Custom, Excise & Service Tax Tribunal
Asea Brown Boveri Ltd vs Commissioner Of Central Excise & ... on 12 July, 2016
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL SOUTH ZONAL BENCH BANGALORE Appeal(s) Involved: ST/372/2007-DB [Arising out of Order-in-Original No. 60/2007 dated 03/08/2007 passed by the Commissioner, LTU, Bangalore] For approval and signature: HON'BLE SHRI S.S GARG, JUDICIAL MEMBER HON'BLE SHRI ASHOK K. ARYA, TECHNICAL MEMBER 1 Whether Press Reporters may be allowed to see the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982? No 2 Whether it should be released under Rule 27 of the CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not? Yes 3 Whether Their Lordships wish to see the fair copy of the Order? Seen 4 Whether Order is to be circulated to the Departmental authorities? Yes Asea Brown Boveri Ltd. No. 5 & 6, Peenya Industrial Area, 2nd Phase, Bangalore 560 058 Appellant(s) Versus Commissioner of Central Excise & Service Tax, LTU 100Ft Ring Road, J.S.S. Towers, Banashankari III Stage, Bangalore 560 085 Respondent(s)
Appearance:
Shri G. Shivadass, Advocate World Trade Centre, No. 404-406, 4th Floor, South Wing, Brigade Gateway Campus, No. 26/1 Dr. Rajkumar Road, Malleswaram West, Bangalore 560 055 For the Appellant Shri Mohd Yusuf, AR For the Respondent Dates of Hearing: 17&18/05/2016 Date of Decision: 12/07/2016 CORAM:
HON'BLE SHRI S.S GARG, JUDICIAL MEMBER HON'BLE SHRI ASHOK K. ARYA, TECHNICAL MEMBER Final Order No. 20539/ 2016 Per: ASHOK K. ARYA
1. The present appeal has been filed by the appellants namely M/s. ABB Ltd. Bangalore against the Order-in-Original No. 60/2007 dated 03.08.2007 passed by the Commissioner, LTU Bangalore. The impugned order has confirmed the demand of Rs. 1,22,82,303/- (Rupees One Crore Twenty Two Lakhs Eighty Two Thousand Three Hundred and Three only) against the appellant under the category of Intellectual Property Service under Section 73 of the Finance Act along with interest under Section 75 of the Finance Act and has further imposed penalties under Section 76 of the Finance Act 1994.
1.1. The impugned order mentions the fact that the appellants entered into License Agreement with foreign companies and obtained rights to use the technology for manufacture in consideration of which they had paid technical know-how fees of Rs. 44,89,660/- (Rupees Forty Four Lakhs Eighty Nine Thousand Six Hundred and Sixty only) and royalty charges of Rs. 9,58,55,960/- (Rupees Nine Crores Fifty Eight Lakhs Fifty Five Thousand Nine Hundred and Sixty only) during the period of 01.01.2006 to 31.12.2006. The impugned order held that for these payments the service tax was liable to be paid under the category of Intellectual Property Service.
2. The appellants have been represented by learned advocate, Shri G. Shivadass, who has inter alia submitted as follows:
2.1. (a) M/s. ABB Ltd. (hereinafter referred to as the appellants) are engaged in the manufacture of various electrical goods such as Control and Relay Panel, Capacitors, Relays, Drives, DCS Systems, Air Circuit breakers, Contactors, Motors etc; and also providing services viz., erection, installation, commissioning of said equipment and machinery.
(b) In and around the year 2002 the appellants had entered into license agreement with the following foreign companies, which are group companies of ABB:
(i) M/s. ABB Stoz-Kontakt GmbH Eppelheimer Strate Licence Agreement concerning the manufacture of MCBs.
(ii) M/s. ABB Sace S.p.A, Low Voltage Brakers Division, - License Agreement concerning the manufacture of Low Voltage Air circuit Breakers (ACB) EMAX E1.
(iii) M/s. ABB Jumet, Belgium License Agreement concerning the manufacture of capacitor units designed to operate at voltages upto and including 690V.
(iv) M/s. ABB Technologies Ltd. License Agreement concerning the transfer of technology for standardized solutions for Advanced Power System Management.
(v) M/s. ABB OY Drives, Finland Helsinki License Agreement concerning the production of ACS 550 and ACH 550 Frequency converters.
(c) In terms of the above mentioned agreements, the Companies in question would provide to the appellants documents (etc.) related to general data relating to Technology, Tools, and jigs, Special machines and equipment, Quality Control and Quality Assurance to enable the appellants to manufacture, sale and marketing of such goods as specified in the agreement(s). The companies would place at the disposal of appellants the documents etc like:
Production line support for initial set up Electro Static Discharge (ESD) Working instructions Assembly line training Automated Test System with a safety features Testing System Softwares Upgradation in product software by R & D Centre Global Supplier support which will have global certification Under laboratories Complete set of manufacturing drawings Technical provisions for material, semi-finished product Supervision and inspection as well as additional technical documentation necessary for to enable licensee to manufacture product with quality similar to that of licensor manufactured.
