in the hands of a successor, emphasizing its dependence on the continuity of the undertaking and its reputation. They argued that there is no law in India recognizing or protecting goodwill as an intellectual property right. The department's interpretation of 'any other similar intangible property' to include goodwill was deemed erroneous by the appellants, who applied the principle of 'ejusdem generis' to argue that only intangible properties recognized under specific intellectual property laws in India should be included.The appellants also referenced the Tribunal's decision in the case of Alstom T&D Ltd., which held that only intellectual property rights recognized under Indian law would be subject to service tax under the category of 'Intellectual Property Right Service.' Based on these arguments, the appellants contended that the levy of service tax on the alleged transfer of goodwill could not be sustained.Issue 2: Valuation and Quantification of DemandThe second issue pertains to the valuation and quantification of the demand for service tax on the alleged transfer of goodwill. The appellants argued that they had already paid service tax on the consideration received under a separate trademark licensing agreement, which required Mobis India Ltd. to pay 8.5% of their annual domestic sales as a fee for the trademark license. The dispute in the present case arises from the Business Transfer Agreement, where the department alleged that the total consideration of Rs. 425 crores included the value of goodwill, despite no specific mention of goodwill in the agreement.The department based its valuation of goodwill on the trademark licensing agreement, adopting 8.5% of the total Business Transfer Agreement to arrive at a value of Rs. 33.31 crores for the goodwill. The appellants argued that this valuation was erroneous, as the trademark licensing agreement's fee was based on annual domestic sales, which is not applicable to goodwill. Goodwill, if any, was transferred entirely along with the ongoing business to Mobis India Ltd., and thus, the valuation based on assumptions required to be set aside.Tribunal's Findings:Upon hearing both sides and reviewing the records, the Tribunal concluded that goodwill does not fall within the definition of 'Intellectual Property Right Service' under Section 65(55b) of the Finance Act, 1994. The Tribunal noted that goodwill, though an intangible right, is not recognized as an intellectual property right under any Indian law. Goodwill is attached to an ongoing business, whereas intellectual property rights can exist independently. The Tribunal rejected the department's argument that 'any other similar intangible property' would include goodwill.Regarding the valuation and quantification of the demand, the Tribunal found that the department's valuation based on the trademark licensing agreement was without logic or basis. The fee for the use of the trademark was based on annual domestic sales, which could not be applied to the valuation of goodwill. The Tribunal held that the demand could not be sustained and set aside the impugned order, allowing the appeal with consequential relief.Conclusion:The Tribunal ruled that the transfer of goodwill does not fall within the definition of 'Intellectual Property Right Service' under Section 65(55b) of the Finance Act, 1994, and the department's valuation of goodwill was erroneous. The demand for service tax on the alleged transfer of goodwill was set aside, and the appeal was allowed with consequential relief.