TMI Blog2006 (12) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... the services of consulting engineer from countries other than India. The Revenue received an information that the appellant was availing services of foreign consulting engineers HALDOR TOPSOE of Denmark on which service tax was payable by the recipient in India as per rule 2(1)(d)(iv) of the Service Tax Rules, 1994, substituted with effect from 16-8-2002, by Notification No. 12/2002 dated 1-8-2003. The appellant was, therefore, called upon to produce copies of the agreements in respect of such services. The authorized representative of the appellant in his statement recorded under Section 14 of the Central Excise Act, 1944 on 18-8-2004 disclosed that the appellant had paid Rs. 4,22,64,128/- to HALDOR TOPSOE on account of taxable services availed by the appellant under the category of consulting engineer and that, they had also paid a sum of Rs. 19,54,899/- as the Research and Development Cess under the R D Cess Act, 1986, since the appellant wanted to avail the exemption of service tax to the extent of the cess paid by them as applicable under Notification No. 18/2002 dated 16-12-2002 issued by the Board, wherein it was clarified in relation to consulting engineer service, that se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed a highly specialized production. It could be imparted to others without necessarily loosing its value to the source organization. Know-how consisted of the technical and commercial information, documented in the form of detailed manufacturing data including specifications and drawings. It was also contended that the engineering package was prepared in Denmark and brought into India and that the consideration paid for supply of the engineering design package amounted to sale of goods and not rendering of any service. Moreover, the activities relating to development of know-how took place outside India, hence the amount realized on transfer of know-how cannot come under the purview of service tax imposed under the said Act. According to the appellant, the payment made to HALDOR TOPSOE was not on account of any taxable service under the category of consulting engineer defined in Section 65(31) of the said Act. 4.On the basis of the material on record, the adjudicating authority held that the consulting engineer services included advice, consultancy or technical assistance, feasibility study, pre-design services, basic design engineering, detailed engineering design, procur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation and know-how . It was further held that the terms of the agreement made it clear that apart from allowing the use of technical know-how , technical services in various forms including deployment of technical manpower from TOPSOE at the IFFCO AONLA plant had been rendered. It was noted that there was no ambiguity in the clauses of the agreement and the phrases 'engineering service', 'technical service' etc. had been used intermittently. The Commissioner (A) held that merely because there was a non-exclusive right given to the appellant to use their know-how , it did not take away the activity undertaken in this case out of the purview of consulting engineering services. As regards the contention that no period had been invoked in the show cause notice, the Appellate Commissioner held that, as per Rule 7 of the Service Tax Rules, 1994, every assessee was required to submit a half-yearly return for the months covered in the half-yearly return. Such returns were to be submitted by the 26th of the following month. It was held that, in the present case, if the dates of agreements dated 29-10-2003 and 4-12-2003 were taken as the crucial dates, then the last date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of the appellants under the said agreements. Relying upon the decision of the Tribunal in M/s. Navinon v. CCE, reported in 2006 (3) S.T.R. 397 (Tribunal) = 2004 (172) E.L.T. 400, it was pointed out that the Tribunal had set aside the levy of service tax under the category of consulting engineer service on royalty payments made pursuant to an agreement for technical know-how, equipment, skill, expertise and services for production of VAT dyes. On the basis of the decision of the Court of Appeal Evans Medical Supplies Ltd. v. Morearty, reported in (1957) 1 WLR 288, it was submitted that know-how could form the subject matter of sale like a commodity. It was contended that under the agreements in question, the appellant had entered into transaction dealing with property and not for any service. It was, therefore, submitted that no service tax was payable in respect of such an agreement and services rendered pursuant thereto. It was then argued that the amount paid by the appellant was entirely for import of drawings/designs and technical documentation from outside India and therefore, the transaction was for purchase of imported goods and no service tax was payable in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was also argued that the show cause notice was issued without following the procedure laid down by law, because a notice under Section 73 could be issued within the prescribed period reckoned from the relevant date, that is, when periodic return was to be