Whether foregoing of rights to operate on certain routes or sharing of domain knowledge covered under IPR services?

PJ/Case Law/2013-14/1713

Case:- M/s AIR INDIA LTD Vs COMMISSIONER OF CENTRAL EXCISE, THANE-II

Citation:- 2013-TIOL-1329-CESTAT-MUM

Brief Facts:-The appellant M/s Air India Ltd. entered into an Memorandum of Understanding (MOU) with its subsidiary M/s Air India Charters Ltd. (AICL) with effect from 1.4.2005 and operational from 1.3.2008. As per the said MOU, M/s AICL was permitted to operate low cost carrier flights to Gulf Sector by using Air India's International Traffic Rights to Gulf countries and AICL was also permitted to use Air India's brand name “AI” to carry out low cost carrier operations. Further, Air India was also to provide domain knowledge to AICL. In consideration thereof, AICL agreed to pay royalty of 25% of the revenue collected by low cost carriers to Air India. The department was of the view that the services rendered by Air India to AICL would come within the category of Intellectual Property Rights Services and accordingly issued a notice dated 1.6.2009 demanding the Service Tax of Rs. 29,74,75,042/- along with interest thereon and proposing to impose penalties. Though the appellant contested the levy of Service Tax, the demand was confirmed along with interest and by imposing equivalent amount of penalty apart from penalties under Section 76 and 77 of the Finance Act, 1994. Aggrieved by the said order, the appellant preferred appeal before Tribunal.

Appellant’s Contention:-The appellant submits that the Board of Directors of Air India as also AICL in the meeting held on 16.03.2008 decided to modify the MOU dated 24.03.2006 as per which the revenue earned by the AICL is shared between Air India and AICL in the ratio of 25: 75 respectively, retrospectively from 1.4.2005 in return for the forbearance on the part of Air India on not operating on certain routes hitherto being operated by Air India. In other words, the royalty payments were made for the purpose of international traffic rights of certain routes and not for usage of Air India brand name or supply of domain knowledge. Similar resolution was passed by the Board of Directors of AICL also and this has been done after obtaining the legal advice. It is accordingly submitted that charges against the appellant that the royalty payment received by them is for using their brand name lost significance and accordingly, he pleads that the demand is not sustainable. However he fairly submits that the resolutions of Board meeting were not produced before the adjudicating authority at the relevant time.

Respondent’s Contention:- The Revenue, on the other hand, contends that MOU has been retrospectively amended with a view to escape Service Tax liability by changing the terms and conditions of the agreement and it has been made only with an intent to evade the Service Tax liability. Nevertheless, he submits that the matter can be remanded back to the adjudicating authority for consideration of minutes of the Board's meeting. He also points out that the legal opinion has been obtained by the appellant only after passing of the board's resolution and not before. Accordingly, he pleads that the appellant be put to terms at the time of remand.

Reasoning of Judgment:-The Tribunal has carefully considered the submissions made by both the sides and finds that:-

As per the original agreement, royalty was paid to the appellant for three purposes:-

(a) Foregoing the rights to operate in the Gulf region.
(b) Allowing M/s AICL to use the brand name of Air India, and
(c) For sharing the domain knowledge.

However, the Services Tax demand has been made on the whole amount of royalty without explaining how foregoing of rights or sharing of domain knowledge would come under the Intellectual Property Right Services. There is not even a whisper about the services rendered in this regard by the appellant to M/s AICL. Therefore, confirmation of demand on the entire amount of royalty received is not sustainable in law.

The Tribunal further finds that as regards the question what should be the consideration for usage of brand name, there are methods available for doing this by expert in the field. The department does not seem to have utilized the services of expert in assessing the value of the brand and its usage. In the absence of such an assessment, it is difficult to sustain the impugned demand. The appellant themselves has amended their MOU retrospectively, wherein it has been provided that the royalty is payable only for foregoing their rights in operation in certain routes. The authority should have examined whether such retrospective amendment of the MOU is permissible or not. Since the appellant is a Government of India Undertaking and has been ailing for a long time, we consider it appropriate not to order any pre-deposit.

The Tribunal has waived the requirement of any pre-deposit of the dues adjudged and remands the case back to the adjudicating authority for considering the matter afresh in the light of the directions given above. All the issues are kept open. The appellant should be heard before passing de novo order.

Decision:- The appeal is allowed by way of remand.

Comment:-The crux of this case is that as the royalty received pertained to forbearance to operate on certain routes and sharing of domain knowledge, the same prima facie do not come under IPR services. As regards, using the brand name of “AI” is concerned, the department has failed to utilise the services of experts in the field to assess the value of brand and its usage. Accordingly, the appeal was allowed by way of remand.

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PJ/Case Law/2013-14/1713

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