Custom, Excise & Service Tax Tribunal
M/S. Si Group India Ltd vs Commissioner Of Central Excise, Raigad on 29 October, 2014
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL WEST ZONAL BENCH AT MUMBAI COURT NO. Appeal No.ST/134/2007-Mum. (Arising out of Revision Order No. 03 R/BKS (01 R)COMMR/RGD/07-08 dt. 15.06.2007 passed by the Commissioner of Central Excise, Raigad. ) For approval and signature: Honble Mr. Ashok Jindal, Member (Judicial) Honble Mr. P.S. Pruthi, Member (Technical) ============================================================
1. Whether Press Reporters may be allowed to see :
the Order for publication as per Rule 27 of the
CESTAT (Procedure) Rules, 1982?
2. Whether it should be released under Rule 27 of the :
CESTAT (Procedure) Rules, 1982 for publication
in any authoritative report or not?
3. Whether Their Lordships wish to see the fair copy :
of the Order?
4. Whether Order is to be circulated to the Departmental :
authorities?
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M/s. SI Group India Ltd.
:
Appellant
VS
Commissioner of Central Excise, Raigad
:
Respondent
Appearance
Shri D.B. Shroff Sr. Advocate for Appellant
Dr. B. S. Meena, Addl. Commissioner (A.R) for respondent
CORAM:
Mr. Ashok Jindal, Member (Judicial)
Mr. P.S. Pruthi, Member (Technical)
Date of hearing : 29/10/2014
Date of decision : /11/2014
ORDER NO.
Per : P.S. Pruthi
The appeal has been filed against the impugned order demanding service tax of Rs. 52,22,259/- along with interest and equivalent penalty under Section 76,77 and 78 of the Finance Act, 1994.
2. The facts of the case are the appellants manufacture chemicals and entered into a Technology Licensing Agreement with Schenectady International Inc (SII) for supply of technical know how and technical services. Under the Agreement, SII was to render certain technical services under Article 5. The appellants were to pay a lump sum of US$ 500000 for transfer of technical know how under Article 7.1 and royalty at the rate of 4% of Net sales under Article 7.2 for receiving technical services from SII. Initially, the show cause notice had also demanded duty on the technical know how. However, Commissioner dropped this amount of the demand. He confirmed the demand on royalty for the years 1999-2000, 2000-2001, 2001-2002 and on the development expenses incurred in India for converting the know how into manufacturing facility. The demand on account of royalty paid by the appellants was confirmed treating the same as a service under the category of Consulting Engineer Service.
3. Heard both sides.
4. The Ld. Sr. Advocate for the appellants mentioned at the outset that there is a plethora of judgments which have held that Consulting Engineer Service by its very definition relates only to Consultancy provided by a firm, as the service was defined during the period in dispute. And the appellants are not covered by the term firm. Secondly, he contended that what is paid to the principal is royalty which was not leviable to service tax at the relevant time and in any case the royalty is paid as a percentage of net sales and, therefore, cannot be termed as a service. Thirdly, his argument was that the show cause notice was issued in September 2003 whereas royalty for the years 2000-2001 and 2001-2002 was paid only in February 2004. Therefore, the demand is not sustainable because during the period in dispute service tax was payable only on receipt of payment. Lastly, he stated that the developmental expenses are on account of completing the technology into manufacturing facility, representing pre-operative expenses incurred by the appellant themselves in India and, therefore, there is no question of rendering of any service in this case to the appellants.
5. The Ld. A.R. reiterated the findings of the Commissioner.
6. We have carefully considered the submissions. As regards the development expenses, the fact that these expenses were incurred by the appellant in India and were not paid to SII, proves that no service has been rendered to the appellant. There is no finding whatsoever by the Commissioner as to why service tax should be demanded on these expenses. At paragraph 33 of the order, the Commissioner himself while referring to the licensing agreement states that the expenses are to be born by the assessee for the development of the products as per the technical know-how. On the other hand, the appellants have furnished a certificate from the Chartered Accountant certifying that the amount relates to expenses for completing the technology into manufacturing facility and the same have been incurred by the appellants and no payment has been made to SII. The Commissioners order is very vague and without reasoning. We have no hesitation in holding that service tax is not payable on the development expenses.
7. We have gone through the Technology Licensing Agreement. We find that under Article 5 technical services are indeed to be rendered to the appellants by way of training of personal, selection of suppliers of machinery, for commissioning and testing of the plant and machinery as well as for testing of samples of products for inspection and examination by SSI. It is Article 7.2 which refers to payment of royalty. It states that in consideration of SII providing technical services to the Indian company, the Indian company shall pay to SII royalty at the rate of 4% on the Net Sales subject to We do not agree with the argument of the Ld. Sr. Advocate that the service provided is Intellectual Property Service and service of Engineer Consultancy is not provided, notwithstanding the fact that the royalty paid for such services which is determined on basis of Net Sales. It is well established in law that measure of taxation does not determine the nature of taxation. But the pertinent fact of this case is that whereas the show cause notice was issued in September 2003, the royalty on account of technical services for the years 2000-2001 and 2001-2002 was paid in 2004. This fact has been also certified by the Chartered Accountant and not controverted by Revenue. The service tax provisions under the Service Tax Rules,1994, as applicable during the period in dispute, clearly provided that service tax is payable when the value of taxable services is received. The relevant provisions in law was Rule 6(1) which stated that service tax is payable when payments are received towards the value of taxable services. Therefore, clearly service tax was not leviable on royalty paid for the years 2000-2001 and 2001-2002.
Having held that the royalty was on account of providing technical services in India and such technical services are clearly covered under the Consulting Engineering Services, tax is leviable for the year 1999-2000 agreed to by both sides. The amount of service tax payable at the rate of 5% which was the prevailing tax rate at that time, works out to Rs.2,89,777/-.
8. As regards penalty we find that the leviability of tax under the Consulting Engineer Service provided by a firm or Intellectual Property Service was a matter not clear from doubt. Therefore this is not a fit case for imposition of penalty. We hold accordingly.
9. The appeal is disposed in above terms.
(Pronounced court on 11/2014)
(Ashok Jindal)
Member (Judicial)
(P. S. Pruthi)
Member (Technical)
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