By TIOL News Service

MUMBAI, JAN 15, 2013: THE appellant is a manufacturer of Ion exchange resins. In USA, one Shri Narendra Singh who was working with M/s Purolite International Ltd., a competitor of the applicant, left the job and provided trade secret for manufacturing of ion exchange to the applicant. M/s Purolite International Ltd. filed a suit in the USA court and the applicant was charged with using the trade secret of M/s Purolite International Ltd. Court proceedings were initiated against the applicant.

Not to escalate the matter further and be saddled with damages of astronomical proportions, the applicant entered into an agreement with M/s Purolite International Ltd., to settle the dispute out of court. As per the settlement, they paid consideration for the use of trade secret and became the co-owner of the Purolite's technology and information transferred by Shri Narender Singh to the applicant.

Revenue found this "out of court settlement" and took a view that the consideration paid by the applicant to Purolite is covered under Intellectual Property Service under reverse charge mechanism and, therefore, the applicant is liable to pay service tax on the entire consideration.

Proceedings were initiated and this resulted in a confirmation of demand of Service tax of Rs.18,05,50,717/- along with imposition of equivalent amount of penalty under section 78 of the FA, 1994 by the CCE, Pune I.

The appellant is before the CESTAT with a Stay application.

It is submitted that the consideration is not for the service rendered but an out of court settlement of dispute between them and Purolite . It is further submitted that the applicant has become co-owner of the technology used by the Purolite with undivided shares. Moreover, the activity of transfer of trade secret i.e. technology and information is not covered under the definition of Intellectual Property Right for applicability of Service Tax and hence the demand is not sustainable.

The Revenue representative submitted that the adjudicating authority has correctly saddled the appellant with the service tax liability and pre-deposit of the entire demand is warranted.

The Bench observed -

"6. The 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. While framing the charge against the applicant, the adjudicating authority has not specified specifically under which part of the Intellectual Property Right applicable in India the applicant is covered.

7. In view of the above observations the impugned demands are not sustainable. Therefore, prima facie the applicant has made out a case for waiver of pre-deposit of the entire demand. Accordingly, we grant waiver of pre-deposit of dues adjudged in the impugned order and stay recovery thereof during the pendency of the appeal."

For the record: Thermax paid USD 38 million, about Rs 178 crore, in four equal instalments of USD 9.5 million by the end of 2010 as part of an out-of-court settlement with Purolite International , the US-based company with which it had a five-year-old dispute over trade secrets. Under the terms of the agreement, both the companies are co-owners in perpetuity of the disputed trade secrets. The agreement also resolves all claims and counter-claims even over people, with no further financial obligations on this account.

Now what...?

(See 2013-TIOL-94-CESTAT-MUM)