Full Judgment
Pinnacle Industries Ltd. are engaged in the manufacture of furniture and motor vehicle parts. They entered into an agreement with M/s.
Saporiti, Italy (a foreign company) on 23.11.1998 for availing the benefit of technical know-how for manufacture of furniture and also sale thereof in India. The agreement entered into by them reveals the following two aspects: (1) Clauses 13 to 15 of the agreement refers to the technical know-how rendered by the foreign company against a lumpsum consideration of US $ 90,000/-.
(2) Clause 16 relates to the payment of royalty on all items of furniture manufactured and sold by the Indian company with the help of know-how received from the foreign company @ 5% of the ex-factory sale price of such products invoiced by the Indian company.
2. A show cause notice was issued to them on 13.10. 2003, demanding service tax on "consulting engineer", besides contemplating penalty and interest. The case was adjudicated by the Assistant Commission vide his Order-in-Original dated 17.3.2004. They were found liable to pay service tax along with interest as the service was received by them under "consulting engineer" who does not have any office in India and also in terms of Rule 2(1) of the Service Tax Rules 1994 as amended vide Notification No. 12/2002-ST dated 1.8.2002. The respondents were also imposed a penalty. Being aggrieved, the respondents went in appeal before the Commissioner (Appeals). The Commissioner (Appeals) in his Order-in-Appeal made the following observations: The appellants are contesting the findings of the adjudicating authority mainly on the ground that they are not liable for service tax on the royalty amounts paid by them. There is a lot force in the appellant's contention in this regard and also of the view that amounts paid in 2000-01, 2001-02 and 2002-03 towards royalty cannot be considered as technical know-how fees. Accordingly I have no hesitation in holding that the demand made in the impugned order is not sustainable and hence I set aside the same. The penalty imposed on the appellants is also set aside as the duty demand is not sustained.
3. Now the Revenue has filed this appeal before us. The learned authorised representative of the department for the Revenue reiterates the grounds of appeal. He has clarified that the limited issue here is whether rendering technical know-how amounts to rendering service as a consulting engineer. He refers to the Distribution and Technical Collaboration Contract (DTCC) entered into between the two parties and points out that on 16.8.2002 an amendment has been brought in the Service Tax Rules which makes the service recipient liable to pay service tax if the service provider were in a foreign country.
According to him royalty is a consideration for service and hence it represents the value of service. The contention of the learned representative is that in this case particularly the rendering of technical know- how amounts to a service. On being asked, he also clarifies that out of a sum of Rs. 1,98,053/- which was the balance demanded on account of royalty, the Revenue is contesting only in respect of Rs. 1,67,977/- which has become payable after the said amendment on 16.8.2002. The learned consultant to the respondents argues that royalty is only a share of profit and to support his contention he relies upon the Tribunal's decision in Navinon Ltd. v.Commissioner of Central Excise, Mumbai-VI . It was held here that royalty represents sharing of profit reserved by owner for permitting another person to use his property. Para 5 of the said order reads as under: 5. The amounts, which the appellants have to remit to M/s. Ciba Geigy Ltd., Switzerland, are mentioned in the agreement under the heading "royalty". Payments of royalty in the common parlance are not insisted Page 502 as payment for a service provided. It is understood as a share of product or profit reserved by owner for permitting another the use of his property. Royalty payments in the present case for the use of technology and know-how cannot be equated with any services to be provided by M/s. Ciba Geigy Ltd. to the appellants and therefore, the order of the lower authorities attracting a levy of tax on royalty payments made are required to be set aside.Aviat Chemicals P. Ltd. v. Commissioner of Central Excise (Service Tax), Mumbai according to which leasing on sale of trademark is merely a transaction in tangible property and not a consultancy or advice. Service tax is not payable in respect of receipts under agreement allowing use of trade mark to other manufacturers.
4. Heard both the sides. A careful reading of the contract (DTCC) reveals that what was charged by the foreign company is actually a technical know-how fee and this amount was to be paid initially by the respondents and as regards the royalty is concerned this was to be paid by the respondents @ 5% of the ex-factory price of their clearance in every quarter. This was also paid for their right to use the brand name "Saporiti Claasics". The learned Consultant to the respondents relies upon the Tribunal's order in the case of Bajaj Auto Ltd. v.Commissioner of Central Excise and Customs, Aurangabad . The Tribunal has held here that royalty for right to use trade mark is a transaction in property and no consultancy or advice is involved and the same is not liable to service tax.
5. After going through the agreement carefully and after hearing both the sides, we are of the view that royalty charged cannot be taken as a consideration for the service. It is rather a fee between the two contracting parties to be paid for sharing mutual benefits/profits. In view of this, we dismiss the appeal filed by the Revenue.
6. The memorandum of cross-objection filed by the respondents in this case is accordingly disposed of.