filed, while in the present case, it was issued prior to the completion of the prescribed date of filing of the returns in respect of several invoices. Reliance was placed on the decision of the Supreme Court in CIT v. Karban Hussain, reported in 82 ITR 821 in which it was held that mentioning of wrong assessment year would result in invalid assessment. It was argued that the show-cause notice did not refer as to which particular half-year, the proceeding related, and that in respect of some payments made during 1-4-2004 and 30-9-2004, the show cause notice was premature. It was finally contended that there was no justification for levy of any penalty on the appellant, as the appellant was under a bona fide impression that no service tax was payable in respect of the know-how transferred by a foreign company to the appellant. Arguments made for the Revenue : 7.The learned authorized representative for the department cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical services including establishing systems and procedures for an existing plant etc. It was, therefore, submitted that since such services were provided to the appellant under the agreements in question, they attracted levy of service tax on the amounts paid by way of consideration for such services. Referring to the Circular dated 18-12-2002 issued by the Ministry of Finance, it was submitted that the work of erection and commissioning of machineries and plants was one of providing technical assistance and, therefore, in the nature of taxable service provided by a consulting engineer. It was also submitted that the appellant had availed of the benefit of the Notification No. 18/2000, dated 16-12-2000 issued by the Central Government under Section 93(1) of the said Act, on the footing that taxable services were provided to it by a consulting engineer on transfer of technology, thereby claiming exemption of the service tax leviable under Section 66 of the Act to the extent to which the amount of cess was paid on such transfer of technology under Section 3 of the Research Development Cess Act, 1986. The decision of this Tribunal in Nokia (I) Pvt. Ltd. v. CC Delhi, reported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I Energy Saving Project Phase-I. HALDOR TOPSOE had the requisite experience of design, construction, modification of ammonia plants and had a right to grant process licences as may be required, for use and practice of TOPSOE technology. HALDOR TOPSOE also had a right to grant sub-licences for a carbon dioxide removal process, which was owned and licensed by GIAMMARCO VETROCOKE (GV) of Benits, Italy. Under the agreement, TOPSOE provided required licences for providing engineer design package (EDP) and other engineering services and assistance , for the said project of the appellant. The appellant had issued a letter of intent (LOI) dated 12-9-2003 to HALDOR TOPSOE for consultancy services in respect of the said project and HALDOR TOPSOE had undertaken single point responsibility , as indicated in the agreement. It was stipulated that the appellant will have detailed engineering and construction of the plant carried out under contracts with Indian Engineering consultants/contractors, who were to be approved by HALDOR TOPSOE. A separate agreement was to be entered into by TOPSOE with the detailed engineering consultancy engaged by the appellant. 9.1The licence in respect of Techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R or a third party, and supplied to TOPSOE for review as specified in clause 4.0 of Appendix II to this Agreement. The purpose of such review is to see whether the process and design requirements of TOPSOE are satisfied. Unless otherwise agreed, TOPSOE shall inform IFFCO of its comments with remedial measures, if any, within 15 (fifteen) working days (official working days TOPSOE's office) from receipt of each item of technical documentation. 3.3 Technical Assistance in India In accordance with the General Conditions specified in Appendix V TO THIS agreement, TOPSOE shall provide technical assistance in India in IFCCO's offices or CONTRACTOR'S offices in India and at the site of ANOLA-I PLANT as follows : (a) Review, etc. Technical assistance related to review of the engineering supplied by TOPSOE pursuant to sub-clause 3.1 of this Agreement and related to detailed engineering and procurement carried out by IFFCO or for IFFCO by CONTRACTOR (b) Construction, Commissioning, etc. Technical assistance related to construction, pre-commissioning, commissioning, start-up and test rune of the revamped ANOLA-I PLANT and technical assistance for demo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b-clauses 4.2 of this Agreement shall be paid within 45 (forty five) days after the end of each month in which the technical assistance services were rendered on the basis of monthly invoices issued to IFFCO by TOPSOE : TOPSOE shall ensure that each invoice is received by IFFCO 30 (thirty) days prior to the due date of payment. 