The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that the mere licensing of pre-existing technical know-how, technical documentation and trademarks does not amount to the provision of “Consulting Engineer Services” under the Finance Act, 1994.
Setting aside a service tax demand of Rs. 2.31 crore, the bench of Ajay Sharma (Judicial Member) and Rajeev Tandon (Technical Member) ruled that the agreement between Skoda Auto Volkswagen India Pvt. Ltd. and its Czech parent was essentially a licence to use intellectual property rather than a consultancy arrangement.
The appellant/assessee is engaged in the assembly and manufacture of passenger cars in India. To facilitate its manufacturing operations, it entered into an agreement dated October 1, 2001 with Skoda Auto A.S., Czech Republic, under which the foreign entity granted it a non-exclusive, non-transferable licence to use its existing technology, technical documentation, know-how and the “Skoda” trademark for manufacturing, assembling and selling passenger cars and components in India.
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Under the agreement, the Indian company agreed to pay a lump sum consideration of USD 45 million in six installments along with a running royalty of 5% on domestic sales and 8% on exports.
The Service Tax Department treated the arrangement as the provision of “Consulting Engineer Services,” alleging that the foreign company had rendered engineering advice and technical assistance. Since the Czech company had no office in India, the Department sought to recover service tax of ₹2.31 crore from the Indian recipient under the reverse charge mechanism for the period 2001-02 to 2003-04, along with interest and penalties. The Commissioner confirmed the demand, prompting the company to appeal before the CESTAT.
The Tribunal considered two principal questions.
Firstly, whether licensing of technical know-how and technical documentation constituted “Consulting Engineer Services” under Section 65 of the Finance Act, 1994.
Secondly, even if the services were taxable, whether service tax could be demanded from the recipient for the period prior to the insertion of Section 66A on April 18, 2006, which introduced statutory reverse charge liability on recipients of services from abroad.
The Bench undertook a detailed examination of the licensing agreement and observed that its true substance was the grant of a licence permitting the Indian company to use intellectual property that had already been independently developed by Skoda Czech.
The Tribunal emphasized that the technical documentation, drawings, engineering information and know-how were pre-existing proprietary intellectual property of the foreign company. They had not been created pursuant to any request or engineering assignment given by the Indian company. Instead, the Indian entity merely obtained the right to use technology already in existence.
According to the Tribunal, “Consulting Engineer Services” require the rendering of professional engineering advice, consultancy or technical assistance tailored to the client’s specific engineering problems or projects. Such services necessarily involve the application of engineering expertise for solving the client’s particular requirements.
In contrast, the agreement before it involved no customised engineering advice, consultancy or project-specific assistance. The Czech company was not retained as a consultant, nor was it asked to solve any engineering problem or develop technology specifically for the Indian manufacturer. It merely licensed access to its existing technology and trademarks.
The Tribunal further noted that, during the relevant period, the statutory definition of “Consulting Engineer” applied only to a professionally qualified engineer or an engineering firm. Skoda Czech was primarily a manufacturer of passenger vehicles and not an engineering consultancy. Merely possessing valuable engineering know-how did not transform it into a consulting engineer for service tax purposes.
The Tribunal distinguished between a licence of intellectual property and the provision of engineering consultancy.
It held that permitting another entity to use existing know-how, technical documentation or trademarks against payment of royalty constitutes a licensing transaction involving intangible property. Such an arrangement cannot be re-characterised as consultancy merely because the subject matter relates to engineering.
The Bench observed that the Revenue had selectively relied upon certain expressions in the agreement while ignoring its overall commercial substance, which clearly reflected a licensing arrangement rather than the rendering of professional services.
The Tribunal also held that, even assuming the services were taxable, the demand against the Indian company could not survive because the relevant period was 2001-02 to 2003-04, whereas Section 66A introducing statutory reverse charge liability came into force only on April 18, 2006.
It relied upon the Bombay High Court’s judgment in Indian National Shipowners’ Association, which held that recipients of services from abroad could not be made liable to service tax before the enactment of Section 66A.
The Bench further found that the adjudicating authority had relied upon Rule 2(d) of the Service Tax Rules even though the show cause notice had not invoked that provision, thereby travelling beyond the allegations contained in the notice and violating settled principles of natural justice.
The Tribunal also referred to its earlier decision in Bajaj Auto Ltd., wherein it had held that licensing of trademarks and similar intellectual property rights constituted a transaction involving intangible property and not consultancy or technical advice. Since that decision had attained finality after the Department chose not to pursue further appeal before the Supreme Court, the Tribunal followed the same legal position in the present case.
Allowing the appeal, the CESTAT held that the licensing of pre-existing technical know-how, technical documentation and trademarks did not amount to “Consulting Engineer Services” under the Finance Act, 1994. It further ruled that service tax could not be demanded from the Indian recipient under the reverse charge mechanism for a period preceding the introduction of Section 66A.
Accordingly, the Tribunal set aside the Order-in-Original confirming the demand of ₹2.31 crore along with interest and penalties and granted consequential relief to Skoda Auto Volkswagen India Pvt. Ltd. in accordance with law.
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