Indian-law-recognised intellectual property requirement defeats service tax on foreign royalty and technical know-how payments.

Technical know-how fees and royalty paid to a foreign supplier were treated as outside service tax under intellectual property service because the right was not shown to be an intellectual property right recognised under Indian law, and the revenue failed to establish that it fell within the statutory definition. The Tribunal also accepted discharge of the disputed reverse-charge liability through the Cenvat credit account for the relevant period, noting prior acceptance of that method and no applicable statutory bar. The service tax, interest and penalty demand was therefore unsustainable.

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Issues: (i) Whether technical know-how fees and royalty paid to a foreign supplier were chargeable to service tax under the category of intellectual property service. (ii) Whether the service tax liability, if any, could be discharged from the Cenvat credit account under reverse charge.

Issue (i): Whether technical know-how fees and royalty paid to a foreign supplier were chargeable to service tax under the category of intellectual property service.

Analysis: The levy of service tax on intellectual property service was confined to intellectual property rights of the kind recognised under Indian law. The definition of intellectual property right covered intangible rights such as trademarks, patents, designs and similar rights under law for the time being in force, and the Board circular also clarified that only IPRs covered under Indian law were chargeable. On the facts, the foreign supplier's right was not shown to be registered or governed by Indian law, and the revenue had not produced evidence to bring it within the statutory definition. The payments for technical know-how and royalty therefore did not answer the description of taxable intellectual property service.

Conclusion: The levy of service tax on the impugned technical know-how fees and royalty was not sustainable.

Issue (ii): Whether the service tax liability, if any, could be discharged from the Cenvat credit account under reverse charge.

Analysis: The Tribunal noted that the appellant had debited the disputed amount from Cenvat credit and had also reflected the payments in its returns. The question whether service tax under reverse charge could be paid from Cenvat credit had already been accepted in the appellant's own earlier proceedings, and the later restriction inserted by notification did not govern the relevant period. The amount debited from the credit account could not be retained by the Government without authority of law.

Conclusion: Discharge of the disputed liability from Cenvat credit was permissible on the facts of the case.

Final Conclusion: The demand of service tax, interest and penalty was unsustainable, and the appeal succeeded with consequential relief.

Ratio Decidendi: For levy of service tax on intellectual property service, the intellectual property right must fall within the category of rights recognised under Indian law, and where the disputed liability is otherwise discharged from Cenvat credit for the relevant period, such payment cannot be denied in the absence of a statutory bar.

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