Bill of material Assembly drawing Pictures Specification of material and source Manufacturing documentation Manufacturing specifications Job instructions Time standards Drawings for tolls, jigs and fixtures Specification for machine tools Production testing specifications Purchasing specifications Technical sales documentation in the form of catalogue, brochures Spare parts catalogues Training documentation Explanation of licensors drawings systems, symbol numbering system Computer software in machine readable form
(d) The technology transferred by the Foreign Companies was developed by them and is the exclusive property of the respective entities. Under the aforesaid agreement(s) the Companies transferred licensed use of their technical information, know-how and trade secrets which were not registered under any Indian law for time being in force. They did not license to the appellants any patent, copyright, design, or any other similar intellectual property rights. Certificates obtained from the Foreign Companies are enclosed.
2.2. Earlier also department issued a show-cause notice dated 22.09.2006 demanding service tax under the category of Intellectual Property Service. This demand in show-cause notice was dropped by the Additional Commissioner under Order-in-Original No. 19/2007 dated 30.03.2007 saying that know-how is not covered under any Indian Law for the time being in force following Circular 80/04-ST dated 17.09.2004 and the Tribunal decision in the case of M/s. IFFCO V. CCE reported in [2007 (5) S.T.R. 281 (Tri.-Del.)]. For these facts the Commissioner, LTU invoked provisions under Section 84 of the Central Excise Act and issued show-cause notice dated 07.09.2007 for taxing the services under Intellectual Property Service and demanded service tax of Rs. 39,98,975/- (Rupees Thirty Nine Lakhs Ninety Eight Thousand Nine Hundred and Seventy Five only) along with interest and for imposition of penalties. Commissioner against the show-cause notice passed the Order-in-Original No. 31/2007 dated 10.04.2008 confirming the demand of service tax along with interest and imposed penalties.
2.3. Against the above order dated 10.04.2008 appeal was allowed by the Tribunal vide Final Order No. 453/2010 dated 11.02.2010 on the ground that no service tax was payable for the said services prior to the period 18.04.2006.
3. The learned advocate for the appellants has further inter alia submitted as follows:
3-A. THE AGREEMENT IS FOR THE TRANSFER OF KNOW HOW AND NOT FOR ANY TAXABLE SERVICE
(i) The Appellants submit that by virtue of the agreements in question the foreign companies make available to the Appellants knowledge by means of data, experience, for the purpose of manufacture, sale and use of the Contract Products. This knowledge may be made available in written form, any other recorded form or in the form of personal experience. In the present case, Foreign Companies had supplied the Appellants technical know-how, which is a fact accepted in the Show Cause Notice itself.
(ii) The Finance Act, 2004 w.e.f. 10.09.2004 inserted Intellectual Property Service within the ambit of taxable services in Chapter V of the Finance Act, 1994, for the purpose of levying service tax.
(iii) Section 65 of the Finance Act 1994 defines IPR service as follows:
(55a) intellectual property right means any right to intangible property namely trademarks, designs, patents or any other similar intangible property, under any law for the time being in force, but does not include copyright;
(55b) intellectual property service means,-
(a) transferring, temporarily; or
(b) permitting the use or enjoyment of, any intellectual property right; (105) taxable service means any service provided or to be provided,-
(zzr) to any person, by the holder of intellectual property right, in relation to intellectual property service;
(iv) While explaining the scope of service under the above insertion the Department has issued a clarification vide F. No. B2/8/2004 TRU dated 10.09.2004 which provides as under:
09. Intellectual property services (other than copyrights):
9.1 Intellectual property emerges from application of intellect, which may be in the form of an invention, design, product, process, technology, book, goodwill etc. In India, legislations are made in respect of certain Intellectual Property Rights (i.e.IPRs) such as patents, copyrights, trademarks and designs. The definition of taxable service includes only such IPRs (except copyright) that are prescribed under law for the time being in force. As the phrase law for the time being in force implies such laws as are applicable in India, IPRs covered under Indian law in force at present alone are chargeable to service tax and IPRs like integrated circuits or undisclosed information (not covered by Indian law) would not be covered under taxable services.
9.2 A permanent transfer of intellectual property right does not amount to rendering of service. On such transfer, the person selling these rights no longer remains a holder of intellectual property right so as to come under the purview of taxable service. Thus, there would not be any service tax on permanent transfer of IPRs 9.3 In case a transfer or use of an IPR attracts cess under Section 3 of the Research and Development Cess Act, 1986, the cess amount so paid would be deductible from the total service tax payable. (refer notification No.17/2004-ST, dated 10.09.2004). [Emphasis supplied]
(v) Know how is not recognized as an Intellectual Property and is not protected under any Indian law for the time being in force. In fact, Know how is the undisclosed information cited by the aforementioned departmental clarification dated 10.9.2004, as example of intellectual property right not covered by any Indian law. Therefore, grant of right to use Know how is not a service even under the taxable service of intellectual property service and thus not subject to service tax.
(vi) The Appellant relies on the order of the Tribunal in the case of M/S Indian Farmers Fertilizers Co-operative Ltd. Vs. CCE, Bareilly (2007 (5) S.T.R. 281 (Tri. - Del.)
13. ..... 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 propositional 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 owners experience and tests, which is secret, substantial, and identified. It is secret because it is not generally known or easily accessible. ...
