Customs, Excise and Gold Tribunal - Delhi
Indian Farmers Fertilizer ... vs Commissioner Of Central Excise on 26 December, 2006
Equivalent citations: (2007)7VST6(CESTAT-NEW DELHI)
ORDER
R.K. Abichandani, J. (President)
1. This appeal has been preferred against the order dated June 1, 2005 made by the Commissioner (Appeals) upholding the order in original dated February 8, 2005 passed by the adjudicating authority confirming the demand of service tax amounting to Rs. 14,26,231 on the appellant and directing its recovery under Section 73 of Chapter V of the Finance Act, 1994, in respect of consulting engineer services availed by the appellant company for their units from Haldor Topsoe of Denmark. Facts:
2. The appellant-Indian Fanners Fertiliser Co-operative Ltd. (IFFCO), was registered under Section 69 of the said Act under registration dated July 2, 2004 for availing the services of consulting engineer from countries other than India. The Revenue received an information that the appellant was availing services of foreign consulting engineers Haldor Topsoe of Denmark on which service tax was payable by the recipient in India as per Rule 2(1)(d)(iv) of the Service Tax Rules, 1994, substituted with effect from August 16, 2002, by Notification No. 12 of 2002 dated August 1, 2003. The appellant was, therefore, called upon to produce copies of the agreements in respect of such services. The authorised representative of the appellant in his statement recorded under Section 14 of the Central Excise Act, 1944 on August 18, 2004 disclosed that the appellant had paid Rs. 4,22,64,128 to Haldor Topsoe on account of taxable services availed by the appellant under the category of consulting engineer and that, they had also paid a sum of Rs. 19,54,899 as the Research and Development Cess under the Research and Development Cess Act, 1986, since the appellant wanted to avail the exemption of service tax to the extent of the cess paid by them as applicable under Notification No. 18 of 2002 dated December 16, 2002 issued by the Board, wherein it was clarified in relation to consulting engineer service, that service tax payable upon services rendered in relation to transfer of technology was exempted to the extent of the amount of cess paid on such transfer of technology under the provisions of Section 3 of the Research and Development Cess Act, 1986. The said authorised representative of the appellant, who was Manager (Accounts), had also stated that the appellant would not be paying any further amount of R & D cess. After deducting R&D cess by the appellant of Rs. 19,54,899 from the said tax liability of Rs. 33,81,130 in respect of the said amount of Rs. 4,22,64,128 paid by the appellant to the foreign concern, the service tax liability of the appellant came to Rs. 14,26,231, which the appellant refused to pay on the ground that the services availed by the appellant were towards right to use the licence and supply of engineering design package from outside India, and that the procurement of services did not fall under the category of "consulting engineer service". Therefore, a show cause notice dated September 10, 2004 came to be issued on the appellant, for the said demand of service tax with interest and proposing penalties under Sections 76, 77 and 78 of the said Act.
3. The defence of the appellant in their reply to the show cause notice was that they had entered into four agreements on October 29, 2003 and December 4, 2003 with Haldor Topsoe of Denmark to obtain the licence for use and practice of their technology, as required for redesigning, modification and operation of their Aonla units I & II for Energy Saving Project Phases I & II. According to them, the real nature of the transaction was of transfer of "know-how" and some technical information, and not consultancy. It was contended that the appellant had entered into a transaction dealing with intellectual property and not for any service because, "know-how" was property like any other property which could be sold or given on hire. Haldor Topsoe had licenced the "know-how" property to the appellant for commercial exploitation during the period of the contract. The transfer of "know-how" was undertaken by way of supplying technical information and technical assistance to the appellant. It was contended that Haldor Topsoe possessed the "know-how" as property before the transaction was entered into. It was submitted that there was no comprehensive definition of "know-how" which was described as ambience that provided a highly specialised production. It could be imparted to others without necessarily losing its value to the source organisation. "Know-how" consisted of the technical and commercial information, documented in the form of detailed manufacturing data including specifications and drawings. It was also contended that the engineering package was prepared in Denmark and brought into India and that the consideration paid for supply of the engineering design package amounted to sale of goods and not rendering of any service. Moreover, the activities relating to development of "know-how" took place outside India. Hence, the amount realised on transfer of "know-how" cannot come under the purview of service tax imposed under the said Act. According to the appellant, the payment made to Haldor Topsoe was not on account of any taxable service under the category of "consulting engineer" defined in Section 65(31) of the said Act.
4. On the basis of the material on record, the adjudicating authority held that consulting engineer services included advice, consultancy or technical assistance, feasibility study, pre-design services, basic design engineering, detailed engineering design, procurement, construction supervision and project management, supervision on commissioning and initial operation and power planning and training, post operation and management, trouble shooting and technical services, etc. For this, the adjudicating authority relied on the circular dated July 2,1997 and the clarification dated December 18, 2002 issued by the Board. It was noted that the appellant had, in paragraph 10.1 of their reply, disclosed that under the agreement, Haldor Topsoe had granted right to use technical data, information and know-how, for all purposes related to construction, maintenance, debottlenecking and operation of Aonla I Energy Saving Project Phases I and II. From the wordings of the agreements analysed by the adjudicating authority it was concluded that the appellant had clearly received engineering services including technical assistance in connection with its energy saving project for their units from Haldor Topsoe Denmark through transfer of technology and that cannot be termed as "know-how" only. It was, therefore, held to be taxable under the category of consulting engineer services in view of the aforesaid Government circulars. The liability to pay service tax of Rs. 14,26,231 was worked out on the basis of the admission made on behalf of the appellant that an amount of Rs. 4,22,64,128 was paid to Haldor Topsoe by the appellant and that an amount of Rs. 19,54,899 was paid as R & D cess under the R & D Cess Act, 1986 on account of transfer of technology and exemption was claimed by the assessee in respect of that amount from service tax under the notification dated December 1, 2002 (No. 18 of 2002-ST). Besides ordering recovery of Rs. 14,26,231, a penalty of the like amount was imposed under Section 76 of the Act and a penalty of Rs. 1,000 was imposed under Section 77 for failure to furnish the returns. The appellant was also directed to pay interest, under Section 75 of the Act.
