By TIOL News Service

MUMBAI, JULY 19, 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.

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.

Revenue came to know of 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 Bench while granting stay (2013-TIOL-94-CESTAT-MUM) 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."

The appeal was heard recently.

The appellant adverted to the definition of "Intellectual Property Right" mentioned in section 65(55a) of the FA, 1994 and submitted -

+ Trade Secret or confidential information has not been declared as an intellectual property right in India and there is no law passed by the Parliament in respect of trade secret/confidential information. Therefore, the trade secret/confidential information procured by them from Purolite USA is not an intellectual property right under the Indian laws and therefore, the provisions of Section 65 (55a) do not apply.

+ The appellant relies on the decision of the Unites States District Court for the Eastern District of Pennsylvania dated 14/01/2010 in the case of Brotech Corporation and Purolite Company (Plaintiff) in Civil Suit No.05-CV-2330. As per the decision of the said Court, the rights acquired by Thermax in contravention of law of the Purolite Technology was trade secret and/or confidential information. Accordingly, an injunction was passed against Thermax from utilizing the said technology in India. In order to overcome the adverse legal decision, Thermax entered into an agreement with Purolite USA by way of an out of Court settlement as per which Thermax was required to pay a compensation of US $ 3.8 Crore to Purolite and on payment of compensation, Thermax became a co-owner of the Purolite Technology. Thereafter the appellant applied to the RBI seeking permission to remit the foreign exchange to Purolite, USA, and vide permission dated 16/02/2010, RBI granted permission to Thermax Ltd. for remittance of US $ 3.8 crore for final settlement in respect of the aforesaid case. As per the agreement, Thermax became the co-owner of the Purolite technology and being a co-owner was entitled to all the rights relating to said IPR including its use, assign, sell, transfer, license, etc. Thus it is not a case of temporary transfer of an IPR or permitting the use of enjoyment of any intellectual property right as defined in Section 65 (55b) and therefore, the transaction does not come within the category of intellectual property right service as defined in the Finance Act, 1994.

The appellant also referred to the decision of the Court of Settlement of UK {MAN/92/454 (VTD 9548)} and the CESTAT decision in CCE, Mumbai Vs. Ratnatraya Heat Exchangers Ltd., - (2011-TIOL-1538-CESTAT-MUM) wherein a question arose whether compensation received from the Insurance Company for the damages suffered could be treated as consideration for sale of the goods and it was held that since the compensation was towards damages suffered it cannot be treated as a consideration for sale.

The definition of ‘co-owner' as explained in Salmond on Jurisprudence, 12 th Edition, page 18

Black's Law Dictionary, K Y Aiyer's judicial Dictionary 13th Edition & Mulla's The Transfer of Property Act, 1882, 9 th Edition was also referred to submit that the appellant is a co-owner of the trade secrets and is not a recipient of any IPR Service.

The Revenue representative submitted that the agreement between the appellant and Purolite related to certain processes relating to production of plastic resins; that under the Indian law, patents can be made both for products as well as processes; therefore, in the impugned case, the processes obtained by the appellant from Purolite, USA is patentable and hence it could be considered as an intellectual property right coming within the category of patent and receipt of such services is taxable under Section 65 (55a); that the agreement provides for use or enjoyment of said IPR by the appellant and, therefore, the definition of intellectual property service under Section 65 (55b) is also satisfied and therefore, the appellant is liable to pay service tax on the transfer of IPR by Purolite under reverse charge mechanism and the order is sustainable in law.

The Bench referred to the definitions of intellectual property right, intellectual property service and taxable service as given in Section 65 (55a), 65 (55b) and 65 (105) (zzr) and observed -

"5.2 From the above, to constitute a intellectual property it should be either a trade mark, design patent or any other similar intangible property under any law for the time being in force in India. As per the decision of the US District Court of Pennsylvania, the information obtained by Thermax in contravention of the US law was relating to Purolit's trade secrets and/or confidential information. In that case, the appellant herein, Thermax contested that the information related to expired patents and therefore, use of these processes did not involve Purolite's trade secrets. This contention of Thermax was rejected by the Court held that the formula pertaining to the processes were trade secrets or confidential information. If that be so, the department cannot take a different stand about the nature of the right involved in the transaction. It is well settled that there is no law relating to the trade secrets or confidential information in India. Therefore, the trade secrets obtained by Thermax from Purolite, USA is not an intellectual property right as defined in Section 65 (55a)."

After taking note of clause 9 of the agreement, the Bench further observed -

"5.4 In other words, Thermax became a co-owner of the intellectual property right and was entitled to use, assign, sell, license, transfer or convey their interests in the in the said trade secret/information. In other words, it was not a temporary transfer of an intellectual property right or a permission to use or enjoy the intellectual property right. The transaction involved ownership of the intellectual property right and therefore, the transaction does not satisfy the requirement of Section 65 (55b). In this regard, the circular issued by the Board at the time of introduction of IPR service [Circular 80/2004-ST dated 17/09/2004] is relevant and the same is reproduced below:

"x x x"

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."

The Bench also referred to the decision in Royal Western India Turf Club Ltd. - (2012-TIOL-1145-CESTAT-MUM) and observed that neither in the show-cause notice nor in the impugned order there is any mention of the type of Intellectual Property acquired by the appellant.

Holding that the said decision and the decision of the UK Tribunal relied upon by the appellant wherein it was held that payment received as out of Court settlement would not amount to supply of any service applies to the facts of the present case, the Bench concluded that the transaction in question cannot be considered as a taxable service.

In fine, the order was held as not sustainable in law and the appeal was allowed.

(See 2013-TIOL-1092-CESTAT-MUM)