14. As noted above, know-how as an intellectual property is sometimes also referred to 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 recognized, 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, which 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 of reasonable efforts to maintain its secrecy. Trade secrets are, however, not protected by law in the same manner as trademarks or patents. ...
[Emphasis Supplied]
(vii) The above view finds support from the TRIPS Agreement where in Section 7 relating to Protection of Undisclosed Information, the measures to protect the same are set out.
(viii) Further, in support of the view that the transfer of know-how cannot be considered rendering of service, reliance is placed on the following cases:
(i) OEN India Limited v. CCE Cochin, 2008-TIOL-1589-CESTAT Bangalore
(ii) CST, Faridabad v. G.E.C Avery Ltd. 2008 (10) STR 297 (Tri. - Del)
(iii) CCE, Daman v. Supreme Treaves (P) Ltd. 2009-TIOL-179-CESTAT-AHM
(iv) Toyota Motor Corp Japan v. CCE&ST, Bangalore 2007-TIOL-1865-CESTAT-BANG
(v) Larsen and Tourbro Ltd. v. CST, Chennai 2008-TIOL-2357-CESTAT-MAD
(ix) The Appellants have placed on record the certificates obtained from all its foreign collaborators that they have not provided any Intellectual Property Right which is covered under any Indian law for the time being in force.
(x) The appellants further rely on the following cases in this regard:
Rochem Separation Systems (India) P. Ltd. Vs. Commissioner of Service Tax, Mumbai 2015 (39) STR 112 (Tri.-Mumbai) Tata Consultancy Services Ltd. Vs. Commissioner of Service Tax, Mumbai 2015 TIOL 2370 CESTAT MUM Thermax Ltd. Vs. CCE, Pune 2014 (36) STR 318 (Tri.-Mumbai)
(xi) The Appellants further submit that all the agreements specifically provide that the registration or non-registration of the intellectual properties given, if any, will not have any effect on the payment of royalty by the Appellants. Thus, it is evident that there was never ever an intention between the Appellants and the Foreign Companies to transfer any intellectual property under the Agreement. The Appellants are extracting clause 5 of the Agreement with ABB Stotz-Kontakt GmbH, which reads as follows:
Clause 5 - Intellectual Property Rights 5.1 Administration Nothing in this agreement shall oblige either party to apply for, take out, maintain or defend any intellectual property rights or trademarks in any country, nor does any Party assume any liability for the validity of the Intellectual Property Rights or trademarks.
The rejection, expiry, abandonment or nullification of any Intellectual Property Rights or licensed rights or trademarks have no influence on amount of and obligation to pay the remuneration.
[Emphasis supplied]
(xii) It is submitted that similar clause is present in each and every agreement entered by the Appellants in the present case. Thus, without prejudice to the argument that no IPR which is protected under any Indian law for the time being in force has been transferred to the Appellants, since the agreement specifically provides that the consideration is having no nexus with any IPR transferred under the agreement the royalty payment made cannot be made liable to Service Tax.
3-B. TRANSFER OF DESIGNS/DRAWINGS UNDER THE AGREEMENTS WITH THE FOREIGN COLLABORATOR IS NOT INTELLECTUAL PROPERTY WITHIN THE MEANING OF THE DESIGNS ACT, 2000
(i) The Ld. Commissioner has held in the impugned Order-in-Original that the transfer of technical know-how and technology licensing include provision for the requisite drawings, specifications and other processes required for manufacture/assembly of contract products and that the designs and drawings transferred as a part of technical know how would be covered under Indian law, the Designs Act, 2000.
(ii) The appellants in this regard submit that the above finding is erroneous as the Agreements for transfer of technical know how entered into between the appellants and the foreign collaborators contain certain designs which are subjected to protection under the Designs Law of the foreign country to which foreign collaborator belongs.
(iii) It is submitted that designs rights are protected by the municipal laws of each country and the rights are limited to the geography of that particular nation. Hence, a foreign entity cannot transfer (assign/license) its Designs Rights to its Indian counterpart, unless the foreign entity has a registered Design Right in India. A design not registered in India is not treated as a Design Right under the provisions of the Designs Act, 2000.
(iv) The appellants submit that none of the Foreign Collaborators with whom the appellants have entered into agreements have registered any of the Designs under Indian law as per the requirements of the Indian Designs Act, 2000 and Design Rules, 2001. Therefore it is submitted that none of the designs transferred to the appellants as a part of technical know how are designs for the purpose of the Designs Act, 2000 and Designs Rules, 2001. The designs are merely Product Specifications to maintain the standards and quality control while manufacturing the goods by the appellants. Hence there is no transfer of Designs Rights from foreign entity to the appellants. Therefore the impugned order is liable to be set aside.
3-C. BURDEN ON REVENUE TO PROVE THAT THE TECHNICAL KNOW-HOW INVOLVED IS AN INTELLECTUAL PROPERTY RIGHT COVERED UNDER INDIAN LAW
(i) The appellant submits that the burden is on the revenue to prove that the technical know how transferred to the appellant is in the nature of an Intellectual Property Right covered under Indian law and that there is a transfer of such a right.