5. The Appellate Commissioner, on consideration of the terms of the agreement, held that the relevant parts of the preamble, Clauses 2, 3, 4.2 and 6.2 focused on the technical services being provided including deployment of manpower by Haldor Topsoe in the plants of the appellant for the technical advisory services under the agreements. It was noted that technical services were in addition to the right given to IFFCO, i.e., the appellant, to use all technical data information and "know-how". It was further held that the terms of the agreement made it clear that apart from allowing the use of technical "know-how", technical services in various forms including deployment of technical manpower from Topsoe at the IFFCO Aonla plant had been rendered. It was noted that there was no ambiguity in the clauses of the agreement and the phrases "engineering service", "technical service", etc. had been used intermittently. The Commissioner (Appeals) held that merely because there was a non-exclusive right given to the appellant to use their "know-how", it did not take away the activity undertaken in this case out of the purview of consulting engineering services. As regards the contention that no period had been invoked in the show cause notice, the Appellate Commissioner held that, as per Rule 7 of the Service Tax Rules, 1994, every assessee was required to submit a half-yearly return for the months covered in the half-yearly return. Such returns were to be submitted by the 26th of the following month. It was held that, in the present case, if the dates of agreements dated October 29, 2003 and December 4, 2003 were taken as the crucial dates, then the last date on which a show cause could have been issued, would be sometime in the current year, and since show cause notice was issued on September 11, 2004, it was well within the time prescribed by the law. The Commissioner (Appeals) held that in the present case contents of various clauses indicated that the agreement was not one of transfer of "know-how" as intellectual property, but it also was for rendering engineering service and technical assistance as well as deployment of technical manpower, and all these activities were within the ambit of the definition of "consulting engineer". It was observed that the definition did not bar the transfer of "know-how" also, along with such technical assistance at the relevant time. The appeal was, therefore, dismissed.
Arguments made for the appellant:
6. The learned Counsel appearing for the appellant contended that the technical and engineering information provided under the agreement was "know-how" and not engineering consultancy. It was submitted that though the appellant had received from Haldor Topsoe the technical "know-how" in the shape of drawings and designs, it was distinguishable from a consulting engineer preparing designs and drawings for his client. It was contended that a consulting engineer would not give drawings and designs in the form of licence to use the end-result of the service, as was done in the present case. Moreover, a consulting engineer would not be interested in including infringement, indemnification and secrecy clauses in the agreement for providing his services. Such clauses indicated that Haldor Topsoe wanted to protect its knowledge, which it wanted to commercially exploit by giving user licence to others. Moreover, a consulting engineer would not provide for a performance guarantee which indicated that the engineering drawings represented knowledge about some activity that was intended for giving a desired result. It was submitted that when Haldor Topsoe made available its "know-how", it was exploiting its intellectual property by giving right to the appellants for exploitation. In such commercial transaction, there was no element of any service, much less of engineering consultancy. It was argued that "know-how" is property and like any property it can be sold or given on hire. It was submitted that both technical information and technical assistance were part of transfer of "know-how" in favour of the appellants under the said agreements. Relying upon the decision of the Tribunal in Navinon Ltd. v. Commissioner of Central Excise , it was pointed out that the Tribunal had set aside the levy of service tax under the category of consulting engineer service on royalty payments made pursuant to an agreement for technical know-how, equipment, skill, expertise and services for production of VAT dyes. On the basis of the decision of the Court of Appeal Evans Medical Supplies Ltd. v. Morearty reported in [1957] 1 WLR 288, it was submitted that "know-how" could form the subject-matter of sale like a commodity. It was contended that under the agreements in question, the appellant had entered into transaction dealing with property and not for any service. It was, therefore, submitted that no service tax was payable in respect of such an agreement and services rendered pursuant thereto. It was then argued that the amount paid by the appellant was entirely for import of drawings/designs and technical documentation from outside India and therefore, the transaction was for purchase of imported goods and no service tax was payable in respect thereof. Reliance was placed on the decision of the Supreme Court in Associated Cement Companies Ltd. v. Commissioner of Customs , in which the Supreme Court held that all tangible, movable articles were goods for charge of customs duty. The amount paid for import of engineering drawings, designs and technical material contained in tangible media, was for the purchase of goods and not towards rendering of any service. The decision of the Supreme Court in Scientific Engineering House P. Ltd. v. Commissioner of Income-tax , was cited for the proposition that technical know-how purchased in the shape of drawings, designs, charts, manuals, etc., being tangibles, such technical documents were eligible for depreciation. It was also contended, that the appellant had not made any payment for technical assistance, which was provided as a part of transfer of know-how. In any event, no tax could be levied on such transfer of technical assistance, since it was merely incidental to the transfer of technical know. It was submitted that need-based assistance was incidental to the transfer of know-how. Therefore, such provision of technical assistance in the agreement cannot be subject to service tax. It was then contended that the activities relating to development of know-how had taken place outside India and therefore, the amount realised on transfer of know-how cannot come under the service tax jurisdiction in India. It was pointed out that as per the delivery schedule, Engineering Design Package (EDP), was to be dispatched from Denmark. The delivery was to be understood to have taken place upon dispatch made from Haldor Topsoe's office in Denmark. It was submitted that the presence of Haldor Topsoe's officials in India, at the time of performance guarantee test, was only in connection with the determination of the remuneration and that no further service was provided in India for the payment covered in the present proceedings. Reliance was placed on the decision of the Supreme Court in Carborandum Co. v. Commissioner of Income-tax , in which the Supreme Court held that in a case where advice was sent by post by an American company for starting of the factory in India, the fact that advice was put to use in India for setting up the factory, was of no relevance and the services were held to have been rendered outside India. It was also argued that the show cause notice was issued without following the procedure laid down by law, because a notice under Section 73 could be issued within the prescribed period reckoned from the relevant date, that is, when periodic return was to be filed, while in the present case, it was issued prior to the completion of the prescribed date of filing of the returns in respect of several invoices. Reliance was placed on the decision of the Supreme Court in Commissioner of Income-tax v. Kurban Hussain Ibrahimji Mithiborwala in which it was held that mention of wrong assessment year would result in invalid assessment. It was argued that the show cause notice did not refer as to which particular half-year, the proceeding related, and that in respect of some payments made during April 1, 2004 and September 30, 2004, the show cause notice was premature. It was finally contended that there was no justification for levy of any penalty on the appellant, as the appellant was under a bona fide impression that no service tax was payable in respect of the "know-how" transferred by a foreign company to the appellant.
