Brief Facts of the Case€¦ · Web view1. Audit of the records of M/s Intas Biopharmaceuticals Limited, 423/P/A, Sarkhej Bavla Highway, Moriaya, Tal:-Sanand, Ahmedabad -382213 (Service

2 OIO No. 26/STC/AHD/ADC(JSN)/2013-14

BRIEF FACTS OF THE CASE

1. Audit of the records of M/s Intas Biopharmaceuticals Limited, 423/P/A, Sarkhej Bavla Highway, Moriaya, Tal:-Sanand, Ahmedabad -382213 (Service Tax Registration Number AABCI4722MST001) (hereinafter referred to as M/s IBL/noticee) for the period of 2007-08 to 2010-11 was carried out by the Audit wing of the Service tax Commissionerate and in pursuance to the same, Final Audit Report No.88/ 2012-13 dated 30.10.2012 was released.

1.1 It was noticed Vide Revenue Para 5 of the subject Audit Report dated 30.10.2012 that M/s IBL received “Intellectual Property Right Services” from various foreign parties and paid charges in foreign currency but did not discharge the applicable service tax liability on the same as defined under Section 66A of the Finance Act, 1994 read with section 68(2) of the Finance Act, 1994, under the category of “Intellectual Property Right Services” defined under Section 65(105)(zzr) of the Finance Act, 1994 read with Section 65(55a) and Section 65(55b) of the Finance Act, 1994.

1.2 As M/s IBL was not in agreement with the said objection raised by the audit wing of the Service Tax Commissionerate, the following show cause notice was issued demanding the service tax along with applicable interest and penalties for the reasons and facts mentioned in the said show cause notice:-

S.No. Period Involved SCN No. SCN Date Service tax Involved

1 2007-08 to 2010-11 F. NO.STC/4-36/O&A/ADC/12-13 23.10.2012 49,01,798/-

3. Information for the further period i.e., April’2011-March’2012 was called from M/s IBL vide letters dated 09.03.2013, 29.03.2013 & 10.04.2013.

3.1 M/s IBL vide letter dated 11.04.2013 submitted as under:-

“The details as regard to the financial year 2011-12 related to royalty payments. We have booked the expenditure to the tune of Rs 1,35,35,695/- (One Crore thirty five lacs thirty five thousand six hundred ninety five only) (Statement is enclosed as per Annexure-1)

Since there was the change in the legal provision of the service tax law with effect from 1 st

July, 2012 and hence accordingly we have discharged the service tax liability against the payments made after 1st July, 2012. So we have discharged the service tax liability against the payments made to overseas party on 30 th Sep, 2012 Rs.67,65,032/- (Rs Sixty Seven lacs sixty five thousand thirty two only) (a copy of GAR-7 of Rs.8,36,168/- is enclosed as annexure-2)

They are analyzing the legal applicability on such issues with the help of Learned senior advocates by evaluating the relevant documents etc., we reserve right to file the refund of the amount so paid as above on appropriate time if found the same was erroneously paid.

3.2 The table mentioned in the annexure-1 to the letter dated 11.04.2013 of M/s IBL is as below:-

Sr. No.

Book Value of

the payment

Booked in Financial

Year

Expense relating

to Period (F.Y.)

Actual Payment

Date

Payment Amount (in

Foreign Currency)

Name of Foreign

Currency

Exchange Rate

Actual Payment

Amount (in INR)

Name of the Party

2


made (in INR)

1 3,952,26

7 2011-12 2011-12 9-Jan-12 58,831.00 Euro 67.18

3,952,267

EUGENEX Biotechnologies,

GmbH

2 2,818,39

6 2011-12 2011-12 24-May-12 41,557.00 Euro 67.82

2,818,396

EUGENEX Biotechnologies,

GmbH

3 6,765,03

2 2011-12 2011-12 30-Sep-12

133,591.00

USD 50.64 6,765,03

2 SUNBIO Inc., South Korea

13,535,695

4. Thus, it appeared that in the period from April’2011 to March’2012

(a) M/s IBL continued the practice of receiving the services which were classified under the category “Intellectual Property Right Service” vide show cause notice dated 23.10.2012.

(b) M/s IBL continued the practice of not discharging the applicable service tax liability under Section 66A of the Finance Act, 1994 read with Section 68(2) of the Finance Act, 1994 under the category “Intellectual Property Right Service” on the services mentioned in point 4(a) above as was alleged vide show cause notice dated 23.10.2012.

5. Statement reflecting the details of services provided by M/s IBL for the period April’2011 to March’2012 was prepared on the basis of the information furnished by M/s IBL vide letter dated 11.04.2013 and has been annexed as Annexure-A (which is the statement from the perspective of Section 73(1A) of the Finance Act, 1994 inserted vide Finance Act, 2012).

6. Therefore a show cause notice was issued from F. No STC/4-56/O&A/12-13 dtd 4.6.2013 to M/s Intas Biopharmaceuticals Limited, 423/P/A, Sarkhej Bavla Highway, Moriaya, Tal:-Sanand, Ahmedabad -382 213, by Additional Commissioner, Service Tax, Ahmedabad as to why:

(a) amount of Rs.1,35,35,695/- paid towards the receipt of Intellectual Property Services from the service providers located outside India during the period April’2011 to March’2012 (as detailed in Annexure-A to this Show Cause Notice) should not be considered as taxable value under the category of “Intellectual Property Right” Services;

(b) Service tax amounting to Rs.13,94,177/- (Rupees Thirteen Lakhs Ninety Four Thousand One Hundred Seventy Seven only) (S.Tax:-Rs.13,53,570/-, Ed.Cess:- Rs.27,071/- and H.Ed.Cess:-Rs.13,536/-) not paid during the period April’2011 to March’2012 under the category of “Intellectual Property Right” Services (as detailed in Annexure-A to this Show Cause Notice) should not be demanded and recovered from them under section 73(1A) of the Finance Act, 1994 (as amended from time to time) and service tax amount of Rs.8.36,168/- already paid by them should not be appropriated against the said demand..;

(c) Interest at the prescribed rate should not be recovered under Section 75 of the Finance Act, 1994(as amended from time to time);

(d) Penalty should not be imposed on them for non-payment of service tax under section 76 of the Finance Act, 1994 (as amended from time to time).

3


(e) Penalty under Section 77(2) of the Finance Act, 1994, as amended should not be imposed upon them for the failure to self assess the correct taxable value and not showing the same in statutory ST-3 returns.

DEFENCE REPLY AND PERSONAL HEARING

7. M/s. IBL filed their reply dated 16.12.2013 in which they submitted that they denied each and every allegation contained in the above Show Cause Notice.

8. The patents/technologies for which the permission of use has been given to the Noticees are not covered by Patent Act, 1970, which is in force in India. Therefore, consideration for use of such patented information is not liable to service tax.

A.1 Through the Finance Act, 2004 service tax was imposed on “Intellectual Property Service’ w.e.f. 10.09.2004. The relevant sub-sections under section 65 of the Finance Act 1994, as amended, read as under:

“(55a) “intellectual property right” means any right to intangible property namely trademarks, designs, patents or any other similar intangible property, under any law for the time being in force, but does not include copyright;

(55b) “intellectual property service” means,-

(a) transferring temporarily; or(b) permitting the use or enjoyment of,

any intellectual property right;’

(105) “taxable service” means any service provided,-(zzr) to any person, by the holder of intellectual property right, in relation to

intellectual property service;”

A.2 While explaining the scope of service, the Department (TRU) issued the following clarifications vide F.No. B2/8/2004 – TRU dated 10.09.2004 which read as under:

“09. Intellectual property services (other than copyrights):

9.1 Intellectual property emerges from application of intellect, which may be in the form of an invention, design, product, process, technology, book, goodwill etc. In India, legislations are made in respect of certain Intellectual Property Rights (i.e.IPRs) such as patents, copyrights, trademarks and designs. The definition of taxable service includes only such IPRs (except copyright) that are prescribed under law for the time being in force. As the phrase ‘law for the time being in force’ implies such laws as are applicable in India, IPRs covered under Indian law in force at present alone are chargeable to service tax and IPRs like integrated circuits or undisclosed information (not covered by Indian law) would not be covered under taxable services.

[Emphasis supplied]

4


A.3 The definition of ‘intellectual property right’ as also the circular dated 10.9.2004 make it clear that IPRs covered under Indian law in force at present alone are chargeable to service tax.

A.4 A patent is an intellectual property right relating to inventions and is the grant of exclusive right, for limited period, provided by the Government to the patentee, in exchange of full disclosure of his inventions, for excluding others, from making, using, selling, importing the patented product or process producing that product for those purposes.

A.5 Patent right is territorial in nature and a patent obtained in one country is not enforceable in other country. The inventors/their assignees are required to file separate patent applications in different countries for obtaining the patent in those countries.

A.6 India is signatory to Patent Co-operation Treaty (PCT). It provides for an international patent filing system. In other words, when a patent application is filed in one of the member-states of PCT, this is legally in effect equivalent to filing in all PCT member states, which have been designated in such application. Section 7(1A) of Patent Act, 1970 provides so. It is to be noted that the provision is not for granting patent automatically in India. It is to be noted that there is no concept like ‘world patent’ or ‘international patent’. Only if the patent application is found in order, the patent would granted by the patent office in India and then the Controller would publish the fact that the patent has been granted.