(ii) In this case apart from referring to the definition of Intellectual Property Service, there is no attempt to examine and prove that the technical know-how is an Intellectual Property Right coming under service tax levy.
(iii) There is plethora of case laws which lay down that in a case of taxation, the burden of proving the necessary ingredients prescribed by the taxing provision are satisfied, is entirely upon the taxing authority. The appellants place reliance on the following case laws:
S.N. Uppar & Co. V. Commissioner of C.Ex., Belgaum, 2008 (11) STR 34 (Tri.-Bang.).
United Telecom Ltd. V. Commissioner of Service Tax, Bangalore, 2008 (9) STR 155 (Tri.-Bang.).
Elite Detectives Pvt. Ltd. V. Commr. of Service Tax, Bangalore, 2006 (4) STR 583 (Tri.-Bang.).
Phoneix Mills Ltd. V. Union of India, 2004 (168) ELT 310 (Bom.).
Sri Ayyappan Silicate & Chemical Products (P) Ltd. V. CCE, Trichy, 2004 (165) ELT (Tri.-Chennai).
Union of India V. Garware Nylons Ltd., 1996 (87) ELT 12 (SC).
Collector of Central Excise, Cochin V. Fertilizers and Chemicals, Travancore Ltd., 1986 (24) ELT 388 (Tribunal).
Tata Export Ltd. V. Union of India and others, 1985 (22) ELT 732 (MP) Hevaecrumb Rubber (P) Ltd. V. Superintendent of Central Excise, 1983 (14) ELT 1685 (Ker.).
Navin Chimmanlal Sutaria V. Union of India and others, 1981 (8) ELT 913 (Bom.).
3-D ENTIRE ISSUE IS ONE OF REVENUE NEUTRAL
(i) In terms of Rule 9(1)(e) of the Cenvat Credit Rules, 2004 the person liable to pay service tax under Rule 2(1)(d)(iii),(iv) and (v) of the Service Tax Rules, 1994 is entitled to take credit based on the TR6 challan evidencing payment of service tax. Thus the Appellants are entitled to take credit of the service tax and the entire exercise is one of revenue neutrality. Therefore, there can be no intent to evade payment of service tax when the tax paid is available as credit.
(ii) The Appellants rely in the matter of CCE, Jamshedpuram Vs. Jamshedpuram Beverages (2007 (214) ELT 321 (SC) wherein it was held that the excise duty paid and the MODVAT credit availed were identical and therefore consequences of payment of excise duty after availing MODVAT credit was revenue neutral, therefore the appeal is dismissed leaving the question of law open.
(iii) In this regard, the Appellants also rely on the following decisions:-
? Amco Batteries vs. CCE 2003 (153) ELT 7(SC) ? CCE, Mumbai Vs. Mahindra & Mahindra Ltd., 2005 (171) ELT 159 (SC) ? CCE, Mumbai Vs. Mahindra & Mahindra Ltd., 2005 (179) ELT 21 (SC) ? CCE vs. Naramada Chematur Pharma Ltd., 2005 (179) ELT 276 (SC) ? CCE vs. Narayan Polyplast 2003 (179) ELT 20(SC) ? Jay Yuhshin Ltd. vs. CCE, New Delhi 2000 (119) E.L.T. 718 (Tri LB) ? Brakes India Limited Vs CCE 2008 (223) ELT 222.
(iv) The Appellants submit that it is now well settled law that where payment of duty results in a situation of revenue neutrality, no intention to evade payment of duty can be attributed to the person liable to pay duty.
3-E NO INTEREST OR PENALTY IS PAYABLE
(i) Since no service tax is payable in view of the above submissions, the Appellants submit that no interest can be levied in terms of Section 75 of the Act. The Appellants further inter alia submit as follows:
(a) The Appellants submit that Section 75 does not provide for payment of interest by a person liable to pay service tax under Section 66A which is a separate charging section. It refers to Section 68 only which is applicable for services rendered in India and not to Section 66A which is for services rendered outside India.
(b) The Appellants further submit that in Finance Act, 1994, there are no mandatory penalties. Section 80 provides that no penalty shall be imposable on the assessee for any failure if the assessee proves that there was reasonable cause of the said failure. Thus the Act statutorily provides for waiver of penalty. Reliance is placed on the following decisions of the Apex Court.
i) Hindustan Steel Ltd. vs The State of Orissa 1978 (2) ELT 159 (SC)
ii) ETA Engineering Ltd v CCE Chennai, reported in 2004 (174) ELT 19 (Tri-LB)
4. The Revenue has been represented by learned AR, Shri Mohd Yusuf, who has reiterated the findings given in the impugned order dated 03.08.2007. Learned AR has cited the CESTAT, Chennais decision in the case of Suolificio Chennai Vs. CST, Chennai [2008 (11) S.T.R. 414 (Tri.-Chennai)] saying that transfer of trademarks and drawings, prima facie covered under Intellectual Property Service and therefore subject transactions are liable for service tax under the category of Intellectual Property Service. He also relied on the Tribunals decision in the case of Indian Farmers Fertilizer Co-op Ltd. Vs. CCE, Bareilly reported in [2007 (5) S.T.R. 281 (Tri.-Del.)] in support of his argument.
