Customs, Excise and Gold Tribunal - Mumbai
Pfizer Ltd. vs Commissioner Of Central Excise on 20 May, 2005
Equivalent citations: 2005(102)ECC248, 2005(188)ELT456(TRI-MUMBAI), 2006[3]S.T.R.693
ORDER
S.S. Sekhon Member (T)
1. Appellant a company, registered under the Company Act, are inter-alia engaged in the manufacture of Medicaments at the plant at Turbha Naka, Navi Mumbai where they are registered as an assessee under the Central Excise Act, 1944. They entered into an agreement with M/s Pfizer Inc 235 East 42 Street New York USA (herein after referred to as Pfizer) a foreign company. They hold 40% stake in the appellant company and in the Capacity of an investor/promoter of the appellant company agreed to disclose Technical know how to the appellant in relation to certain pharmaceutical product as also allowed the use of the patents held for the products. The appellants made consequent payment for the same after the Reserve Bank of India approvals.
1.2 During the period 1997-98 & 2000-01 pursuant to the agreements for the use of the patented Technology an amount of Rs. 21.26 crores was paid to Pfizer. A cess @ 5% under R&D Cess in the said amount to Pfizer as Royalty and know how fee.
1.3 Department has on 5.7.2002, issued a notice to the appellants to show cause as a Service Tax, assessee 'service provider' as to why--
(i) the Rs. 21.26 crores paid as 'engineering consultancy' to Pfizer & the amount having been paid as 'technical know fees' and 'Royalty' during 1997-2001 on which no Service Tax was paid for the services received by the appellants should not be covered under 'Consulting Engineer Service'.
(ii) Service Tax demands at 5% on the Gross amount of Royalty and Technical fees paid be made.
(iii) for failure to get Registered under the Service Tax as an assessee and having failed to pay the Tax, liability for violation of the Service Tax Rules and penalties should not be determined and interest also not be recovered.
1.4 The Dy. Commissioner determined the Tax Demands alongwith interest and imposed penalties for breach of the Service Tax Law provisions. In appeal the Commissioner (Appeals) heard the application for waiver of the pre-deposit and the appeal together and dismissed the application and the appeal for contravention of Section 35F of the Central Excise Act, 1944 and on merits.
1.5 Hence this appeal.
2.1 After hearing both sides and considering the material it is found--
(a) Pfizer the New York based company is admittedly engaged in the manufacture and marketing of medicaments and cannot be understood as an 'Engineering firm' by a common man. The perusal of the Agreement entered into, which has caused for the payments, reveals that the same Licences, with conditional rights, and cannot be considered to be tendering any service. The lower authorities have relied upon the stipulation in the Agreement to the effect that the appellant will bear the taxes. The, mere agreement to bear the incidence of Tax if any, cannot render the consideration of a service receiver and become and be understood as 'Service provider', especially in light of the decision by the apex court in the case of Laghu Udyog Bharti and Ors., 1999 (65) ECC 687 (SC): 1999 (112) ELT 365 SC. The appellants submit--
"that for the levy of Service Tax to be sustained under the taxing entry for "Consulting Engineers" Services, set out in Sections 65 (31) and 65(105)(g) of the Act, the following ingredients ought to be cumulatively satisfied:
(i) The service ought to be provided by a service provider, who must be a "professionally qualified engineer" or an "engineering firm",
(ii) The said "service" must be in the nature of "advice", consultancy or technical assistance".
(iii) The advice, consultancy or technical assistance must be "in relation to or in connection with one or more discipline of engineering",
(iv) The said service ought to have been provided to a "client".
It is submitted that Pfizer is not engaged in the profession of "consulting" and accordingly is not a Service Provider as defined under the Act. The agreement that Pfizer has entered into with the Appellants is by virtue of the fact that Pfizer is an investor/stake holder in the Appellant company. Pfizer and the Appellants, therefore, do not share a professional-client relationship to attract the levy of Service Tax.
It is submitted that the Ld. Commissioner (Appeals) has erred in finding that Pfizer is an "engineering firm". The commercial understanding of an 'engineering firm' would be a firm or an entity whose main business would be to provide consultancy in one or more disciplines of engineering, as has been held in the following case law:
(i) Asian Paints India Ltd. v. Collector of Central Excise, 1988 (16) ECC 172 (SC): 1988 (35) ELT 3 (SC)
(ii) Moti Laminates v. Collector, 1995 (40) ECC 57 (SC) : 1994 (76) ELT 241 (SC) Trade Notice No. 7/97-ST, dated 4.7.1997, issued by the Mumbai Commissionerate-I, provides as below:
"The services which attract the levy to include all the services which are rendered in the capacity of a professional person and specifically includes the services pertaining to structural engineering works, civil/mechanical/electrical engineering works or relating to construction management. All services rendered within the above scope of the term 'engineering' attract service tax provided they are rendered in the capacity of a consulting engineer. The scope of the services of a consultant may include any one or more of the following categories: Feasibility report;
Pre-design services project report;
Basic design engineering;
Detailed design engineering;
Procurement;
Construction supervision and project management;
Supervision of commissioning and initial operation;
Manpower planning and training;
Post-operation and management;
Trouble shooting and technical services, including established systems and procedures for an existing plant".