Arguments made for the Revenue:
7. The learned authorised representative for the department contended that since the appellant was not registered for the purpose of service tax till July 2, 2004, the "relevant date" for the purpose of issuing notice was the date on which the tax was to be paid as provided in Clause (c) of Section 73(6) of the said Act. It was pointed out that in the prescribed return, the registration particulars were required to be mentioned and since there was no question of any return being filed by such unregistered person, nor was the return to be filed, the date on which tax was required to be paid would be the "relevant date", and therefore, the show cause notice could not be said to have been prematurely issued for any period. It was further submitted that the services were, in fact, rendered in India as per the terms of the agreement and, therefore, the recipient was liable to pay the tax in the present case. It was also submitted that technical assistance provided with the "know-how" amounted to rendering of service as a consulting engineer. It was further submitted that providing know-how of the nature covered under the said agreement, itself amounted to rendering engineering service. It was contended that this was not a case where mere drawings and designs were supplied in the form of a book, but it was a clear case where active engineering services, consultation and advice were provided to the appellant in India. It was contended that non-mention of period of assessment in the show cause notice in respect of the service tax under the said Act cannot be equated with non-mention of the relevant assessment period in a notice issued under the Income-tax Act, 1961. It was submitted that service tax liability was linked with individual transactions, unlike under the Income-tax Act, 1961 where it was based on the taxable income during the relevant assessment year. It was submitted that the agreement clearly provided for advice, consultancy as well as technical assistance and therefore, the services provided were within the category of consulting engineering services, which were taxable.
8. The learned authorised representative for the department submitted that, under the notification dated July 2, 1997 issued by the Ministry of Finance, the scope of services of consulting engineer was indicated as per which, it included feasibility study, pre-design study/project report, basic design engineering, detailed design engineering, trouble-shooting and technical services including establishing systems and procedures for an existing plant, etc. It was, therefore, submitted that since such services were provided to the appellant under the agreements in question, they attracted levy of service tax on the amounts paid by way of consideration for such services. Referring to the circular dated December 18, 2002 issued by the Ministry of Finance, it was submitted that the work of erection and commissioning of machineries and plants was one of providing technical assistance and, therefore, in the nature of taxable service provided by a consulting engineer. It was also submitted that the appellant had availed of the benefit of Notification No. 18 of 2000 dated December 16, 2000 issued by the Central Government under Section 93(1) of the said Act, on the footing that taxable services were provided to it by a consulting engineer on transfer of technology, thereby claiming exemption of the service tax leviable under Section 66 of the Act to the extent to which the amount of cess was paid on such transfer of technology under Section 3 of the Research and Development Cess Act, 1986. The decision of this Tribunal in Nokia (I) Pvt. Ltd. v. CC, Delhi reported in [2006] 1 STR 233, was cited to point out that, the Tribunal observed in paragraph 10 of the judgment that the circular dated July 2,1997 and the trade notice dated July 4, 1997 issued pursuant thereto, illustrated the wide scope and nature of the services provided by consulting engineer. It was submitted that the definition of "consulting engineer" was unambiguous and the technical assistance rendered for transferring "know-how" fell within the ambit of the said definition. Relying upon the decision of the Supreme Court in Nathi Devi v. Radha Devi Gupta (a rent control matter), it was argued that while interpreting a statute, attempt should be made to give effect to each and every expression used by the Legislature and that the courts should presume that the Legislature inserted every part thereof for a purpose and the legislative intention was that every part of the statute should have effect.
Reasons:
9. For understanding the nature of the transaction under which consulting engineering services were rendered as alleged by the Revenue, it is essential to refer to the relevant terms of the agreements. The appellant had entered into four agreements with Haldor Topsoe, namely, agreement dated October 29, 2003 for Energy Saving Project Phase I at IFFCO Aonla Unit I, agreement dated December 4, 2003 for Energy Saving Project Phase II at IFFCO Aonla Unit I, agreement dated October 29, 2003 for Energy Saving Project Phase I at IFFCO Aonla Unit II and agreement dated December 4, 2003 for the Energy Saving Project Phase II at IFFCO Aonla Unit II. These four agreements are similarly worded and both the sides have referred to the agreement dated October 29, 2003 for Energy Saving Project Phase I during their arguments.