5. We have carefully considered the facts on record and the submissions of both the sides and the case laws quoted.
6. The main issue here is that whether transfer of technical know-how/technology transferred to the appellant company under various license agreements by the group foreign companies is, covered under the taxable service of Intellectual Property Service? and if so whether it is liable to levy of service tax under Chapter 5 of the Finance Act 1994 and the Rules made thereunder? The subject show-cause notice dated 20.04.2007 inter alia says that appellants entered into an agreement with respective foreign companies and obtained rights to use the technology for manufacture/sale/marketing the goods on behalf of them and further states that the assessee received the said service and paid Rs. 44,89,660/- (Rupees Forty Four Lakhs Eighty Nine Thousand Six Hundred and Sixty only) as technical know-how fees and Rs. 9,58,55,960/- (Rupees Nine Crores Fifty Eight Lakhs Fifty Five Thousand Nine Hundred and Sixty only) as royalty charges during 1.1.2006 to 31.12.2006 (as per the Annexure enclosed). The show-cause notice states that the right to use the technical know-how for manufacture/sale/marketing the goods is a taxable service under the category of Intellectual Property Rights as defined under Section 65(55b) of the Finance Act 1994 as amended (hereinafter called as the said Act) which reads as follows:-
Intellectual Property Service means (a) transferring, whether permanently or otherwise; or (b) permitting the use or enjoyment of, any intellectual property right. Section 65(55a) defines Intellectual Property Right as any right to intangible property, namely, trade marks, designs, patents or any other similar intangible property, under any law for the time being in force, but does not include copyright. The show-cause notice also states that the assessee is the person liable for making payment of Service tax on behalf of the service provider in terms of Rule 2(1)(d)(iv) of Service Tax Rules, 1994, as amended, as the foreign service provider has no office in India.
6.1. The Commissioner, LTU in its impugned order has inter alia held that in the instant case, the noticee has received technical know-how on the design and other specifications of the said goods on a temporary basis and paid royalty as consideration which would squarely (fall) under the definition of Intellectual Property Services.
6.2. In respect of the issue mentioned above the appellants have made agreements with the foreign group companies for receiving various kinds of documents etc related to general data relating to Technology, Tools and jigs, Special machines and equipment, Quality Control and Quality Assurance to enable the appellants to manufacture, sale and marketing of such goods as specified in the agreement(s). We are herein giving a small list of some of the documents etc which the appellants are getting from their foreign companies under these agreements.
Production line support for initial set up Electro Static Discharge (ESD) Working instructions Assembly line training Automated Test System with a safety features Testing System Softwares Upgradation in product software by R & D Centre Global Supplier support which will have global certification Under laboratories Complete set of manufacturing drawings Technical provisions for material, semi-finished product Supervision and inspection as well as additional technical documentation necessary for to enable licensee to manufacture product with quality similar to that of licensor manufactured.
Bill of material Assembly drawing Pictures Specification of material and source Manufacturing documentation Manufacturing specifications Job instructions Time standards Drawings for tolls, jigs and fixtures Production testing specifications Purchasing specifications Technical sales documentation in the form of catalogue, brochures Spare parts catalogues Training documentation Explanation of licensors drawings systems, symbol numbering system Computer software in machine readable form 6.3. Further from the License Agreement between the appellants and ABB Stotz-Kontakt GmbH, we quote its Clause 5, which is as follows:
CLAUSE 5 INTELLECTUAL PROPERTY RIGHTS 5.1. Administration Nothing in this Agreement shall oblige either Party to apply for, take out, maintain or defend any intellectual property rights or trademarks in any country, nor does any Party assume any liability for the validity of intellectual property rights or trademarks.
The rejection, expiry, abandonment or nullification of any Intellectual Property Right or Licensed Mark have no influence on amount of and obligation to pay the remuneration.
5.2. Rights of Third Parties Neither Party shall be held responsible by the other for any infringement of intellectual property rights or trademarks belonging to third parties.
The parties agree, however, that they will promptly advise each other in writing with respect to any claim of infringement of any intellectual property right or trademark asserted against them by any person arising out of the manufacture, use, sale or other disposition of the Contract Products.
5.3. Marking and Infringement Licensor is entitled to prescribe that the Contract Products and corresponding documentation are marked with the reference S 270 as applicable, and/or with an appropriate reference to the Intellectual Property Rights licensed under this agreement.
The Licensee shall notify the Licensor of any infringement of the Intellectual Property Rights which comes to its knowledge. 6.4. Further we reproduce from the letter which has been written to the appellants on 02.07.2008 on behalf of General Manager of Foreign Group Company namely M/s. ABB n.v. Power Quality Products, Belgium wherein it has inter alia been stated that the License Agreement is for technology transfer for the manufacture of capacitor units designed to operate up to and including 690V by the licensee and it further says that ABB Belgium have not licensed any patent, copyright, design, trademark or any other similar Intellectual property to ABB India. It also says that under the agreement they have only licensed use of their technical information, know-how and trade secrets which are not registered under any Indian law for time being in force. This letter further says that the technology transferred under this agreement is exclusive property of ABB, Belgium. Similar letters in respect of the agreements entered into with other foreign group companies which are subject matter of this case have also been filed by the appellants.
