By TIOL News Service

MUMBAI, JAN 11, 2016: THE appellant is Fluent India Pvt. Ltd.

Scrutiny of the appellant's balance sheet revealed that they paid "royalty" for the year 2005-06 to 2008-09 to M/s. Fluent Inc. USA (FI) under an agreement. The royalty was paid for distribution, marketing and support of software known as FI software. The appellant developed software and extended the service of trained personnel for testing, documentation and use of the software under the instructions provided by M/s. Fluent Inc. Each software having a distinct customer, M/s. Fluent Inc. generated two locking codes, one for the appellant and the other for the customer. The appellant demonstrates and imparts training to the customers who use their software for their own use under specific lock code system. The master key of the locking code system is entirely in the possession of M/s. Fluent Inc. who are the owners of the said master key.

The CCE, Pune-I held that the activity undertaken is not covered under Copyright Act, 1957 but falls under the category of Intellectual Property Service and, therefore, the appellant is liable to pay service tax on the royalty amount under the reverse charge mechanism. Penalties were also imposed under Section 78 as well as under Section 77.

Against this order, the appellant is before the CESTAT.

The appellant inter alia informed the Bench that their service is covered under "Information Technology Service" which was introduced from 16/05/2008 and they have paid tax thereon from that date.

After considering the submission made by both sides, the Bench extracted the clauses of the Agreement & observed -

++ The appellant is only a subsidiary of M/s. Fluent Inc. The Agreement is essentially for distribution, marketing and support of computer programme known as FI software. No title or ownership of the software product or any portion there of is transferred to the appellant. The appellant is granted a non-exclusive, non-transferable licence to use the software products solely for their own use. The appellant is not allowed to sell, transfer, disclose any software product or copies thereto others.

++ The reasoning given by the Commissioner for holding that the service is not covered under "copyright" service is very vague. He simply brushes aside the contentions of the appellant by stating that meaning of copyright covers literary, dramatic or musical work or computer programme but the appellant's activity is development of software marketing, distribution and sale of the software. The reasoning is incomprehensible to us. Anyway this issue does not require attention from our side because copyright, in any case, is excluded from the scope of intellectual property right under Section 65(55a).

++ To appreciate whether the service provided is related to an "intellectual property right", we note that the definition under Section 65 (55a) covers trademarks, designs, patents or any other similar intangible property under any law. The word, "namely" in the definition qualifies the above rights to show that it restricts the scope to specific intellectual property rights that are covered by specific statutes/laws.

++ It does not require much intelligence to appreciate that the intellectual property referred to in the section has to be an intellectual property under a law. Even otherwise, it is well known that intellectual property rights are defined under specific Acts such as The Trade Mark Act, The Geographical Indications Act, etc. Revenue cannot simply allege that the activity of the appellant is an intellectual property service without specifying the precise intellectual property right. This is the basic flaw in the entire proceedings and shows complete lack of appreciation of the statutory provisions. Therefore, the order deserves to be set aside on this ground alone.

++ The appellant is merely distributing, marketing and supporting set of computer programme knows as FI software. There is absolutely no indication of any transfer of intellectual property right on a plain reading of the Agreement. Neither do we find any hidden or deeper meaning in the Agreement which would indicate transfer of intellectual property right.

In fine, the demand of service tax was set aside and the appeal was allowed with consequential relief.

(See 2016-TIOL-107-CESTAT-MUM )