10. Under the agreement dated October 29, 2003, which was entered into for the Energy Saving Project Phase I of the appellant, it was recorded that the appellant had performed a study and submitted a final study report with a view to implementing a technology upgradation project for energy reduction scheme on the said plant. The appellant was owning and operating the said ammonia plant Aonla I in Uttar Pradesh, which was having a reassessed capacity of 1520 MTPD. The agreement was entered into because the appellant desired to obtain from Topsoe "certain engineering" for the design, modification and operation of the Aonla I plant as required for Aonla I Energy Saving Project Phase I. Haldor Topsoe had the requisite experience of design, construction, modification of ammonia plants and had a right to grant process licences as may be required, for use and practice of Topsoe technology. Haldor Topsoe also had a right to grant sub-licences for a carbon dioxide removal process, which was owned and licensed by Giammarco Vetrocoke (GV) of Benits, Italy. Under the agreement, Topsoe provided required licences for providing "Engineer Design Package (EDP) and other engineering services and assistance", for the said project of the appellant. The appellant had issued a letter of intent (LOI) dated September 12, 2003 to Haldor Topsoe for consultancy services in respect of the said project and Haldor Topsoe had undertaken "single point responsibility", as indicated in the agreement. It was stipulated that the appellant will have detailed engineering and construction of the plant carried out under contracts with Indian engineering consultants/contractors, who were to be approved by Haldor Topsoe. A separate agreement was to be entered into by Topsoe with the detailed engineering consultancy engaged by the appellant.
11. The licence in respect of Technical Information and Processes of Topsoe and GV was granted under Clause 2 of the agreement which reads as under:
2.0 Licence 2.1 Subject to the terms and conditions of this agreement, Topsoe hereby grants to IFFCO a non-exclusive non-transferable right and licence:
(a) to have the Aonla I Energy Saving Project Phase I designed and implementing Topsoe Technical Information and Engineering Services at Topsoe to be supplied by Topsoe under this agreement.
(b) To practice Topsoe processes as may be required for operation of the Aonla I Energy Saving Project Phase I at reduced energy consumption after modification.
(c) To sell, export to, or use in any country the products of Aonla I plant.
2.2 Topsoe hereby represents that it has the right to grant a sublicence for the GV process as stipulated in this agreement Topsoe warrants that neither GV nor Topsoe shall assert against IFFCO or any direct or indirect customer of IFFCO any patent property owned or controlled by GV or Topsoe or IFFCO's customers pertaining to exercising the right and licence granted by Topsoe under this agreement.
[emphasis added]
12. Clause 3 of the agreement detailed the supplies which were to be made by Haldor Topsoe which included engineering, review of documentation and technical assistance. Clause 4 provided for fees and 5 for payments schedule; the other payments were provided for in Clause 6. Since these clauses are relevant to the understanding of the nature of the transactions between the parties and for ascertaining the nature of the services, they are reproduced hereunder:
3.0 Topsoe supplies 3.1 Engineering Topsoe shall prepare in Denmark and supply and Engineering Design Package (EDP) for the Aonla I Energy Saving Project Phase I (within Battery Limits as defined in Clause 2.0 of appendix IV to this agreement) comprising the technical documentation specified in Clause 1.0 of Appendix II to this agreement. Such EDP shall be prepared in accordance with the design basis as specified in appendix IV to this agreement and shall be supplied to IFFCO in accordance with the delivery schedule specified in Appendix III to this agreement.
3.2 Review of documentation Topsoe shall review in Denmark technical documentation for the Aonla I Energy Saving Project Phase I prepared by IFFCO or for IFFCO by contractor or a third party, and supplied to Topsoe for review as specified in Clause 4.0 of appendix II to this agreement. The purpose of such review is to see whether the process and design requirements of Topsoe are satisfied. Unless otherwise agreed, TOPSOE shall inform IFFCO of its comments with remedial measures, if any, within 15 (fifteen) working days (official working days Topsoe's office) from receipt of each item of technical documentation.
3.3 Technical assistance in India In accordance with the general conditions specified in appendix V to this agreement, Topsoe shall provide technical assistance in India in IFFCO's offices or contractor's offices in India and at the site of Aonla I plant as follows:
(a) Review, etc. Technical assistance related to review of the engineering supplied by Topsoe pursuant to Sub-clause 3.1 of this agreement and related to detailed engineering and procurement carried out by IFFCO or for IFFCO by contractor.
(b) Construction, Commissioning, etc. Technical assistance related to construction, pre-commissioning, commissioning, start-up and test rune of the revamped Aonla I plant and technical assistance for demonstration of the design capacity.
(c) It is submitted that 50 man-days of Topsoe assistance, as per Clause 3.3(a) and (b) above will be required for the Aonla I plant [emphasis added] 4.0 Fees 4.1 In consideration of the rights and licences granted by Topsoe pursuant to Clause 2.0 above for the engineering referred to in Sub-clause 3.1 above and for the review of technical documentation referred to in Sub-clause 3.2 above. IFFCO shall pay as follows:
(a) to Topsoe a total net lump sum fee of EUR 160,000 (Euros one hundred and sixty thousand) for supply of the EDP, and
(b) to GV a total net lump sum fee of EUR 220,000 (Euros two hundred and twenty thousand) towards licence for GV process in accordance with the stipulation of the payment agreement.
4.2 For technical assistance in India as referred to in Sub-clause 3.3 of this agreement, IFFCO shall pay fees to Topsoe calculated on the basis of man-day rates and escalation as specified in appendix VI to this agreement.
Furthermore, IFFCO shall reimburse Topsoe for the costs and provide facilities as specified in appendix V to this agreement.
4.3 For technical assistance in India by GV, IFFCO shall pay directly to GV in accordance with the stipulation of the payment agreement [emphasis added] 5.0 Payment Schedules 5.1 The fees specified in Sub-clause 4.1(a) of this agreement shall be paid in Denmark in instalments as specified below:
(a) 20 per cent (twenty per cent) within 30 (thirty) days from the date of signature of this agreement against a bank guarantee pursuant to Sub-clause 6.5 of this agreement.
(b) 30 per cent (thirty per cent) on submitting the documents referred to in Sub-clause 2.3 of appendix II to this agreement.
