[Order per : P. S. Pruthi, Member (T)]. - The appellant are in appeal against impugned order dated 31-12-2012 passed by Commissioner of Service Tax, Mumbai confirming demand of Service Tax amounting to Rs. 73,44,000/- under Section 73(1) proviso of the Finance Act, 1994 along with interest under Section 75 ibid.
2. The facts are that the appellant are registered under the Service Tax Rules for providing various taxable services such as Consulting Engineer Services, Maintenance or Repair Services, Erection, Commissioning and Installation Services, Transport of Goods by Road and Renting of Immoveable Property 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 they had paid royalty of Rs. 6,00,00,000/- on account of technical know-how charges to M/s. Rochem Switzerland under the technology transfer and License Agreement dated 10th April 2007 with Rochem A.G., Switzerland. The relevant clauses of the two agreements which have a bearing on the demand of Service Tax from the appellant are reproduced below :
TECHNOLOGY TRANSFER AND LICENSE AGREEMENT
Article 1. Definitions
b. “Technology” means all the technical knowledge, know-how, standard calculations, data and information developed or otherwise generally used by ROCHEM AG pertaining to the assembly, use and sale of the said Products as stated in Article 3.
d. “Intellectual Property Rights” means any rights under patents, utility models, designs, and trademarks and application thereof presently or hereafter acquired by Licensor and/or which Licensor has or may have the right to control or grant license thereof during the term hereof and which are applicable to cover the Technical Information supplied to RSS.
Article 3. Scope of Technology to be supplied
The technical Information that Rochem AG will supply related to the products will be as follows :
(a) All Technical Information and the related technical support necessary to use such Technical Information which are owned and used by ROCHEM AG at the date of signing of this Agreement and which are necessary, adequate and useful for the assembly, testing, installation, commissioning, use of maintenance of the said Products as carried out by ROCHEM AG.
(b) System, unit and component specifications.
(c) Design information and standards for main and sub system if any.
(d) System engineering data and applications engineering data.
(e) Operation, maintenance and trouble shooting manuals.
(f) Drawings, circuit diagrams, bill of materials comprising codes of all components, sub assemblies with specification.
(g) Engineering, manufacturing and assembly drawings, wiring details and procedures for manufacture.
(h) Mechanical drawings, bills of materials of parts, sub assembly drawings, layout arrangement diagrams, procedure for manufacture and assembly etc.
(i) Quality control data sheet, procedures, testing procedures of sub assemblies, main assembly and completed product, type tests and routine tests with test formats.
(j) Erection and commissioning details of regular and periodic services, check list, log sheets etc.
(k) General calculation sheets
(l) Various approvals from NATO/Navies, etc. to enable Licensee to meet the requirements of all such Institutions/Organizations
(m) Any other necessary technical data and know-how generally used by Licensor and/or required by the Licensee.
Article 4 - Non-Competition.
Rochem AG has in a Share Purchase Agreement dated September 30, 2006 undertaken :
a. Vide clause 3.1 not to compete with RSS, either directly or indirectly, including whether as principal or agent either in the manufacture, sale, service, commission or distribution of products in the Territories for-all applications & industries, for a period of 15 years from the date of signing of the Share Purchase Agreement.
b. Vide clause 3.4 for RSS to continue to have exclusive right to the use of the Trademark/Tradename Rochem in all its variations and its Logo in the territories for all products to be manufactured by RSS which includes the right to use the said Tradename and Logo on all products, packaging, brochures, invoices, letterheads and other materials/literature for a period of 15 years from the date of this agreement.
c. Vide clause 4.2 that they are aware of the fact that the RSS has been using the trade mark and logo “Rochem” and confirm that they do not have any reservations or objections for the use of the trade mark “Rochem” by the Company for a period of 15 years from the date of this agreement.
The period of 15 years in the above said clauses is hereby amended to read “as long as this technology Transfer & License Agreement is in effect”.
Article 10. Payment
In consideration of the Technology and the intellectual Property Rights furnished by ROCHEM AG tp RSS hereunder, RSS shall pay to ROCHEM AG as follows :
a. A one time Royalty of Indian Rupees 60 (Sixty) Million in 3 equal instalments as stated hereinafter.
(i) Indian Rupees 20 (Twenty) Million on receipt of the first installment of the stated data or within 30 days of signing this agreement whichever is earlier.
(ii) Indian Rupees 20 (Twenty) Million on producing the first system based on ST/PT Membrane Module or on completion of three months from first payment whichever is later.
(iii) Indian Rupees 20 (Twenty) Million on producing the first system based on FM Module or three months after the second payment whichever is later.
