Technical know-how royalty and related export services not taxable absent a recognised intellectual property right or certification function.

Royalty paid for transfer of technical know-how was not taxable as Intellectual Property Rights service because the agreement covered data, drawings, specifications and similar know-how, but there was no showing that the subject matter was an intellectual property right recognised under Indian law. Tax was not attracted merely because the arrangement involved a licence or periodic royalty payments. Amounts received for identifying Indian exporters were treated as export-oriented services with benefit accruing outside India and therefore outside domestic service tax. Inspection and certification receipts were also held not taxable because the activities were incidental operational work, not services rendered by an agency engaged in inspection or examination for certification of standards.

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Issues: (i) Whether royalty paid for transfer of technical know-how under the agreement was taxable as Intellectual Property Rights service under reverse charge. (ii) Whether the amounts received for identifying Indian exporters and for inspection and certification of goods were taxable as Business Auxiliary Service and Technical Inspection and Certification Service.

Issue (i): Whether royalty paid for transfer of technical know-how under the agreement was taxable as Intellectual Property Rights service under reverse charge.

Analysis: The agreement transferred data, documentation, drawings, specifications, and similar know-how, but there was no evidence that the subject matter was a registered or otherwise recognised intellectual property right under Indian law. The taxable entry covered only intellectual property rights existing under law for the time being in force in India. The service tax levy could not be attracted merely because the technology was used pursuant to a licence or because royalty was paid periodically. The relevant consideration was whether the right itself was covered by Indian intellectual property law and whether the transfer answered the statutory definition of intellectual property service.

Conclusion: The royalty for technical know-how was not taxable as Intellectual Property Rights service, and the demand was unsustainable.

Issue (ii): Whether the amounts received for identifying Indian exporters and for inspection and certification of goods were taxable as Business Auxiliary Service and Technical Inspection and Certification Service.

Analysis: The commission received for identifying and negotiating with Indian exporters was treated as service used outside India, and the legal principle applied was that export-oriented services are not liable to domestic service tax when the benefit accrues outside India. As to inspection and certification, the statutory entry required an agency engaged in inspection or examination that certifies compliance with standards. The activities in question were found to be incidental operational activities and not the work of an independent technical inspection and certification agency. On these facts, the department failed to establish the necessary statutory ingredients for either category of taxability.

Conclusion: The amounts received for these services were not taxable under the categories invoked by the department.

Final Conclusion: The demands raised in the show cause notices were set aside in full, and both appeals succeeded.

Ratio Decidendi: Transfer of technical know-how is chargeable as intellectual property service only when the right transferred is an intellectual property right recognised under Indian law, and a service falls within technical inspection and certification only if it is rendered by an agency engaged in inspection or examination for certification of specified standards.

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