By TIOL News Service

MUMBAI, AUGUST 02, 2014 : THE appellant had an agreement with their foreign counterparts for development and supply of various services including design and drawing services. The agreement also envisaged transfer of technology so that these could be used in the manufacture and supply of the various products by the appellant in India. These agreements also provided for sale of the intellectual property rights contained in the various products that have been supplied. In other words, the transfer of IPR contained in the products was of a permanent nature and it was not a temporary transfer. The appellant imported drawings and designs by filing bill of entry and declaring the entire consideration paid to the foreign supplier and these bills of entries were assessed to duty and the goods were cleared. Since the transaction involved transfer of technical know-how, the appellant also discharged R&D Cess under Section 3 of the R&D Cess Act.

The jurisdictional CE authorities at Pune were of the view that the drawings and designs imported by the appellant amounts to import of ‘design services' and, therefore, it is liable to service tax under Section 65(105)(zzzzd) under the category of ‘Design Services'.

The appellant disagreed and, therefore, proceedings were initiated which resulted in confirmation of a Service Tax demand of Rs.21,79,28,167/- along with penalties and interest.

Before the CESTAT, the appellant inter alia placed reliance on the decisions in Mitsui & Co. Ltd. [2010-TIOL-479-CESTAT-KOL] & Associated Cement Companies Ltd. [2002-TIOL-08-SC-CUS] wherein it is held that if the liability to Customs duty has been discharged including the value of the services rendered, the same transaction cannot be held liable to service tax under IPR services or Consulting Engineering Services. It is also submitted that the demand is time barred since the transactions were declared to the competent authorities at the relevant time.

The Bench observed –

++ From the records it is clear that the appellant has imported drawings and designs in terms of the product services agreement with the foreign entity and have declared the entire consideration paid as value for the purpose of customs duty and the customs duty liability has been discharged accordingly.

++ Therefore, the entire transaction was treated as supply of goods for the purpose of customs duty and if that be so, we do not understand how the very same transaction can be treated as supply of service and levy of service tax can be made on the entire value of transaction once again.

++ We also find merit in the contention of the appellant that the entire transaction is one of transfer of technical know-how inasmuch as R&D cess under Section 3 of the R&D Cess Act has been paid and, therefore, the transaction does not merit to be treated as ‘design services'.

++ We also note the contention of the appellant that the design services would come within the category of IPR inasmuch as the supply of the drawings and designs, the foreign entities have applied for patent and since the transfer is of permanent nature, it does not fall within the definition of IPR services as defined in the Finance Act, 1994.

++ We also note that the appellant has declared the transaction to the concerned authorities at the relevant time and there is no suppression of any fact or withholding of any information from any of the authorities. Hence the bulk of the demand would become time-barred.

Holding that the appellant has made out a strong case for grant of stay, the Bench granted unconditional waiver from pre-deposit of the dues adjudged and stayed recovery thereof during the pendency of the appeals.

(See 2014-TIOL-1397-CESTAT-MUM)