Micromax's ₹154 Crore Deposit In Ericsson Patent Case Was Not Royalty For Service Tax: Delhi High Court

The Delhi High Court has held that ₹154.79 crore deposited by Micromax Informatics Ltd. pursuant to interim orders passed in a patent dispute with Ericsson could not be treated as a payment towards royalty for the purpose of service tax.

The Division Bench of Justices Avneesh Jhingan and Shail Jain was hearing an appeal filed by the CGST Department against a CESTAT order upholding the dropping of a service tax demand against Micromax.

The dispute arose from litigation between Micromax and Telefonaktiebolaget LM Ericsson, Switzerland concerning the use of Ericsson's patents and technologies.

During the pendency of the patent dispute, the Delhi High Court had, through interim orders, directed Micromax to deposit a total amount of ₹154,79,43,050.

The Directorate General of Central Excise Intelligence (DGCEI) subsequently took the view that Micromax was the recipient of intellectual property rights services from Ericsson, a foreign entity, and that service tax was payable on the amount paid to Ericsson.

Accordingly, a show cause notice proposed a demand of ₹17.50 crore towards service tax, along with interest and penalties.

The Department's case was that the amounts deposited pursuant to the Court's interim orders represented royalty payable by Micromax to Ericsson.

During the pendency of the proceedings however, Micromax and Ericsson entered into an out-of-court settlement.

Under the settlement, Micromax paid ₹96 crore to Ericsson towards royalty. Since the service tax regime had ceased to operate by then and GST regime had come into force, Micromax paid IGST on the ₹96 crore settlement amount.

The service tax proceedings against Micromax were subsequently dropped by the adjudicating authority. The Department challenged the decision before the Tribunal but was unsuccessful, leading to the present appeal.

Department argued that the amount deposited pursuant to the interim orders was, in substance, royalty and was therefore exigible to service tax. It relied upon the Supreme Court's decision in Commissioner of Central Excise and Customs v. Idea Mobile Communication Ltd. to contend that the true nature of a payment, rather than its description, determines its taxability.

Rejecting this contention, the High Court noted that the deposits were made pursuant to interim orders passed during the pendency of the patent dispute to balance the equities and secure the interests of the parties. At that stage, there was no vested right in Ericsson to receive the deposited amount, as the amount remained subject to the outcome of the suit.

The Court observed that when the deposits were ordered, it had not been determined that Micromax had used Ericsson's patents in a manner giving rise to a royalty liability. That question never arose for adjudication because the parties subsequently settled the dispute.

“The contention of the learned counsel for the appellant that the amount deposited pursuant to the interim orders of the Court were payment towards royalties is misconceived,” it held.

It further held that the ₹154 crore deposited pursuant to the interim orders was not a payment towards royalty. In contrast, the ₹96 crore subsequently paid under the settlement was expressly towards royalty and had been subjected to IGST under the applicable taxation regime.

The Court also distinguished the Idea Mobile judgment, observing that in the present case the nature of the payment had not been determined and it had never been adjudicated that the deposited amount related to taxable services between Ericsson and Micromax.

As such, the Court dismissed the Department's appeal.

For Appellant: Advocate Atul Tripathi, SSC, CBIC, Akshay Sagar, Shubham Mishra & Gaurav Mani Tripathi

For Respondent: Advocate Anu Sura, Sameer Jain, Prerna Singh & Anam Khan