CESTAT Hyderabad Upholds Service Tax On Services Received From Abroad Classified As IPR

The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 2 April, held that services received from abroad classified as Intellectual Property Rights (IPR) services attract service tax.

A Bench comprising Technical Member A.K. Jyotish and Judicial Member Angad Prasad partially allowed an appeal by MLR Motors Ltd, allowing the taxpayer to discharge such liability through CENVAT credit for the period prior to 1 July 2012. The Tribunal observed:

“the services received from abroad were classifiable under IPRS, as held by the Adjudicating Authority. Therefore, demand of service tax is upheld. However, we find that appellant have rightly paid their liability utilizing both credit and cash as there was no statutory bar prior to 01.07.2012.”

MLR Motors Ltd., manufactures automobiles and entered into an agreement with a foreign entity for receipt of technical know-how, involving exchange of confidential designs, plans, ideas, and cost data.

During audit, the Department treated the transaction as liable to service tax under IPR services in terms of the Finance Act, 1994, read with reverse charge provisions for services received from outside India. It confirmed a demand of Rs. 1.78 crore, along with interest and penalties.

The appellant discharged the liability partly in cash and largely through CENVAT credit, but the Department objected, arguing that the appellant did not provide any output service.

Before the Tribunal, the appellant argued that the transaction did not qualify as an IPR service, as it did not transfer any intellectual property rights recognised under Indian law—such as patents, trademarks, or copyrights. It contended that mere transfer of technical know-how or confidential information does not fall within IPR services.

The appellant further submitted that, for the relevant period, no law prohibited utilisation of CENVAT credit for payment of service tax under reverse charge. It also challenged the invocation of extended limitation and the imposition of penalties.

The Department countered that the services were correctly classified as IPR services and that the appellant, being a deemed service provider under reverse charge, had to pay the liability in cash. It also argued that the appellant had failed to disclose the transactions and had not obtained service tax registration, justifying the extended period and penalties.

The Tribunal noted that the appellant had not disputed the classification of services under IPR at the adjudication stage and had proceeded on that basis. Accordingly, the Tribunal refused to re-examine the classification and held that the services received from abroad were classifiable under IPR services, as already determined by the adjudicating authority.

On the issue of CENVAT credit utilisation, the Tribunal held that prior to 1 July 2012, no statutory bar prevented using CENVAT credit to discharge service tax under reverse charge. Relying on judicial precedents, the Tribunal stated that the appellant had the right to pay the tax liability through CENVAT credit, which the Department had to accept and adjust against the confirmed demand. The Bench stated:

“the payments have been paid prior to the amendment brought in with effect from 01.07.2012 and therefore there was no bar, as held by various judicial pronouncements, for availing the said credit towards discharge of service tax liability including that on RCM basis.”

The Tribunal further held that the benefit of Section 73(3) and Section 80 was not available. It upheld the demand of interest and penalties under Sections 76, 77, and 78 of the Finance Act, 1994.

However, it set aside the penalty under the CENVAT Credit Rules read with Section 11AC of the Central Excise Act, observing that no prohibition existed on utilisation of credit during the relevant period.

Accordingly, the CESTAT partly allowed the appeal, upholding the service tax demand and consequential liabilities, while granting relief by recognising the validity of payment made through CENVAT credit.

For Appellant: Y. Sreenivasa Reddy, Advocate

For Respondent: V.R. Pavan Kumar, Authorized Representative