6.4.1. In order to make above things more clear and contextually more meaningful, we are reproducing above referred letter herein below:
6.5. Before we go further into the main issue that whether the services in question would be covered under Intellectual Property Service and whether the same are liable to service tax under the said category of Intellectual Property Service, we would like to refer to the definitions of Intellectual Property Right, and the corresponding taxable service concerning intellectual property namely Intellectual Property Service as defined and given in the Finance Act, 1994. These definitions are given below:
6.5.1 Intellectual Property Right as defined under Section 65(55a) of Finance Act 1994 is as follows:
1[(55a) intellectual property right means any right to intangible property, namely, trade marks, designs, patents or any other similar intangible property, under any law for the time being in force, but does not include copyright;
Which has been inserted by Finance Act 2004 dated 10.09.2004 (made effective from 10.09.2004) Intellectual Property Service as defined under Section 65(55b) is as follows:
(55b) intellectual property service means,-
(a) transferring, 4[temporarily]; or
(b) Permitting the use or enjoyment of, any intellectual property right;] Taxable Service concerning intellectual property service as defined in Section 65(105)(zzr) is as follows:
Section 65(105) taxable service (concerning intellectual property right) means any [service provided or to be provided]-
(zzr) to any person, by the holder of intellectual property right, in relation to intellectual property service.
6.5.2. From the above provisions concerning Intellectual Property Right, Intellectual Property Service, and Taxable Service of Intellectual Property Right, we find that for any services to be covered under the taxable service concerning intellectual property right, the following ingredients need to be present:
(i) the said service need to have the element of the intellectual property right and covered as such by the definition of intellectual property right given in the Section 65(55a) of the Finance Act, 1994.
(ii) There has to be temporary transfer of any intellectual property right OR there has to be the permission to use or enjoy any intellectual property right.
(iii) The said transfer or permission for use or enjoyment of intellectual property right has to be by the holder of the said intellectual property right. In other words the provider of service has to be the holder of related intellectual property right.
6.6. Now we have to see whether under these agreements foreign group companies are transferring any intellectual property right to the appellants, which could be covered under the definition of intellectual property right as given under Section 65(55a) of Finance Act, 1994. This definition of Section 65 (55a) says that it is any right to intangible property namely,
(a) trade marks,
(b) designs,
(c) patents or
(d) any other similar intangible property, under any law for the time being in force, but does not include copyright.
6.6.1. We find that foreign group companies by transfer of various documents etc are placing at the disposal of the appellants especially the technical knowledge which may be called technical information, technical know-how and trade secrets so that the appellant, an Indian company namely M/s. ABB Ltd. Bangalore could manufacture right kind of products which have been mentioned in the schedule of the respective agreement(s) as contract products.
6.6.2. The question now arises that what has been transferred under the respective agreements between the foreign group company and the appellant can be termed as right to intangible property which is either a trademark or design(s) or patent(s) or any other similar intangible property recognized as such under any existing Indian law (and when it is not a copyright under Indian Copyright Law); and then only such a right would be covered under the definition of Intellectual Property Right as defined in Section 65(55a) of the Finance Act 1994. From the documents on record which are various licensing agreements and submissions of the letters written on behalf of General Manager of the foreign company to the appellant concerning these respective license agreements, which are on record, we find that they do not anywhere say that they are the trademarks, designs, patents or other similar intangible property which are covered by any Indian law on the subject. However it is clear that under these transfer agreements the appellants have been given the right to assemble or manufacture various contracted products and the right to use or otherwise dispose of such products which is evident from the Clause 2.1 of the respective agreement(s). The contents of the Clause 2.1 of the License Agreement between ABB Sace S.p.A. Milano-Italy (Licensor) and the appellants (Licensee), are being reproduced below for making the scope of the subject agreement(s) more clear:-
CLAUSE 2 - LICENCES 2.1. Scope Licensor grants Licensee under Information and Intellectual Property Rights (if any):
(a) a non-exclusive right to assemble or manufacture the Contract Products in the Assembling or Manufacturing Territory;
(b) a non-exclusive right to use, sell or otherwise dispose of the Contract Products assembled/manufactured under this Agreement in the Sales Territory.
Export of Contract Products by Licensee to countries outside the Sales Territory is subject to the prior written approval of Licensor, always provided that Licensors decision shall comply with applicable compulsory legislation. 6.6.3. Important point here is whatever is under transfer by the foreign companies under the respective licenses, - is the said subject matter a right to an intangible property and is the said intangible property is a trademark or design or a patent or any other similar intangible property under an Indian law? Here we do not find any evidence to categorically hold that the technical information or technical know-how or the designs or patents or the documents etc which are the said subject matters, have been transferred are covered under any of the Indian laws namely Indian Trademarks Act or under Trade and Merchandise Marks Act or under Indian Patent Act 1970 or Indian Designs Act 2000 or any such related law.
