Volvo Not Liable To Pay Service Tax On Royalty Paid For Technical Know-How: CESTAT Bangalore

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) in Bangalore has ruled that Volvo Buses (India) Pvt. Ltd. is not liable to pay service tax on royalty paid to its Swedish parent company for technical know-how under a Technical License Contract Agreement.

The tribunal held that there was no material to show the royalty was paid towards any intellectual property right recognised under Indian law.

A bench of Judicial Member P.A. Augustian and Technical Member R. Bhagya Devi observed, "In the impugned order, there is nothing to suggest that the royalty payments was made towards intellectual property rights and since as per the Technical License Contract Agreement, the payments are towards technical know-how, therefore, the question of payment of service tax does not arise."

The dispute arose after the Service Tax Department demanded service tax, interest and penalties on royalty paid by Volvo Buses India to Volvo Bus Corporation, Sweden, under a Technical License Contract Agreement. According to the Department, the agreement fell within the scope of Intellectual Property Right (IPR) services, and the royalty attracted service tax.

Volvo contended that the payments were made only for the right to use technical know-how and technical documentation for manufacturing, assembling and quality control, and not towards any intellectual property right recognised under Indian law.

After examining the agreement, the tribunal found that Volvo India had been granted only a non-exclusive and non-transferable licence to use technical documentation and know-how for manufacturing licensed products and related purposes.

It noted that the agreement also stated that, apart from the rights expressly granted, the company acquired no right or claim over trademarks, trade names, utility model rights, design rights, patents, copyrights, technical documentation, know-how or technical knowledge owned, used or adopted by the Swedish company.

The tribunal also relied on its earlier decision in Volvo's own case involving an identical dispute, in which it had set aside a similar service tax demand. It further referred to the CBEC Circular dated September 10, 2004, which clarifies that only intellectual property rights covered under Indian law are chargeable to service tax.

Observing that there was no evidence to show the royalty represented consideration for any recognised intellectual property right, the tribunal held, "Moreover, as clarified by the Board, only intellectual property rights which are registered and covered under Indian law can only be liable for service tax. Since, there is no such evidences placed on record, we do not find any justification in confirming the demand, therefore, the same is set aside."

The tribunal allowed Volvo's appeal and set aside the service tax demand

For Appellant: Advocate Nischal K.M

For Respondent: M.A. Jithendra, Assistant Commissioner (Authorised Representative).