A.7 Though the agreements entered into by the Noticee refer to license to use patent rights/technologies, it was submitted that such patents are not recognized in India. Further, there is no averment in the show cause notice that the patents are granted under Patent Act, 1970 and therefore, are recognized by the law for the time being force.

A.8 Therefore, no part of the consideration attributable to use of patented technologies is liable to service tax.

9. The cell clone, documentation and know how supplied by the foreign supplier would qualify as import of goods and not as import of service.

B.1 It was submitted that the cell clone, documentation and know how supplied by the foreign supplier would qualify as import of goods and not as import of service. The reasons in support of this submission are explained hereinafter.

B.2 Chapter 49 of Section X of Schedule I to the Customs Tariff Act, 1975 covers “Printed books, newspapers, pictures and other products of the printing industry; manuscripts; typescripts and plans”.

B.3 Chapter heading 4906 of the Customs Tariff Act, 1975 covers “Plans and drawings for architectural, engineering, industrial, commercial, topographical or similar purposes, being originals drawn by hand; hand-written texts; photographic reproductions on sensitized paper and carbon copies of the foregoing”.

B.4 Serial No.162 of General Exemption Notification No.21/2002-Cus dated 01.03.2002 exempts all goods falling under chapter 4906.

B.5 Section 12 of the Customs Act, 1962 provides that duties of customs shall be levied as may be specified under the Customs Tariff Act, 1975, or any other law for the time being in force, on goods imported into India or exported from India.

5


B.6 Section 2(22) of the Customs Act, 1962 defines the term ‘goods’ as under:

“goods” includes – (a) vessels, aircrafts and vehicles;(b) stores;(c) baggage;(d) currency and negotiable instruments; and(e) any other kind of moveable property.

B.7 Section 2(25) of the Customs Act, 1962 defines the term ‘imported goods’ as under:

“Imported goods” means any goods brought into India from a place outside India but does not include goods which have been cleared for home consumption.

B.8 Therefore, “plans and drawings for transfer of technical know how” is specifically covered under chapter heading 4906 as a product liable to customs duty on importation. Thus, drawings and designs are ‘goods’ upon which customs duty is leviable upon being imported into India or exported from India.

B.9 They also drew support from the decision of the Hon’ble Supreme Court in Associated Cement Companies Limited V/s Commissioner of Customs 2001 (128) ELT 21 (SC) , wherein it has been held that drawings, plans, manuals etc are regarded as ‘goods’ attracting a specified rate of customs duty on their import into India. Relevant extract from the said judgment is reproduced herewith as under:

24. According to Section 12 of the Customs Act, duty is payable on goods imported into India. The word “goods” has been defined in Section 2(22) of the Customs Act and it includes in sub-clause (c) “baggage” and sub-clause (e) “any other kind of movable property”. It is clear from mere reading of the said provision that any immovable article brought into India by a passenger as part of his baggage can make him liable to pay customs duty as per the Customs Tariff Act. An item which does not fall within sub-clause (a), (b), (c) or (d) of Section 2(22) will be regarded as coming under Section 2(22) (e). Even though the definition of the goods purports to be an exclusive one, in effect it is so worded that all tangible movable articles will be the goods for the purposes of the Act by residuary clause 2(22)(e). Whether movable article comes as a part of a baggage, or is imported into the country by any other manner, for the purpose of the Customs Act, the provision of Section 12 would be attracted. Any media whether in the form of books or computer disks or cassettes which contain information technology or ideas would necessarily be regarded as goods under the aforesaid provisions of the Customs Act. These items are movable goods and would be covered by Section 2(22)(e) of the Customs Act.

……........................

27. Drawings, plans, manuals, etc., specified in Chapter 49 of the Tariff Act are thus statutorily regarded as goods attracting a specified rate of customs duty on their import into India. There is no challenge to any of the statutory provisions and reading the two Acts together there can be no manner of doubt that what has been imported into India by the appellants, through the courier or otherwise, from their technical collaborators were goods even though the tangible articles so imported contained information or knowledge for use by the appellants.

....................................

6


30. It is true that what the appellants had wanted was technical advice or information technology. Payment was to be made for this intangible asset. But the moment the information or advice is put on a media, whether paper or diskettes or any other thing, that what is supplied becomes chattel. It is in respect of the drawings, designs, etc., which are received that payment is made to the foreign collaborators. It is these papers or diskettes, etc., containing the technological advice, which are paid for and used. The foreign collaborators part with them in lieu of money. It is, therefore, sold by them as chattel for use by the Indian importer. The drawings, designs, manuals, etc., so received are goods on which customs duty could be levied.

… (underlining supplied)

B.10 The Noticees are supporting the above submission by analysing the situation from another angle.

B.11 Service Tax is levied on rendering of taxable service. Customs Duty is levied on the act of importation of goods into India.

B.12 The foreign service providers are rendering services from outside India which ultimately get subsumed in the drawings, manuals etc. The end result of the labour of the foreign collaborator is the ‘manual’ containing data, design etc for say, setting up of some plants in India.

B.13 In view of the above, technical know-how received in the form of data sheets, manuals, drawings, designs would not be liable to service tax. However, customs duty is leviable under section 12 of the Customs Act, 1962.

B.14 Union of India has competence to levy ‘Duties of customs including export duties’ under Entry 83 of List I of Schedule VII of the Constitution read with Article 246(1) and power to levy ‘tax on services’ under Entry 92-C of List I of Schedule VII of the Constitution.

B.15 We refer to the decision of the 5 Judge Bench of the Hon’ble Supreme Court in the case of Godfrey Phillips India Ltd. Vs. State of UP reported at 2005 (139) STC 537. The relevant portion is extracted below:

“46. Therefore, taxing entries must be construed with clarity and precision so as to maintain such exclusivity, and a construction of a taxation entry which may lead to overlapping must be eschewed. If the taxing power is within a particular legislative field it would follow that other fields in the legislative Lists must be construed to exclude this field so that there is no possibility of legislative trespass.”

B.16 Further, in M/s Bharat Sanchar Nigam Limited V/s Union of India 2006 (145) STC 91 (SC), the Hon’ble Supreme Court has held as under:

“85…. The aspect theory would not apply to enable the value of the services to be included in the sale of goods or the price of goods in the value of service”

B.17 There can be no overlapping in the field of taxation, such a tax if specifically provided under one legislative entry effectively narrows the field of taxation available under other related entries

B.18 Therefore, it is submitted that drawings, plans, manuals etc being ‘goods’ liable to duty of customs under chapter 4906 of the Customs Tariff Act, 1975 on being imported into India cannot attract levy of service tax under the Finance Act, 1994, as amended.

7


10. Legislative history also supports the above submission.

C.1 The Service Tax levy was introduced for the first time in the year 1994 under the Finance Act, 1994. To start with, three services were identified and service tax was imposed at the rate of 5% on Services relating to non-life Insurance, Telephone services and stock brokers services.

C.2 Extract from the Hon’ble Finance Minister’s speech relating to Service Tax is reproduced herewith as under :

“87 Over the years, while attempts have been made to widen the base for domestic indirect taxes, the services sector has not been subjected to taxation. Yet this sector accounts for about 40% of our GDP and is showing strong growth. There is no sound reason for exempting services from taxation, when goods are taxed and many countries treat goods and services alike for tax purposes. The Tax Reforms Committee has also recommended imposition of tax on services as a measure for broadening the base of indirect taxes. I therefore, propose to make a modest effort in this direction by imposing a tax on services of telephones, non-life insurance and stock brokers.”


C.3 The above introduction was based upon the Recommendations of the Rajah Chelliah Committee; mentioning Services as a potential base for increasing revenue. The recommendation of the Tax Reform Committee weighed the system deliberation by experts on the taxation of services. Extracts from the report of Rajah Chelliah Committee are reproduced herewith as under:

"Taxation of services

9.47 We have throughout the report emphasized the need for broadening the base of the tax system, which would make possible a lowering of rates. In respect of indirect taxes, such broadening has to take the form of covering (a) almost all commodities other than raw produce of agriculture, (b) many, if not most, services and (c) all stages of production or transactions. This is accomplished under an ideal system of VAT. In our present context, the major steps to be taken are to extend the coverage of commodities under excise, on which we have already made recommendations, and to make a beginning with the taxation of services.

9.48 From the economic point of view, there is little difference between the taxation of commodities and that of services. In both cases, the principle of value added taxation can be applied to tax the final users. As an economy develops the services sector expands relatively to the commodities sectors. Multifarious services are produced for the benefit of the consumers as well as producers. Exclusion of services from indirect taxation tends to create distortions just as the exclusion of major commodity groups. There is no question, therefore, that services must be brought under taxation. …..

9.49 It is extremely important, however, that we do not commit the same kinds of mistakes as we have committed in respect of commodities. We must ensure that there will be a unified and rational system of taxation of services applicable to the whole country. This means that the services tax must be part of value added tax in course of time and should be levied at the Central level. A cascading type of services tax should be avoided at all costs. We envisage that as the Union excise on commodities gets gradually transformed into a value added tax at the manufacturing level, the services tax will get woven into that system and therefore tax could be levied also on services that enter into the productive processes.

