CESTAT Rules, Royalty Paid For Exclusive Trademark License Is Not Taxable As A Service
Pranav B Prem
The New Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), comprising Dr. Rachna Gupta (Judicial Member) and P.V. Subba Rao (Technical Member), has ruled that royalty paid for granting an exclusive license to use a trademark amounts to 'Deemed Sale' and is not taxable as a service under the Finance Act, 1994. Consequently, the Tribunal set aside the demand for service tax on such royalty but upheld the rejection of the refund claim due to the principle of unjust enrichment.
Background of the Case
M/s Bajaj Resources Limited (formerly known as M/s Bajaj Consumer Care Limited), the appellant, had entered into a Trademark License Agreement with its wholly-owned subsidiary, M/s Bajaj Corp Limited (BCL), on 12.03.2008. Initially, the license was for a non-exclusive right to use the trademark in Andhra Pradesh for 10 years. This arrangement was later modified by agreements dated 22.01.2010 and 24.02.2010, whereby the license was made exclusive, its tenure was extended to 99 years, and its scope was expanded to cover the entire world.
Despite this exclusivity, the appellant continued to pay service tax under the category of "Intellectual Property Services." Subsequently, the appellant realized that such an arrangement constituted a 'Deemed Sale' as per Article 366(29A)(d) of the Constitution and did not fall within the definition of 'service' under Section 65B(44) of the Finance Act, 1994. Based on this understanding, the appellant stopped paying service tax from April 2014 onwards and sought a refund of ₹79,52,935 for service tax paid in 2013-14.
Findings of the Tribunal
1. On Demand of Service Tax (Appeal No. ST/51121/2017): The Tribunal examined the novation agreement dated 24.02.2010 and concluded that the transfer of the exclusive right to use the trademark for a substantial period of 99 years constituted a 'Deemed Sale.' The agreement restricted the transferor (the appellant) from manufacturing or dealing with similar products during the license period, thereby fulfilling the conditions laid down by the Supreme Court in Bharat Sanchar Nigam Ltd. v. Union of India [2006 (3) TMI 1 – Supreme Court] for classifying such transactions as 'Deemed Sale.'
The Tribunal observed: "The transferee, M/s BCL, was allowed to use the IPR/goods to the exclusion of the transferor, i.e., M/s BCCL. The specified period of 99 years is substantial, and the transaction was that of a transfer of right to use goods and not merely a license to use the goods." Thus, the Tribunal set aside the service tax demand of ₹2,14,16,141 confirmed under Section 73(1) of the Finance Act, 1994, holding that no service tax was leviable on the amount of royalty received by the appellant.
2. On Refund Claim (Appeal No. ST/53227/2018): While the Tribunal agreed that the service tax paid earlier was not legally required, it upheld the rejection of the refund claim on the ground of unjust enrichment. It noted that the appellant had collected the service tax amount from its subsidiary, M/s BCL, as evidenced by tax invoices, and had not provided any documentary proof showing that the burden of tax was not passed on.
The Tribunal stated: "There is no evidence produced on record to show the reversal of the said amount. Hence, we do not find any infirmity when the doctrine of unjust enrichment has been invoked for rejecting the said refund claim." As a result, while the demand for service tax was set aside, the rejection of the refund claim was upheld.
Verdict
In summary:
The demand for service tax on royalty received by M/s Bajaj Resources Limited was quashed, holding that the transaction qualified as 'Deemed Sale' and did not attract service tax liability.
The rejection of the refund claim was upheld on the ground of unjust enrichment.
Appeal No. ST/51121/2017 was allowed.
Appeal No. ST/53227/2018 was dismissed.
The Tribunal thus disposed of both appeals in these terms.
Appearance
Shri B.L. Narasimhan and Ms. Shagun Arora, Advocates for the Appellant
Shri Aejaz Ahmad, Authorized Representative for the Respondent
Cause Title: M/s. Bajaj Resources Limited V. Commissioner of Central Excise and CGST, Udaipur
Case No: Service Tax Appeal No. 53227 of 2018
Coram: Hon’ble Dr. Rachna Gupta [Member (Judicial)], Hon’ble Mr. P.V. Subba Rao [Member (Technical)]
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