6.2 Taxes (a) TOPSOE's fees and payments under this Agreement exclude any and all taxes leviable on TOPSOE and payable in India on the fees and payments to be paid to TOPSOE. IFFCO will pay these taxes and hold TOPSOE at any time harmless and indemnified from and against any tax liability in India in respect of payments received by TOPSOE under this Agreement. These fees, however, include all taxes, which are imposed outside India on TOPSOE in connection with this Agreement TPSOE shall give assistance to IFFCO in IFFCO's dealings with Indian Income Tax Authorities for taxes, if any, leviable on the fees to TOPSOE under this agreement... [emphasis added] 9.3Under clause 10 relating to technical information, TOPSOE granted to the appellant non-exclusive rights to use all technical data, information, and know-how (described as tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tified by the appellant, as stipulated in Clause 5.2. 10.It is, therefore, abundantly clear that the said agreement stipulated not only supply of technical knowledge, but also rendering of engineering services in connection with the designing and implementation of the said Energy Saving Project of the appellant. The agreement clearly referred to technical information , which was to comprise of technical data, besides referring to technical assistance . The fees chargeable for rights and licences granted by TOPSOE for its technical information and processes under clause 2, were separately stipulated in clause 4.1 on the supply of the EDP, while the fees for technical assistance were stipulated under clauses 4.2 and 4.3. The fees for technical assistance were to be paid against monthly invoices. The amounts under clause 4.2 were to be paid, within 45 days after the end of each month in which the technical assistance services were rendered on the basis of monthly invoices issued to IFFCO by TOPSOE . 10.1The above stipulations indicate that it was not only the licence to use know-how as an intellectual property transferred to the appellant, but giving of technical assis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings, photographs and sculptures and architectural designs. Rights related to copyright include those of performing artists in their performances, producers of programmes in their recordings, and those of broadcasters in their radio and television programmes. 12.Intellectual property is thus, a broad concept and includes many different intangibles such as : patents (inventions), copyright (works of authorship, including technical manuals, software, specifications, formulae schematics and documentation, among other things), know-how (e.g. expertise, skilled craftsmanship, training capability, understanding of how something works), trade secrets (a protected formula or method, undisclosed to customer or technical information, algorithms etc.) trademarks (logos, distinctive names for products and technologies, etc.), industrial designs (unique way a product looks, such as, a computer's moulding), and semi-conductor mask works (physical design of semi-conductor circuits). 12.1The Convention establishing the World Intellectual Property Organization (1967) does not seek to define intellectual property, but gives the following list of the subject matter protected by intellectual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tantial. Know-how must be described in a sufficiently comprehensive manner in order to verify whether it meets the secrecy and substantiality criteria. An agreement dealing with transfer of know-how as an intellectual property may also provide exchange of non-proprietary information. Mere word know-how , as commonly understood, will not make all know-how, that is, the processes involved in doing of a task, as intellectual property, unless it is a confidential know-how or a trade secret known only to the knower and is not in pubic domain, so that its commercial exploitation could be done only under a licence from the person having the know-how which would be a special skill unknown to others that can be imparted for commercial exploitation. A new licencee may require assistance from the licensor in terms of know-how, training and consultation to make the technology or product practically useful and functional. The licencee may need help from the licensor in terms of written documentation or materials that help him to understand how to use the technology. The licencee may need the know-how of the licensor in order to exploit the technology. The licencee may desire to have li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certainable by other person who can obtain economic value from its disclosure or use, and is the subject of efforts that are reasonable under the circumstances, to maintain its secrecy. 