(c) 50 per cent (fifty per cent) on submitting the remaining documentation referred to in Clause 2.0 of appendix II to this agreement against a bank guarantee pursuant to Sub-clause 6.6 of this agreement.
5.2 The fees for technical assistance as referred to in Sub-clause 4.2 of this agreement shall be paid against monthly invoices duly certified by IFFCO.
6.0 Other terms of payment 6.1 All payments under Sub-clauses 5.1 and 5.2 of this agreement, whether payable under Sub-clause 6.3 or 6.4 of this agreement, shall be made against invoices issued in quadruplicate to IFFCO by Topsoe.
The amounts under Sub-clauses 4.2 of this agreement shall be paid within 45 (forty five) days after the end of each month in which the technical assistance services were rendered on the basis of monthly invoices issued to IFFCO by Topsoe : Topsoe shall ensure that each invoice is received by IFFCO 30 (thirty) days prior to the due date of payment.
6.2 Taxes
(a) Topsoe's fees and payments under this agreement exclude any and all taxes leviable on Topsoe and payable in India on the fees and payments to be paid to Topsoe. IFFCO will pay these taxes and hold Topsoe at any time harmless and indemnified from and against any tax liability in India in respect of payments received by Topsoe under this agreement. These fees, however, include all taxes, which are imposed outside India on Topsoe in connection with this agreement. TOPSOE shall give assistance to IFFCO in IFFCO's dealings with Indian income-tax authorities for taxes, if any, leviable on the fees to Topsoe under this agreement....
[emphasis added]
13. Under Clause 10 relating to technical information, Topsoe granted to the appellant non-exclusive rights to use all technical data, information, and "know-how" (described as technical information) for all purposes related to construction, maintenance, debottlenecking and operation of the said project. Under Clause 10.2, the appellant agreed to, "hold in confidence all technical information supplied to it by Topsoe in connection with the said project". By Clause 11, Topsoe undertook to indemnify the appellant against any claim made on the ground of infringement of intellectual property rights in connection with the use of Topsoe's technical information. Engineering guarantees stipulated in Clause 12, inter alia, provided that Topsoe was responsible for the correctness and completeness of all drawings and other documentation. In case of any defect or omission, Topsoe undertook to supply free of charge new or revised drawings and documentation as were required to rectify the defect or omission. Under Clause 13, performance guarantee, as specified in Clause 1 of appendix VII of the agreement was given, inter alia, on the condition that the detailed design, procurement and construction were carried out in accordance with the instructions given, "through Topsoe's technical assistance pursuant to Sub-clause 3.3 of the agreement" and that, the "commissioning and guarantee" test of Aonla I Energy Saving Project Phase I were carried out "in the presence of engineers of Topsoe/GV". Under the "miscellaneous terms", stipulated in Clause 15, it was provided by Clause 15.8, that, it was understood that, "the total estimated 50 man-days mentioned in Clause 3.3(c) of the agreement was an aggregate of technical assistance to be provided by Topsoe/GV personnel". Under Clause 3.3(c), as noted above, it was estimated that 15 man-days assistance as per Clause 3.3(a)(b), in respect of review of engineering and technical assistance related to construction, etc., was required for the said plant. As noticed above under Clause 4.2, for technical assistance in India as referred in Clause 3.3 of the agreement, the appellant had agreed to pay fees to Topsoe calculated on the basis of man-day rate and, escalation as specified in appendix VI to the agreement. For technical assistance in India by GV, the appellant had agreed to pay directly to GV in accordance with the stipulation of the payment agreement, as per Clause 4.3. The fees for technical assistance as referred to in Sub-clause 4.2 of the agreement were to be paid against monthly invoices duly certified by the appellant, as stipulated in Clause 5.2.
14. It is, therefore, abundantly clear that the said agreement stipulated not only supply of technical knowledge, but also rendering of engineering services in connection with the designing and implementation of the said energy saving project of the appellant. The agreement clearly referred to "technical information", which was to comprise of technical data, besides referring to "technical assistance". The fees chargeable for rights and licences granted by Topsoe for its technical information and processes under Clause 2, were separately stipulated in Clause 4. 1 on the supply of the EDP, while the fees for "technical assistance" were stipulated under Clauses 4.2 and 4.3. The fees for "technical assistance" were to be paid against monthly invoices. The amounts under Clause 4.2 were to be paid, "within 45 days after the end of each month in which the technical assistance services were rendered on the basis of monthly invoices issued to IFFCO by Topsoe".
15. The above stipulations indicate that it was not only the licence to use "know-how" as an intellectual property transferred to the appellant, but giving of "technical assistance in India" was also clearly stipulated and the performance guarantee was given, inter alia, on the condition that the testing would be done in the presence of engineers of Topsoe/GV. It is, therefore, difficult to accept the contention that nothing was to be done in India or that no services were provided in India. Admittedly, commissioning and guarantee test run was conducted in the presence of engineers of Topsoe/GV in India. The project study report which heralded the agreement, could not have been done abroad and the use of technical "know-how" was intricately connected with rendering of technical assistance services, which were included in the definition of "consulting engineering services". The submission made on behalf of the appellant that the entire agreement should be treated as of only intellectual property in the nature of "know-how" supplied in form of drawings dispatched from abroad cannot, therefore, be accepted. The types of services rendered under the agreement squarely fall within the illustrative clarification made by the Central Government in their notification dated July 2, 1997. The contention that the entire agreement should be treated as licensing the use of "know-how" as an intellectual property with which technical assistance was integrally connected, is made by ignoring the definition of "consulting engineer", which clearly includes "technical assistance" within the meaning of the services provided by a consulting engineer.