8


9.50 Towards the end of our discussion of the reform of the Union excises earlier in this chapter we had indicated the manner in which the modvat system should be gradually converted into a comprehensive value added tax at the manufacturing stage. Once this is done it would be possible to introduce a fairly comprehensive system of taxation of services also on the basis of the value added principle so that the entire system of indirect taxation at the Central level would be devoid of cascading and would cause no distortion in costs or in the allocation of resources."


C.4 Furthermore, in 1993, the National Institute of Public Finance & Policy submitted a report on Taxation of services. It suggested that

“…… in absence of any reference to services in the base of excise and sales tax has been at the root of many administrative and compliance problems, in indirect taxation in India. For there, the tax base is fractured between goods and services. There is wide scope for manipulation a good part of the price of the product can be shown as payment for services such as after sales cum installation, etc. ....problem of separating the services from the material in levying sales tax on goods supplied in the course of execution of a complete contract bear an ample testimony to the loopholes that exclusion of services from the tax base opens up and problem imposes for administration to tackle them”

C.5 Thus, there has always been a distinction between the goods which are subject to customs duty/excise duty and services which are subject to service tax, since inception of the levy on service tax. The legislature has always looked at goods and services as distinct and separate. There is no overlapping between the two entries.

C.6 If we apply the above discussion to the facts of the present case, ‘Cell clones and documents containing technical know how’ is covered under Chapter heading of the Customs Tariff Act, 1975. Thus, it is a commodity which attracts duties of customs on importation into India. All goods falling under chapter heading 4906 are exempted from payment of customs duty.

C.7 Take a case where there is no notification granting exemption from payment of customs duty for the abovementioned goods and they attract tariff rate of duty (15%). In such a situation, the Noticees for the same activity, would be liable to pay customs duty on the value of goods imported and would also be liable to pay service tax on the consideration paid to the foreign supplier for the services provided. This obviously cannot be possible.

C.8 It is submitted that the Central Government would not exempt the goods from payment of Customs duties only to levy service tax on the said activity resulting in production of goods. More so when customs duty is levied only on the act of importation of the goods into India from a place other than India and service tax is levied on wide range of activities.

C.9 Therefore, it is submitted that the activity of preparation and supply of designs, drawings, manual etc in the form of books, manuals etc. by the foreign supplier is ‘goods’ being imported into India which are a subject matter of Customs Duty. Therefore, there is no liability to pay service tax on the same.

11. The terms of the agreement entered with M/s Eugenex shows that the technology has been permanently transferred to the Noticee and hence not covered under “IPR services”

9


D.1 The terms of the agreement entered with M/s Eugenex clearly shows that the relevant technology from M/s Eugenex has been permanently transferred to the Noticee. The relevant terms are reproduced herein below:

Grant of Rights and INTAS Deliverables

4.1 Grant: Subject to the terms and conditions of this Agreement, EUGENEX hereby grants to INTAS subject to payment of the sums as per section 3:

A worldwide, non exclusive, permanent, non transferable right and license for commercialisation of EUGENEX EPO technology.

A worldwide exclusive, permanent, non transferable right and license for commercialization of one specific EUGENEX EPO producing cell clone i.e EPO producing cell clone i.e. EPO producing clone CHOSI EPOP8 H42.

(underlining supplied)

D.2 The definition of the “IPR service” does not cover under its ambit the permanent transfer of the intangible property but only the temporary transfer or use or enjoyment of the intangible property. Whereas, in the present case the Noticee have got the right to permanently use the technology received from M/s Eugenex. Thus, no service tax is liable to be paid by the Noticee under the category of “IPR service” with regard to the consideration paid to M/s Eugenex for the technology received from M/s Eugenex. Hence, the Show Cause Notice is liable to be dropped herewith.

D.3 In the case of Commissioner of Sales Tax vs Duke & Sons Pvt. Ltd. (1999) 112 STC 370 (Bom), an issue arose for consideration before the Hon’ble Bombay High Court that whether the grant of license to use trademark by the assessee to persons conferring the right to manufacture the products using such trademark qualifies as “transfer of right to use goods” and accordingly royalty charges collected therein is liable to sales tax. The Hon’ble High court observed that for transferring the right to use the trade mark, it is not necessary to hand over the trade mark to the transferee or give control or possession of trade mark to him and it can be done merely by authorising the transferee to use the same in the manner required by the law. Further, it was observed that the right to use the trade mark can be transferred simultaneously to any number of persons. Accordingly, it was held that the transactions qualifies as transfer of right to use goods and liable to sales tax.

D.4 Similar views were also taken in the case of S.P.S Jayam and Co. vs Registrar, T.N.T.S.T [2004] 137 STC 117 (Mad) and Jojo Frozen Foods (P) Ltd. vs State of Kerala [2009] 24 VST 327 (Ker) wherein it was held that licensing of trade mark even on non exclusive basis amounts to “transfer of right to use goods”.

D.5 Accordingly the Appellants submit that in their case there is permenant transfer of right to use the intangible goods that is patent on exclusive basis which amount to deemed sale. Hence question of imposition of service tax on the royalty paid by the Appellants does not arises. Therefore the show cause notice is liable to be setaside on this ground also.

12. Extended period of limitation is inapplicable in the present case. Therefore, Entire demand of service tax is barred by limitation

E.1 Without prejudicing the above made submission the Appellants submit hat entire demand for the period from April 2011 to March 2012 is barred by limitation since extended period of limitation cannot be invoked I the present case.

10


E.2 As per first provision to section 73(1) of the Finance Act, 1994, where any service tax has not been levied or paid or has been short-levied or short paid by reason of fraud, collision, willful misstatement or suppression of fact or contravention of the any of the provision of the act or rule made there under then extended period of 5 year can be invoke for issuance of the show cause notice.

E.3 In the present case the appellants entered in to an agreement with EUGENEX Biotechnologies, GMBN on 1st December, 2013.

E.4 The department has started inquiry on 30.10.2012 and sought for various details during the course of CERA audit. On the basis of the information provided by the appellants, first show cause notice was issued on 23.10.2012, demanding service tax for the period 2007-08 to 2010-11.

E.5 At the time of issuance of the first show cause notice the department was well aware with the facts of the transaction entered into by the appellants.

E.6 Further on 09.03.2013, 29.03.2013 & 10.04.2013, the department further sought for details of the Royalty payment made by the Appellants. The Appellants vide their letter dated 11.04.2013, (refer annexure-10) has provided all the necessary details.

E.7 Thus, the appellants submit that from the above state facts that there is case of suppression of the fact and extended period of limitation should not be invoked.

E.8 In the present case period involved is from April 2011 to March 2012. The Appellants have submitted ST-3 returns for the half year ended on 30.09.2011 on 22.12.2011 and for the half year ended on 31.03.2012 on 25.04.2012.

E.9 Accordingly, as per the provisions of section 73(1), for demanding service tax for the period April 2011 to March 2012, the show cause notice had to be issued on or before 24.04.2013 i.e. 1 year from the date of actual return filing.

E.10 Hence, It is submitted that the proceedings initiated by the present show cause notice dated 04.06.2013 which is for the subsequent period from 2011-12 on the same set of facts on which already show cause notice was issued on 23.10.2012, is time barred.

E.11 Therefore, the entire demand for the period from April 2004 to November 2006 which is beyond the period of normal period of limitation is barred. In view of this fact even if the appellants failed on merits, the liability to pay service tax in the present case cannot arise as the entire demand is barred by limitation.

E.12 The above stated view taken by the appellants is supported by the decision of Apex court. In case of Nizam Sugar Factory Vs Commissioner of Central Excise 2006 (197) ELT 465 (S.C), the apex court has held that in a case in which a show cause notice has been issued for the earlier period on certain set of facts, then, on the same set of facts another show cause notice based on the same/similar set of facts invoking the extended period of limitation on the plea of suppression of facts by the assessee cannot be issued as the facts were already in the knowledge of the department. The relevant para of the decision is extracted hereunder:

9. Allegation of suppression of facts against the appellant cannot be sustained. When the first SCN was issued all the relevant facts were in the knowledge of the authorities. Later on, while issuing the second and third show cause notices the same/similar facts could not be taken as suppression of facts on the part of the assessee as these facts were already in the knowledge of the authorities. We agree with the view taken in the aforesaid judgments and respectfully following the same, hold that there was no suppression of facts on the part of the assessee/appellant.

11


E.13 The appellants also place reliance on the following decisions in their support:

CCE vs. Escorts Ltd. 2009 (235) ELT 55 (P&H)

Geotech Foundation & Construction 2008 (224) ELT 177 (SC)

E.14 Hence, the demand is barred by limitation. Therefore, the Show Cause Notice is liable to be set aside.

13. The Noticees are not liable to pay service tax. Hence, question of imposing penalty does not arise.

F.1 As it has been discussed in the preceding paras that the Noticees are not liable to pay service tax, the Noticee cannot be subjected to penalty under section 76 and 77 of the Finance Act, 1994. Similarly, no interest under section 75 can be demanded from the Noticees.