15.In the present case, the adjudicating authority has on the basis of the definition of consulting engineering services in clause 65(31) and the circular dated 2-7-1997 issued by the Ministry of Finance and the clarification dated 18-12-2002 issued by the Board, found that once the drawings and designs were completed, they were required to be approved by the client before proceeding with the construction and changes that were required to be incorporated as suggested by the client and, therefore, the services were definitely in the nature of consulting engineer services and hence taxable. It was also held that the agreement had guaranteed rights to use all technical data, information, and know-how for all purposes related to construction, maintenance, de-bottlenecking, and operation of the said Energy Saving Project, and that, the technical assistance relating to review of engineering supplied by HALDOR TOPSOE and procurement carried out by the appellant and also relating to construction, re-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are of the minimum 50 man-days technical assistance which was required for the use of the licensed know-how. 16.In the context of technical assistance in India covered by clause 3.3, the appellant in their reply (paragraph D-7) had contended that the technical assistance rendered by HALDOR TOPSOE was incidental to the transaction for transfer of know-how, which was transaction in property. It was not their case that no technical assistance was rendered. Know-how as intellectual property already existing with HALDOR TOPSOE, could not have been subjected to service tax, but surely the technical assistance which went with it and without which it would not have been possible to implement or use the technical know-how, remained taxable service under the said Act. The agreements in question were not merely in respect of licence to use the know-how as intellectual property which HALDOR TOPSOE already possessed, but they also provided for minimum required man-days of technical assistance as well as other technical assistance in the form of further services. The service tax would be attracted in respect of services rendered in India at the plant of the appellant to that extent of their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods, are different from the considerations of ascertaining the place where the services are to be rendered. The technical assistance was t obviously to be rendered in the AONLA plants of the appellant in respect of which the studies were undertaken initially and for which the know-how was adapted with an undertaking of providing technical assistance, of which, at least 50 man-days were required as the minimum, under the agreement. There is, therefore, no substance in the contention that services, if any, were not rendered in India. 18.The contention that show cause notice for recovery of service tax for the period from 1-4-2004 to 31-9-2004 was premature, is erroneous. The appellant did not get itself registered under Section 69 of the Act till 2-7-2004. Show cause notice for the purpose of recovery of service tax which had not been levied or paid was required to be issued within one year from the relevant date . For the purpose of Section 73 relevant date is defined in Section 73(6). In cases where under the rules made under Chapter V of the said Act, a periodic return is to be filed by an assessee, the date of such return would be the relevant date and in cases where no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sold or licensed to any one. In such cases, special knowledge held as intellectual property and reduced in form of book or any other tangible matter would be capable of being sold as goods just as books containing an information can be sold. When technical information of confidential nature and not in public domain is sold or licensed for commercial exploitation, something which already had come into existence is being transferred and would, therefore, not be an active service rendered. However, when coupled with transfer of such know-how as a trade secret in the nature of intellectual property, it is required to be supplemented by rendering service in the nature of advice, consultancy or technical assistance, that activity would be different, and any payment in respect of such activity which amounts to service rendered with a view to enable the recipient to properly use the intellectual property for its purpose would be subject to taxation under the said Act. However, when some consulting engineer is engaged to work out special techniques or knowledge which was not already existing with the consulting engineer as a trade secret or know-how in the nature of intellectual propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out the consideration that was relatable to the technical assistance which was rendered in the context of licensing rights has not been attempted by the Commissioner (Appeals), though he appears to have been appropriately conscious of the fact that, apart from allowing the use of the technical know-how , technical services in various forms including deployment of technical manpower from TOPSOE at IFFCO AONLA has been rendered . All the payments except those which are specifically relatable to licence as covered by clause 2 and which did not relate to any form of technical assistance included thereunder, will have to be separated, since no tax could be chargeable in respect of such licensing fees attributable to the rights covered by clause 2 of the agreement, and the service tax will be chargeable only in respect of the technical assistance which was contemplated under the agreement for being rendered at the plant of the appellant in India and which was so rendered. Final order 21.The impugned order is, therefore, modified by directing that the amount of consideration under the agreements in question, which related to the licensing of 'know-how' as contemplated und ..... X X X X Extracts X X X X X X X X Extracts X X X X
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