6.7. Our attention has been drawn to the CBEC Circular F.No. B2/8/2004-TRU dated 10.09.2004 which was issued when the individual service namely intellectual property service (other than copyrights) was introduced by the Finance (No. 2) Bill 2004, which was enacted on 10.09.2004. In respect of Intellectual Property Service the said CBEC Circular in its para 9 says as below:
9.Intellectual property services (other than copyrights):
9.1 Intellectual property emerges from application of intellect, which may be in the form of an invention, design, product, process, technology, book, goodwill etc. In India, legislations are made in respect of certain Intellectual Property Rights (i.e. IPRs) such as patents, copyrights, trademarks and designs. The definition of taxable service includes only such IPRs (except copyright) that are prescribed under law for the time being in force. As the phrase law for the time being in force implies such laws as are applicable in India, IPRs covered under Indian law in force at present alone are chargeable to service tax and IPRs like integrated circuits or undisclosed information (not covered by Indian law) would not be covered under taxable services (emphasis supplied).
9.2 A permanent transfer of intellectual property right does not amount to rendering of service. On such transfer, the person selling these rights no longer remains a holder of intellectual property right so as to come under the purview of taxable service. Thus, there would not be any service tax on permanent transfer of IPRs.
9.3 In case a transfer or use of an IPR attracts cess under Section 3 of the Research and Development Cess Act, 1986, the cess amount so paid would be deductible from the total service tax payable (refer Notification No. 17/2004-S.T., dated 10-9-2004). 6.7.1. From the contents of above para 9 of CBEC Circular dated 10.09.2004 it is clear that the wordings under any law for the time being in force means the laws as applicable in India. It clarifies that IPRs covered under Indian Law in force alone are chargeable to service tax. It further says that IPRs like integrated circuits or undisclosed information (not covered by Indian law) would not be covered under taxable services of Intellectual Property Services. Revenue has not been able to prove in any manner that right to any of the intangible properties (by whatever name they call the same i.e. either documents or designs, instructions, catalogues, drawings, product software, testing specification, symbol numbering system, technical know-how, pictures and so on) is covered as IPR(s) under any of the relevant Indian law. In case of undisclosed information this CBEC circular itself says that an Indian law does not cover such undisclosed information. In other words, there is no evidence before us to categorically hold that any of the intangible properties, which are the subject matter(s) of the respective agreement(s), which have been transferred by foreign group companies to the appellant company have been registered or covered by any of the Indian law concerning intellectual property and which can be covered under the definition of Intellectual Property Right as given in Section 65(55a) of Finance Act, 1994. The appellants have mentioned in their submissions that by way of these agreements the technologies are being transferred by the foreign companies which were developed by them and are the exclusive property of the respective companies. The appellants state that these foreign companies transferred licensed use of their technical information, know-how and trade secrets which are not registered under any Indian law for time being in force. The appellants further state that foreign companies did not grant license to them any patent, copyright, design or any other similar intellectual property rights. The conclusive point here is that the subject facts and the conditions do not fulfill the ingredients of the definition of Intellectual Property Right as given in the Section 65(55a) of Finance Act, 1994.
7. During the hearing of the case the learned AR appearing for the Revenue has given certain technical literature on Patents, IPRs, Trade Secrets and Technical Know-How etc. but we find that the contents of the said technical literature do not help the case of the Revenue when the subject matter(s) of respective agreement(s) do not fulfill the criteria and conditions of the definition of Intellectual Property Right of Section 65(55a) of the Finance Act, 1994.
7.1. Revenue has also cited the case laws in the case of Indian Farmers Fertilizer Co-op. Ltd. Vs. CCE (supra) and Suolificio Chennai Vs. CST, Chennai (supra). We find that CESTAT, Delhi in the case of Indian Farmers Fertilizer Co-op. Ltd.(supra) mainly discussed the Consulting Engineer Services though it says that technical know-how as intellectual property is transferable and it also mentions that know-how as intellectual property can be referred as trade secret. It further says that trade secrets are not protected by law in the same manner as trademarks or patents. It states that trade secret is protected without disclosure of secret. But we do not find any support to the Revenue from this decision [IFFCO Vs. CCE, Bareilly (supra)] of CESTAT, Delhi. Revenue has also referred to CESTAT, Chennais decision in the case of Suolificio Chennai (supra) where it has been held that transfer of trademarks and drawings, prima facie covered under Intellectual Property Service. Again we do not find any assistance to the Revenue from this decision because firstly it is on the subject of Consulting Engineer Service and secondly we do find that the subject matter(s) of the agreement(s) between the foreign companies and the appellants in the present case are not covered under any Indian law concerning Intellectual Property Rights, which is the basic ingredient of the definition of Intellectual Property Right in Section 65(55a) of Finance Act. We again state that whatever is being transferred even if it is the design or drawings or other document or technical know-how, this has to be first covered under an Indian law on the subject of intellectual property right for declaring it an Intellectual Property Right for the purpose of inclusion of the transfer of said subject matters/documents etc. under corresponding taxable service namely Intellectual Property Service which has been further defined in Section 65(55b) of the Finance Act, 1994.
