2025 (11) TMI 1025 - AT - Service Tax

Appeal allows relief: service tax not leviable on one-time overseas IPR/patent transfers; demand and extended period set aside

M/s UOP Inter Americana Versus Commissioner of Central Excise & Service Tax, Delhi

CESTAT, Chandigarh (AT) allowed the appeal, holding the levy of service tax on overseas IPR-related transfers unsustainable. The tribunal found the ... Levy of service tax - place of provision of services - services received from the overseas entity as per Rule 2(1)(d)(iv) of the Service Tax Rules,1994 under the category of IPR services - appellant did not intimate department regarding receipt of payments against the IPR services provided by it - invocation of extended period of limitation - HELD THAT:- It is clear from the agreements that M/s UOP LLC provided the services related to Grant of Patent, Supply of Engineering designs and Provision of Engineering Services. It is not dispute that said patents and IPR are registered in USA. The terms of the agreement indicate that the payment for such transfers is to be made in USD. The liaison office of UOP Asia Ltd, a group company, is registered in India, collected the payments from Indian Petroleum companies and remitted the same to the parent company. We find that neither the Show Cause Notice nor the impugned order established that the liaison office in India has provided the services on their own to the Indian Petroleum companies. In case the liaison office India provided the services, the consideration for the same should have been in Indian Rupees. It is not established that such consideration was paid in Indian Rupees. It is seen in the present case that the transfer of 'patent rights' by the Appellant to Petroleum Companies in India, though a onetime event and that no further rights/ processes/upgrades were provided to Petroleum Companies in India. Revenue has not brought forth any evidence at least to this extent. The adjudicating authority misconstrued the continuous usage and periodical payment of remuneration to be the occurrence of taxable event. We find that such a construction is absurd and makes the provisions of the statute to tax amount paid or payable as consideration for the service, meaningless and redundant. We find that the taxable event of ‘transfer’ happens only once and cannot be treated as a continuous activity merely because the consideration for such transfer is paid in pre-determined intervals as per the terms agreed between parties. Support found in the decision of the tribunal in the case of Modi Mundipharma [2009 (4) TMI 113 - CESTAT, NEW DELHI]. Tribunal held that since services were rendered in 1990, the liability to pay Service Tax would not arise merely because the payment installments were received after 10.09.2004. It is found that the decision in the case of Indian National Shipowners Association [2008 (12) TMI 41 - BOMBAY HIGH COURT] was followed in a number of cases. Tribunal in the case of Mitsui & Co. Ltd. vs. C. Ex & ST Jamshedpur [2013 (3) TMI 228 - CESTAT, KOLKATA] held that no service tax can be levied on services rendered prior to 18.04,2006 by a foreign service provider to a service recipient in India. Thus, the services were rendered before 10.09.2004 prior to the date when the services of IPR came under service tax net. Taxable event occurred prior to introduction of IPR services under the category of taxable services. Further, the Services were provided by the appellant from a place outside India and there was no way they could be taxed before 18.04.2006. Thus, by no stretch of imagination can the Appellant be obligated to discharge Service Tax on such services provided by it from outside India. It is further found that the impugned order tries to confirm a demand of Rs. 1,64,789, on account of out-of-pocket expenses recovered prior to 18.04.2006, in terms of Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006. The impugned order cannot be sustained - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the transfer/grant of rights in intellectual property (patent/IPR) under the licence/royalty agreements constituted a taxable event as a continuing service or a one-time transfer for purpose of service tax. 2. Whether services provided by a non-resident/service provider located outside India to recipients in India prior to the statutory insertion of a charging provision making such receipts taxable could be subjected to service tax (including under reverse charge rules) for the period before that insertion. 3. Whether the existence of a liaison/representative office in India converted a foreign service provider into a taxable provider in India (thereby attracting service tax obligations on the provider rather than on the recipient under reverse charge rules) where the liaison office only collected and remitted consideration abroad. 4. Whether out-of-pocket expenses recovered by the provider prior to the effective date of the charging provision are taxable. 5. Whether penalties under multiple penal provisions (Sections 76 and 78) can be simultaneously imposed for the same default; and whether errors in computation (cum-tax treatment, cess abatement, erroneous rate) vitiate the demand. ISSUE-WISE DETAILED ANALYSIS Issue 1: Nature of IPR transfer - one-time transfer versus continuing/periodic service Legal framework: The taxable category defined for intellectual property services refers to 'transfer of' or 'grant of permission to use' intellectual property; the taxable event is the transfer/grant by the service provider. Precedent treatment: Earlier decisions of tribunals and courts have recognized that a transfer of know-how or IPR effected at a point in time is a one-time transaction and is not rendered continuously taxable merely because consideration is payable in instalments or related to future production. Interpretation and reasoning: The Court examined the licence/engineering agreements and payments structure and found that the substantive transfer/grant of rights occurred prior to the inclusion of IPR services in the taxable net. The agreements showed lump-sum/defined deliverables and that subsequent payments were instalments for that transfer; there was no material on record to show ongoing provision of new rights, upgrades or fresh processes that would make the obligation continuous. Treating instalmentary consideration as a continuing taxable event would render the statute's focus on the transfer/grant meaningless and produce absurd results. Ratio vs. Obiter: Ratio - the taxable event for IPR is the transfer/grant and, where that transfer occurred prior to the inclusion of IPR services in the taxable net, subsequent instalment payments do not create fresh taxable events. Obiter - observations on hypothetical cases where continuing technical assistance or periodic upgrades are actually supplied. Conclusion: The transfer/grant of patent/IPR in the facts was a one-time