F.2 It is a well-settled principle of law that where there is no demand of duty, penalty cannot be imposed. The Noticees relies on the judgment in case of Coolade Beverages Limited Vs. Commissioner of Central Excise (2004) 172 ELT 451 (All).

F.3 The Show Cause Notice alleges that the Noticees have suppressed the facts from the Department with an intention to evade payment of duty. It is humbly submitted that the allegation of suppression of facts is perverse and contrary to the facts on records. Hence, the question of suppression of material facts with intention of evading payment of duty does not arise.

F.4 The Show Cause Notice has invoked Section 78 of the Act for imposition of penalty. Section 78 can be invoked only when there is fraud, collusion, willful misstatement, suppression or contravention of any of the provisions of the Finance Act, 1994 or the rules framed there uner with an intention to evade payment of service tax.

F.5 The language of the service tax provisions is ambiguous. The law is in the nascent stage. The Noticees had no intention to evade payment of service tax. Therefore, the Noticees can not be said to be acting malafide and suppressing facts with an intention to evade payment of service tax and penalty is not imposable.

F.6 In support of the above view, reliance is placed on the decision of the Hon'ble Supreme Court in the case of Hindustan Steel Ltd. v The State of Orissa reported in AIR 1970 (SC) 253 . The above decision of the Apex Court, was followed by the Tribunal in the case of Kellner Pharmaceuticals Ltd. Vs CCE, reported in 1985 (20) ELT 80, and it was held that proceedings under Rule 173Q are quasi-criminal in nature and as there was no intention on the part of the Appellants to evade payment of duty the imposition of penalty cannot be justified. The ratio of these decisions squarely applies in all force to the present case. In the present case, there was neither any malafide intention nor any intention to evade payment of tax. In view of the foregoing, no penalty is imposable.

F.7 Reliance is also placed on the judgment of the Hon’ble Supreme Court in the case of Akbar Badruddin Jiwani V. Collector of Customs 1990 (047) ELT 0161 SC, wherein the Hon’ble Supreme Court has held as follows:

57. Before we conclude it is relevant to mention in this connection that even if it is taken for arguments sake that the imported article is marble falling within Entry 62 of Appendix 2, the burden lies on the Customs Department to show that the Noticee has acted dishonestly or contumaciously or with the deliberate or distinct object of breaching the law.

12


[Emphasis Supplied]

No penalty when bonafide belief.

F.8 It is further submitted that there was no mala fide or deliberate intention on the part of the Noticees to evade payment of service tax and the default, if any, is solely on account of the bona fide belief that the Noticees were not liable to pay service tax, the activity being excluded from the ambit of taxable service. In such a situation, imposition of penalty on the Noticees is not justified. Reliance is placed upon the following decisions in support of this submission;

(i) CCE, Trichy v. Grasim Industries 2005 (183) ELT 123 (SC)

(ii) Indian Explosives Ltd. v. CC 1992 (60) ELT 111 (Cal)

(iii) Tata Yodagwa Ltd. v. ACCE 1983 (12) ELT 17 (Pat)

(iv) Cement Marketing Co. of India Ltd. v. ACST 1980 (6) ELT 295 (SC)

No penalty when issues relating to interpretation of law involved.

F.9 It is further submitted that the issues raised in the Show Cause Notice involve interpretation of provisions of the service tax law in as much as the issue involved is whether the service tax is payable on the whole sum of royalty paid by the Noticees to the foreign entities for import of technology. Therefore, in such a situation, wherein questions of fact and law are required to be decided, penalty cannot be imposed as issues relating to interpretation of provisions are involved. Reliance is placed upon the following decisions in support of this submission;

(i) Ispat Industries Ltd. vs. CCE 2006 (199) ELT 509 (T)

(ii) NIRC Ltd. vs. CCE 2007 (209) ELT 22 (T)

(iii) Chemicals & Fibres of India Ltd. vs. CCE 1988 (33) ELT 551 (T)

(iv) Bharat Wagon & Engg. Co. Ltd. vs. CCE, Patna (146) ELT 118

(v) Goenka Woollen Mills Ltd. vs. CCE, Shillong 2001 (135) ELT 873

(vi) Bhilwara Spinners Ltd. vs. CCE, Jaipur 2001 (129) ELT 458

Penalty under Section 77 is not imposable

F.10 The Noticees submit that the present Show Cause Notice has proposed penalty under Section 77 of the Act on the ground that the Noticees have violated the provisions of the Act and the Rules. The Noticees seek to reproduce the relevant extract of Section 77 as hereinbelow:

SECTION 77. Penalty for contravention of rules and provisions of Act for which no penalty is specified elsewhere.

(1) Any person, —

(a)who is liable to pay service tax, or required to take registration, fails to take registration in accordance with the provisions of section 69 or rules made under this Chapter shall be liable to pay a penalty which may extend to five thousand rupees or two hundred rupees for every day during which such failure continues, whichever is higher, starting with the first day after the due date, till the date of actual compliance;

13


(b) who fails to keep, maintain or retain books of account and other documents as required in accordance with the provisions of this Chapter or the rules made thereunder, shall be liable to a penalty which may extend to five thousand rupees;

(c) who fails to —

(i) furnish information called by an officer in accordance with the provisions of this Chapter or rules made thereunder; or

(ii) produce documents called for by a Central Excise Officer in accordance with the provisions of this Chapter or rules made thereunder; or

(iii) appear before the Central Excise Officer, when issued with a summon for appearance to give evidence or to produce a document in an inquiry,

shall be liable to a penalty which may extend to five thousand rupees or two hundred rupees for everyday during which such failure continues, whichever is higher, starting with the first day after the due date, till the date of actual compliance;

(d) who is required to pay tax electronically, through internet banking, fails to pay the tax electronically, shall be liable to a penalty which may extend to five thousand rupees;

(e) who issues invoice in accordance with the provisions of the Act or rules made thereunder, with incorrect or incomplete details or fails to account for an invoice in his books of account, shall be liable to a penalty which may extend to five thousand rupees.

(2) Any person, who contravenes any of the provisions of this Chapter or any rules made thereunder for which no penalty is separately provided in this Chapter, shall be liable to a penalty which may extend to five thousand rupees.

F.11 The Noticees submit that in terms of the above extracted provisions, penalty cannot be imposed as the Noticees have paid service tax in accordance with the provisions of the Act and has correctly furnished all the details in the Returns. It is submitted that none of the sub-clauses of Section 77 can be invoked as all the requisite details have been produced in the Returns. Further, in the absence of any specific allegation in the Show Cause Notice for the proposition of penalty under Section 77 of the Act, no penalty can be imposed.

F.12 The Noticees were under the bonafide interpretation that it is eligible to avail the benefit of the composition scheme. The amount so paid as per the composition scheme was correctly reflected in the ST-3 returns for the relevant period. Hence, it is submitted that the allegation in the impugned Show Cause Notice that the Noticees have contravened the provisions of the Act is incorrect and penalty not imposable under Section 77.

14. Interest not payable

G.1 The Noticees submit that no interest is payable in case where the demand itself is not payable, as made out in the above para(s). This follows from the decision of the Hon’ble Apex Court in the case of Pratibha Processors v. Union of India 1996 (88) E.L.T. 12 (SC), wherein the Hon’ble Court held that interest payable is a mere accessory of the principal and if the principal is not recoverable, payable, so is the interest on it.

G.2 Further, language of Section 75 of the Act makes it clear that it cannot be invoked in the facts of the present case.

15. Section 80 of the Finance Act, 1994 is in favour of the Noticees.

14


H.1 Moreover, Section 80 of the Act provides that no penalty shall be imposed on the assessee for any failure referred to in sections 76, 77 or 78 of the Act, if the assessee proves that there was reasonable cause for the said failure. Thus, the Act statutorily provides for waiver of penalty. In the present case, there was a bonafide belief on part of the Noticees that the benefit of Works Contract Composition Scheme can be availed by the Noticees, since the Department never raised any objection when the Noticees intimated the Department regarding the availment of benefit of Works Contract Composition Scheme. Therefore, there was reasonable cause for failure, if any, on part of the Noticees to pay service tax. Hence, in terms of section 80 of the Act, penalties cannot be imposed under Sections 76, 77 and 78 of the Act. In this regard, reliance is placed on the following judgments:

(i) ETA Engineering Ltd. vs. CCE, Chennai, 2004 (174) E.L.T 19 (T-LB)

(ii) Flyingman Air Courier Pvt. Ltd. vs. CCE 2004 (170) ELT 417 (T)

(iii) Star Neon Singh vs. CCE, Chandigarh, 2002 (141) ELT 770 (T)

16. M/s. IBL was granted personal hearing on 16.12.2013 and Shri Abhishek Rajan, Advocate and Shri Ajit Goswami ( Senior Manager finance) appeared for PH on 16.12.2013 on behalf of M/s. IBL and reiterated submissions made in their earlier case of same issue. In addition to that they produced the case law in support

(i) 2009(15)STR 713(T) in the case of M/s Modi-Mundipharma P Ltd Vs. CCE, Meerut

(ii) 2013(30)STR 591(T) in the case of Hewwit Associates (India) P Ltd Vs. Commr. Of Service Tax, Delhi

(iii) 2012 –TIOL-931-CESTAT –DEL in the case of M/s Denso Haryana P Ltd Vs. CCE, Delhi-III.

