Service tax appeal dismissed, trademark license agreement analyzed, gross value bifurcation upheld.

The appeal filed by the Commissioner of Service Tax was dismissed. The Principal Commissioner's decision that service tax does not apply to the "right to use" component of the Trademark License Agreement was upheld. The bifurcation of the gross value into royalty and right to use was deemed legitimate. The demand for the period beyond the limitation period was implied to be excludable. The judgment emphasized the distinction between deemed sale attracting VAT and services attracting service tax based on the exclusivity of the license granted.

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Issues Involved:
1. Whether the "right to use" component of the Trademark License Agreement amounts to a deemed sale under Article 366(29A) of the Constitution, thereby attracting VAT and not service tax.
2. Whether the bifurcation of the gross value into royalty and right to use is arbitrary and intended to avoid paying higher service tax.
3. Whether the demand for the period April 2008 to September 2008 is beyond the limitation period and hence excludable.

Issue-wise Detailed Analysis:

1. Deemed Sale and VAT vs. Service Tax:
The Principal Commissioner dropped the show cause notice, stating that the grant of license under the Trademark License Agreement would amount to a deemed sale under Article 366(29A) of the Constitution and, therefore, could not be subjected to service tax. This conclusion was supported by the Supreme Court's judgment in Bharat Sanchar Nigam Ltd. vs Union of India [2006 (2) S.T.R. 161 (S.C.)]. The respondent argued that the transfer of the right to use the Trademark on an exclusive basis qualifies as a deemed sale, thus attracting VAT and excluding service tax. The relevant statutory provisions before and after 01.07.2012 were analyzed, including sections 65(55a), 65(55b), and 65(105)(zzr) of the Finance Act, and section 65B(44) and 66E of the Finance Act post-01.07.2012. The Principal Commissioner concluded that the Trademark License Agreement provided an exclusive license, barring the licensor from transferring the same right to another person during the agreement period, thus falling under Article 366(29A)(d) of the Constitution. Therefore, service tax was not applicable.

2. Bifurcation of Gross Value:
The Department argued that the respondent deliberately bifurcated the gross value into royalty and right to use to avoid paying higher service tax. The Principal Commissioner, however, observed that the issuance of two invoices (one for royalty with service tax and another for right to use with VAT) was proper and in accordance with the law. The Commissioner noted that the Trademark License Agreement granted an exclusive license, which constituted a transfer of the right to use goods, thus falling under the purview of deemed sale and attracting VAT. The bifurcation was found to be legitimate and not arbitrary.

3. Limitation Period:
The respondent contended that the demand for Rs. 10,01,258/- for the period April 2008 to September 2008 was beyond the limitation period of five years and hence excludable. The judgment did not specifically address this issue in detail, but the overall conclusion supported the respondent's stance on the applicability of VAT over service tax, implying that any demand beyond the limitation period would be invalid.

Conclusion:
The appeal filed by the Commissioner of Service Tax was dismissed. The Principal Commissioner's order, which held that service tax could not be levied on the "right to use" component of the Trademark License Agreement, was upheld. The bifurcation of the gross value into royalty and right to use was deemed appropriate and compliant with the law. The demand for the period beyond the limitation period was implicitly considered excludable. The judgment reinforced the distinction between deemed sale attracting VAT and services attracting service tax, based on the nature of the transaction and the exclusivity of the license granted.

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