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Modi-Mundipharma Beauty Products Pvt. Ltd. Vs. Commissioner of Service Tax, Delhi-II - (Customs, Excise and Service Tax Appellate Tribunal) (08 Jun 2020)

Grant of exclusive right to use the “know-how” would not fall in definition of Intellectual Property Right (IPR) for levying tax under Section 65(105)(zzr) of the Finance Act

MANU/CE/0076/2020

Service Tax

Present Appeal has been filed to assail the order passed by the Commissioner to the extent it confirms the demand made under “intellectual property right”. The Appellant is engaged in manufacture of cosmetics and skin care products. It has its corporate office at New Delhi but its factory is situated at Ghaziabad.

This appeal has been filed by Modi Revlon Pvt. Ltd., to assail the order passed by the Commissioner, Service Tax, on the two show cause notices issued to the Appellant. In regard to the first show cause notice the Commissioner has confirmed the demand of service tax amounting to Rs. 5,06,62,452 for the period 2007-08 to March, 2012 under section 65(105)(zzr) of the Finance Act, 1994. The remaining demand under “goods transport agency” service has been dropped. In regard to the second show cause notice, the Commissioner has confirmed the demand amounting to Rs. 26,91,973 under section 65 (105) (zzr) of the Finance Act for the period April, 2012 to June, 2012.

Learned Counsel appearing for the Appellant submitted that, the Commissioner completely misread the First Agreement dated 27 July, 1994 entered into between the Appellant and Revlon Mauritius and wrongly concluded that “know how” received by the Appellant from Revlon Mauritius would fall within the taxable category of “intellectual property right” service.

The dominant nature of the First Agreement entered into between the Appellant and Revlon Mauritius is only for transfer of “know how” and “know how” is not covered under the definition of “intellectual property right” services.

Benefits from the service procured at the time when the First Agreement was executed in 1994 were not subjected to levy of service tax and when the said agreement was renewed in 2003, there was no change in the clauses of the agreement. The entire payment made and likely to be made in future under the First Agreement relates to services received much before the introduction of service tax on „intellectual property right‟ with effect from 10 September, 2004. The arrangement between the Appellant and Revlon Australia is on cost sharing basis and there is complete absence of any service element between the Appellant and Revlon Australia;

A perusal of the first show cause notice clearly shows that it makes no reference to the Agreement executed between Revlon Mauritius and the Appellant, or the Agreement executed between Freya Holdings and the Appellant, though it does make reference to payment of royalty to Revlon Mauritius for the use of the trademark/ name in India. It is, therefore, clear that the two Agreements have been mixed up. The First Agreement between Revlon Mauritius and the Appellant, conferred upon the Appellant the exclusive right to use “know how” in any plant approved by Revlon Mauritius in connection with the manufacture, marketing, sale and distribution of Revlon products. Royalty under the First Agreement, it needs to be noted, was not paid for use of trademark/name of Revlon Mauritius in India, but the show cause notice mentions that royalty was paid to Revlon Mauritius for use of trademark/name. It is under the Second Agreement executed between Freya Holdings and the Appellant that the Freya Holdings had granted the exclusive license to the Appellant to use the trademarks and all other intangible rights. However, it does not provide for payment of any consideration for this purpose. The term “trademark” has not been used in Clause 2 of the First Agreement and the term „know how‟ has not been used in Clause 2 of the Second Agreement. The first show cause notice, therefore, proceeds on an absolutely wrong footing.

A show cause notice is the foundation on the basis of which any demand can be confirmed and it is trite to state that no demand can be confirmed on the basis of an allegation not made in the show cause notice. It is, therefore, more than apparent that the grant of exclusive right to the Appellant by Mauritius Revlon to use the 'know how' in any plant in accordance with the processes, specifications and recipes thereof in connection with the manufacture, marketing, sale and distribution of Revlon Products would not fall in the definition of 'intellectual property right' so as to make it taxable under section 65(105)(zzr) of the Finance Act. The order passed by the Commissioner, therefore, cannot be sustained. It is, accordingly, set aside and the Appeal is allowed.

Tags : DEMAND   CONFIRMATION   LEGALITY  

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