Castrol Ltd., Uk and Castrol India Vs. the Commissioner of Central - Court Judgment

Excerpt:
1. the above appeals arising out of the two separate orders of the commissioner of central excise involve common issues and are heard together and disposed of by this common order.2. in appeal no. st/206/06, the commissioner has levied service tax of rs. 4,04,23,400/- on castrol ltd., uk, for the period 1997 to 2001 on the ground that as per the agreement of transfer of technology and know-how, services rendered by them were covered under the category of "management consultancy services" and, therefore, being the provider of services, the uk company was required to discharge service tax liability. in appeal no. st/207/06, which covers the period 2002 to 2003, the indian company i.e., castrol india ltd., being the recipient of such services has been held liable to pay service tax of rs......

Judgment:
1. The above appeals arising out of the two separate orders of the Commissioner of Central Excise involve common issues and are heard together and disposed of by this common order.

2. In Appeal No. ST/206/06, the Commissioner has levied service tax of Rs. 4,04,23,400/- on Castrol Ltd., UK, for the period 1997 to 2001 on the ground that as per the agreement of transfer of technology and know-how, services rendered by them were covered under the category of "Management Consultancy Services" and, therefore, being the provider of services, the UK company was required to discharge service tax liability. In Appeal No. ST/207/06, which covers the period 2002 to 2003, the Indian company i.e., Castrol India Ltd., being the recipient of such services has been held liable to pay service tax of Rs. 1,11,46,800/- + Rs. 1,81,68,000/-. In the first appeal penalty of amount equal to service tax amount has been imposed on the UK company under the provisions of Section 76 and 77 of the Finance Act, 1994 and penalty of amount equal to tax has been imposed on the UK firm under the provisions of Section 78 and further a penalty of Rs. 500/- has been imposed under the provisions of Section 75A. In the second appeal, the penalties on Indian Company are equal to the amount of service tax confirmed under the provisions of Section 76 & 77 and there is also an other penalty of amount equal to service tax under the provisions of Section 78, plus a penalty of Rs. 500/- under the provisions of Section 75A.3. We have heard both sides and carefully perused the relevant clauses of the agreement in the case of Appeal No. ST/206/06 and the agreement is dated 21/06/93 and valid for a period of seven years, and in Appeal No. ST/207/06, the relevant agreement is dated 16/08/2001. The relevant clauses of the agreement dated 21st June 93 are re-produced herein below: (A) "Castrol is carrying on the business of blending and producing various types of lubricants, brake fluids, greases in the UK and has extensive experience and expertise at Laboratory and Plant level in blending and producing lubricating oils, brake fluids, greases and speciality chemicals.

(B) The Indian company is blending and producing in India the lubricating oils, brake fluids, greases and speciality chemicals but it recognizes that by virtue of the total change in the entire industry in India and particularly the automobile industry, it has become necessary for the Indian company to improve the quality of its products and to obtain continuous upgradation of its product ranges to meet the changed demand in India. Accordingly the Indian Company has requested Castrol to impart to it the benefits of specialized technology and technical services and know how in the UK to enable it to blend, produce and market Castrol products (herein after defined) in most efficient manner and which Castrol has agreed to do subject to the terms and conditions herein after contained.

4. The relevant clauses of the agreement dated 16th August 2001 are reproduced herein below: (A) "Castrol, UK has long been engaged in the business of blending and producing various types of lubricants and in the research and development, manufacture and sale of automotive lubricants, lubricating oils and other oils and greases and ancillary materials used in connection therewith; and (B) Castrol India has requested Castrol UK to impart to it the benefits of specialized technology and technical services to enable Castrol India to blend, produce and market the products (hereinafter defined) in the most efficient manner and which Castrol UK has agreed to do subject to the terms and conditions hereinafter contained.

(C) Castrol UK is willing to grant such right and licence to Castrol India subject to the terms and conditions hereinafter contained.

"the Products" - the products referred to in Schedule-1 hereto as amended from time to time by written agreement between the parties.

5. From the above, it is clear that the technical know-how rendered by the UK Company to Indian Company relates to the goods to be manufactured in India. The definition of "Management Consultant", which is contained in Section 65(65) is as under: Management Consultant", means any person, who is engaged in Providing any service, either directly or indirectly, in connection with the management of any organization in any manner and includes any person, who renders any advice, consultancy or technical assistance, relating to conceptualizing, devising, development, modification, rectification or upgradation of any working system of any organization.

6. The services rendered by the UK Company to the Indian Company can by no stretch of imagination be considered as falling within the definition of "Management Consultant" as set out above. The contention of the Ld. SDR that since the agreement dated 29/03/93 refers to request of the Indian Company to the UK Company to impart benefits of specialized technology and technical services and know-how in the UK to enable it to blend, produce and market Castrol products and since marketing will fall within the definition of working system of an organization, service tax has rightly been confirmed under the heading of Management Consultant", is not tenable as we do not find any force in the above submission that know-how for marketing the product is in relation to the working system of the organization. Both, the 1993 as well as 2001 agreements provide for payment of royalty in UK in Pounds Sterling on sale of all the products manufactured by the Indian Company and it is further provided that if in any financial year the Indian Company has no profits, no royalty will be payable to Castrol UK. This only reinforces the view that payment is for the services rendered in relation to the products and royalty is payable on sale of products.

7. Since the services rendered by the UK company to the Indian Company do not fall within the category of service rendered by Management Consultant, we hold that service tax demands in both the cases and penalties are not sustainable and accordingly set aside the same and allow the appeals.