Permanent transfer of intellectual property right does amounts to rendering of service.

Case:-THERMAX LTD Vs COMMISSIONER OF CENTRAL EXCISE, PUNE-I

Citation:- 2013-TIOL-1092-CESTAT-MUM

Brief facts:-The appellant, M/s. Thermax Ltd. entered into an agreement, i.e., out of Court settlement with M/s. Purolite International Ltd., (Purolite in short) USA. Vide agreement dated 23/02/2010 it was resolved to settle amiably all disputes between the parties worldwide including, but not limited to, pending litigation in the United States District Court for the Eastern District of Pennsylvania and pending litigation between Brotech Corporation and Purolite International Ltd against Thermax Europe Ltd., Thermax Ltd. and Narvinder Sachdev in the High Court of Justice Chancery Division, Royal Courts of Justice, UK. As per this agreement M/s. Purolite agreed to irrevocably transfer to Thermax all claims, rights and interests necessary to use Purolite Technology and Information and Thermax shall jointly co-own with Purolite the Purolite Technology and Information in perpetuity and not subject to any geographical restrictions or customer restrictions. Upon the technology transfer, Thermax became co-owner in the Purolite Technology and Information and was entitled to use, assign, sell, license, transfer or convey their respective interests in the Purolite technology and information. For these rights, Thermax agreed to pay Purolite a sum of Us $ 3.8 Crore. The department was of the view that the transfer of technology from Purolite USA to Thermax Ltd. India amounts to receipt of service by Thermax and the service so received merited classification under "intellectual property rights service" as defined in Section 65(55a) and 65 (55b) read with Section 65(105) (zzr) of the Finance Act, 1994. Accordingly, a show-cause notice dated 28/09/2011 was issued to the appellant proposing to classify the service received under "intellectual property right service" and demanding service tax amounting to Rs.18,05,50,717/- under the provisions of Section 73 of the Finance Act read with Section 66A and Rule 2 (1) (d) (iv) and Rule 6 of the Service Tax Rules, 1994. The notice also proposed to demand interest and imposed penalties. The notice was contested by the appellant and was adjudicated vide the impugned order and the demands were confirmed along with interest thereon apart from imposition of penalties under Section 76 & 77 of the Finance Act, 1994 and an equivalent amount of penalty under Section 78 ibid. Aggrieved of the said order, the appellant is before Tribunal.

Appellant’s Contention:-The Appellant submitted that as per Section 65 (55a) "intellectual property right" means any right to intangible property, namely, trademarks, designs, patents or any other similar intangible property, under any law for the time being in force, but does not include copyright. Further, "intellectual property right service" means transferring temporarily; or permitting the use or enjoyment of any intellectual property right. In their case, the intellectual property right which they have acquired from M/s. Purolite International Ltd., USA is in the nature of trade secrets/confidential information. Under the Indian Law, a trade secret or confidential information is not an intellectual property right. In India, the IPR laws related to trade marks, patent, copyright, licence, geographical indications, industrial designs, layout designs of integrated circuits, Trade Secret or Confidential information has not been declared as an intellectual property right in India and there is no law passed by the Parliament in respect of trade secret/confidential information. Therefore, the trade secret/confidential information procured by them from Purolite USA is not an intellectual property right under the Indian laws and therefore, the provisions of Section 65 (55a) do not apply. The appellant relies on the decision of the Unites States District Court for the Eastern District of Pennsylvania dated 14/01/2010 in the case of Brotech Corporation and Purolite Company (Plaintiff) in Civil Suit No.05-CV-2330. As per the decision of the said Court, the rights acquired by Thermax in contravention of law of the Purolite Technology were trade secret and/or confidential information. Accordingly, an injunction was passed against Thermax from utilizing the said technology in India. In order to overcome the adverse legal decision, Thermax entered into an agreement with Purolite USA by way of an out of Court settlement as per which Thermax was required to pay a compensation of US $ 3.8 Crore to Purolite and on payment of compensation, Thermax became a co-owner of the Purolite Technology. Thereafter the appellant applied to the RBI seeking permission to remit the foreign exchange to Purolite, USA, and vide permission dated 16/02/2010, RBI granted permission to Thermax Ltd. for remittance of US $ 3.8 crore for final settlement in respect of the aforesaid case. As per the agreement, Thermax became the co-owner of the Purolite technology and being a co-owner was entitled to all the rights relating to said IPR including its use, assign, sell, transfer, license, etc. Thus it is not a case of temporary transfer of an IPR or permitting the use of enjoyment of an intellectual property right as defined in Section 65 (55b) and therefore, the transaction does not come within the category of intellectual property right service as defined in the Finance Act, 1994. The appellant also submitted that what they had paid to Purolite USA is a compensation in an out of Court settlement and compensation so paid is not a consideration for any service rendered and is not a taxable supply of service under the VAT laws.

