Whether service tax payable for period prior to introduction of taxable service?

PJ/CASE LAW/2015-16/2851

Case:- R.M. DHARIWAL (HUF) VERSUSCOMMISSIONER OF CENTRAL EXCISE, PUNE-III

Citation:-2015 (39) S.T.R. 635 (Tri. - Mumbai)

Brief Facts:-The relevant facts that arise for consideration are that the appellant herein was charged for not discharging the service tax liability for an amount received by them as royalty from M/s. Dhariwal Industries Ltd. for the use of trade name/brand name on the products which were manufactured and cleared consequent to an agreement dated 20-4-2004. Revenue authorities were of the view that as per the terms and conditions of the above-mentioned agreement, M/s. Dhariwal Industries Ltd. is required to pay royalty to the appellant at a fixed rate of 3% of Net sales on the basis of audited annual reports. On scrutiny of the audited balance sheet for the year ending 31-3-2005, it was noticed that the appellant had issued two invoices for the receipt of the royalty for the period 1-4-2004 to 10-9-2004 and did not discharge the service tax liability. Show cause notice was issued which was adjudicated and demand of the service tax liability was confirmed along with interest and penalties were imposed. Aggrieved by such an order, appellant preferred an appeal before the first appellate authority. The first appellate authority after following due process of law did not agree with the contention raised by the appellant and rejected the appeal.

Appellant contentions:- The ld. Counsel appearing on behalf of the appellant would take through the entire case records. He would submit that the appellant had received royalty from M/s. Dhariwal Industries Ltd. It is his submissions that the question involved in this case is whether the service tax liability would be required to be discharged for the period 1-4-2004 to 10-9-2004 under the category of “Intellectual Property Services”. He would submit that the said services were brought into service tax from 10-9-2004. He would submit that both the lower authorities have incorrectly appreciated the facts, as the service tax liability arises on the appellant even for the royalty amounts, which were paid for the period in question. He would submit that the liability would not arise at least up to 10-9-2004, as the service tax was first time brought into statute under the category of Intellectual Property Services and the benefit of Notification No. 18/2004-S.T., dated 10-9-2004 cannot be called is for help by the department. He would draw our attention to the agreement entered by the appellant with M/s. Dhariwal Industries Ltd. and submit that the royalty which has been paid for the period in question i.e. 1-4-2004 to 10-9-2004 though settled in 2004-2005 and hence only tax net.

Respondent contentions:-Ld. AR on the other hand, would draw our attention to the Notification No. 18/2004-S.T. and submit that the said notification specifically states service tax liability would not arise on the appellant to that portion of the value of taxable service which is received by the service provider from the customer prior to 10th day of September, 2004. He would then submit that the balance sheet for the year 2004-2005 was finalized on 8-9-2005 and appellant could be ineligible for the exemption granted by Notification No. 18/2004-S.T. He would reiterate the findings of the lower authorities.

Reasoning of Judgment:- We have considered the submissions made by both sides and perused the records.
The issue to be decided in this case is whether the amounts received by the appellant for the period 1-4-2004 to 10-9-2004 would be covered under the service tax net under the category of “Intellectual Property Services” or otherwise. It is undisputed that the amount which has been received by the appellant during material period in question was as royalty for the use of the brand which is registered in the name of the appellant assessee.
We peruse the agreement entered by the appellant with M/s. Dhariwal Industries Ltd. The said agreement assigned brand/trade name to M/s. Dhariwal Industries Ltd. for a period of 4 years i.e. 20-4-2004 to 31-3-2008, specific articles of the said agreement, which need to be read is the consideration to be paid by M/s. Dhariwal Industries Ltd. to the appellant. We reproduce the same.
“The considerations for the use of trade-name “RMD”, the Second Party shall pay Royalty from 20th April, 2004 to 31st March, 2008, i.e. for a further period of 4 years, and shall be paid at Percentages of the Net Total Sales every year as stated hereunder :

*For the year*	*Per cent Net Sales*
20-4-2004 to 31-3-2005	3% of Net Sales
1-4-2005 to 31-3-2006	3% of Net Sales
1-4-2006 to 31-3-2007	3% of Net Sales
1-4-2007 to 31-3-2008	3% of Net Sales

The Net Sales shall include all indigenous Sales, Exports Sales [including Sales to RMD (HUF)].
(3) DIL shall render to RMD (HUF) the audited annual reports following the close of each financial year, on the basis of which royalties are payable under this agreement. DIL shall pay to RMD (HUF) the amount of Royalty payable within 3 months from audited annual reports.”
It can be noticed from the above reproduced articles of the agreement, the royalty which are paid from 20-4-2004 to 10-9-2004 were done so after calculating the correct sales turnover on finalization of the balance sheet on 8-9-2005. It is undisputed that during the period, no service tax was leviable on Intellectual Property Services, as the said services came into the statute w.e.f. 10-9-2004.
In Tribunal’s considered view, both the lower authorities have erred in coming to a conclusion that appellant is liable to pay the service tax. In Tribunal’s view, if amount which is paid for as royalty and remains undisputed, the said amount of royalty cannot be covered under the Intellectual Property Service which came into tax net from 10-9-2004. It is seen from the records that the lower authorities have sought to recover the service tax liability from the appellant by invoking the provisional collection of tax to hold that service tax liability arises. In Tribunal’s view, this is incorrect, at least, in respect of service tax liability, as in the case of service tax liability on any new services; it comes into effect only from the date which is notified by the Central Government by notification. In the case in hand, it is undisputed that the notification which was issued for taxing an amount paid as royalty under Intellectual Property Service was w.e.f. 10-9-2004. If that be so, service tax liability would not arise on the amount received by the appellant during the period 20-4-2004 to 10-9-2004.

Decision:- Appeal allowed.

Comment:-The analogy of the case is that as the service tax under the category of ‘Intellectual Property Rights Service’ came effect from 10-09-2004, no service tax could be demanded on the provision of said service prior to 10.09.2004. In the case of service tax liability on anynew services,it comes into effect only from the date which is notified by theCentral Government bynotification and not prior to date when notification does not exist.

Prepared By:- Anash Kachaliya

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PJ/CASE LAW/2015-16/2851

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