2025 (6) TMI 595 - AT - Service Tax

Levy of service tax - royalty amount received for granting a license to use trademarks under a novation agreement dated 24.02.2010 - refund of the amount of service tax paid after executing the novation agreement - sale or deemed sale. Whether the service tax was leviable on amount of royalty received by M/s. BCCL for grant of license in favour of M/s. BCL to use the trademark or not? - HELD THAT - The transfer of property in goods is sale. In addition the transactions where there may not be a conventional transfer of property in goods but a transfer of right to use the goods also got included to be called as sale of goods/the Deemed Sale . It is also observed that the term transfer of right to use goods as got coined with the said 46th Amendment is not defined in the Constitution nor it is defined in any other statute. The said phrase for the first time got interpreted by Hon ble Supreme Court of India in the case of Bharat Sanchar Nigam Ltd. Vs. Union of India 2006 (3) TMI 1 - SUPREME COURT wherein the Hon ble Apex Court enunciated following five attributes for a transaction to constitute a transfer of right to use the goods . The Intellectual Property Rights are held equivalent to goods. Support drawn from the decision of this Tribunal in the case of Commissioner of Service Tax Delhi-II Vs. Future Brands 2022 (9) TMI 436 - CESTAT NEW DELHI wherein it was held that the exclusive license to use the trademark would qualify as transfer of right to use the goods and would be covered by article 366 (29A) (d) of the Constitute of India. It is not inclined to accept the contention of the department that the transaction does not amount to permanent transfer of goods hence will amount to rendering of service. It is rather held that the impugned transaction arising out of novation agreement dated 24.02.2010 the parties to the said agreement agreed to enter into the transaction of Deemed Sale as different from it being called as declared service as the transferee M/s. BCL was allowed to use IPR/goods to the exclusion of the transferor i.e. M/s. BCCL. The service tax was not leviable on amount of royalty received by the appellants M/s. BCCL. The demand is held to have been wrongly confirmed qua the appellant. This issue stands decided in favour of the appellants. Whether the appellant is entitled for the refund of the amount of service tax paid after executing the novation agreement dated 24.02.2010? - HELD THAT - The appellant was restrained to use the said trademark during the said period in any territory of the world and as such the transaction was a transaction of Deemed Sale inviting no service tax liability. Hence the amount paid by the appellant for which refund has been claimed was the amount not towards the duty but was an amount wrongly deposited by the appellant. It is also observed that the Commissioner (Appeals) has upheld the rejection of refund announced by the original adjudicating authority on the ground of unjust enrichment. Apparently and admittedly the appellant had collected service tax for the relevant period. There is no evidence produced on record to show the reversal of the said amount. Hence there are no infirmity when the doctrine of unjust enrichment has been invoked for rejecting the said refund claim. Apparently and admittedly the appellant had collected service tax for the relevant period. There is no evidence produced on record to show the reversal of the said amount. Hence there are no infirmity when the doctrine of unjust enrichment has been invoked for rejecting the said refund claim. Conclusion - i) The service tax was not leviable on amount of royalty received by the appellants M/s. BCCL. ii) The amount paid by the appellant for which refund has been claimed was the amount not towards the duty but was an amount wrongly deposited by the appellant. However since the appellant had collected service tax for the relevant period and there is no evidence of reversal the doctrine of unjust enrichment applies and refund claim rightly rejected. Appeal allowed.

Summary

Two appeals involving the same appellant were considered, focusing on the tax treatment of royalty payments received for trademark licensing. The core legal questions were:

(i) Whether service tax was leviable on the royalty amount received for granting a license to use trademarks under a novation agreement dated 24.02.2010;

(ii) Whether the appellant was entitled to a refund of service tax paid after executing the novation agreement, given the contention that the transaction amounted to a 'Deemed Sale' and not a taxable service.

Issue 1: Levy of Service Tax on Royalty Received for Trademark License

The legal framework involved Section 66E(c) and Section 65B(44) of the Finance Act, 1994, which define 'Declared Services' and 'Service' respectively, and Article 366(29A) of the Constitution of India, which defines 'tax on sale or purchase of goods' to include transfer of the right to use goods for any purpose, thereby deeming such transfer as a 'sale' for taxation purposes.

