CESTAT Chennai Quashes ₹1.59 Crore Service Tax Demand Against RRB Energy Over Foreign Technology Agreements

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) at Chennai has set aside a ₹1.59 crore service tax demand raised against RRB Energy Ltd on payments made to overseas entities for technology transfer and wind turbine development services.

The tribunal held that the department failed to establish that the transactions were taxable as Intellectual Property Service or Consulting Engineering Services.

A coram of Judicial Member Ajayan T.V. and Technical Member M. Ajit Kumar passed the order while allowing RRB Energy's appeal. The appeal challenged an order that had confirmed service tax demands, interest, and penalties on services received from entities based in the Netherlands and Germany.

"We find that Revenue has not disputed the Appellants contention that the technical know-how received as per the IITA from CTC was not registered as an IPR under the laws of India. This being so and in the light of the judgments of this Tribunal cited above, we hold that the Department has not discharged its burden of proof of exigibility of the activity to tax under the head of 'Intellectual Property Service' and the demand for duty under the RCM as per Section 68(2) of the FA 1994 merits to be dropped.", it noted.

The dispute arose after the department alleged that between 2007-08 and 2011-12, RRB Energy received taxable services from Composite Technology Center (CTC), Netherlands, and Windrad Engineering GmbH, Germany.

RRB Energy had entered into an International Technology Transfer Agreement with CTC. Under the agreement, CTC provided drawings, technical information and technical assistance relating to the manufacture of rotor blades.

The department treated the arrangement as Intellectual Property Service. It sought to levy service tax on a reverse-charge basis.

RRB Energy argued that the technical know-how received from CTC was not registered as an intellectual property right under Indian law. It contended that the transaction could not therefore be taxed as Intellectual Property Service.

After examining the agreement, the tribunal noted that Revenue had not disputed the company's contention that the technical know-how received from CTC was not registered as an IPR under the laws of India.

Referring to earlier Tribunal decisions, it held that the Department had not discharged its burden of proof of exigibility of the activity to tax under the head of Intellectual Property Service.

The tribunal also examined an Engineering Consultancy Agreement entered into by RRB Energy with Windrad Engineering GmbH. The agreement concerned the development of wind turbines.

Under the agreement, Windrad's engineers were required to work with RRB Energy's research and development team. The project involved concept development, design, detailing, prototype-related work and start-up support.

"The arrangement is one for collaborative development of a wind turbine project, covering design, detailing, prototype-related work and start-up support, and is not a mere contract for advice, consultancy or technical assistance simpliciter.", the tribunal observed.

The bench observed that the nature of the transaction had to be determined from the substance of the agreement. It observed that the nature of the transaction could not be determined from the nomenclature adopted in the Profit and Loss account.

The Tribunal found that Windrad was required to deploy engineers to work alongside RRB Energy's engineers. It also found that the agreement contemplated generation of materials and data that would ultimately vest in the appellant.

"The expression 'technical' undoubtedly postulates the application of specialised knowledge, skill and expertise. However, for the purposes of the present levy, the decisive consideration is the manner in which such expertise is deployed.", the tribunal observed.

The tribunal said these features were indicative of a composite arrangement involving active participation in execution and creation of deliverables. It held that the arrangement was not of a standalone consulting engagement alone.

The Tribunal held that Revenue had not discharged its burden of proving that the services received under the agreement were taxable as Consulting Engineering Service. It therefore held that the demand could not be sustained.

The Tribunal set aside the impugned order and allowed the appeal. It held that the remaining issues relating to limitation, revenue neutrality, interest and penalty did not survive.

For Appellant: Advocates Shwetha Vasudevn and Shri Sheerabdhinath G, Advocates

For Respondent: M. Selvakkumar, Authorised Representative