16. The foremost contention raised on behalf of the appellant is that transfer of proprietary "know-how" was not consultancy service. Hence, it would not be subject to service tax under the Act. This argument proceeds on the hypothesis that all know-how is intellectual property. Intellectual property refers to creations of the mind, such as, inventions, literary and artistic works, symbols, names, images and designs, used in commerce. Intellectual property is divided into two categories : industrial property, which includes inventions (patents), trademarks, industrial designs and geographic indications of source (signs used on goods that have a specific geographic origin and possess qualities or a reputation that are due to that place of origin, as for example, "Swiss watches"), and copyright, which includes literary and artistic works such as knowledge, poems and plays, films, musical works, drawings, paintings, photographs and sculptures and architectural designs. Rights related to copyright include those of performing artists in their performances, producers of programmes in their recordings, and those of broadcasters in their radio and television programmes.
17. Intellectual property is thus, a broad concept and includes many different intangibles such as : patents (inventions), copyright (works of authorship, including technical manuals, software, specifications, formulae schematics and documentation, among other things), know-how (e.g. expertise, skilled craftsmanship, training capability, understanding of how something works), trade secrets (a protected formula or method, undisclosed to customer or technical information, algorithms, etc.), trademarks (logos, distinctive names for products and technologies, etc.), industrial designs (unique way a product looks, such as, a computer's moulding), and semiconductor mask works (physical design of semi-conductor circuits).
18. The Convention Establishing the World Intellectual Property Organisation (1967) does not seek to define intellectual property, but gives the following list of the subject-matter protected by intellectual property rights:
(a) literary/artistic and scientific works;
(b) performances of performing artists, phonograms and broadcasts;
(c) inventions in all fields of human endeavour;
(d) scientific discoveries;
(e) industrial designs;
(f) trademarks, service marks and commercial names and designation;
(g) protection against unfair competition; and
(h) all other rights resulting from intellectual activity in the industrial, scientific, literary or artistic fields.
Intellectual property relates to items of information or knowledge which can be incorporated in tangible objects at the same time in an unlimited number of copies at different locations anywhere in the world. The property is not in those copies but in the information or knowledge reflected in them, the right to which can be sold or licensed for use.
19. Technology licensing occurs, when the owner of intellectual property having the legal right to prevent the other party from using it consents to its use in exchange for money or other consideration. Technology licensing does not occur when there is no intellectual property. In the context of maintenance and equipment, know-how would include knowledge about the assembly and function of machinery, the course of production processes, and information about the measures that are to be carried out and the time when they are to be carried out. "Know-how" about maintenance can be acquired by way of instructions and training only, while know-how about equipment may be treated as descriptive knowledge. "Know-how" is different from other kinds of knowledge such as prepositional knowledge in that, it can be directly applied to perform a task. In intellectual property law, the "know-how" is a parcel of closely-held information relating to industrial technology, sometimes also referred to as trade secret which enables its user to derive commercial benefit from it. "Know-how" as an intellectual property, would mean a proprietary series of practical, non-patented knowledge, derived from the owner's experience and tests, which is secret, substantial, and identified. It is secret because it is not generally known or easily accessible. Since know-how would include knowledge indispensable to the licencee for its use, or for sale, resale, management or organisation of the contractual goods or services, it is substantial. "Know-how" must be described in a sufficiently comprehensive manner in order to verify whether it meets the secrecy and substantiality criteria. An agreement dealing with transfer of "know-how" as an intellectual property may also provide exchange of non-proprietary information. Mere word "know-how", as commonly understood, will not make all know-how, that is, the processes involved in doing of a task, as intellectual property, unless it is a confidential know-how or a trade secret known only to the knower and is not in pubic domain, so that its commercial exploitation could be done only under a licence from the person having the "know-how" which would be a special skill unknown to others that can be imparted for commercial exploitation. A new licencee may require assistance from the licensor in terms of know-how, training and consultation to make the technology or product practically useful and functional. The licencee may need help from the licensor in terms of written documentation or materials that help him to understand how to use the technology. The licencee may need the "know-how" of the licensor in order to exploit the technology. The licencee may desire to have licensor personnel available, to work with its own employees, or may wish its employees to be trained by the licensor in the use of the technology in respect of which the necessary work hours would be fixed.
20. As noted above, "know-how" as an intellectual property is sometimes also referred to as a trade secret which enables its user to derive commercial benefit from it. A trade secret is a formula, practice, process, design, instrument, pattern or compilation of information used by a business to obtain an advantage over competitors within the same industry or profession. Such trade secrets are sometimes referred to as "confidential information". A person having "know-how" as a trade secret would protect such confidential information by non-compete or non-disclosure contracts. Unlike patent or trade mark, the attribute of protection of confidential information in the know-how gives perpetual monopoly in such secret information which does not expire over a period of time as is usual for the protection in form of validity period granted to patents and copyrights. Where trade secrets are recognised, the creator of property regarded as trade secret is entitled to regard some special knowledge as intellectual property. A trade secret is such sort of information, that is not generally known to the relevant portion of the public, that confers some sort of economic benefit on its holder and which is the subject to reasonable efforts to maintain its secrecy. Trade secrets are, however, not protected by law in the same manner as trademarks or patents. A significant difference, is that trade secret is protected without disclosure of the secret. So long as the owner of the trade secret can prove that reasonable efforts have been made to keep the information confidential, the information remains a trade secret and generally remains legally protected as such. However, where trade secret owner has not exercised reasonable effort at protecting the confidential information, there is risk of losing the trade secret, even if competitor obtains the information illegally. Know-how in the nature of trade secret as an intellectual property would, therefore, be information including a formulae, pattern compilation, programme device, method, technique or process, that derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by other person who can obtain economic value from its disclosure or use, and is the subject of efforts that are reasonable under the circumstances, to maintain its secrecy.