DISCUSSIONS AND FINDINGS

17. I have carefully gone through the facts on records, the show cause notice under reference and submissions made by M/s IBL vide their letter dated 16.12.2013 and during the personal hearing.

18. I find that the following issues are to be decided in this case :

(i) Whether the services provided/agreements made for development, transfer of technology by the foreign entities with M/s IBL, would fall under the aegis of “Intellectual Property Service” under Section 65(55b) of the Finance Act, 1944.

(ii) Whether when such agreements were entered prior to 10.09.2004 {when “Intellectual property service” was introduced under Section 65(55b) of the Finance Act, 1944}, service tax would be payable or not

(iii) Whether service tax was payable on import of services prior to introduction of Section 66 of the Finance Act, 2006 on 18.04.2006.

19. I proceed with the case by discussing the first issue i.e whether the services provided/agreements made for development, transfer of technology by the foreign entities

15


with M/s IBL, would fall under the aegis of “Intellectual Property Service” under Section 65(55b) of the Finance Act, 1944.

20. I have carefully gone through the agreements entered by M/s IBL with the following parties i.e

(a) “Technology Transfer and Licensing Agreement” with M/s Eugenex Biotechnologies GmbH, Switzerland on 01.12.2006. (b) “Technology Licensing and Supply Agreement” with M/s SunBio, Inc., South Korea on 01.11.2003 and

21. In case of M/s Eugenex Biotechnologies GmbH, I find that the agreement dated 1.12.2006 clearly shows that M/s IBL was desirous of obtaining the exclusive rights in technologies developed by EUGENEX for purpose of developing and commercializing recombinant human erythropoietin(EPO) and for the said purpose the aforesaid agreement dated 01.12.2006 was executed. The activities to be performed by EUGENEX included:-

a) Transfer of a cell clone that produces recombinant EPO.b) Provide the technology, know-how, trade secrets and other similar information.

21.1 I find that these technologies were patented / possessed / owned by M/s EUGENEX and that by executing the said agreement, M/s EUGENEX permitted use of the said technologies to M/s IBL. In lieu of such permission for use of technology M/s EUGENEX was paid consideration by M/s IBL.Such consideration included:-

(a) a fixed amount of Euro 3,00,000.00 was to be paid in installments as agreed in the said agreement.(b) a royalty was to paid at the end of 2nd and 4th quarters of the accounting year (April-March) at the rate of 5% of the “Net Sales received by Intas and its affiliates for that six months period.” I further find that M/s IBL was paying the amounts as was agreed upon vide the said agreement in foreign currency to M/s Eugenex Biotechnologies GmbH, Switzerland.

22. In case of M/s SunBio, Inc., South Korea, I find that the agreement dated 01.11.2003 was executed to provide M/s IBL the non-exclusive rights to SUNBIO PEG products and pegylation technology for the development, manufacture and marketing of PEG-GCSF in India as well as rest of Asia excluding South Korea and Japan, and in all countries in Africa and Oceania. The activities to be performed by SUNBIO included:-

a) Supply of SUNBIO PEG (polyethylene glycol) derivative products.b) Provide the technology, analytical methods and other similar information related to the

PEG products and pegylation.

22.1 These technologies were patented / possessed / owned by M/s SUNBIO by executing the said agreement, M/s SUNBIO temporarily transferred or permitted use of the said technologies to M/s IBL.In lieu of such temporary transfer or permission for use of technology M/s SUNBIO was paid consideration by M/s IBL.Such consideration included:-

(a) a upfront amount of USD 1,50,000.00 was to be paid in installments as agreed in the said agreement.

16


(b) a royalty which constitutes 5% of the net revenue from the sale of Peg-GCSF was paid within 3 months from the end of fiscal year of M/s IBL.

Further, I find that M/s IBL was paying the amounts as was agreed upon vide the said agreement in foreign currency to M/s SunBio, Inc., South Korea.

23. Thus, I find that agreements between the parties were for transferring technical know-how i.e for allowing M/s IBL a right to use licensed technology of M/s Eugenex Biotechnologies GmbH, Switzerland and M/s SunBio, Inc., South Korea and as such the agreements are in the nature of allowing use of intellectual property rights. From the agreements it is clear that these parties had agreed to provide technical know-how to M/s IBL for manufacture of various products, on payment of lump sum fees and royalty as per the agreements.

24. I find that in identical cases, the issue has attained finality with large no. of judgments being pronounced. In COMMISSIONER OF S.T., AHMEDABAD Versus TRUMAC ENGG. CO. PVT. LTD. reported at 2008 (10) S.T.R. 148 (Tri. - Ahmd.), where the issue was whether such transfer of technology, knowhow ( as in the case of M/s IBL) would fall under “Consulting Engineer Service” or Under “Intellectual Property Service”. The Hon’ble Tribunal ruled as under :

2. As per facts on record, respondents are engaged in the manufacture of textile machinery and parts thereof and entered into a technology transfer agreement with M/s. Truetzschler Textilmaschinen, a German company (hereinafter referred to as M/s. T.T.). They paid technical know how fee and royalty to their foreign collaborator, which the Revenue is of the view comes under the category of consulting engineer and have accordingly raised and confirmed service tax against the respondents.

3. Commissioner (Appeals) while setting aside such confirmation has observed as under :

“17. It is not disputed that M/s. T.T., Germany were the owners of the patents, inventions, process and date relating to manufacture of various products, components, accessories and spares thereof. The agreements between the parties were for transferring technical know-how i.e for allowing the appellants a right to use licensed technology of M/s. T.T., Germany, and as such the agreements are in the nature of allowing use of intellectual property rights. From the agreements it is clear that M/s. T.T, Germany had agreed to provide technical know-how to the appellants for manufacture of various products, on payment of lump sum fees and royalty as per the agreements. The Hon’ble Tribunal in the case of M/s. Navinon Ltd. v. CCE, Mumbai-IV reported in 2004 (172) E.L.T. 400 (Tri. - Mumbai) while dealing on the similar issue, has held that payment of royalty for technical know-how was not payment for any service and royalty was a share of profit reserved by the owner for permitting another person to use his property and royalty payments for the use of technology or know-how cannot be equated with any services. In the case of Essel Propack Ltd. - 2006 (1) S.T.R. 150 (Tri. - Mumbai), it was held that royalty payment for use of technology and know-how cannot be equated with any service to be provided by foreign company to Indian company. The Hon’ble Tribunal in the case of BST Limited v. CCE, Cochin reported in 2006 (4) S.T.R. 40 (Tri. - Bang.) has held that royalty for technical know-how paid to foreign collaborator was not liable for service tax under “consulting engineer service” during the material period.

17


18. The technical know-how provided by the foreign company as per the licensed agreements was transfer of intellectual property rights and no consultancy or advice was involved and hence the same was not liable to service tax under consulting engineer service. Further the Government has specifically covered this service for levy of service tax with effect from 10-9-2004 under Section 65(55b) of the Finance Act, 1944 as “Intellectual property service” and with effect from 10-9-2004 the appellants had been discharging their service tax liability on this service under intellectual property service. The definition of ‘intellectual property services’ given under clause (55b) of Section 65 is very specific and covers within its ambit, the sale of ‘intellectual property right’ or transfer for some period or just giving right to the other person for the use or enjoyment of any ‘intellectual property right’. Further, the German company was the manufacturer of the machinery and were in possession of technical know-how for the manufacture of various machineries and spares. Therefore, the technical know-how provided by M/s. T.T., Germany could not be termed as advice or consultancy. Therefore, the technical know how provided by M/s. T.T., Germany cannot be equated with any service covered under consulting engineer service. Therefore, the service tax demanded and confirmed under consulting engineer service is hereby set aside.”

24.1 In another case of M/s Commissioner v. Molex (India) Ltd. reported at 2011 (24) S.T.R. J50 (Kar.), the Hon’ble The High Court of Karnataka, delved comprehensively on the issue and I reproduce the same as under :

“Revenue has preferred this appeal challenging the order passed by the Tribunal which has held that the assessee is not liable to pay service tax for the services received during the relevant period from foreign company.

2. The assessee, M/s. Molex (India) Private Limited has paid Rs. 1,37,38,030-00 + Rs. 27,77,471-00 to their holding Company M/s. Molex International Inc. USA towards Royalty fees for supplying technical data during the period 2003-04 and the service tax on the aforesaid Royalty works out to Rs. 13,21,240-00. A show cause notice came to be issued on 2-7-2004 calling upon them to show cause as to why a sum of Rs. 21,53,631-00 should not be demanded towards service tax with interest and penalty. The assessee replied to the said show cause notice contending that collaboration agreement envisaged payment for use of technology involving transfer of technology and does not involve rendering of technical assistance advice or consultancy. No services are actually rendered/provided or even deemed to be rendered or provided and they denied the liability to pay service tax. The explanation was not accepted by the Assistant Commissioner. Therefore he confirmed the demand and also directed payment of penalty. Aggrieved by the same, the assessee preferred an appeal to the Commissioner of Central Excise, who set aside the said order in so far as Royalty fees for supply of technical know-how. Aggrieved by the said order, the Revenue preferred an appeal to the Tribunal. The Tribunal following the judgment in the case of BST Ltd. v. CCE Cochin [2006 (4) S.T.R. 40] and other cases referred to therein, held that the assessee is not liable to pay service tax.

