2025 (12) TMI 685 - AT - Service Tax

Service tax demand quashed on royalty, know-how and export expenses; no liability under IPR, BAS Section 65(19).

CESTAT Kolkata allowed the appeal, setting aside the entire service tax demand. It held that royalty income was remitted to and accounted for by the ... Levy of service tax - Royalty Income earned by the Corporate Office of the appellant, which is having a separate registration - Intellectual Property Services for licensing of know-how under the Know-How Licensing Agreement - Export sales expenses under Business Auxiliary seervices as per reverse charge mechanism. Whether the appellant is liable to pay service tax on “Royalty Income” earned by the Corporate Office of the appellant, which is having a separate registration, or not? - HELD THAT:- The Royalty amounts were remitted by their Corporate Office and the appellant is one of the manufacturing unit of the Corporate Office, which is having multiple manufacturing facilities and administrative offices situated across the various locations and all such units are part of a single legal entity i.e. Corporate Office and the figure of royalty has been shown a consolidated balance sheet of the Corporate Office. In that circumstances, if the service tax is payable on that royalty is to be paid by the Corporate Office not by the appellant. The appellant is not required to pay service tax, as is having a separate service tax registration. Therefore, the demand of service tax on account of royalty income is not sustainable against the appellant as held by this Tribunal in the case of M/s Narayan Kumar Vs. Commissioner of CGST & Central Excise, Bolpur [2025 (8) TMI 91 - CESTAT KOLKATA]. Thus, the appellant is having a separate service tax registration, in that circumstances, the demand confirmed on the basis of data recovered from the records of the Corporate Office are not sustainable. Accordingly, the demand of royalty income confirmed against the appellant is set aside. Whether the appellant is liable to pay service tax under the category of “Intellectual Property Services” for licensing of know-how under the Know-How Licensing Agreement, or not? - HELD THAT:- The said issue has been dealt with by this Tribunal in the case of Munjal Showa Limited Vs. Commissioner of Central Excise & Service Tax, Delhi (Gurgaon) [2017 (6) TMI 819 - CESTAT CHANDIGARH], wherein this Tribunal has observed that 'services received by the appellant-assessee are not covered under Intellectual Property Rights services, under Section 65(105)(zzr) of the Finance Act, 1994, therefore, no service tax is payable by the appellant-assessee.' Thus, the service received by the appellant is not covered under the ‘Intellectual Property Royalty Services’, therefore, no service tax is payable by the appellant under reverse charge mechanism. Therefore, the said demand is also set aside. Levy of service tax - Business Auxiliary seervices - Export sales expenses - reverese charge mechanism - HELD THAT:- The demand of service tax under Business Auxiliary Service on reverse charge mechanism in respect of export sales expenses is not sustainable as no specific clause under Section 65 (19) of the Finance Act, 1994 has been invoked to demand service tax from the appellant. Therefore, the demand on export sales expenses under reverse charge mechanism under the category of Business Auxiliary Service is not sustainable. Accordingly, the demand of service tax is set aside under Business Auxiliary Service. The impugned order is set aside - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether service tax liability on royalty income arising from a know-how licensing agreement could be fastened on a manufacturing unit when such income was earned and accounted for by the corporate office holding a separate service tax registration. (2) Whether licensing of technical know-how under a Know-How Licensing Agreement is taxable under the category of 'Intellectual Property Service'. (3) Whether service tax under reverse charge on 'export sales expenses' is sustainable under 'Business Auxiliary Service' in the absence of specification of the applicable sub-clause of Section 65(19) of the Finance Act, 1994. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Service tax liability on royalty income earned by corporate office having separate registration Interpretation and reasoning (a) The Court noted that the know-how licensing agreement was entered into by the corporate office, which also raised invoices and directly received royalty remittances in its own bank account. (b) The appellant unit was only one of several manufacturing units of the same legal entity, and the royalty figure appeared in the consolidated balance sheet of the corporate office. (c) The appellant unit possessed a separate service tax registration distinct from that of the corporate office. (d) Relying on precedent, the Court held that a commissionerate cannot fasten service tax liability on a unit in respect of services/income pertaining to another separately registered unit beyond its territorial and registration jurisdiction. (e) The demand was based solely on data retrieved from the corporate office records and consolidated balance sheet, without establishing that the taxable service was rendered by, or consideration received by, the appellant unit. Conclusions (f) Where royalty income and the related taxable activity pertain to the corporate office holding a separate registration, service tax, if any, is payable by that registered unit alone and not by another unit with a different registration. (g) The demand of service tax on royalty income against the appellant unit was held to be without jurisdiction and unsustainable, and was accordingly set aside. Issue 2 - Taxability of licensing of know-how under 'Intellectual Property Service' Legal framework (as discussed) (a) Section 65(55a) of the Finance Act, 1994 defines 'intellectual property right' as any right to intangible property, namely trademarks, designs, patents or any other similar intangible property, under any law for the time being in force, excluding copyright. (b) Section 65(55b) defines 'intellectual property service' as transferring or permitting the use or enjoyment of any intellectual property right. (c) Section 65(105)(zzr) defines taxable service as any service provided or to be provided by the holder of intellectual property right in relation to intellectual property service. (d) Tribunal precedent holds that, for a right to qualify as 'intellectual property right' for service tax purposes, it must be recognized/registered under Indian law 'for the time being in force'. Interpretation and reasoning (e) The Court relied on earlier Tribunal decisions (including one affirmed by the Supreme Court) which held that technical know-how, designs, trademarks, and similar rights not registered/recognized in India do not qualify as 'intellectual property right' within Section 65(55a). (f) It was reiterated that only intellectual property rights covered by Indian law and duly registered (e.g. trademarks/patents with the competent Indian authorities) fall within the taxable ambit of 'intellectual property service'. (g) In cases where the know-how or similar rights are not so registered/recognized in India, there can be no taxable 'intellectual property service', and consequently no liability under reverse charge. Conclusions (h) Licensing of technical know-how under the concerned agreement did not constitute a taxable 'Intellectual Property Service' within the meaning of Sections 65(55a), 65(55b) and 65(105)(zzr). (i) No service tax was payable by the appellant under reverse charge on such know-how licensing; the related demand was set aside. Issue 3 - Service tax under reverse charge on 'export sales expenses' under Business Auxiliary Service Interpretation and reasoning (a) The demand on export sales expenses was raised under 'Business Auxiliary Service' on reverse charge basis. (b) The Court observed that the show cause notice and adjudication did not specify the particular sub-clause of Section 65(19) under which the impugned activities were sought to be classified as BAS. (c) It was noted that liability had been mechanically computed from the figures of foreign currency expenses without analysis of the precise nature of services or correlation with any specific ingredient of BAS. (d) The Court applied the settled principle that the burden lies on the Department to identify the exact taxable service and sub-clause and to demonstrate how the statutory ingredients are satisfied; failure to do so vitiates the demand. Conclusions (e) In the absence of invocation of a specific sub-clause of Section 65(19) and without proper classification and factual correlation, service tax demand under BAS on export sales expenses on reverse charge basis is not sustainable. (f) The demand of service tax on export sales expenses under Business Auxiliary Service was set aside in entirety. Overall disposition (g) As the demands on royalty income and export sales expenses were held unsustainable on merits and jurisdiction/classification grounds, the impugned order was set aside and the appeal allowed with consequential relief.