A test in all these cases as set by the Supreme Court is the perception and understanding of the trade. It is respectfully submitted that Pfizer are universally recognized as a pharmaceutical company, and cannot be considered to be "engineering firm". A perusal of the activities mentioned in the Trade Notice extracted above also indicates that neither the Appellants nor Pfizer would be considered as an "engineering firm" and consequently do not fall within the definition of "Consulting Engineer".
From a perusal of the list of services enumerated in the aforesaid trade notice and the application of the principle of ejusdem generis would lead to the conclusion that transfer/licensing of know-how for the manufacture of a pharmaceutical product would not fall within any one or more discipline of engineering. The Ld Commissioner (Appeals) having clearly failed to appreciate this, it is submitted that the impugned order is without basis and deserves to be set aside.
It is further submitted that an examination of the definition of "Consulting Engineer's services" indicates that the advice, consultancy or technical assistance sought to be covered is in respect of one or more disciplines of engineering. In the present case, the subject matter of the transaction is the grant of a license for use of know-how in the manufacture and marketing of various pharmaceutical products. Such "know-how" is the subject of an intellectual property right. It is submitted that the Ld. Commissioner (Appeals) has failed to appreciate that the "know-how" is an intellectual input into how certain pharmaceutical products can be manufactured and such "know-how" does not fall within one or more disciplines of engineering. As such, neither the Appellants nor Pfizer can be classified as "Consulting Engineers", and the impugned order ought to be set aside.
It is submitted that the transfer of know-how was made under the aegis of the agreement entered into by Pfizer with the Appellants, which was in the nature of a license agreement. It is submitted that the activities contemplated under the agreement were clearly in the nature of a license with transfer of know-how and not that of a service and consequently Pfizer has rendered no taxable service to the Appellants. There is a clear distinction between a License and an Agreement for Service, which the Ld. Commissioner (Appeals) has failed to appreciate. It is respectfully submitted that as there is no taxable service rendered by Pfizer to the Appellants under this Agreement, the question of levying Service Tax on the transaction does not arise. The impugned order not having appreciated this fact, it is bad in law and deserves to be set aside.
It is submitted that in the instant case, the transaction in question took place between a licensor supplying certain technical know-how and a licensee who is the recipient of such know-how. The relationship between a licensor-licensee is quite different from the relationship between a consultant-client. It is respectfully submitted that the Ld. Commissioner (Appeals) has failed to appreciate that for Service Tax to be payable, a service provider-client relationship has to exist, which is clearly not the case in the transaction between the Appellants and Pfizer. The term "client" is not defined under the Act and has to be examined as per its dictionary definitions. "Client" has been defined as:
"an individual, corporation, trust or estate that employs a professional to advice or assist it in the professional's include but are not limited to attorneys, accountants, architects etc." (Black's Law Dictionary) 'a person who engages the professional advice or services of another.' (Merriam Webster's Collegiate Dictionary) The dictionary meaning of the word 'client' thus suggests that a 'client' is a person who hires, engages or employs services of a professional. It is submitted that the Appellants have entered into a license Agreement with Pfizer, whereby Pfizer provides technical know-how to the Appellants. This cannot be construed as a client-consultant relationship, and therefore, no Service Tax is payable on such a transaction.
We find force in the agreements, the decision in the case of Tata Consulting Service, 2001 (77) ECC 694 (Kant) : 2001 (130) ELT 726 (Kar) & MN Dastoor & Co. Ltd., 2002 (140) ELT 341 (Cal) relied by the Ld. DR will not help the case only to bring Pfizer under the coverage of the term 'person', it will not cast a liability of Consulting Engineer or Engineering Services having been provided.
(b) The period of demand in this case is 1997 to 2001. The insertion of Sub-clause (iv) in Rule 2(1)(d) of the Service Tax Rules vide Notification 12/2002 dt 1.8.2002 providing that in relation to taxable services provided by a person who is a non-resident or is from outside India, then the person receiving the Service shall be liable. Therefore, in this present case, the demands made and determined as a liability on the appellants and consequence of penalty interest etc. are required to be held as misdirected.
(c) Following the Tribunal decision in the case of Navinon Ltd., 2004 (172) ELT 400 (Tri) and after perusal of the agreement on finding that the admitted position is the receipt of Technical know how of patented process from the foreign company and payments for the same and for the Royalty cannot be fastened with Service Tax Liability. No contrary decision or provision from the Agreement entered into was shown to arrive at or differ from the Tribunals decision.
(d) The grant, as per the terms of the Agreement, is of a Licence to manufacture, provide Technical assistance including Training and permit the availment of knowledge and expertise in connection with marketing management. Tribunal vide its decision in the case of M/s Avial Chemicals Pvt. Ltd. (ST Final Order No. 24/04-NB dt 7.6.2004 is ST/45/04-NBCA) had not upheld the levy of Service Tax as a consulting engineer on such Licence Agreements and for such use. The other part of the agreement is as regards Management Service of Marketing etc. & cannot be called 'Consulting Engineering Service' under the Service Tax Provisions. When the definition of various services under the Service Tax provision is seen.
2.2 In view of the findings herein above, the demands of Tax, interest and penalties cannot be upheld and are required to be set aside.
3.1 Ordered accordingly and appeal allowed.