By TIOL News Service

MUMBAI, SEPT 09, 2013: THE appellant entered into a Memorandum of Understanding (MOU) with its subsidiary M/s Air India Charters Ltd. (AICL) with effect from 1.4.2005 and operational from 1.3.2008. As per the said MOU, M/s AICL was permitted to operate low cost carrier flights to Gulf Sector by using Air India's International Traffic Rights to Gulf countries and AICL was also permitted to use Air India's brand name "AI" to carry out low cost carrier operations. Further, Air India was also to provide domain knowledge to AICL. In consideration thereof, AICL agreed to pay royalty of 25% of the revenue collected by low cost carriers to Air India. The department was of the view that the services rendered by Air India to AICL would come within the category of Intellectual Property Rights Services.

Accordingly,a show-cause notice took wings on 1.6.2009 demanding the Service Tax of Rs.29,74,75,042/- along with interest thereon and proposing to impose penalties.

The CCE, Thane-II confirmed the demand with aplomb.

Already in the red, the appellant is before the CESTAT and submits -

+ that the Board of Directors of Air India as also AICL in the meeting held on 16.03.2008 decided to modify the MOU dated 24.03.2006 as per which the revenue earned by the AICL is shared between Air India and AICL in the ratio of 25: 75 respectively, retrospectively from 1.4.2005 in return for the forbearance on the part of Air India on not operating on certain routes hitherto being operated by Air India; that a similar resolution was passed by the Board of Directors of AICL also.

+ that charges against the appellant that the royalty payment received by them is for using their brand name loses significance and accordingly, the demand is not sustainable.

Nonetheless, it is submitted that the resolutions of Board meeting were not produced before the adjudicating authority at the relevant time.

The Revenue representative submitted that the MOU has been retrospectively amended with a view to escape Service Tax liability by changing the terms and conditions of the agreement. Nevertheless, it is submitted that the matter can be remanded back to the adjudicating authority for consideration of minutes of the Board's meeting and the appellant be put to terms at the time of remand.

The Bench observed -

"5.1 As per the original agreement, royalty was paid to the appellant for three purposes:-

(a) Foregoing the rights to operate in the Gulf region.

(b) Allowing M/s AICL to use the brand name of Air India, and

(c) For sharing the domain knowledge.

However, the Service Tax demand has been made on the whole amount of royalty without explaining how foregoing of rights or sharing of domain knowledge would come under the Intellectual Property Right Services. There is not even a whisper about the services rendered in this regard by the appellant to M/s AICL. Therefore, confirmation of demand on the entire amount of royalty received is not sustainable in law.

5.2 As regards the question what should be the consideration for usage of brand name, there are methods available for doing this by expert in the field. The department does not seem to have utilized the services of expert in assessing the value of the brand and its usage. In the absence of such an assessment, it is difficult to sustain the impugned demand. The appellant themselves has amended their MOU retrospectively, wherein it has been provided that the royalty is payable only for foregoing their rights in operation in certain routes. The authority should have examined whether such retrospective amendment of the MOU is permissible or not. Since the appellant is a Government of India Undertaking and has been ailing for a long time, we consider it appropriate not to order any pre-deposit."

In fine, after waiving the requirement of pre-deposit of the adjudged dues adjudged, the matter was remanded to the adjudicating authority.

(See 2013-TIOL-1329-CESTAT-MUM)