Applicability of VAT on Payments of Royalty To Foreign Holding Company

[Guest]

Dear All,

Greetings of the day.

we are a company Situated in State of Tamailnadu,

We paid Royalty to our Foreign parent company for their technical Know how support and also paid service tax for Availing of Services.

now The Tamilnadu Vat dept.sent one Notice to pay vat on The Royalty amount paid to our parent company.

is Vat applicable on payment of Royalty? in the State of Tamilnadu?

please Provide Your Views .

thanks in advance .

[YAGAY andSUN]

In the case of S.P.S. Jayam and Co. vs Registrar, Tamil Nadu Taxation Special Tribunal and others (2004) 137 STC 117(MAD) = 2004 (4) TMI 539 - MADRAS HIGH COURT, the High Court held that the Royalty received as consideration of use of trade mark is consideration of transfer of right to use a movable asset and upheld its taxation under the sales tax laws. The court observed that “ For transferring the right to use the trademark, it is not necessary to hand over the trademark to the transferee or give control or possession of trademark to him.” The court further observed that “Simply because the assessee retained the right for himself to use the trademark and reserved the right to grant permission to others to use the trademark, it would not take away the character of the transaction as one of transfer of a right to use.”

[Ganeshan Kalyani]

Dear Yagay and Sun, from your reply it is inferred that Vat/Cst would be applicable. However when the querist company has availed the technical knowhow and made payment towards it then the revenue is accounted in the books of the parent company and an expensive to the querist company. However since the parent company is in foreign country does the querist company will have pay vat /cst. Pl present your valuable view in this regard.

[YAGAY andSUN]

The provision of purchase tax would be applicable on this transaction.

[YAGAY andSUN]

Further, whatever amount is paid by you as Purchase Tax/VAT that would be available to you as Input Tax Credit, since such technology is being used in manufacturing of finished goods on which Output VAT is being paid.

[Guest]

Dear All ,

Greetings of the day.

In our case it is Import of Service and We paid Service Tax According to Reverse Charge Mechanism, Now TN Vat Dept. Wants Us to pay VAT on the Royalty Paid to our parent company which is in another Country.

Is We have to pay vat on this Royalty amount? Even though we paid Service tax.?

is Royalty Is a good or service.?

How we have to Counter this Notice?

Here We Had paid The Royalty Not Received from MY parent Company. Please Provide Your Views .

Thanks in Advance.

AI Summary

VAT on royalty: state turnover tax may apply to payments for right to use intellectual property despite service tax payment. The core issue is whether VAT applies to royalty paid to a foreign parent for technical know how and trademark use. A cited High Court ruling treats consideration for the right to use a trademark as a taxable transfer of a right to use a movable asset, supporting state turnover taxation. Advisers note purchase tax/VAT may be payable but any VAT paid could be available as input tax credit when the technology is used in manufacturing; the payer contests whether prior payment of service tax under reverse charge negates VAT liability and asks whether royalty is a good or service.