Unreported Decisions – ST – February 2019

By Vinay Jain & Sachin Mishra, Advocate

1. Whether royalty paid for ‘know-how’ received from outside India for technological enhancement of manufacturing facility in India be chargeable to Service tax under the category ‘Intellectual Property Services’ under reverse charge?

Facts & Pleadings: 

M/s. Welspun Maxsteel Ltd. (hereinafter referred to as ‘Appellant’), subsequently amalgamated into JSW Salav Steel Ltd., is engaged in the business of manufacturing hot briquettes, iron and sponge iron. For technological enhancement of their processes, they entered into an agreement with a M/s. HYL Technologies, a Mexican entity, for basic engineering for a consideration of USD 900,000, for providing Know-how for a license fee of USD 200,000 and royalty of USD 900,000. The appellant discharged Service Tax on consideration for basic engineering and license fee, under the reverse charge as ‘Engineering Consultancy Services’.

The Department alleged the Royalty paid by the appellant is consideration for transfer of ‘Intellectual Property Right’. Therefore, service tax is leviable on the same under reverse charge.

The appellant contended that the definition of ‘Intellectual Property Right’ in Section 65(55a) of the Finance Act, 1994, prior to the amendment of 2012, restricts the scope of the term to only those rights which are enforceable in India. Since know-how has not been recognised in Indian Laws, royalty cannot be subjected to service tax. The appellant further stated that no demand of service tax can be raised on royalty payments made by the appellants to the foreign collaborator as royalty is not a consideration for rendering any service.

Judgment: The Hon’ble CESTAT observed that any service which cannot be included within the ambit of Rule 3 of the Taxation of Service (Provided from Outside India and Received in India) Rules, 2006 shall be considered to be exempt from levy of service tax. The Hon’ble CESTAT followed Catapro Technologies vs. CCE, 2017 (48) STR 94 (T), to held that in order to fall under the provision of Section 65(55a) of Finance Act, 1994 the ‘Intellectual Property Right’ must be acknowledged in India under the laws governing IPR. The Hon’ble CESTAT further observed that the provisions of the Finance Act, 1994 deem a service recipient to be the provider in cases where the service is being provided from outside India, however, there is no such provision that deems service recipient to be the possessor of intellectual property. The same can only be determined by laws governing Intellectual Property Rights. Therefore, the demand was held to be unsustainable in law.

JSW Salav Steel Ltd. v. CCE Raigad, CESTAT Mumbai, decided on 14-01-2019 in Appeal No. ST/85777/2013

JSW Salav Steel Ltd.

2. Whether providing cranes on hire to ONGC along with operators and operated as per the requirement of ONGC can be subject to service tax under the category of “Business Auxiliary Service” as “procurement of goods for client” for the period 01-07-2003 to 30-04-2006?

Facts & pleadings: Dewanchand Ramsaran Corporation Pvt. Ltd (hereinafter referred to as the ‘Appellants’) entered into an agreement with ONGC to provide cranes on a hire basis, along with manpower to operate them. The cranes were made available along with operators and operated as per the requirement of ONGC. For this, the appellant received consideration in the form of operational charges and empty run charges.

The Department alleged that the services provided by the assessee will qualify as “Business Auxiliary Service” as “procurement of goods which are inputs for clients”.

The appellant contended that the contract was purely that of hiring of cranes and the same cannot qualify as “Business Auxiliary Service”. The appellant also contended that service, at best, qualifies as “Supply of Tangible Goods for Use”, which was introduced only in 2008. Therefore, the demand is unsustainable.

Judgment: The Hon’ble CESTAT held that the contract for hiring of cranes is only between two parties and in no way involves any third person, hence the same cannot be considered as “procurement of goods which are inputs for clients”. Evidently the activity has not been carried out on behalf of ONGC. Accordingly, the Hon’ble CESTAT held that since the appellant is not doing any act on behalf of the other party, there is no “Business Auxiliary Service” being provided by them in present matter. The Hon’ble CESTAT further observed that at best, this transaction could be covered under the category of “Supply of Tangible Goods for Use” which was introduced in 2008, which cannot be retrospectively invoked. Therefore, the demand for tax was held to be unsustainable in law.

Dewanchand Ramsaran Corporation Pvt. Ltd vs. Commissioner of Central Excise, Dibrugarh, CESTAT Kolkata, decided on 11-12-2018 in Appeal No. ST/102/2009 and ST/129/2009.

Dewanchand Ramsaran Corporation Pvt. Ltd.

Note: The Whole decisions can be downloaded from the CTC website www.ctconline.org under Knowledge Centre.