The Appellant also referred to a decision by a UK Court in this regard wherein " a broker began legal proceedings against a company which traded as a transfer agent claiming the he had provided the company with information consisting a number of shops which were for sale but the company failed to pay him the commission which had agreed upon. The broker filed a suit against the company and ultimately both the parties agreed for an out of Court settlement of UK £ 35,000/-. The tax department issued an assessment order charging tax on the aid amount and the broker appealed. The Tax Tribunal therein allowed the broker's appeal holding that since the broker had not obtained judgement against the company, it has not been proved that there had been any actual supply of service and the payment included an element of compensation. The payment should be treated as being outside the scope of VAT. {(MAN/92/454 (VTD 9548)}. The Ld. Counsel submits that the ratio of this decision, though belonging to a UK Court would apply equally as well to transactions in India.

The Appellant also submitted the decision of this Tribunal in the case of CCE, Mumbai Vs. Ratnatraya Heat Exchangers Ltd., 2011 (269) ELT 419 (Tri-Mum) = (2011-TIOL-1538-CESTAT-MUM)wherein a question arose whether compensation received from the Insurance Company for the damages suffered could be treated as consideration for sale of the goods and it was held that since the compensation was towards damages suffered it cannot be treated as a consideration for sale. The ratio of the said decision would apply to the facts of the present case.

The Appellant also submitted that Salmond on Jurisprudence, 12th Edition, page 18 has explained, concept of co-ownership as follows:-

"It is not correct to say that property owned by co-owners is divided between them, each of them owning a separate part. It is an undivided unity, which is vested at the same time in more than one person.”

The Appellant also relied on the definition of co-ownership given in Black's Law Dictionary, which reads as follows:

"Co-owner" means a person who is in concurrent ownership, possession, and enjoyment of property with one or more owners".

KY Aiyer'sjudicial Dictionary 13th Edition, defines the term as follows:

"Co-owner" means one of two or more persons who own property (moveable or immovable)

He also referred to Mulla's The Transfer of Property Act, 1882, 9 th Edition published by Butterworths India, which reads as follows:

" Co-ownership is a relationship which springs from consensus and contract. Legislation has only imprinted, on the concept of co-ownership, certain rights which have a supervening effect which are declaratory of the rights between co-owners. The legal relationship (in co-ownership) is always knitted in a frame work of jointness and no one interested therein can predicate, with certainty, as to what portion of the property held in common is his, and an element of inseparability is inherent in the doctrine of co-ownership."

In other words, it is the contention of the appellant that the appellant is a co-owner of the trade secrets and is not a recipient of any IPR services.

Respondent’s Contention:-The Ld. Commissioner (AR) appearing for the Revenue on the other hand submits that the agreement between the appellant and Purolite related to certain processes relating to production of plastic resins. Under the Indian law, patents can be made both for products as well as processes. Therefore, in the impugned case, the processes obtained by the appellant from Purolite, USA is patentable and hence it could be considered as an intellectual property right coming within the category of patent and receipt of such services is taxable under Section 65 (55a). It is his further submission that the agreement provides for use or enjoyment of said IPR by the appellant and therefore, the definition of intellectual property service under Section 65 (55b) is also satisfied and therefore, the appellant is liable to pay service tax on the transfer of IPR by Purolite under reverse charge mechanism and therefore, the impugned order is sustainable in law.

Reasoning of Judgment:-We have carefully considered the submissions made by both the sides. Our findings and conclusions are discussed herein after.

The definition of intellectual property right, intellectual property service and taxable service are given in Seciton 65 (55a), 65 (55b) and 65 (105) (zzr) and these are reproduced below:

"Sub-section 65 (55b) of Section 65 of the Finance Act, 1944 reads as follows:
"intellectual property service" means, -

(a) transferring, temporarily; or

(b) permitting the use or enjoyment of any intellectual property right;

Sub-section (55a) of Section 65of the Act reads as;

"intellectual property right" means any right to intangible property, namely, trade marks, designs, patents or any other similar intangible property, under any law for the time being in force, but does not include copyright;

Further, Section 65 (105) (zzr) of the Act define "Taxable service" as:

"any service provided or to be provided to any person, by the holder of intellectual property right, in relation to intellectual property service;

From the above, to constitute a intellectual property it should be either a trade mark, design patent or any other similar intangible property under any law for the time being in force in India. As per the decision of the US District Court of Pennsylvania, the information obtained by Thermax in contravention of the US law was relating to Purolite's trade secrets and/or confidential information. In that case, the appellant herein, Thermax contested that the information related to expired patents and therefore, use of these processes did not involve Purolite's trade secrets. This contention of Thermax was rejected by the Court held that the formula pertaining to the processes were trade secrets or confidential information. If that be so, the department cannot take a different stand about the nature of the right involved in the transaction. It is well settled that there is no law relating to the trade secrets or confidential information in India. Therefore, the trade secrets obtained by Thermax from Purolite, USA is not an intellectual property right as defined in Section 65 (55a).

