Service tax on Technology Transfer

Under Sec. 65 (55b) of Finance Act, 1994 and under Sec. 65 (55b) of the Finance Act, 1994 Intellectual Property Services is defined as

(a) transferring temporarily or

(b) permitting the sue or enjoyment of, any intellectual property right.

Sec. 65 (55a) Intellectual Property Rights (IPR) as any right to intangible property, viz., design, patents or any other similar intangible property, under any law for the time being in force, but does not include copyright. Further it says since the service provider has no Office in India, the recipient of the service has to bear the service tax.

However in the case of transfer of technology this may not attract service tax for following reasons:

(a) There is no IPR permitted temporarly. The transfer of technical information and know-how is not temporary. It is a transfer of technical know-how, which means permanent transfer of ownership.

(b) The technical know-how or technical information does not fall within the ambit of definition of IPR under Sec. 65 (55(a)) of the Finance Act, 1994.

Further for deriving an opinion on the meaning attributable to technology in "Technology Transfer" we may refer to the Research and Development Act 1986 and as per Section 2(h) of the said Act, '"Technology" means any special or technical knowledge or any special service required for any purpose whatsoever by an industrial concern under any foreign collaboration, and includes designs, drawings, publications and technical personnel.' Here the technology transferred is not any services but is Technical Information. In such case and even otherwise if at all service tax is chargeable, it may fall under scientific and technical consultancy or as a franchisee and not under IP service is worth noting.

A few decisions on this issue are cited below:

a) Hon'ble CESTAT, West Zonal Branch, Mumbai, has held in the matter of Rubco Huat Woods Pvt. Ltd., -Vs- the Commissioner of Central Excise, Calicut 2006 (4) S.T.R. 603 (Tri. - Bang.) and Volvo India Ltd., -Vs- the Commissioner of Service Tax, Bangalore, 2007 (7) S.T.R. 600 (Tri. - Bang.) that transfer of technology do not attract Service tax.

b) In a similar judgment of CESTAT, West Zonal Branch, Mumbai, 2007 (8) S.T.R. 501 (Tri. - Mumbai) SIKA (I) PVT. LTD.Versus COMMISSIONER OF C. EX., GOA it was held that payment of Royalty cannot be stated to be for a Service and therefore the Service tax cannot be levied on Royalty.

c) Another case of 2006 (3) S.T.R. 397 (Tri. - Mumbai) Navinon Ltd., -Vs- Commissioner of Central Excise, Mumbai, it was held that recipient of technical know-how from foreign company against payment of royalty could not be fastened with service tax liability. It was held in the said case that royalty for technical know-how is not a payment for any service and its payer cannot be liable to service tax.

4 On analysis, it is very clear that the technical know-how/technical information in respect of certain products for enabling someone to produce such products by itself and a specified percentage of net selling prices paid as royalty for such produced products will not pave way for leviablity of Service Tax. The term 'technical know-how' was discussed by CESTAT in a case of Indian Farmer Fertilizers Co-operative Ltd., -Vs- Commissioner of Central Excise. In this case, the know-how was interpreted as a proprietary series of practical, non patented knowledge, derived from the owners experience and tests, which is secret, substantial and identified. Accordingly, the same cannot be equated with IPR. Even if it is IPR, under any law for the time being in force "know-how" is not included into the definition of IPRs. Even if it is assumed that the same is included under IPRs, the transaction does not envisage "Intellectual Property Services" as the IPR is not transferred temporarily or it is not a permission for enjoyment of any IPR. However even in case of such technology transfer service tax would be leviable if :

i) there is a provision for Supervision and Training and technical fee paid is also towards this services.

ii) it states that the ownership of the all patents and other IPRs continues with the owner.

How so ever, the matter is still not resolved. It leaves so much vacuum once we reach here. It definitely points to the fact that there would be much more to deliberate regarding service tax concepts and practice in our country.