21. In the present case, the adjudicating authority has on the basis of the definition of "consulting engineering services" in Clause 65(31) and the circular dated July 2, 1997 issued by the Ministry of Finance and the clarification dated December 18, 2002 issued by the Board, found that once the drawings and designs were completed, they were required to be approved by the client before proceeding with the construction and changes that were required to be incorporated as suggested by the client and, therefore, the services were definitely in the nature of consulting engineer services and hence taxable. It was also held that the agreement had guaranteed rights to use all technical data, information, and know-how for all purposes related to construction, maintenance, de-bottlenecking, and operation of the said Energy Saving Project, and that, the technical assistance relating to review of engineering supplied by Haldor Topsoe and procurement carried out by the appellant and also relating to construction, re-commissioning, commissioning, start-up and test run of the revamped Aonla plant, and the estimated 50 man-days of Topsoe assistance, which was required for the plant, indicated receipt of engineering services including technical assistance from Haldor Topsoe, through transfer of technology, which cannot be termed as know-how only, and was, therefore, taxable under the category of consulting engineer services in view of the said Government's circular. The Appellate Commissioner, as noted above, held that various clauses of the agreement focused on technical services being provided including deployment of manpower by Topsoe for the plant for such advice and service. These were in addition to the licensing rights given to IFFCO to use all its technical data information, and know-how. It was held that apart from allowing the use of technical know-how, technical services in various forms, including deployment of technical manpower from Topsoe, had been rendered. The Commissioner (Appeals) was, therefore, conscious of the fact that technical know-how as intellectual property, which could be transferred, was distinct from technical assistance provided for the use of such technical know-how. The terms of the agreement indicated the payment patterns and 50 man-days work appeared to have been stipulated as a part of the technical assistance which was required for the purpose of using the technical information provided for revamping the plant. It is, therefore, difficult to accept the contention that the entire payment made by the appellant was made only for the licensing of technical know-how, which was intellectual property and not towards the technical assistance rendered for the use of "know-how" for which under the agreement 50 man-days work was considered as a minimum requirement. The payment for providing such manpower for the use of the "know-how" of Haldor Topsoe towards technical assistance was distinct from the licence fee for know-how as an intellectual property. Under Clause 15.8, it was understood that total estimated 50 man-days was an aggregate of technical assistance "to be provided by Topsoe/GV personnel". Therefore, apart from the expenses, which were required to be incurred during the visit of such personnel which were to be separately borne by the appellant, as stipulated in appendix V, the consideration stipulated in the agreement also took care of the minimum 50 man-days technical assistance which was required for the use of the licensed know-how.
22. In the context of technical assistance in India covered by Clause 3.3, the appellant in their reply (paragraph D-7) had contended that the technical assistance rendered by Haldor Topsoe was incidental to the transaction for transfer of know-how, which was transaction in property. It was not their case that no technical assistance was rendered. Know-how as intellectual property already existing with Haldor Topsoe, could not have been subjected to service tax, but surely the technical assistance which went with it and without which it would not have been possible to implement or use the technical know-how, remained taxable service under the said Act. The agreements in question were not merely in respect of licence to use the "know-how" as intellectual property which Haldor Topsoe already possessed, but they also provided for minimum required man-days of technical assistance as well as other technical assistance in the form of further services. The service tax would be attracted in respect of services rendered in India at the plant of the appellant to that extent of their value from the total payment made to Haldor Topsoe under the said agreements. Therefore, necessarily that amount of consideration which is relatable to technical assistance rendered, in whatever form, was required to be subjected to service tax and only the part of consideration that related to the licensed use of Topsoe technical information and processes, was required to be considered as the consideration in respect of the transfer of the intellectual property in the know-how, not amenable to service tax.
23. It would be too naive to accept the contention raised on behalf of the appellant that mere dispatch of the post from abroad by which the client's designs, etc., comprising the "know-how" as intellectual property were to be delivered to the appellant in India should be equated with rendering or receipt of technical assistance abroad so as to make the said Act inapplicable on the ground that the services were rendered abroad. Though the technical information in the form of drawings, designs as "goods" was dispatched from abroad, the technical assistance which was agreed to be provided was to be rendered obviously in India at the plants of the appellant. No technical assistance was to be rendered or could be considered to have been rendered at the place where the post was dispatched from abroad. With the confidentiality attached with it, the technical information came to be disclosed first time in India for the purpose of the plants of the appellant where the entire technical assistance was to be rendered and the plants were obviously the target of all the services, which went with the transfer of "know-how" under the licence. The date of delivery fixed in the context of dispatch of the technical information (EDP) was only a contractual arrangement for the purpose of ascertaining the date on which the contractual liability to make payments arose, but that did not dilute the stipulations requiring the actual assistance to be rendered in India in respect of the said plants. The act of dispatch of technical data by post cannot be considered as rendering of technical service. The utility of the technical information was first targeted in India in the plant of the appellant where the services would be considered to have been received. Considerations of delivery of goods at the place which the parties may have stipulated under the contract of sale of goods, are different from the considerations of ascertaining the place where the services are to be rendered. The technical assistance was obviously to be rendered in the Aonla plants of the appellant in respect of which the studies were undertaken initially and for which the "know-how" was adapted with an undertaking of providing technical assistance, of which, at least 50 man-days were required as the minimum, under the agreement. There is, therefore, no substance in the contention that services, if any, were not rendered in India.
