No service tax on royalty payments, rules tribunal

BANGALORE: Royalty payments cannot attract a service tax liability, according to a recent decision of the Service Tax (Appellate) Tribunal, Mumbai Bench. Generally, royalty is paid for the use of technology or know-how. Hence, service tax cannot be attracted.

Tax practitioners admit that service tax authorities are mechanically issuing demand notices to companies for royalty payments made to overseas entities against transfer of technology.

Service tax authorities justify their move by contending that the entities making available such technology or know-how are providing a taxable service in their capacity as consulting engineers. Litigation is ongoing in respect of demands running into several crores.

Currently the service tax regulations provide that where the service provider is a non-resident or is from outside India and does not have any office in India, the person receiving taxable service in India, is liable to pay the service tax.

�Thus, such notices are being issued both to the service provider and the recipient of services,� affirms Mr Ashok Dhingra, director, indirect tax, Bharat S Raut & Co, chartered accountants.

In the case decided by the appellate tribunal, an Indian company paid royalty to Ciba Geigy, Switzerland. Such payments were for the provision of technical know-how, equipment, skill, expertise, and services for production of dyes.

The tribunal held that royalty payment for the use of technology and know-how cannot be equated with services to be provided by Ciba Geigy. It is more in the nature of sharing of profits for the permission to use the technology or know-how.

For example, the royalty payable to Ciba Geigy was fixed at 8% of the export and 5% of the domestic sales of the net invoice value of products manufactured and sold by the Indian company.

The tribunal also held that since the overseas company is the manufacturer of the same goods, it cannot fall within the ambit of the term consulting engineers.

“With this decision, the contentious issue of service tax demands against royalty payments, under the category of consulting engineers, by tax authorities ought to settle. But it is likely that the Tax Department may file an appeal,� adds Mr Dhingra.