CESTAT New Delhi: Service Tax Not Leviable On Deposits Made Under Interim Court Orders Pending Adjudication
Pranav B Prem
The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), New Delhi Bench, comprising Binu Tamta (Judicial Member) and P.V. Subba Rao (Technical Member), has held that service tax cannot be levied on amounts deposited pursuant to interim directions of a court. The Tribunal ruled that such payments are in the nature of deposits and do not amount to taxable consideration unless the service in question is actually rendered.
The matter arose from a dispute between M/s Telefonaktiebolaget LM Ericsson of Switzerland and Micromax Informatics Limited, in which Ericsson sued Micromax for royalty for the use of its patented technologies. During the pendency of the proceedings before the Delhi High Court, interim orders were passed directing Micromax to make certain payments to Ericsson and deposit additional sums with the court.
The Directorate General of Central Excise Intelligence (DGCEI) initiated proceedings against Micromax, alleging that the payments made to Ericsson represented consideration for “intellectual property rights services” received from abroad and were thus subject to service tax under the reverse charge mechanism. Consequently, a show-cause notice was issued demanding service tax amounting to ₹17.50 crore, along with interest and penalties. Subsequently, Ericsson and Micromax settled the dispute amicably, agreeing that Micromax would pay ₹96 crore as royalty under a global patent license agreement dated January 1, 2018. The Delhi High Court, by order dated April 6, 2018, dismissed the suit as withdrawn and directed the release of the deposited amounts to the respective parties. Micromax then paid Integrated GST (IGST) on the ₹96 crore royalty amount, which was duly verified by the Directorate General of GST Intelligence.
The Adjudicating Authority, by an order dated August 30, 2018, dropped the service tax proceedings against Micromax. The Revenue challenged this order, arguing that the amounts deposited under the interim orders were, in substance, royalty payments liable to service tax.
The CESTAT rejected the Revenue’s contention, holding that the interim deposits did not constitute consideration for taxable services. The Bench observed that the nature of such payments was contingent on the final outcome of the High Court proceedings and could not be treated as royalty unless and until the dispute was adjudicated or settled. “All the amounts which were paid during the pendency of the proceedings before the Delhi High Court either to Ericsson or deposited with the Delhi High Court by Micromax were merely deposits. The amounts paid to Ericsson or deposited in the High Court as per the interim orders cannot be called as royalty paid for the use of IPR,” the Bench held.
It further observed that the entire royalty paid by Micromax to Ericsson for the use of intellectual property rights was ₹96 crore, as per the final settlement between the parties, and IGST had already been paid on that amount. Therefore, there was no question of levying additional service tax on the interim payments. Concluding that the Revenue’s appeal lacked merit, the Tribunal upheld the Adjudicating Authority’s decision and dismissed the appeal.
Appearance
Counsel for Appellant/ Department: Anand Narayan
Counsel for Respondent/ Assessee: Anu Sura and Shri Ayushraj
Cause Title: Principal Commissioner v. M/s Micromax Informatics Limited
Case No: Service Tax Appeal No. 50318 Of 2019
Coram: Binu Tamta (Judicial Member), P.V. Subba Rao (Technical Member)
