Know-how royalties outside intellectual property right service, and a demand cannot stand on facts not stated in the notice.

Royalty for the use of technical know-how was treated as outside intellectual property right service because Section 65(55a) covered only rights such as trademarks, designs, patents and similar recognised intangible property under Indian law, while know-how was not shown to be a distinct statutory right. The note also states that a service tax demand cannot be sustained when the show cause notice alleges payment for trademark or name use, but adjudication relies on a different agreement covering know-how; the demand must conform strictly to the notice. It concludes that the impugned order was set aside because the transaction was outside the taxable scope and the notice was defective.

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Issues: (i) Whether the royalty paid for the right to use technical know-how under the agreement with the foreign licensor fell within the taxable category of intellectual property right service; (ii) Whether the demand could be sustained when the show cause notice proceeded on a different factual basis from the agreements actually relied upon in adjudication.

Issue (i): Whether the royalty paid for the right to use technical know-how under the agreement with the foreign licensor fell within the taxable category of intellectual property right service.

Analysis: The definition of intellectual property right under Section 65(55a) of the Finance Act, 1994 covered trademarks, designs, patents and other similar intangible property recognised under law for the time being in force, excluding copyright. The agreement with the foreign licensor granted only the exclusive right to use know-how, meaning formulae, processes, recipes, specifications and technical data for manufacture of the products. Know-how was not shown to be a distinct intellectual property right recognised by Indian law, and it could not be brought within the residuary expression by merely linking it with processes or patents. The circular of 17.09.2004 also supported the view that only rights recognised under Indian law were taxable under the service.

Conclusion: The royalty for use of know-how did not fall within intellectual property right service and was not taxable under Section 65(105)(zzr) of the Finance Act, 1994.

Issue (ii): Whether the demand could be sustained when the show cause notice proceeded on a different factual basis from the agreements actually relied upon in adjudication.

Analysis: The show cause notice proceeded on the footing that royalty had been paid to the foreign licensor for use of trademark or name, whereas the agreement relied upon for the royalty related to know-how, and the trademark licence was contained in a separate agreement with different terms. A demand must be confined to the allegations contained in the notice, and no adjudication can be sustained on a basis not put to notice. The notice thus mixed up distinct contractual arrangements and failed to set out the correct foundation for the demand.

Conclusion: The demand could not be sustained because it travelled beyond the basis disclosed in the show cause notice.

Final Conclusion: The impugned order was set aside and the appeal succeeded because the transaction was outside the taxable scope of intellectual property right service and the demand was founded on a defective show cause notice.

Ratio Decidendi: Know-how is not taxable as intellectual property right service unless it is shown to be a distinct right recognised under Indian law, and a service tax demand must strictly conform to the allegations made in the show cause notice.

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