ST - Transfer of technical knowhow is not consultancy envisaged for taxation by section 65(105)(za) of FA, 1994 - Demand set aside: CESTAT
By TIOL News Service
MUMBAI, APR 12, 2016: THE CCE, Raigad confirmeda service tax demand totaling Rs.1,56,71,018/- for the period from April 2004 to March 2009 with interest and penalties.
The appellant is said to have rendered ‘Scientific or technical consultancy service' chargeable to service tax under section 65(105) (za) of Finance Act, 1994 to M/s Doctors' Organics Chemicals Ltd and M/s Bravo Healthcare Ltd. The tax liability that has been confirmed for rendering this service to the two recipients was held to be Rs.112,80,000/- and Rs. 34,71,924/- respectively.
The appellant also has allegedly rendered ‘Business auxiliary service' chargeable to tax under section 65(105)(zzb) of Finance Act, 1994 to M/s Doctors' Organic Chemicals Ltd by providing material procurement assistance as per agreement dated 6 th February 2006. The tax liability on this count has been confirmed at Rs.9,19,094/-.
In appeal before the CESTAT, the appellantsubmits that they are not liable to pay tax as their activity is not covered by the definition of ‘scientific or technical consultancy' and the agreement that has been cited to sustain the demand is for transfer of technical knowhow. It is also claimed that in relation to services rendered to M/s Doctors' Organic Chemical Ltd. which merged with the appellant in accordance with the rehabilitation scheme under the Sick Industrial Companies (Special Provisions) Act,1985, the tax liability after 1 st April 2007 cannot arise as it would be tantamount to taxing service rendered to itself.
Reliance is also placed on the following decisions in support viz. Hindustan Aeronautics Ltd. - 2015-TIOL-895-CESTAT-MUM, Universal Pharmacy - 2015-TIOL-1897-CESTAT-MUM, RMDhariwal (HUF) - 2013-TIOL-1897-CESTAT-MUM and Just Textiles Ltd - 2013-TIOL-2112-CESTAT-MUM.
The AR while reiterating the contents of the order impugned submitted that the takeover of M/s Doctors' Organic Chemicals Ltd was a consequence of conversion of the royalty amount unpaid into shares and hence, in accordance with section 67 of FA, 1994, the value of the company taken over is taxable as gross receipts for rendering the service.
The Bench adverted to the cited decisions and inter alia observed -
| Scientific or technical consultancy service: |
++ The Tribunal has held (in cited cases) that the tax liability will arise only when the consultancy is provided by a ‘science or technology institution or organisation' and that transfer of technical knowhow is not the consultancy envisaged for taxation by section 65(105)(za) of Finance Act, 1994.
++ Transfer of their proprietorial knowhow does not require adaption to industrial ambience but, being tried and tested, is usable as such; hence, they do not qualify as scientific or technical consultancy and, while not ruling out taxability elsewhere, is not within the ambit of section 65(92) of Finance Act, 1994.
| Business auxiliary service: |
++ The appellant has been procuring material for M/s. Doctors' Organic Chemicals Ltd under an agreement and the period for which that activity was undertaken predates the incorporating within the structure of the appellant. Section 65(19) of Finance Act, 1994 incorporates procurement of goods or services, which are inputs for the client as ‘business auxiliary service'. The claim of appellant that this has reference to a third party is not acceptable as, in the present instance, the client is M/s Doctors' Organic Chemicals Ltd. Hence, the taxability of amounts charged form the client is not in doubt.
In fine, the impugned order was upheld only to the extent of Rs.9,19,094/- for rendering ‘Business auxiliary service' with interest thereon. The demand of service tax for rendering ‘scientific or technical consultancy service' was set aside. Penalties too were set aside.
(See 2016-TIOL-867-CESTAT-MUM)
