Royalty for technical know-how not taxable as IPR service under Section 65(105)(zzr); deduction denial overturned, appeal allowed

CESTAT CHANDIGARH held that royalty/fee for transfer of technical know-how is not taxable as IPR service under Section 65(105)(zzr) of the Finance Act, 1994, since know-how and unregistered trademark rights are not IPRs chargeable under Indian law; therefore the appellant-assessee is not liable for service tax on the payments. The Tribunal also found the impugned denial of deduction under Notification No.17/2004-ST contrary to earlier decisions, and refused to invoke the extended limitation period because the appellant had a bona fide belief and the issue was one of interpretation. Appeal allowed.

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Issues Involved:
1. Liability of service tax on royalty for technical know-how under Intellectual Property Rights (IPR) Service.
2. Availability of deduction under Notification No. 17/2004-ST.
3. Invocation of extended period of limitation and imposition of penalty.
4. Cum-tax benefit in reverse charge scenario.

Summary:

1. Liability of Service Tax on Royalty for Technical Know-How under IPR Service:
The appellant-assessee, engaged in manufacturing electrical articles, was issued two show cause notices for non-payment of service tax on royalty paid to a France-based company for technical know-how. The Tribunal held that the royalty paid is not liable to service tax under IPR Service as the IPRs were not registered under Indian law. The Tribunal referenced several decisions, including *Lurgi India International Services Pvt. Ltd. v. Commissioner* and *Munjal Showa Ltd. v. CCE*, which consistently held that know-how is not an IPR within the meaning of service tax law.

2. Availability of Deduction under Notification No. 17/2004-ST:
The Tribunal found that the deduction under Notification No. 17/2004-ST is available even for service tax paid under reverse charge mechanism (Section 66A). This finding is supported by the decision in *Rochem Separation Systems (India) P. Ltd. v. CST*, which clarified that the notification's intention is to exempt service tax on cess paid towards the import of technology.

3. Invocation of Extended Period of Limitation and Imposition of Penalty:
The Tribunal held that the extended period of limitation and penalty could not be invoked due to the appellant's bona fide belief that no service tax was payable on the acquisition of know-how. The Tribunal noted that the department was aware of the non-payment as early as November 2008, but the first show cause notice was issued in July 2010. The Tribunal referenced decisions like *Anand Nishikawa Co. Ltd. v. CCE* and *Padmini Products v. CCE* to support this conclusion.

4. Cum-Tax Benefit in Reverse Charge Scenario:
The Tribunal upheld the cum-tax benefit granted by the Commissioner to the appellant-assessee, referencing the decision in *DHL Express (I) Pvt. Ltd. vs. CST*, which held that cum-tax benefit is applicable even in reverse charge scenarios. The Tribunal dismissed the Revenue's appeal challenging this benefit.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the royalty paid for technical know-how is not liable to service tax under IPR Service, the deduction under Notification No. 17/2004-ST is applicable, the extended period of limitation and penalty are not sustainable, and cum-tax benefit is applicable in reverse charge scenarios. The Revenue's appeal was dismissed.

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