The Court examined the novation agreement dated 24.02.2010, which granted an exclusive worldwide license to use the trademark for 99 years, replacing the earlier non-exclusive license. Key clauses revealed that the licensee was granted exclusive rights to use the trademark and associated goodwill, with the licensor restrained from manufacturing similar products or granting similar rights to others during the term. A royalty of 1% of the licensee's annual net sales was payable to the licensor.

The Court applied the five attributes laid down by the Supreme Court in Bharat Sanchar Nigam Ltd. v. Union of India (2006) to determine whether the transaction constituted a transfer of the right to use goods:

• Existence of goods available for delivery;
• Consensus on the identity of goods;
• Legal right of the transferee to use the goods, including necessary permissions;
• Exclusion of the transferor's right to use the goods during the transfer period;
• Owner's inability to transfer the same rights to others during the transfer period.

All these attributes were satisfied by the novation agreement, indicating a transfer of right to use the trademark (considered 'goods' under intellectual property law) for a substantial period (99 years) to the exclusion of the licensor.

Consequently, the Court held that the transaction was a 'Deemed Sale' under Article 366(29A)(d) of the Constitution, not a 'Declared Service' under Section 66E(c) of the Finance Act. The transfer was not merely a temporary license but an exclusive transfer of the right to use the trademark, amounting to a sale of goods for tax purposes.

The Court distinguished the department's reliance on cases involving non-exclusive licenses or franchise agreements, such as McDonald's India Pvt. Ltd., noting that those involved composite services or non-exclusive licenses, unlike the exclusive, long-term transfer here.

The Court also referred to the department's own Circular No. 80/10/2004 clarifying that permanent transfer of intellectual property rights does not constitute a taxable service. The Court further relied on a Madras High Court decision holding that exclusive licenses can amount to transfer of right to use goods and thus 'Deemed Sale'.

Thus, the demand for service tax was held to be wrongly confirmed, and the appellant was not liable to pay service tax on the royalty received under the novation agreement.

Issue 2: Entitlement to Refund of Service Tax Paid

Since the transaction was held to be a 'Deemed Sale' and not a taxable service, the service tax paid by the appellant on the royalty was paid without liability and thus eligible for refund.

However, the refund claim was rejected by the original adjudicating authority and upheld by the Commissioner (Appeals) on the ground of unjust enrichment, as the appellant had issued tax invoices including service tax to the licensee (M/s. BCL), indicating that the tax burden was passed on to the licensee. The appellant failed to produce evidence of reversal of this tax burden.

The Court upheld the rejection of the refund claim, relying on the doctrine of unjust enrichment and Supreme Court precedents, including Mafatlal Industries Ltd. v. Union of India and ITC Ltd. v. Commissioner of Central Excise, which hold that refunds cannot be granted if the tax burden has been passed on and no modification of assessment has been made.

Therefore, despite the absence of service tax liability, the refund was denied due to unjust enrichment principles.

Significant Holdings:

"The agreed transaction between M/s. BCCL and M/s. BCL was for the transfer of right to use the goods/IPR though for a specified period but to the exclusion of the appellant. The specified period is also substantial i.e. 99 Years. Hence, as held by Hon'ble Supreme Court, the transaction was that of a transfer of right to use goods and was not merely a license to use the goods. Such transfer of right to use, in light of article 366 (29A) of the Constitution is an act of 'Deemed Sale' as different from an act of 'Declared Service' of transferring the use of IPR/goods."

"The concept of 'Deemed Sale' has extended the scope of the meaning of permanent transfer to include the transfer of right to use though for a certain period but to the exclusion of the transferor."

"The service tax was not leviable on amount of royalty received by the appellants M/s. BCCL. The demand is held to have been wrongly confirmed."

"The amount paid by the appellant for which refund has been claimed was the amount not towards the duty but was an amount wrongly deposited by the appellant. However, since the appellant had collected service tax for the relevant period and there is no evidence of reversal, the doctrine of unjust enrichment applies and refund claim rightly rejected."

In conclusion, the Court allowed the appeal challenging the service tax demand, setting aside the demand, but dismissed the appeal challenging the rejection of refund, thereby upholding the refund denial on unjust enrichment grounds.