3. The sum and substance of the reasoning is, during the relevant period, even if services are received from a foreign company, it is provider of service who should have paid tax and not the recipient of the tax, as the provider of service was also a Company. It is only from 18-4-2006 onwards, when Section 66A(2) was introduced in the statute book, the liability was foisted on the service recipient to pay the service tax. Therefore it dismissed the appeal. Aggrieved by the said order, the present appeal is filed.

4. This Court had an occasion to go into the said question in the case of the

18


Commissioner of Central Excise & ST v. M/s. Micro Labs Ltd., in CEA 33/2010 disposed off on 27th day of January, 2011 [2011 (22) S.T.R. 615 (Kar.)], wherein it has been held as under :

“From a perusal of the aforesaid Section it is clear from sub-Section (1) of Section 68 that every person providing taxable service is liable to pay service tax. However, sub-Section (2) makes it very clear that notwithstanding anything contained in sub-Section (1) in respect of any taxable service provided by the Central Government in the Official Gazette the service tax thereon shall be paid by “such person in such manner” and the same may be prescribed at the rate specified in Section 66 and all provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service. Therefore, the aforesaid provision authorises the Central Government to issue a Notification and prescribe a person who is liable to pay tax as well as the manner in which the tax is to be paid. As the opening words of sub-Section (2) starts with non-obstante clause even though under Section 68(1) the service tax is payable by the person who provided the service it is open to the Central Government by issuing a Notification under sub-Section (2) to specify that a person other than the service provider is also liable to pay tax. It is in this context the Notification 36/2004 S.T. dated 31st December 2004 has been issued not only stipulating the services which are liable for service tax and it also makes it clear that any taxable service provided by a person who is not a resident or is from outside India who is not having any office in India. The said Circular is set out hereunder :-

“(Notification No. 36/2004-S.T., dated 31-12-2004)”“Service tax payment in relation to specified Services :

In exercise of the powers conferred by sub-section (2) of section 68 of the Finance Act, 1994 [32 of 1994], the Central Government hereby notifies the following taxable services for the purposes of the said sub-section, namely :-

(A) the services,-(i) in relation to a telephone connection or pager or a communication through

telegraph or telex or a facsimile communication or a leased circuit;(ii) in relation to general insurance business;(iii) in relation to insurance auxiliary service by an insurance agent; and(iv) in relation to transport of goods by road in goods carriage, where the

consignor or consignee or goods is, -(a) any factory registered under or governed by the Factories Act, 1948

(63 of 1948);(b) any company established by or under the Companies Act, 1956 (1 of

1956);(c) any corporation established by or under any law;(d) any society registered under the Societies Registration Act, 1860 (21 of

1860) or under any law corresponding to that Act in force in any part of India;

(e) any co-operative society established by or under any law;(f) any dealer of excisable goods, who is registered under Central Excise

Act, 1944 (1 of 1944) or the rules made thereunder; or(g) any body corporate established, or a partnership firm registered by or

under any law;(B) any taxable service provided by a person who is a non-resident or is from

outside India, does not have any office in India.2. This notification shall come into force on the first day of January, 2005.”

19


The said Circular was amended further by Notification No. 9/2006 dated 19th April, 2006 which reads as under :Services provided from country other than India - Tax liability -Amendment to Notification No. 36/2004-S.T.In exercise of the powers conferred by sub-section (2) of section of 68 of the Finance Act, 1994 (32 of 1994), the Central Government hereby makes the following further amendment in the notification of the Government of India in the Ministry of Finance (Department of Revenue) No. 36/2004-Service Tax, dated the 31st December, 2004, G.S.R. 849 (E), dated the 31st December, 2004, namely :-In the said notification, for paragraph (B), the following paragraph shall be substituted, namely :-“(B) any taxable service provided or to be provided from a country other than India and received in India under section 66A of the Finance Act, 1994”.Further Notification No. 24/2005-S.T., dated 7-June-2005, was issued which reads as under :- Service tax liability when on person other than Service providers - Amendment to Notification No. 36/2004-S.T.

In exercise of the powers conferred by sub-section (2) of section 68 of the Finance Act, 1994 (32 of 1994), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby makes the following further amendments in notification of the Government of India in the Ministry of Finance (Department of Revenue) No. 36/2004-Service Tax, dated the 31st December, 2004 which was published in the Gazette of India, Extraordinary, vide number G.S.R. 849(E), dated the 31st December, 2004, namely :

In the said notification :(a) in paragraph (A), in sub-paragraph (iv), in item (b), for the words

“established by or under”, the words “formed or registered under” shall be substituted;

(b) for paragraph (B), the following paragraph shall be substituted namely :- “any taxable service provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place of residence, in a country other than India, and such service provider does not have any office in India.”

In none of these Notifications the Central Government had specified the person who is liable to pay service tax in the case of a service provider who is residing outside India who has no fixed establishment in India or who has no permanent address in India. However, the Parliament has amended the Act by introducing Section 66-A by the Finance Act, 2006 which came into effect on 18-4-2006 which reads as under :-“66-A. Charge of service tax on services received from outside India. - (1) Where any service specified in clause (105) of section 65 is,

(a) provided or to be provided by a person who has established a business or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place or residence, in a country other than India, and

(b) received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or usual place of residence, in India,

Such service shall, for the purpose of this section, be the taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India, and accordingly all the provisions of this Chapter shall apply.

20


Provided that where the recipient of the service is an individual and such service received by him is otherwise than for the purpose of use in any business or commerce, the provisions of this sub-section shall not apply :

Provided further that where the provider of the service has his business establishment both in that country and elsewhere, the country, where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided.

(2) Where a person is carrying on a business through a permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purposes of this section.

Therefore it is clear that from 18-4-2006 the service provided by a person who is outside the country and who has no fixed establishment or permanent address in the country, such a taxable service shall be treated as if the recipient of service had himself provided the service in India and accordingly all the provisions of this Chapter shall apply. Therefore prior to 18-4-2006 the service tax was not payable by the recipient, in the event the service provider was outside or place of business within the country. Under these circumstances, the order passed by the appellate authority relying on the aforesaid Judgments of the Bombay High Court and Delhi High Court cannot be found fault with. Accordingly we do not see any merit in this appeal. Hence, it is dismissed.”

24.2 In view of the above, there is no doubt that the activities/agreements carried out by M/s IBL with the foreign entities fall under the Intellectual Property Services. Further, I find that under Section 66A of the Finance Act, 1994, such services are liable to Service Tax from 18.04.2006 onwards, under reverse charge mechanism.

25. In their defence I find that M/s IBL has while referring to the agreement with M/s EUGENEX, has mentioned that , in this case they have got a permanent right over the technical know-how/technology being transferred by them and that therefore would not come under the definition of “Intellectual Property Services”.

25.1 I find that the abovesaid argument has been made with reference to the definition of “intellectual property service” as it stood prior to 16-6-2005. This definition reads as follows :-

“(55b) ‘intellectual property service’ means, -(a) transferring [temporarily]; or(b) permitting the use or enjoyment of, any intellectual property right.”The clause “whether permanently or otherwise” was substituted for the word “temporarily” by the Finance Act, 2005 with effect from 16-6-2005.

25.2 I find that the permanent transfer of IPR amounts to sale of patent and technology rights.. In this connection, I find that M/s IBL has given only blurred picture relating to “Grant of Rights and INTAS deliverables” produced at Section 4 of the agreement dated 1.12.2006 with M/s Eugenex. On perusal of the agreement at Para 4.1, it is clearly mentioned as under :

“….However, patent rights and technology rights on EUGENEX general technology and EUGENEX special EPO technology will remain with EUGENEX.”

21


25.3 Thus, I find that as patent rights and technology rights remains with EUGENEX, there cannot be permanent transfer of IPR as stated by M/s IBS, and they are trying to mislead the Department on this count. And thus there is no doubt that technology transfer between them and M/s EUGENEX would fall within the ambit of Intellectual Property Services. Also I find that there has been continuous payment of royalties by M/s Eugenex. I further take refuge in the case of EICHER GOOD EARTH LTD.Versus COMMISSIONER OF SERVICE TAX, NEW DELHI reported at 2012(28) STR 279 (Tr-Delhi ) wherein in a similar argument, the Hon’ble Tribunal held that

“…When the contract is read as a whole it is indeed a contract for transfer of the right to use the Trademark for limited purposes but on a permanent basis. The fact that certain post transfer conditions are attached to transfer of the right does not change the nature of the contract. A person selling a particular product to a dealer may impose post sale conditions like he should not re-sell the goods in loose forms, the dealer should sell the product only from a premises displaying the name of the manufacturer, the dealer should not re-sell the goods in other than specified territories or that he should not resell the goods or to the effect that the goods sold should be used only for a specified purpose only does not alter the nature of the transaction as a sale. So the transaction would not be covered by clause (a) of Section 65(55b). But we do not see any reason why the transaction would not be covered by clause (b) Section 65(55b). So the transaction amounts to Intellectual Property Service.”