SHARE PURCHASE AGREEMENT
Rights
3.1 ROCHEM AG undertakes not to compete with RSS, either directly or indirectly, including whether as principal or agent either in the manufacture, sale, service, commission or distribution of Products in the Territories for-all applications & industries, for a period of 15 years from the date of this agreement.
3.2 RSS undertakes not to compete with Rochem AG, either directly or indirectly, including whether principal or agent either in the manufacture, sale service, commission or distribution of Products outside of the Territories for-all applications * industries, for a period of 15 years from the date of this agreement.
3.3 For the sake of clarification RSS has the right to manufacture sell, service, commission, distribute and in any other way deal with products and technology developed by its own research and development activity under any brand, trademark, logo without any territorial limits except that it may not use the name Rochem or other Rochem Trademarks in any form outside of the territories without agreement from Rochem AG.
3.4 RSS shall continue to have the exclusive right to use of the Trademark/Tradename Rochem in all its variation and its Logo in the Territories for all products to be manufactured by RSS which includes the right to use the said Tradename and Logo on all products, packaging, brochures, invoices, letterheads and other materials/literature for a period of 15 years from the date of this agreement.
REPRESENTATIONS AND WARRANTIES OF ROCHEM AG AND RSS
4.2 That Rochem AG is aware of the fact that the RSS has been using the trade mark and logo “Rochem” and confirm that they do not have any reservations or objections for the use of the trade mark “Rochem” by the Company for a period of 15 years from the date of this agreement.
3. Show cause notice was issued demanding duty of Rs. 73,44,000/- on the royalty amount of Rs. 6,00,00,000/- paid during 2007-08 on the basis that the appellant had received Intellectual Property Right Service from M/s. Rochem A.G. Switzerland. The extended period was invoked under Section 73(1) for not declaring the fact of paying royalty for receiving Intellectual Property Right Service. The Commissioner upheld the charge of non-payment of service tax on Import of service on reverse charge mechanism under Section 73(l) invoking extended time period alongwith interest. However, he refrained from imposing penalties under Sections 76, 77 & 78 of the Finance Act, 1994.
4. Heard both sides.
5. The ld. counsel appearing on behalf of the appellant stated that the Intellectual Property Right Service is defined
(55b) “intellectual property service” means,-
(a) transferring, [temporarily; or
His contention is that the technology is defined under the Technology Transfer and License Agreement to mean technical knowledge, know-how, standard calculation data and information developed or generally used by Rochem AG Switzerland pertaining to the assembly, use and sale of the products manufactured by them. He argued that payment of royalty for transfer of technology (technical know-how) will not fall under the category of Intellectual Property Right Service as is apparent from the definition. He also stated 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. In any case, according to him, the service in relation to Intellectual Property Right Service under Section 65(105)(zzr) can only be applied to Intellectual Property Right registered in India. The Ld. Counsel also contended that neither the show cause notice nor the impugned order set out the basis on which the services are sought to be classified under Intellectual Property Right Service and Revenue has mainly relied upon some clauses of the agreements.
5.1. The next argument of the ld. counsel is that the matter is revenue neutral, because 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. They relied on Supreme Court judgment in the case of Commissioner of C. Ex. & Cus., Vadodara v. Narmada Chematur Pharmaceuticals Ltd. (S.C.) and Commissioner of C.Ex., Pune v. Coca-Cola India Pvt. Ltd. 2007 (213) E.L.T.490 (S.C.).
5.2. The third argument is that they have been denied the benefit of Notification No. 17/2004, dated 10-9-2004 which reads as under :
“In exercise of the powers conferred by sub-section (1) of Section 93 of the Finance Act, 1994, the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable service provided by the holder of intellectual property right to any person, in relation to intellectual property service, from so much of the service tax leviable thereon under Section 66 of the said Act, as is equivalent to the amount of cess paid towards the import of technology under the provisions of Section 3 of the Research and Development Cess Act, 1986 (32 of 1986) in relation to such intellectual property service.”
According to him, the appellants are entitled to exemption on the amount of Rs. 30,00,000/- paid by them as cess under the Cess Act.
5.4. Lastly, it was argued that the demand has been confirmed by invoking extended period. On the other hand the penalty under Sections 76, 77 and 78 has been waived on the basis of that the legality of service tax on reverse charge basis under Section 66A was under litigation and this is reasonable cause for invoking the provisions of Section 80 of the Finance Act for waiver of penalty under Sections 76, 77 and 78.
6. Ld. A.R. appearing for the Revenue reiterated the findings of the Commissioner. He drew our attention to clauses in the License Agreement and Share Purchase Agreement which indicate that the right to use trademark of Rochem AG Switzerland by the appellant was transferred and, therefore, the import of services under the agreement is leviable to Service Tax under the category of Intellectual Property Right under Section 65(105)(zzr) on reverse charge basis.