24. The contention that show cause notice for recovery of service tax for the period from April 1, 2004 to September 31, 2004 was premature, is erroneous. The appellant did not get itself registered under Section 69 of the Act till July 2, 2004. Show cause notice for the purpose of recovery of service tax which had not been levied or paid was required to be issued within one year from the "relevant date". For the purpose of Section 73 "relevant date" is defined in Section 73(6). In cases where under the rules made under Chapter V of the said Act, a periodic return is to be filed by an assessee, the date of such return would be the relevant date and in cases where no periodic return is filed, the last date on which such return is to be filed under the rules will be the relevant date. The returns are to be filed under Rule 7 in a prescribed form. By Section 70, a person liable to pay service tax, is required to self-assess the tax payable on the services and to furnish return in the prescribed form. Half-yearly return is to be submitted, as required by Rule 7. However, the liability to pay service tax, as contemplated by Rule 6, arose by the 5th of the month immediately following the calendar month in which the payments were received towards the value of taxable services. Therefore, if service tax is not paid on the date prescribed under Rule 6(1), the date relevant for issuing notice for recovery of tax would be, in respect of those who are not registered, like the appellant who was not registered at the relevant time, the date when the tax liability arose. A person not registered could not have given the particulars of registration in the prescribed form, and would therefore be governed by Clause (c) of Section 73(6), which prescribes the date on which the tax was to be paid as the "relevant date". The prescribed form of return ST-3 or ST-3A is required to accompany copy of TR-6 challan showing the payment of service tax. In cases where registration is not obtained and no return is filed or to be filed along with such copy of TR-6 challans as was the case with the appellant, the relevant date was the date on which the tax was liable to be paid. Therefore, the show cause notice was validly issued and cannot be termed as premature in respect of any portion covered by it, as contended on behalf of the appellant.
25. "Consulting engineer" as defined under Sub-section (3) of Section 65 is a professionally qualified person who directly or indirectly renders any advice, consultancy or technical assistance, in any manner to a client, in any discipline of engineering. In the present case, the advice, consultancy and technical assistance were in the field of engineering, which fact is not disputed. However, the definition of "consulting engineer" contemplates advice, consultancy or technical assistance as service. When technical information exists beforehand without being intended to be a service to a particular client, such information of confidential nature may properly be described as "know-how"--as a trade secret that can be sold or licensed to any one. In such cases, special knowledge held as intellectual property and reduced in the form of book or any other tangible matter would be capable of being sold as goods just as books containing information can be sold. When technical information of confidential nature and not in public domain is sold or licensed for commercial exploitation, something which already had come into existence is being transferred and would, therefore, not be an active service rendered. However, when coupled with transfer of such "know-how" as a trade secret in the nature of intellectual property, it is required to be supplemented by rendering service in the nature of advice, consultancy or technical assistance, that activity would be different, and any payment in respect of such activity, which amounts to service rendered with a view to enable the recipient to properly use the intellectual property for its purpose, would be subject to taxation under the said Act. However, when some consulting engineer is engaged to work out special techniques or knowledge which was not already existing with the consulting engineer as a trade secret or know-how in the nature of intellectual property, the consulting engineer would be rendering service to a person who engages him for preparing such special techniques or finding out special practice or procedures which may be of some value to the client's commercial ventures. Ordinarily, a consulting engineer rendering mere professional services does not intend to part with any trade secret or know-how and, in fact, he need not have any existing right over any trade secret or know-how in the discipline of engineering and may work in the general domain of these fields. However, if a consulting engineer is in possession of some trade secret or "know-how" as an intellectual property already existing and owned by him, he can simply licence or transfer it as such property and may not render any advice, consultancy or technical assistance. On the other hand, a consulting engineer having trade secret or know-how in the nature of intellectual property already existing, may not only licence for consideration, but also with a view to properly implement or use the same, assist the recipient/licencee in technical matters for which he may give advise and may be consulted. It would, therefore, be essential to distinguish between the licence to use given in respect of "know-how" or trade secret as an intellectual property of the licensor and the services which may be rendered as consulting engineer, namely of advice consultancy or technical assistance, which may also be provided for under the same agreement. Therefore, necessarily the total consideration relatable to the licensing rights of the know-how as well as with the services rendered by way of advice, consultancy or technical assistance in the context of such licensing use has to be bifurcated for the purpose of the valuation of the taxable service rendered, if any, by the consulting engineer as distinguished from the licensing of the "know-how", provided by such consulting engineer under the agreement.
26. In the present case, agreement is a composite one and speaks of both licensing rights in respect of the "know-how" which was to be kept confidential and technical assistance which was to be rendered in context thereof. Obviously, all the consideration that was relatable to technical assistance, particularly of 50 man-days technical assistance, was liable to be taxed under the said Act as a taxable service. This exercise of apportioning and finding out the consideration that was relatable to the technical assistance which was rendered in the context of licensing rights has not been attempted by the Commissioner (Appeals), though he appears to have been appropriately conscious of the fact that, "apart from allowing the use of the technical 'know-how', technical services in various forms including deployment of technical manpower from Topsoe at IFFCO Aonla has been rendered". All the payments except those which are specifically relatable to licence as covered by Clause 2 and which did not relate to any form of technical assistance included thereunder, will have to be separated, since no tax could be chargeable in respect of such licensing fees attributable to the rights covered by Clause 2 of the agreement, and the service tax will be chargeable only in respect of the technical assistance which was contemplated under the agreement for being rendered at the plant of the appellant in India and which was so rendered.
Final order:
27. The impugned order is, therefore, modified by directing that the amount of consideration under the agreements in question, which related to the licensing of "know-how" as contemplated under Clause 2 of the agreement is reduced from the service tax demanded. Rest of the amount of consideration thereunder and under the other relevant clauses which is relatable to the services provided as consulting engineer by way of advice, consultancy or technical assistance in respect of the plants of the appellant in India are taxable under the said Act and to that extent the orders of the authorities below stand confirmed. The appeal is accordingly partly allowed and matter remanded for quantification of the liability with a direction to the Commissioner (Appeals) to work out the difference and reduce the confirmed demand by the part of the consideration amount that related to mere licensing rights, in the light of this judgment.