taxable event occurring before the relevant inclusion date; it is not taxable as a continuing IPR service simply because consideration was payable periodically. Issue 2: Taxability of services provided from outside India before insertion of charging provision and reverse charge applicability Legal framework: Taxation of services provided from outside India to recipients in India requires statutory authority (the charging section and applicable rules). The reverse charge mechanism applies only as permitted by the statute and its amendments in force on the relevant dates. Precedent treatment: Prior decisions construed that liability to tax services provided by non-residents to Indian recipients arose only after the enactment of the statutory charging provision extending the levy to services received in India; earlier departmental rules could not override the absence of a charging section. Interpretation and reasoning: The Court held that services rendered from a place outside India could not be effectively taxed by domestic authorities before the statutory insertion that made receipts in India taxable. All invoices and remittances in the present case were dated prior to that insertion; therefore jurisdictional and charging authority were absent for imposing service tax on those transactions. The reverse charge rules cannot be invoked to reach back to periods when the charging provision did not create a liability on recipients. Ratio vs. Obiter: Ratio - services performed/provided from outside India before the statutory charging provision cannot be taxed in India merely by rule-making or administrative fiat; the charging provision's effective date governs tax liability. Obiter - comparisons with services received outside India or cases where the charging provision post-dates performance. Conclusion: Services rendered from outside India and invoiced/paid prior to the effective date of the statutory charging provision were not taxable in India, and reverse charge could not be applied for that earlier period. Issue 3: Effect of liaison/representative office in India on taxability of foreign provider Legal framework: Presence of an establishment/office in India may create taxable status if services are provided from that establishment; however, liaison/representative offices are restricted in activity by foreign exchange/Reserve Bank policy and their functions are limited to liaison/collection unless authorized otherwise. Precedent treatment: Authorities and courts have held that mere registration or obtaining service tax registration is not conclusive of taxable activity; factual matrix must demonstrate that the Indian office performed the taxable services. Interpretation and reasoning: The Court analysed the record and found no material to show that the liaison office in India performed the disputed services or that consideration was received in Indian Rupees from clients as payment for services performed in India. The liaison office collected payments and remitted them to the foreign parent under RBI authorization; collection alone without provision of services in India does not convert the representative office into the service provider for taxation purposes. Reliance on registration alone is insufficient to fasten liability - factual evidence of activity is required. Ratio vs. Obiter: Ratio - a liaison/representative office used solely for collection/remittance, without provision of the taxable service in India, does not make the foreign entity a taxable provider in India. Obiter - commentary on circumstances where the representative office engages in service provision and currency of consideration is significant. Conclusion: The liaison office's collection/remittance function did not make the foreign provider liable to service tax as a provider operating in India for the disputed period. Issue 4: Taxability of out-of-pocket expenses recovered before the charging provision Legal framework: Value determination rules may treat reimbursed expenses as part of taxable value only if the underlying service is taxable and the statutory rules for valuation are intra vires the charging statute. Precedent treatment: A decision questioned the vires of the specific valuation rule relied upon to tax reimbursed expenses; when the main service is not taxable for the period, related recovered expenses cannot be taxed. Interpretation and reasoning: Because the services themselves were held not to be taxable for the relevant period, the recovery of out-of-pocket expenses prior to the effective date of the charging provision could not be made taxable; additionally, reliance on a valuation rule deemed ultra vires in earlier authority undermines the basis for taxing such reimbursements. Ratio vs. Obiter: Ratio - expenses recovered in relation to services that were not taxable during the period cannot be taxed; Obiter - observations on the vires of valuation rules in other contexts. Conclusion: The assessed tax on out-of-pocket expenses recovered prior to the effective date cannot be sustained. Issue 5: Imposition of concurrent penalties and computational errors Legal framework: Penal provisions prescribe conditions and relief; computation of tax must correctly apply applicable rates, abatements and treatment (cum-tax), and penalties are conditionally imposed per statute. Precedent treatment: Authorities have cautioned against imposing multiple penalties for the same default where statute does not permit cumulative penalties; computational errors may invalidate or reduce demands. Interpretation and reasoning: The Court noted challenges to computation (cum-tax benefit, cess abatement, rate application) and the contention that two separate penal provisions were imposed for the same act. Given the primary conclusions on non-taxability, imposition of penalties and disputed computation required no independent sustenance; where penalties are not independently justified once tax liability fails, simultaneous imposition is improper. Ratio vs. Obiter: Ratio - where the substantive tax demand is unsustainable, ancillary penalties founded on that demand cannot stand; Obiter - detailed treatment of which penalty may apply if distinct culpability were established. Conclusion: Penal and computational aspects do not survive the primary conclusion of non-taxability and cannot be sustained on the record. Overall Disposition The Court concluded that the levy and related penalties under the impugned order could not be sustained: the IPR transfer was a one-time event prior to the taxable inclusion; services were provided from outside India before the charging provision made such receipts taxable; the liaison office's collection/remittance activity did not convert the foreign provider into a taxable domestic provider; related recovered expenses were not taxable for the period; and the penalties/demand based on these findings were not maintainable. The appeals were allowed.