The Delhi Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that service tax is not leviable on the amount of royalty.
The bench of Dr. Rachna Gupta (Judicial Member) and P.V. Subba Rao (Technical Member) has observed that permanent transfer of Intellectual Property Right does not amount to rendering of service and permanent means when a person transferring the rights no longer remains the holder of these rights. As already discussed above, 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 appellant/assessee, M/s. Bajaj Resources is registered with the service tax department under the category of “Intellectual Property Services”. The appellants were paying service tax under the said category towards grant of license to M/s. Bajaj Corp Limited, a wholly owned subsidiary of M/s. BCCL for use of its trademark on a non-exclusive basis in the defined territory (State of Andhra Pradesh) for a period of 10 years in terms of Trademarks License Agreement dated 12.03.2008. The tenure of the license was increased from 10 years to 25 years and the territory was the State of Rajasthan. The said agreement was further novated vide agreement by which the tenure was increased from 25 years to 99 years and the license was granted on an exclusive basis worldwide.
However, M/s. BCCL still continues to pay service tax under the category of Intellectual Property Services. Later when it was realized that the amount of royalty which is received by M/s. BCCL from M/s. BCL for grant of exclusive license to BCL that it shall not attract service tax in the new service tax regime w.e.f. 01.07.2012, it being ‘Deemed Sale’ within the meaning of Article 366 (29A) of the Constitution of India which is specifically excluded from the definition of term ‘service’ as per Section 65B(44) of Finance Act, 1994.
The appellant filed a refund claim for Rs.79,52,935/- on 05.12.2014 in respect of service tax paid on royalty received during the period 2013-14. While scrutinizing the said refund, it was observed that the agreement dated 24.02.2010 based whereupon the impugned refund claim was filed, grants license to use trademarks or goods and does not transfer the legal right of possession. Resultantly, the transfer of use of a trademark in such circumstances cannot be termed as ‘Sale’ or ‘Deemed Sale’.
The transfer shall continue to be called as a taxable service i.e. ‘Intellectual Property Service’ and the amount of royalty received shall be the consideration for rendering the said service on which the appellant was liable to pay service tax. Hence the service tax/amount in question was rightly paid. Also, it was opined that the incidence of tax has been passed on to the other persons. Accordingly, vide show cause notice, the refund claim of Rs.79,52,935/- was prayed to be rejected.
The subsequent show cause notice has been issued in the Appeal based on the audit observations that M/s. Bajaj Resources Limited have shown royalty income of Rs. 761.36 lakhs received in the Year 2014-15 in P&L account which was received towards use of the appellant’s trademark as was allowed to be used by M/s. BCL which was amended and again novated. But the appellants have not paid the service tax. Appellants mentioned that the transactions, subsequent to agreement, are the transaction of ‘Deemed Sale’.
However, denying the contention the show cause notice was issued proposing the demand of service tax of the amount as indicated above along with the interest and the proportionate penalties. Both the proposals have been confirmed. The proposal of rejection of refund has been accepted even by Commissioner (Appeals).
The CESTAT held that the transaction arising out of novation agreement dated 24.02.2010, the parties to the 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.
Case Details
Case Title: M/s. Bajaj Resources Limited Versus Commissioner of Central Excise and CGST, Udaipur
Case No.: Service Tax Appeal No. 53227 of 2018
Date: 06.06.2025
Counsel For Appellant: B.L. Narasimhan and Ms. Shagun Arora
Counsel For Respondent: Aejaz Ahmad
