royalty- Intellectual property service

[jitendra Gupta]

an agreement done for payment of royalty on total sales made during the year @ 3%. Royalty worked out Rs. 1.70 crore on total sales made during the year 2007-08. But the payment of royalty was made after 24.2.2009. So at which rate (10% or 12%) service tax payment has to be made? The royalty pertains for sales of 5 units, so credit should be equally or on the basis of sales value distributed to each unit or one unit can availed entire credit?

[Sucheta Agrawal]

Dear Mr. Jitendra,

Taxabla event arise when services are rendered or payment is received whichever is earlier. Thus the rate which was applicable in 2007-08 will be applicable in your case.  

 

[Surender Gupta]

Yes, it is the event when the services have been provided. Therefore, the rate of duty as applicable as on the date of provision of services are applicable. Regarding cenvat credit, where the amount is consolidated and distributed amount the different units, there is no mandate to distribute in equal proportion. Any reasonable method for distributing the input services would be sufficient for availing cenvat credit.

[Ramanujam Varadarajan]

In my view, the period of sale is not relevant as it is only the basis for calculating the royalty, but the period when the royalty is to be paid as per the agreement is important and accordingly, rate as applicable as on the date on which the royalty accrues would be payable. As far as availment of credit by different units of the same entity for the service tax commonly paid by a unit, having registeration as input service distributor would be best course to pass on the credit in this scenario.

AI Summary

Service tax rate applicability determined by date of provision or accrual, not payment, for royalty transactions. Service tax rate for royalty is determined by the date the service was provided or the royalty accrued, not by the later payment date. For cenvat credit, a consolidated payment may be allocated among units by any reasonable method, and an Input Service Distributor registration is the appropriate mechanism to pass on common service tax credit.