Custom, Excise & Service Tax Tribunal
M/S. Day International Inc., Usa vs Commissioner Of Central Excise, ... on 5 September, 2008
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
SOUTH ZONAL BENCH AT CHENNAI
S/80/06/MAS
[Arising out of Order-in-Appeal No.89/2005-ST dated 9.11.2005 passed by the Commissioner of Central Excise (Appeals), Coimbatore ]
For approval and signature:
Honble Mr. P. Karthikeyan, Member (Technical)
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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 the Member wishes to see the fair copy of
the Order? :
4. Whether Order is to be circulated to the Departmental
Authorities? :
M/s. Day International Inc., USA
Appellants
Versus
Commissioner of Central Excise, Coimbatore
Respondent
Appearance:
Shri M. Saravanan, Const. Shri V.V. Hariharan, JCDR For the Appellants For the Respondent CORAM:
Mr. P. KARTHIKEYAN, MEMBER (T) Date of hearing : 5.9.2008 Date of decision : 5.9.2008 Final Order No.____________/2008 The impugned order sustained demand of service tax of Rs.53,615/- from M/s. Day International Inc., USA (Day International) under the category of Consulting Engineer and penalty imposed on it under Sections 75, 75A, 76 and 77 of the Finance Act, 1994 (the Act). The Commissioner (Appeals) also confirmed the demand of interest on the service tax demanded.
2. The facts of the case are that Day International manufacture textile machinery and parts. Day International entered into an agreement with M/s. Lakshmi Machine Works (LMW) for manufacture cots and aprons (components of ring frame machine) by LMW. Day International provided technical know-how, technical assistance and imparted training in marketing and manufacture of cots and aprons to LMW. LMW obtained manufacturing and selling right of the licensed products and right to use the trade name of Day International. As per the agreement, Day International received royalty at the rate of 3% of the sale proceeds of the licensed products. LMW made payment of Rs.10,72,292/- to Day International during 1.4.2001 to 30.9.2001. Service tax on this amount is demanded along with interest from Day International treating the same as gross value of engineering consultancy rendered by Day International to LMW. After due process of law, the original authority and the first appellate authority passed their respective orders discussed above.
3. The Commissioner (Appeals) relied on the Ministrys Circular No.B/43/5/97-TRU dated 2.7.1997 and found that technical assistance, technical advice for converting the existing plant and machinery to suit the manufacturing needs of the licensed products, training the personnel of LMW in the preparation of the machinery and manufacture of the licensed products fell under the category of Consulting Engineer Service. However, he found that, transfer of technical know-how, right to use the trade name and right to manufacture would not fall under Consulting Engineer Service. So also the assistance provided in marketing of the product. Transfer of technical know-how, right to use the trade name and the right to manufacture would not fall under Consulting Engineer Service in the light of the decision of the Tribunal in M/s. Navinon Ltd. Vs. CCE, Mumbai-VI [2004 (172) ELT 400 (Tri.Mum)] and Bajaj Auto Ltd. Vs. CCE&C, Aurangabad [2004 (65) RLT 857 (CESTAT-Mum)]. Day International was compensated for parting with the technical know-how, sharing the trade name and right to manufacture the licensed products and the various activities constituting Consulting Engineer Service by paying royalty at the rate of 3% of the sale proceeds of the licensed product. In the absence of break-up among the activities found to be taxable and not taxable under Consulting Engineer Service, the Commissioner (Appeals) demanded tax on the entire amount paid by the appellants to the tune of Rs.57,658/-.
4. In the appeal filed, Day International has relied on a plethora of case law all of which held that transfer of technical know-how did not constitute Consulting Engineer Service and that royalty paid in exchange was in the form of a share of profit and not a payment for any service received. In Navinon Ltd (supra), the Tribunal had held the view that royalty payments were not in consideration for any service provided. The provision of technical know-how was therefore not any service. In Yamaha Motors (I) Pvt Ltd. Vs. CCE, Delhi-IV [2005 (186) ELT 161 (Tri.Del)] it was held that personal instruction and training carried out by the staff of the foreign collaborator formed part of transfer of know-how and involved teaching. In Bajaj Auto Ltd. Vs. CCE [2005 (179) ELT 481(Tri.)] the Tribunal had held that no service was involved in the case of transfer of intangible property and service tax was not liable to be paid on such transactions. Several other decisions of the Tribunal were also cited in support of the plea that royalty payment towards the supply of technical know-how did not attract service tax. Arguments were advanced with case law against invocation of the larger period and imposition of penalty.
5. Ld. JCDR reiterates the findings contained in the impugned order.
6. I have carefully considered the case records and the submissions made by both sides. There is no dispute that the appellants imparted technical knowledge to modify the existing machinery of LMW suitable for manufacture of licensed product, know-how for their manufacture, right to use brand of Day International and to sell the products. The package also included the training of LMW personnel. In the application of technical knowledge received from the foreign collaborator the royalty payment is recognized as a share of the profit earned through the use of the technical know-how, expertise and technical advice, training in marketing of LMW staff etc. This payment of royalty is not for any service received by the LMW. The Commissioner (Appeals) has tried to separate relatively less important activities undertaken by Day International such as assistance of the foreign collaborator in achieving the object of manufacturing licensed products under the agreement, to classify under Engineering Consultancy. Tax can be demanded only on the tax base relatable to taxable activity. In this case demand covers other activities found to be not taxable service. This is not acceptable. In any case, technical advice, technical assistance, training etc. imparted incidentally in the process for achieving their dominant objective of manufacturing the licensed product as per the agreement cannot be identified as constituting Consulting Engineer Service and tax demanded on the same. Royalty is paid mainly for the technical know-how/intellectual property received from Day International. Therefore, the impugned order is not sustainable. The same is set aside and the appeal filed by the party is allowed.
(Dictated and pronounced in open court) (P.KARTHIKEYAN) MEMBER (T) swamy ??
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