7.2. Further we refer to CESTAT, Mumbais decision in the case of Rochem Seperation Systems (supra). CESTAT, Mumbai has inter alia observed in the paras of the said decision as under:
8... 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. 7.2.1. Rochem Seperation Systems (supra) is the case that though discusses the issue of Intellectual Property Right it concluded there that the demand is time-barred, we are deciding the matter only on the basis of limitation. Further we refer to CESTAT, Mumbais decision in case of Tata Consultancy Services Ltd. (supra), where it held that intellectual property right not covered by Indian laws would not be covered under the taxable service in the category of IPR services. In this regard we are reproducing below paras 4, 4.1, 4.2 and 4.3 to make the position more clear:
4. The taxable service under consideration is defined under Section 65 (105)(zzr) to mean any service provided or to be provided to any person, by the holder of Intellectual Property Right, in relation to Intellectual Property Service. Intellectual Property Service is defined under Section 65(55b) to mean (a) transferring (temporarily) or (b) permitting the use or enjoyment of, any intellectual property right. And Intellectual Property Right as defined under Section 65 (55a) means any right to intangible property, namely, trade marks, designs, patents or any other similar intangible property, under any law for the time being in force, but does not include copyright.
4.1 Short question to be decided is whether the transfer of technical 'know how' received by the appellant is a service which may be categorized under "Intellectual Property Right Services". We find that the definition of Intellectual Property Right must be satisfied to term the services received by the appellant as Intellectual Property Right Services. We find no clue at all in the records as to which type of Intellectual Property Right is being assigned to the "Technical know how" received by the appellant. It is obvious from the definition of Intellectual Property Right that the right has to be a specific Right under a specific Law. Examples are given under the definition such as the Trade Mark which is a right provided under "Trade Marks Act". Similarly the right mentioned as 'design' in the definition is a right under the "Design Act". Therefore we find that the technical know-how received by the appellant and the royalty payment made by the appellant to Unisys is nowhere established to result from the use of any Intellectual Property Right.
4.2 We may further go on to add that the Intellectual Property Right should be a right under the Indian Law. Intellectual Property Right not covered by the Indian laws would not be covered under taxable service in the category of Intellectual Property Right Services. We are fortified in our view by Board Circular F.No. 80/10/2004-ST dated 17/9/2004 which clarified that "Intellectual Property emerges from application of intellect, which may be in the form of an invention, design, product, process, technology, book, goodwill etc. In India, legislations are made in respect of certain Intellectual Property Rights (i.e.IPRs) such as patents, copyrights, trademarks and designs. The definition of taxable service includes only such IPRs (except copyright) that are prescribed under law for the time being in force. As the phrase ''law for the time being in force'' implies such laws as are applicable in India, IPRs covered under Indian law in force at present alone are chargeable to service tax and IPRs like integrated circuits or undisclosed information (not covered by Indian law) would not be covered under taxable services".
4.3 We are fortified in our view by the Tribunal decision in the case of Rochem Separation Systems (India) P. Ltd. Vs. Commr. Of S.T. Mumbai-I 2015 (39) S.T.R. 112 (Tri. Mumbai) =2015-TIOL-120-CESTAT-MUM in which it was held that mere 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. 7.3. We also refer to CESTAT, Mumbais decision in the case of Thermax Ltd. (supra). CESTAT, Mumbai in the said decision has observed that the subject transaction has to satisfy the requirement of Section 65(55b) of the Finance Act, 1994 so as to cover the same under the service concerning Intellectual Property Right. We reproduce para 5.5 of the said decision which says that for any transaction to be covered under IPR services has to be first covered under the category of an IPR under an Indian law. CESTAT, Mumbai in the said decision in para 5.5 has observed as below:
5.5 From the above circular, it becomes very clear that to come under the category of IPR, there should be a law in India, Governing such IPR and only IPR covered under the Indian law in force are chargeable to Service Tax. It is well known that there is no law governing trade secrets/confidential information in India and therefore, the rights obtained by the appellant does not constitute intellectual property right as defined in law. Secondly, it is also very clear from the said Circular that a permanent transfer of intellectual property right does not amount to rendering of service. In the present case, the appellant has become a co-owner of the intellectual property which would mean that the transfer is permanent. Therefore, the transaction does not come under the purview of Section 65(55b) of the Finance Act, 1994.
8. Based on the above discussions, analyses and the case laws quoted it is our considered conclusion that the subject matter(s) of transfer of various documents/drawings, designs, softwares, catalogues, technical assistance/training documents/symbol numbering system etc., done under respective agreements which are on the record of these proceedings are not covered under the definition of Intellectual Property Right as given in Section 65(55a) of Finance Act 1994 and consequently subject transfers of right to intellectual property, if any, covered by those transactions do not come within the definition of Intellectual Property Service given in Section 65(55b) of the Finance Act, 1994 and the service(s) if any, provided by the foreign companies by way of transfer of subject matter(s) under respective agreements to the appellants cannot be covered under the taxable service of Intellectual Property Service as defined under Section 65(105)(zzr) of the Finance Act, 1994. Therefore, appeal is allowed with consequential benefits, if any, to the appellants.
(Order pronounced in open court on )
(ASHOK K. ARYA)
TECHNICAL MEMBER (S.S GARG)
JUDICIAL MEMBER
iss