ST - If reason for waiving penalty u/s 80 are that there was confusion about scope of leviability under reverse charge mechanism, then, it is same confusion because of which appellants had not declared fact of receiving service by way of import - Demand time barred: CESTAT
By TIOL News Service
MUMBAI, JAN 15, 2015 : THE appellants are registered for providing various taxable services. Rochem A.G. Switzerland, is a Corporation incorporated under the law of Switzerland. Rochem A.G. are the owners of Technology and Patents relating to manufacture of Membrane Based Filtration, Separation and Treatment Systems for any/all Liquid-Liquid and/or Solid-Liquid Separation systems designed for Membrane Module Technology.
During the audit of the records of the appellant it was noticed that the appellant had paid royalty of Rs.6 crores on account of technical know-how charges to M/s. Rochem Switzerland under the technology transfer and License Agreement with Rochem A.G., Switzerland.
A SCN came to be issued demanding ST of Rs.73,44,000/- on the royalty amount of Rs.6 crores paid during 2007-08 on the basis that the appellant had received Intellectual Property Right Service from M/s. Rochem A.G. Switzerland.
The Commissioner, ST, Mumbai upheld the charge of non-payment of service tax on Import of service on reverse charge mechanism u/s 73(1) invoking extended period alongwith interest. However, he refrained from imposing penalties u/s 76, 77 & 78 of the Finance Act, 1994.
The appellant is before the CESTAT.
It is submitted that payment of royalty for transfer of technology (technical know-how) will not fall under the category of Intellectual Property Right Service; that the share Purchase Agreement never came into force and, therefore, it cannot be relied upon to say that royalty has been paid by the appellants to Rochem AG Switzerland for the use of the trademarks; service in relation to Intellectual Property Right Service under Section 65(105)(zzr) can only be applied to Intellectual Property Right registered in India. It is further submitted that the exercise is revenue neutral as during the disputed period, they had paid excise duty amounting to Rs.3,74,68,704/- in cash from the PLA account & had they paid the service tax demanded, they would have been entitled to take credit of the same. Reliance is placed on the decisions in Narmada Chematur Pharmaceuticals Ltd. 2004-TIOL-113-SC-CX-LB & Coca-Cola India Pvt. Ltd. 2007-TIOL-245-SC-CX. The appellant also submitted that although they paid Rs.30,00,000/- as cess under the Cess Act they have been denied the benefit of Notification No. 17/2004-ST dt. 10.9.2004. Moreover, since the penalty has been waived, the extended period is not invokable.
The AR supported the order.
The Bench observed -
On Merits:
++ In our view, the Technology Transfer Agreement read with Share Purchase Agreement clearly points to the provision of two services by Rochem AG Switzerland, namely, the service of providing technology transfer and the service of providing intellectual property right transfer. The Commissioner is right in holding that the Share Purchase Agreement is inextricably linked to the Technology Transfer Agreement by virtue of Article 4 Non-competition. Further, Article 4 also recognizes that appellant have been using the trademark and logo “Rochem”.
++ However, the Commissioner failed to analyze the Agreements in detail and came to a hasty conclusion that the entire amount of royalty is towards transfer of Intellectual property Right. The definition of intellectual property right such as trademark, patent etc. have to be construed in the same sense as in the Intellectual Property Right Acts such as the Patent Act and the Trademark Act. Only rights which are registered with the trademark/patent authorities are considered as Intellectual Property Right. The Commissioner has failed to go into these aspects in detail and has clubbed the entire service as Intellectual Property Right service.
++ On the aspect of revenue neutrality, we agree with the reliance place on the Supreme Court judgments.
++ The Commissioner has rejected the benefit of notification No. 17/2004 for the reason that the notification applies only to Section 66 and not to Section 66A in which the appellant is required to pay service tax on the import of services or reverse charge basis. This reasoning is flawed. Section 66A was introduced by Finance Act, 2006 w.e.f. 18.4.2006 whereas the notification No 17/2004 was issued on 10.9.2004. It appears that the law makers slipped on bringing an amendment to the notification because the intention of the notification is very clear, that is, not to levy service tax on cess paid towards the import of technology. Careful reading of the notification indicates that what is exempted is “taxable service provided by the holder of the Intellectual Property Right to any person...........” Service Tax Rule 2(r) defines “Provider of Taxable Service” to include a person liable for paying service tax. Therefore, this rule read with notification No. 17/2004 can be interpreted only to mean that the appellant being the person liable to pay service tax under Section 66A will also be eligible for exemption. It must not be forgotten that the charge of service tax on Intellectual Property Right under Section 65(105) (zzr) is actually made under Section 66. What Section 66A does is only to fasten the liability to the receiver of services in India while receiving services from abroad. In the present case the charge of service tax is under Section 66 but the appellant being the receiver is liable to pay under Section 66A. The Commissioner's reasoning is not correct and is rejected. The appellants are eligible to benefit from notification No. 17/2004.
On Limitation:
++ The Commissioner noted that the issue of charging service tax on reverse charge basis under Section 66A was under litigation in various courts. He relied on case laws which have held that if the service tax has not been paid due to pendency of matter in judicial forums, the said aspect may be considered as reasonable cause for non payment for invoking the provisions of Section 80. Accordingly, he waived penalties under Section 76, 77 & 78 of the Finance Act. ...If the reason for waiving penalty under Section 78 in terms of the provisions of Section 80 are that there was confusion about the scope of leviability on service receivers under reverse charge mechanism, then, it is the same confusion because of which the appellants had not declared the fact of receiving service by way of import. In fact, the appellants case is even stronger because it has not even been established convincingly by the Commissioner that the service received is entirely covered under the category of Intellectual Property Right Services. ...We hold that the limitation period will apply and the demand is time barred.
Holding that the demand is time barred and that the matter is being decided only on the basis of limitation, the order was set aside and the appeal was allowed.
(See 2015-TIOL-120-CESTAT-MUM)