26. Further, I find that M/s IBL has also argued that the cell clone, documentation and know how supplied by the foreign supplier would qualify as import of goods and not as import of service. In this connection, I do not find any substance in the argument. As I have already discussed above in Paras 35 & 36 , the issue of service tax payment on Intellectual Property Services has attained finality, and thus needs no discussion here.

27. I find they have cited the following case laws in the hearing dated 16.12.2013, as under:

(i) In M/s. Modi-mundipharma Pvt Ltd v/s. Commissioner of Central Excise Meerut (supra) wherein it has been held that no services were rendered and received during the disputed period. Whereas in the present case, I find that the services were received during the period of demand, and also the service tax payment on Intellectual Property Services has attained finality as discussed in the foregoing para. Hence the case law is irrelevant to the present issue.

(ii) The case of M/s. Hewitt Associates (India) Pvt Ltd (supra) is a Stay order. The issue was that the services were received by them in terms of agreement entered in October 2002 when IPR were not liable to tax. I find that a similar issue has been comprehensively covered in the case of M/s Murugappa Morgan Thermal Ceramics as reported at 2012(28) STR 58 (Commr.Appl) taking into account the judgements of M/s. Indian National Shipowner’s Association v. UOI - 2009 (13) S.T.R. 235 & M/s. Unitech Limited v. Commissioner of S. Tax, New Delhi - 2009-TIOL-293-HC-DEL-ST = 2009 (15) S.T.R. 385 (Del.)

(iii) In the case of M/s. Denso Haryana Pvt Ltd Vs. Commissioner of Central Excise, Delhi-III, which is also a stay order, the issue was one time technology transfer, whereas this is a case of continuous transfer of knowhow in F. Y. 2011-12 and the payments made thereof in 2011-12 and is discussed at Para 29 below.

22


28. Now, I come to the second issue i.e Whether when such agreements were entered prior to 10.09.2004 { the date when “Intellectual property service” was effected under Section 65(55b) of the Finance Act, 1944}, service tax would be payable or not. I find that M/s IBS in their defence reply has stated that they have paid service tax under Section 66A of the Finance Act, 1994 after availing the benefit of Notification 17/2004-ST dated 10.09.2004, on the fixed amount paid to M/s Eugenex, M/s Sunbio Inc the same has also been mentioned in the Audit Report no. 88/12-13. Now the issue concerning here is the payment of service tax on “Royalties “ to foreign these companies in the year 2011-2012, under Intellectual Property Services. I find that the issue of payment of service tax on royalties is also no more res-integra. In TRUMAC ENGG. CO. PVT. LTD (supra), wherein at Para 4 , it is held as under :

“4. As is clear from the above, the appellate authority has relied upon the Tribunal’s decisions in the case of M/s. Essel Propack Ltd. [2006 (1) S.T.R. 150] and M/s. BST Ltd. [2006 (4) S.T.R. 40], which have held that such transfer of technical know-how and royalty payment will not be leviable to service tax under the category of consulting engineers. It is further seen that the said activities were covered under the service of transfer of intellectual property rights w.e.f. 10-9-2004 and the appellants are paying service tax on the same with effect from the said date….”

28.1 Thus it is clear that w.e.f 10.09.2004, royalty payment has been covered under the ambit of Intellectual Property Services. However, I find, in the present case, such services are liable to Service Tax from 18.04.2006 onwards only, on reverse charge mechanism. under Section 66A of the Finance Act, 1994, under the head of Intellectual Property Services, as discussed in the foregoing paras.

29. Now I come to the argument of the assessee that the as the services were received prior to 18.04.2006 in case of M/s Sunbio Inc. for rendering or providing of the services was the taxable event and only after the introduction of Point of Taxation Rules, 2011, the date of payment can be taken as the date for determination of tax liability.

29.1 I find that though the agreements was 1.11.2003 with M/s SunBio Inc respectively, the royalty payments were made from the year 2008 onwards, as seen in Annexure ‘A’ as attached with the SCN. But since Intellectual Property Service were brought into the Service tax net from 10.09.2004, such royal payment to the foreign entities are taxable from 18.04.2006 onwards as decided by Commissioner of Central Excise (Appeals) in M/s Murugappa Morgan Thermal Ceramics as reported at 2012(28) STR 58 (Commr.Appl) and I reproduce the Paras 5.1 and 6 as under :

5.1 I find from the records that the appellant’s main contention is that the transfer of technical know-how is on a permanent basis in the instant case and it had taken place during the period when the Service was not taxable; that it should be treated as sale and not as service to levy Service tax. From the records I find that the appellant had been paying royalty right from 1-2-1995. The Intellectual Property Right Service was brought into the tax net w.e.f. 10-9-2004. If it is a one time affair as contended by the appellant then why they are paying royalty every year? The continuous payment of royalty by the appellant proves that the transfer of technical know-how is not on one time affair and the up-gradation of the same is taking place for which the royalty charges are being paid during the disputed period. I hold that the appellant is liable to pay Service tax under IPR Service.

23


5.2 Further the appellant had contended that if at all they are liable to pay Service tax as service receiver, they are liable to pay the same w.e.f. 18-4-2006. In this connection, it is pertinent to note that the Hon’ble High Court of Delhi in the latest judgment in the case of M/s. Unitech Limited v. Commissioner of S. Tax, New Delhi - 2009-TIOL-293-HC-DEL-ST = 2009 (15) S.T.R. 385 (Del.) has held as follows :

“5. In the present appeal, the assessee is aggrieved only with respect of its liability for the period 1-1-2005 to 15-6-2005.

5.1 In view of the above the following substantial question of law has arisen for our consideration :-

Whether the Tribunal misdirected itself in law in coming to the conclusion that the assessee will be liable to pay service tax for the period 1-1-2005 to 15-6-2005.

5.2 The answer to the question is squarely covered by the judgment of the Bombay High Court in the case of Indian National Shipowners Association (supra) with which we are in respectful agreement. Accordingly, the question of law is answered in favour of the assessee. The appeal is allowed and the impugned judgment passed by the Tribunal is set aside. No costs.”

The Hon’ble Bombay High Court in the case of M/s. Indian National Shipowner’s Association v. UOI - 2009 (13) S.T.R. 235 has held as follows :

“20… … … … … … … … … It appears that it is the first time when the Act was amended and Section 66A was inserted by Finance Act, 2006 i.e. 18-4-2006, the Respondents got legal authority to levy service tux on the recipient of the taxable service. Now, because of the enactment of Section 66A, a person who is resident in India or business in India becomes liable to be levied service tax when he receives services outside India from a person who is non-resident or is from outside India. Before enactment of Section 66A it is apparent that there was no authority vested by law in the Respondents to levy service tax on a person who is resident in India, but who receives services outside India. In that case till Section 66A was enacted a person liable was the one who rendered the services. In other words, it is only after enactment of Section 66A that taxable services received from abroad by a person belonging to India are taxed in the hands of the Indian residents. In such cases, the Indian recipient of the taxable services is deemed to be a service provider. Before enactment of Section 66A, there was no such provision in the Act and therefore, the Respondent had no authority to levy service tax on the members of the Petitioners association.

21. In the result, therefore, the petition succeeds and is allowed. Respondents are restrained from levying service tax from the members of the Petitioners association for the period from 1-3-2002 till 17-4-2006, in relation to the services received by the vessels and ships of the members of the Petitioners association outside India, from persons who are non-residents of India and are from outside India.

22. Rule made absolute accordingly. No order as to costs.”

The above decision by the Hon’ble High Court was ratified by the Hon’ble Supreme Court by dismissing the Special Leave petition filed by the Union of India

24


against Indian National Ship Owner’s Association reported in [2010 (17) S.T.R. J57 (S.C.)].

6. In view of the above stand taken by the Apex Court, I hold that the appellants liable to pay Service tax along with interest on the Royalty Charges paid to the foreign company as service receiver w.e.f. 18-4-2006 under “Intellectual Property Service”.

30. In view of the categorical findings which are identical to the present case, there is no doubt that , the service tax on “Royalty payments” will be liable from 18.04.2006 onwards, under reverse charge mechanism, and M/s IBL is liable to pay service tax on Royalty Payments and thus covers the third issue also. I also find that there a large number of judgments rendered by the Hon’ble Tribunals across the country having the same view as that of Appellate authority in M/s Murugappa Morgan Thermal Ceramics (supra). Therefore, in view of the above, Rs. 1,35,35,695/- is treated as taxable value , which was paid by M/s IBL towards the receipt of Intellectual Property Services from the service providers located outside India, and thus the service tax amounting to Rs. 13,94,177/- is hereby confirmed under Section 73 of the Finance Act, 1994.

31 Since M/s IBL had not discharged service tax liability on the amount of taxable value on the services mentioned in the foregoing paras as demanded under the show cause notice and therefore, they have contravened the provisions of Section 67 and 68 of the Finance Act, 1994 and thereby rendered themselves liable to penal action under Sections 76 of Finance Act 1994. Further, I find that they have deliberately failed to assess the correct taxable value in their ST-3 returns and not shown them in their ST-3 returns and therefore have contravened the provisions of Section 69 & 70 of the Finance Act, 1994 . They have thereby rendered themselves liable to penal action under Section 77(2) of Finance Act 1994.

