ST - It is well established in law that measure of taxation does not determine nature of taxation - fact that royalty paid for providing technical services is determined on basis of Net Sales does not mean that engineering consultancy services was not provided: CESTAT
By TIOL News Service
MUMBAI, DECEMBER 20, 2014: THE appellants entered into a Technology Licensing Agreement with Schenectady International Inc (SII) for supply of technical knowhow and technical services. Under the Agreement, SII was to render certain technical services. The appellants were to pay a lump sum of US$ 500000 for transfer of technical knowhow and royalty at the rate of 4% of Net sales for receiving technical services from SII.
The department had demanded Service Tax under reverse charge on these amounts paid by the appellant. The Commissioner dropped the ST demand on 'technical knowhow' but confirmed the demand on royalty under the category of Consulting Engineer Service for the years 1999-2000, 2000-2001& 2001-2002and on the development expenses incurred.
The appellant is before the CESTAT.
It is submitted there are a plethora of judgments which have held that Consulting Engineer Service by its very definition relates only to Consultancy provided by a 'firm', as the service was defined during the period in dispute and the appellants are not covered by the term 'firm'. Secondly, what is paid to the principal is royalty which was not leviable to service tax at the relevant time and in any case the royalty is paid as a percentage of net sales and, therefore, cannot be termed as a service. Thirdly, the SCN was issued in September 2003 whereas royalty for the years 2000-2001 and 2001-2002 was paid only in February 2004. Therefore, the demand is not sustainable because during the period in dispute service tax was payable only on receipt of payment. Lastly, the developmental expenses are on account of completing the technology into manufacturing facility, representing pre-operative expenses incurred by the appellant themselves in India and, therefore, there is no question of rendering of any service in this case to the appellants.
The Bench inter alia observed–
++ As regards the development expenses, the fact that these expenses were incurred by the appellant in India and were not paid to SII, proves that no service has been rendered to the appellant. There is no finding whatsoever by the Commissioner as to why service tax should be demanded on these expenses. The Commissioner's order is very vague and without reasoning. We have no hesitation in holding that service tax is not payable on the development expenses.
++ Article 7.2 of the Technology Licensing Agreement referring to payment of royalty states that "in consideration of SII providing technical services to the Indian Company, the Indian company shall pay to SII royalty at the rate of 4% on the Net Sales subject to…".
++ We do not agree with the argument that the service provided is Intellectual Property Service and service of Engineer Consultancy is not provided, notwithstanding the fact that the royalty is paid for such services which is determined on basis of Net Sales. It is well established in law that measure of taxation does not determine the nature of taxation.
++ But the pertinent fact of this case is that whereas the SCN was issued in September 2003, the royalty on account of technical services for the years 2000-2001 and 2001-2002 was paid in 2004. The service tax provisions under the STR, 1994, as applicable during the period in dispute, clearly provided that service tax is payable when the value of taxable services is received. Therefore, clearly service tax was not leviable on royalty paid for the years 2000-2001 and 2001-2002. Having held that the royalty was on account of providing technical services in India and such technical services are clearly covered under the Consulting Engineering Services, tax is leviable for the year 1999-2000 as agreed to by both sides. The amount of service tax payable at the rate of 5% which was the prevailing tax rate at that time, works out to Rs.2,89,777/-.
++ As regards penalty we find that leviability of tax under the Consulting Engineer Service provided by a firm or Intellectual Property Service was a matter not clear from doubt. Therefore this is not a fit case for imposition of penalty.
The appeal was disposed of.
(See 2014-TIOL-2578-CESTAT-MUM)