7. We have considered the rival contentions. There are two issues to be decided namely (i) the nature of service provided by Rochem AG Switzerland to the appellant - that is, whether it is covered under Indian Property Right Service falling under sub-clause (zzr) of Section 65(105); (ii) whether the provisions of extended time period laid down in Section 73(i) are invokable.
8. We have seen the various clauses of the two Agreements. We find it is clear from Article 3 of the Agreement that Rochem AG Switzerland have passed all technical information necessary for assembly, testing, installation, commissioning etc. of the products. The technology transfer involves various aspect such as engineering data, troubleshooting manuals, drawings, quality control data sheet, procedures, etc. The transfer of technology is certainly not related to service provided in relation to Intellectual Property Right service which involves the transfer or use of any Intellectual Property Rights. However, the agreement also refers to transfer of right to use the trade name etc, under Article 4(b). Even the Article 10 which refers to payment states that the royalty is in consideration of technology and Intellectual Property Right furnished by Rochem AG Switzerland. 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.
9. On the aspect of revenue neutrality, we agree with the reliance place on the Supreme Court judgments (supra). The Commissioner has simply stated that the tax must be paid even if the situation is of revenue neutrality. The judgments of the Supreme Court are very clear and there appears to be no reason whatsoever to disagree with these judgments. Especially when the appellants paid an amount of Rs. 3,74,68,704/- in cash from PLA also during the disputed period as against the service tax demand of Rs. 73,44,000/-.
10. 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. The Commissioner’s further reasoning is that the appellant is only a deemed provider of service under Section 66A(1)(b) and cannot be treated as one who provided the service. 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.
11. In view of the above, we hold that the Commissioner has not analyzed the case on merits. He has not justified that the royalty amount is paid entirely for import of Intellectual Property Right services. He has wrongly disallowed the benefit of Notification No. 17/2004. We may now take up the issue of limitation.
12. We find that the show cause notice has demanded service tax for the period 2004 to 2009 as also mentioned in the order-in-original. At the same time, the demand is confirmed only for the period 2007-08 when the royalty payment of Rs. 6,00,00,000/- was made. From the facts it appears that the demand is restricted for the period 2007-08. The show cause notice was issued on 1-2-2010 invoking the extended time period under Section 73(1). The Commissioner noted that the issue of charging service tax as 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 Sections 76, 77 and 78 of the Finance Act. However, while doing so he also expressed the view that the ingredients of Sections 73 and 78 are not the same. We note that Section 73(1) provides that where service tax is not paid by reason of fraud, collusion, willful misstatement, suppression of facts, or contravention of any of the provisions with intent to evade payment of duty, the extended time period of 5 years for issue of show cause notice can be invoked. Similarly, Section 78 provides that where the service tax has not been paid because of fraud, collusion, willful misstatement or suppression of facts or contravention of any of the provisions with intent to evade payment of duty, the liability of penalty will be equal to the amount of service tax not paid. We fail to understand how Commissioner has come to the conclusion that the ingredients of both the sections are different. 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 are supported in our view by the decision of the Hon’ble High Court of Andhra Pradesh in the case of CCE v. Indian Institute of Chemical Technology - (AP) wherein the Hon’ble High Court held that
7. There is also no dispute that if any service tax has not been levied or has been short levied or short paid or erroneously refunded, within a period of one year from relevant date, the competent Central Excise Officers can serve a notice on the person chargeable requiring him to show cause as to why he should not pay the amount. In this case, the proceedings were initiated with the issue of show cause notice dated 21-2-2006 requiring IICT to pay the service tax for the period from 16-7-2001 to 9-9-2004. As per sub-section (1) of Section 73 of the Act the period of one year would expire by September 2005. Therefore, the proceedings are clearly beyond the period of limitation. When the Commissioner found that the non-payment of service tax in respect of five above named projects is due to bona fide doubt regarding the activity, the non-payment, in our considered opinion, and as rightly found by the CESTAT, does not fall within any of the circumstances/situations mentioned in proviso to sub-section (1) of Section 73 of the Act. Needless to mention that when there is fraud, collusion, willful mis-statement, suppression of facts or contravention of any provisions of the Act, the period of limitation of one year extends to five years. If for the purpose of Section 80 of the Act, the assessee is not liable to pay the penalty because of bona fide doubt they entertained, for the same reason it cannot be said that the case falls in any of the categories under the proviso to Section 73(1) of the Act.
We hold that the limitation period will apply and the demand is time barred.
13. We have held above that the Commissioner has failed to establish that the entire demand is sustainable on merits. However, as we have held that the demand is time barred, we are deciding the matter only on the basis of limitation.
14. The impugned order is set aside and appeal is allowed.
(Pronounced in court)