Royalty payments by 100% EOU for technical know-how not liable to service tax under intellectual property service category

CESTAT Bangalore held that royalty payments by a 100% EOU for technical know-how are not liable to service tax under intellectual property service category. The Tribunal ruled that mere transfer of technical know-how, without being registered or recognized under Indian intellectual property laws, cannot be considered intellectual property service. Following precedent from ABB Ltd. case and appellant's own earlier case, the Tribunal found know-how is not recognized as intellectual property under Indian law and constitutes property transfer rather than service provision. The Commissioner's order was set aside and appeal allowed.

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Issues Involved:

1. Whether royalty payments for receiving technical know-how are liable to service tax under the category of intellectual property service as defined under Section 65(55a) of the Finance Act, 1994.
2. Whether the appellant suppressed facts with the intention to evade payment of duty.

Issue-wise Detailed Analysis:

1. Liability of Royalty Payments to Service Tax:

The primary issue in the case was whether the royalty payments made by the appellant for receiving technical know-how from a foreign company were liable to service tax under the category of intellectual property service as defined under Section 65(55a) of the Finance Act, 1994. The appellant, a private limited company registered as a 100% EOU, had entered into a collaboration agreement with a foreign company, obtaining a non-exclusive, non-transferable right and license to use GE intellectual property. The appellant paid a royalty amount for this license, which the department categorized as intellectual property service, thereby attracting service tax under Rule 2(1)(d)(iv) of the Service Tax Rules, 1994.

The appellant contended that the technical know-how was not recognized as intellectual property under Indian law, and thus the royalty paid could not be considered as a service under intellectual property service in terms of the Finance Act, 1994. They relied on various tribunal decisions where it was held that know-how provided by way of a license by a foreign company to an Indian company is not in the nature of intellectual property service. The tribunal referred to the definition of intellectual property service, which includes only such intellectual property rights that are prescribed under Indian law. Since technical know-how is not recognized as intellectual property by any Indian law, it was concluded that the royalty payments could not be taxed under intellectual property service.

2. Allegation of Suppression of Facts:

The appellant argued that there was no suppression of facts with the intent to evade duty. They maintained that they were a registered service provider and had been paying the service tax due. The appellant had disclosed the receipt of the license to use technical know-how and had been making royalty payments, along with R&D Cess on the royalty paid. They had informed the department about the royalty payments on 14.12.2007, but the show-cause notice was issued only in July 2009, which they argued was time-barred. The appellant asserted that the issue was interpretational in nature and thus, the question of suppression did not arise.

The tribunal found that the department had complete knowledge of the transactions, and the delay in issuing the show-cause notice could not be attributed to suppression by the appellant. The tribunal noted that the issue was indeed interpretational, and therefore, the allegation of suppression was not sustainable.

Conclusion:

The tribunal set aside the impugned order, concluding that the royalty payments for technical know-how were not liable to service tax under the category of intellectual property service, as the know-how was not recognized under Indian law as intellectual property. The appeal was allowed with consequential relief, if any, as per law.

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