32. As regards the issue of imposition of penalty under Section 76 of the Finance Act, 1994, In the case before me, the demand of service tax is for the period 2011-2012 therefore, I hold that penalty under Section 76 of the said Act is imposable on the said noticee. I find that as the noticee has not paid service tax within the stipulated time period as prescribed under Section 68 of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994, I hold them liable to penalty under Section 76 of the Finance Act, 1994. My conclusion is also based on various decisions of Hon’ble High Courts & Tribunals as mentioned below ;

CCE & ST Vs First Flight Couriers Ltd reported at 2007(8) STR 225 (Kar.) UOI Vs Aakar Advertising, reported at 2008 (11) STR.5 (Raj.) UOI Vs Shiv Ratan Advertisers reported at 2008 (12) STR 690 (Raj.) Shiv Network Vs CCE, Daman reported at 2009 (14) STR 680 (Tri-Ahmd) CCE, Vapi Vs Ajay Sales Agencies reported at 2009 (13) STR 40 (Tri–Ahmd) Siddhi Motors Vs CCE, Rajkot reported at 2009 (15) STR 422 (Tri-Ahmd)

32.1 I further observe that the Hon’ble CESTAT in the case of M/s Gujarat Industrial Security Force Society Vs CST, Ahmedabad, vide order No. A/1110/WZB/AHD/2010 dated 05.08.2010, has held that no lenient view can be taken under section 76 of the Finance Act, 1994. The relevant paras are reproduced below;

“2. After hearing both the sides, I find that in this case, the assessee was registered more than 6 years back and no explanation has been given by them for delayed filing of

25


return and delayed payment of service tax. Under these circumstances, I am not finding fault in stand taken by the lower authority that penalty is imposable under section 76 and once it is held that penalty is imposable under section 76, the amount fixed as per the provision of section 76 is required to be imposed. Under these circumstances, even though the Ld. Advocate submitted that the appellant is a non profit organization, no lenient view can be taken in view of the provisions of law.

3. Accordingly, the appeal is rejected.”

32.2 Hon’ble High Court of Gujarat in the case of CCE & Cus. Vs Port Officer, reported at 2010 (19) STR 641 (Guj) has now settled the issue of penalty under Section 76. The relevant para is reproduced below ;

“10. A plain reading of Section 76 of the Act indicates that a person who is liable to pay service tax and who has failed to pay such tax is under an obligation to pay, in addition to the tax so payable and interest on such tax, a penalty for such failure. The quantum of penalty has been specified in the provision by laying down the minimum and the maximum limits with a further cap in so far as the maximum limit is concerned. The provision stipulates that the person, who has failed to pay service tax, shall pay, in addition to the tax and interest, a penalty which shall not be less than one hundred rupees per day but which may extend to two hundred rupees for everyday during which the failure continues, subject to the maximum penalty not exceeding the amount of service tax which was not paid. So far as Section 76 of the Act is concerned, it is not possible to read any further discretion, further than the discretion provided by the legislature when legislature has prescribed the minimum and the maximum limits. The discretion vested in the authority is to levy minimum penalty commencing from one hundred rupees per day on default, which is extendable to two hundred rupees per day, subject to a cap of not exceeding the amount of service tax payable. From this discretion it is not possible to read a further discretion being vested in the authority so as to entitle the authority to levy a penalty below the stipulated limit of one hundred rupees per day. The moment one reads such further discretion in the provision it would amount to re-writing the provision which, as per settled canon of interpretation, is not permissible. It is not as if the provision is couched in a manner so as to lead to absurdity if it is read in a plain manner. Nor is it possible to state that the provision does not further the object of the Statute or violates the legislative intent when read as it stands. Hence, Section 76 of the Act as it stands does not give any discretion to the authority to reduce the penalty below the minimum prescribed.”

32.3 The Hon’ble High Court of Gujarat has further confirmed the above view in the case of CCE Vs S J Mehta & Co., reported at 2011 (21) STR 105 (Guj.) and CCE Vs Bhavani Enterprises reported at 2011 (21) STR 107 (Guj.).

33. In light of the aforesaid discussions and findings, I hold that the service tax amount of Rs. 13,94,177/- alongwith interest is liable to be confirmed under Section 73(1) of the Finance Act,1994 read with Section 75 of the Act ibid and they are also liable to penalty under the provisions of Section 76, 77 of the Finance Act,1994.

34. As regards invoking Section 80 of the Finance Act, 1994 for waiver of penalty, I find that M/s IBL has not produced any reasonable cause for the failure to pay service tax except that it was their bonafide belief that service tax was not payable by them. I have already discussed the issue of taxability of services in the foregoing paras. I observe that if M/s IBL had any doubt with regard to taxability of services, then being a registered service tax assessee they should have

26


approached the service tax authorities for clarification of doubt to ascertain the taxability of the service provided by them.

34.1 On this issue I find that the Hon’ble Tribunal { reported at 2013- TIOL—1160-CESTAT-AHM } on the issue whether “bonafide’ impression” would prevail over legislation observed as under :

4. Section 66A was inserted with effect from 18.4.2006 into the Act, by the Finance Act, 2006 (21 of 2006). This provision enjoins that where any service specified in 65 (105) is provided or to be provided by a person has established a business or has the fixed establishment of his service provided or to be provided or has his permanent address in a country other than India and such service is received by a person (recipient) who has his place of business or its establishment, permanent address or the usual place of residence in India, the recipient shall be treated as having provided the taxable service in India and accordingly, all the provisions of chapter 5 will apply. With effect from 01.5.2006, therefore, the liability of a service recipient, in respect of taxable service provided to such locally established recipient, by a service provider having an overseas establishment, to remit service tax is clear and unequivocal, beyond a scintilla of doubt.

5. The learned counsel for the appellant strenuously contends that since provisions of Section 66A were in challenge before various Courts, the appellant assessee was under a bonafide impression that compliance with the said provisions is not mandatory. This contention is stated to be rejected. It is axiomatic. Legislation is operative proprio vigore on its enactment and effectuation. The operation of legislation is not contingent upon affirmation by the judicial branch, even where a challenge to its constitutionality is presented before the Courts. No person therefore, could reasonably harbour any manner of doubt that when legislation is under challenge, the challenged legislation is in eclipse to be upheld. A doubt. The appellate authority has rightly rejected the appellant's claim in this regard and has rightly reversed the order of adjudicating authority on a true and fair construction of Section 73(4) of the Act. The order of the Appellate Commissioner is impeccable and warrants no interference."

34.2. In view of the above, I consider it appropriate to hold M/s IBL liable to penalty under Section 76 of the Finance Act, 1994.

35. Accordingly, I pass the following order:-

ORDER

i. I consider the amount of Rs. 1,35,35,695/- paid by the noticee towards the receipt of Intellectual Property Services from the service providers located outside India as taxable value under the category of Intellectual Property Services.

ii. I confirm the demand of Service Tax amounting to Rs. 13,94,177/- (Rupees Thirteen lakhs ninety four thousand one hundred seventy seven only) on the taxable value of Rs. 1,35,35,695/- received by M/s Intas Biopharmaceuticals Limited, Ahmedabad under “Intellectual Property Rights Service” and order to recover the same from them under Section 73 of Finance Act, 1994 .

iii. I order the noticee to pay the interest on the amount of their service tax liability for the delay in making the payment under Section 75 of the Finance Act, 1994 on the Service Tax demanded under para (ii) above.

27


iv. I impose a penalty of Rs. 200/- (Rupees Two Hundreds Only) per day /{ Rs. 100/- (Rupees One Hundred only) w.e.f. 8.04.2011} or at the rate of 2% of the service tax amount per month/ {1% of the service tax amount per month w.e.f. 8.04.2011} , whichever is higher, subject to maximum of the outstanding tax amount, from the date on which such tax was due till the actual payment of outstanding tax amount, whichever is earlier, under the provisions of Section 76 of the Finance Act, 1994, as amended, for failure to pay Service Tax within the stipulated period as required under the provisions of Section 68 (1) of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994, as amended.

v. I impose a penalty of Rs 10,000/- ( Rupees Ten Thousand Only) under Section 77 of the finance Act, 1994 on M/s. IBL.

[J S Negi]Additional CommissionerService Tax : Ahmedabad

F.No. STC/4-56/O&A/ADC/12-13 Date : 24.12.2013

By R.P.A.D/Hand Delivery

To,

M/s Intas Biopharmaceuticals Limited,423/P/A, Sarkhej Bavla Highway,Moraiya, Tal : Sanand,Ahmedabad – 382213.

Copy to:-

1. The Commissioner, Service tax, Ahmedabad ( Attn. RRA Cell).2. The Asst. Commissioner, Service Tax, Division-II, Ahmedabad3. The Superintendent, Range-V, Division-II, Service Tax, Ahmedabad with an extra copy of OIO

to be delivered to the assessee and send an acknowledgement to this office.4. Guard File

28

Documents

Brief Facts of the Case€¦ · Web view1. Audit of the records of M/s Intas Biopharmaceuticals Limited, 423/P/A, Sarkhej Bavla Highway, Moriaya, Tal:-Sanand, Ahmedabad -382213 (Service