Service Tax

TRANSFERRING OF SERVICE TAX LIABILITY

UNDER A CONTRACT

 

 

An assessee can certainly enter into a contract to shift his liability of tax and no law prohibits this despite casting a responsibility of tax under reverse charge mechanism.  In a tendered contract, it is the responsibility of a contractor to estimate such liability by himself while participating in the bidding process and even he is enabled to seek clarification on this to employer while doing so.

This applies to any indirect tax laws. For example, it is open to a seller, under his contract with the buyer, to recover the Sales Tax from the buyer, and to pass on the tax burden to him and this is a fully legal and valid contract term.

 

It is in this connection, if there are clauses for shifting of tax liability and inclusion of service tax liability to this, as observed by Supreme Court in Laghu Udyog Bharati v Union of India (AIR 1999 SC 2596), service tax being an indirect tax, it is possible that it may be passed on.

 

Therefore, there cannot be any difficulty in accepting that the liability of a service recipient can be shifted to the provider and vice versa through a contract for the purpose. The provisions concerning service tax are relevant only as between the Assessee under the statute and the tax authorities. The statutory provisions under Finance Act or Service Tax Rules can be of no relevance to determine the rights and liabilities between the contracting parties as agreed in the contract between two of them. To reiterate, there is nothing in law to prevent one party  from entering into an agreement with the contractor that the burden of any tax arising out of obligations of such party under the contract would be borne by the contractor.

 

If there are clauses in contract meaning that a particular party only would be liable to honour its tax liabilities under this contract as per law, and not as per the obligations under the contract, there was no need to make such a provision in a bilateral commercial document executed by the parties, since such party would be otherwise also liable for the same. Therefore, these clauses forming indispensable part of a contract will have to be read as incorporated only with a view to provide for contractor’s acceptance of the tax liability arising out of his obligations under the contract.

 

It is very much a conventional and accepted commercial practice adopted by many organisations to shift such liability to the contractor. In the case of Numaligarh Refinery Ltd. vs. Daelim Industrial Co. Ltd., reported in 2007 (8) SCC 466 the Supreme Court itself has held that by virtue of a clause “All taxes and duties in respect of job mentioned in the aforesaid contracts shall be the entire responsibility of the contractor…” the contractor was liable to pay and bear the ‘countervailing duty’ on the imports though this duty came into force subsequent to the relevant contract. This demonstrates that similar clause in contract will bind the contractor of all tax liabilities including service tax, even if it is on reverse charge basis.

 

In the circumstance, it is felt that there is no manner of doubt left that when there is a clause to that effect, all the taxes and levies shall be borne by the designated party including the service tax portion to be paid by the other (being the recipient of services).

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.