2023 (3) TMI 739 - AT - Service Tax

Foreign royalty for unregistered IP not taxable in India. Service tax liability requires registration.

The Tribunal upheld the impugned order dropping the demands, dismissing the Revenue's appeal. It held that the royalty paid to a foreign service provider ... Levy of service tax on royalty paid to their foreign service provider under Reverse Charge Mechanism - intellectual property rights or not - M/s. Borelli Tea Holdings Ltd. granted to the Respondent non-exclusive, non-transferrable licence allowing use of its patents and trade marks for manufacture/production of tea and export thereof. HELD THAT:- As it is an admitted fact that the trade mark and patent rights were not registered in India, which have been obtained by the Respondent for use in India from their foreign principal therefore the said rights were not governed by any law for the time being in force. Therefore relying on the decision of M/S. MUNJAL SHOWA LIMITED VERSUS COMMISSIONER OF CENTRAL EXCISE & ST, DELHI (GURGAON) AND (VICE-VERSA) [2017 (6) TMI 819 - CESTAT CHANDIGARH] it is held that the amount paid by the Respondent as royalty or licence fee is not taxable in India. There are no infirmity in the impugned order. Therefore the same is upheld and Appeal filed by the Revenue is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether royalty/licence fees paid to a foreign grantor for use of trademarks/patents outside registration in India fall within 'intellectual property right' and attract service tax under the Intellectual Property Right (IPR) service (reverse charge) as defined in the Finance Act. 2. Whether rights not registered under any law 'for the time being in force' in India can be treated as intellectual property rights for the purpose of levy of service tax under IPR service. 3. Whether the extended period of limitation is invocable where the agreements predate the introduction of IPR service into the service tax net (i.e., whether services rendered before levy can be taxed later when payments are made post-levy). ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2 - Taxability of royalty/licence fees for unregistered trademarks/patents under IPR service Legal framework: The Tribunal examined the statutory definitions in the Finance Act: (a) 'intellectual property right' as any right to intangible property, namely trademarks, designs, patents or other similar intangible property, 'under any law for the time being in force' (Section 65(55A)); (b) 'intellectual property service' being transferring or permitting use/enjoyment of any intellectual property right; and (c) 'taxable service' under IPR as any service provided by the holder of an intellectual property right in relation to intellectual property service (Section 65(105)(zzr)). Precedent treatment: The Tribunal relied on and followed prior Tribunal decisions holding that, for service tax under IPR, the relevant right must be recognized under Indian law (i.e., registered/recognized with Indian trademark/patent authorities). Decisions cited include earlier Tribunal rulings that concluded unregistered foreign IPRs are not chargeable as IPR services in India. The decision in Munjal Showa (discussed at length) was applied directly. Interpretation and reasoning: The Tribunal interpreted the statutory phrase 'under any law for the time being in force' to mean rights recognized under Indian law. If a trademark/patent is not registered or recognised by any law in force in India, it does not constitute an 'intellectual property right' for the purpose of the Finance Act definitions. Consequently, payments characterised as royalty/licence fees to a foreign licensor for use of trademarks/patents not registered in India do not fall within the taxable category of IPR services. Circulars or administrative clarifications which attempt to broaden the levy were held insufficient to override the statutory requirement that the right be governed by law in force in India. Ratio vs. Obiter: Ratio - The statutory requirement that an 'intellectual property right' must be a right under a law 'for the time being in force' in India is essential; absent registration/recognition in India, the right does not attract service tax as IPR service. Obiter - Observations on the scope of various cited decisions and administrative circulars are supportive but ancillary to the core statutory construction. Conclusions: The payments made as royalty/licence fees to a foreign principal for trademarks/patents not registered in India are not taxable under the IPR service provisions of the Finance Act; the impugned demand on that basis is unsustainable. Issue 3 - Invocability of extended period of limitation and temporal scope of levy Legal framework: Levy of service tax under IPR service was introduced with effect from a specific date. Taxability must be determined with reference to when the service was rendered, not when payments for that service were made. Precedent treatment: The Tribunal followed earlier decisions holding that services rendered prior to the introduction of the taxable entry cannot be retrospectively taxed merely because payments were made after the levy came into force. Reliance was placed on Tribunal and High Court decisions establishing that the relevant date for levying service tax is the date of rendition of service. Interpretation and reasoning: Where agreements/transfer of rights were entered into and the service was rendered before the IPR service was introduced in the service tax net, the subsequent levy cannot be applied to those past services. Consequently, extended limitation for demands based on such pre-levy services is not invocable. Ratio vs. Obiter: Ratio - Service tax liability is determined by the date the service was rendered; services rendered before the charge was introduced cannot be retrospectively taxed upon later payments. Obiter - Factual observations about the date of specific agreements in relation to levy commencement. Conclusions: Extended period of limitation cannot be invoked where the underlying agreements/services predate the introduction of IPR service; demands based on payments post-levy for services rendered pre-levy are not sustainable. Cross-references and Consolidated Conclusion 1. Issues 1 and 2 are interrelated: the central legal test is whether the right relied upon is an intellectual property right 'under any law for the time being in force' in India. If not, IPR service provisions do not apply. 2. Issue 3 complements Issues 1 and 2: even if a transaction resembles an IPR-related arrangement, service tax liability must be assessed with reference to the time the service was rendered; services rendered prior to the statutory charging entry cannot be taxed thereafter. Final conclusion: Amounts paid as royalty/licence fees to a foreign entity for use of trademarks/patents that are not registered or recognised under Indian law do not constitute taxable IPR services under the Finance Act; accordingly, service tax demand (including on reverse charge) and invocation of extended limitation are unsustainable and were rightly set aside by the adjudicating authority.