Secondly, we notice that as per the agreement between the appellant and Purolite, USA clause 9, provides for the following:-

" Upon the effective date, Purolite shall irrevocably transfer to Thermax all claims, rights and interests necessary to use Purolite Technology and Information (whether by this Settlement Agreemet or any other instrument of transfer reasonably requested by Thermax), and Thermax shall jointly co-own with Purolite the Purolite Technology and Information in perpetuity and not subject to any geographic restrictions or customer restrictions, along the specific terms of paragraphs 9 (a) through 9 (e) below ("Technology Transfer)". Upon the Technology Transfer, Thermax and Purloite shall jointly co-own in equal shares undivided interests in the Purolite Technology and Information subject to the express limitations of this Agreement. The parties each may freely and separately use, assign, sell, licence, transfer or convey their respective interests in the Purolite Technology and Information, subject to the express limitations of this agreement".

In other words, Thermax became a co-owner of the intellectual property right and was entitled to use, assign, sell, license, transfer or convey their interests in the in the said trade secret/information. In other words, it was not a temporary transfer of an intellectual property right or a permission to use or enjoy the intellectual property right. The transaction involved ownership of the intellectual property right and therefore, the transaction does not satisfy the requirement of Section 65 (55b). In this regard, the circular issued by the Board at the time of introduction of IPR service is relevant and the same is reproduced below:

"Intellectual property emerges from application of intellect, which may be in the form of an invention, design, product, process, technology, book, goodwill etc. In India, legislations are made in respect of certain Intellectual Property Rights (i.e.IPRs) such as patents, copyrights, trademarks and designs. The definition of taxable service includes only such IPRs (except copyright) that are prescribed under law for the time being in force. As the phrase ''law for the time being in force'' implies such laws as are applicable in India, IPRs covered under Indian law in force at present alone are chargeable to service tax and IPRs like integrated circuits or undisclosed information (not covered by Indian law) would not be covered under taxable services.

A permanent transfer of intellectual property right does not amount to rendering of service. On such transfer, the person selling these rights no longer remains a ''holder of intellectual property right'' so as to come under the purview of taxable service. Thus, there would not be any service tax on permanent transfer of IPRs.

In case a transfer or use of an IPR attracts cess under Section 3 of the Research and Development Cess Act, 1986, the cess amount so paid would be deductible from the total service tax payable".

From the above circular, it becomes very clear that to come under the category of IPR, there should be a law in India, governing such IPR and only IPR covered under the Indian law in force are chargeable to service tax. It is well known that there is no law governing trade secrets/confidential information in India and therefore, the rights obtained by the appellant does not constitute intellectual property right as defined in law. Secondly, it is also very clear from the said Circular that a permanent transfer of intellectual property right does not amount to rendering of service. In the present case, the appellant has become a co-owner of the intellectual property which would mean that the transfer is permanent. Therefore, the transaction does not come under the purview of Section 65 (55b) of the Finance Act, 1994.

Neither in the show-cause notice nor in the impugned order, is there any mention of the type of Intellectual Property acquired by the appellant. This Tribunal in the case of Royal Western India Turf Club Ltd. vide Order No. A/498-500/12/CSTB/C-I dated 22/05/2012 = (2012- TIOL-1145-CESTAT-MUM) held as follows:

"Further where the demand for service tax has been made under the category of ‘Intellectual Property Right Services', neither the show-cause notices nor the orders relating thereto give a clear proposal or finding as to what is the intellectual property rights involved in the transactions, i.e., whether it is a patent, copy rights, trade mark or design or any other category of intellectual property rights. When service tax is confirmed under the taxable service category of Intellectual Property Right Services, the order confirming the demand should clearly classify the transaction under one or more of the Intellectual Property Rights which are covered under Intellectual Property Right Services' law. The Boards Circular issued on 17.09.2004 in this regard makes it abundantly clear that the Intellectual Property Right Services covered under the service tax laws should be in respect of such services in respect of which laws have been made in India and such laws should cover the Intellectual Property Right Services involved and only in such a situation, demand for service tax can be raised whenever there is a transfer of Intellectual Property Rights by the holder of the Intellectual Property Right to the person who receives or uses the Intellectual Property Rights. In the impugned orders we do not find any such findings by the authorities".

The ratio of the decision applies to the facts of the present case. We have also perused the decision of the UK Tribunal relied upon by the appellant wherein it was held that payment received as out of Court settlement would not amount to supply of any service. If the ratio of the said decision is applied to the facts of the present case, the transaction here cannot be considered as a taxable service.In the light of the foregoing discussion, we hold that the impugned order is not sustainable in law. Accordingly, we set aside the same and allow the appeal with consequential relief, if any, in accordance with law.

Decision:-Appeal allowed.

Comment:-The analogy that is drawn from this case is that procurement of secret/confidential information from ex-employee is not covered under the IPR as stated in the Indian Laws and moreover, permanent transfer of IPR is as it is not leviable to service tax.

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PJ/Case Law/2013-14/1682

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