2026-VIL-1475-CESTAT-CHE-ST
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SERVICE TAX CESTAT Cases

Service Tax - Intellectual Property Right Service - Permanent Transfer of Know-How and Intangible Assets - Definition of IPR under Finance Act, 1994 - Appellant, a manufacturing company engaged in rubber-industry equipment, entered into an Asset Sale and Purchase Agreement with a foreign entity for sale of plant and equipment, raw material, customer records, know-how, supplier records, domain names and brand with specified allocation of purchase price. The Appellant treated a portion of the consideration as referable to intangible assets outside the scope of service tax. The Revenue sought to tax a portion of the consideration as Intellectual Property Right Service under Sections 65(55a) and 65(55b) of the Finance Act, 1994, contending that the know-how transfer was temporary and the continuing royalty payments for five years negated permanency - Whether know-how constitutes an intellectual property right recognised under any law in force in India, whether the transaction constitutes a permanent or temporary transfer of intellectual property right, and whether the demand of service tax with penalties is sustainable - HELD - Know-how is not an intellectual property right recognised under any law in force in India within the meaning of Section 65(55a) of the Finance Act, 1994, as it is neither registrable nor recognised as a distinct species of intellectual property under any statute presently in force in India. Such position is well settled by consistent decisions of the Tribunal including Hyundai Motor India Ltd., Chambal Fertilizers and Chemicals Ltd., and Munjal Showa Ltd., affirmed by the Supreme Court. Permanent transfer of intellectual property right does not amount to rendering of service as per CBIC Circular 80/10/2004-ST. On a conjoint reading of the entire agreement including recitals and clauses, it is evident that the transaction constituted an absolute and permanent transfer of assets free and clear of encumbrances with title, property and risk passing to the appellant on completion. The restraint on the transferor from using or disclosing the know-how post-completion is characteristic of an absolute transfer and wholly inconsistent with any residual right retained. The know-how royalty for five years is properly understood as deferred consideration for a sale completed on the completion date, not a continuing licence. The mode and timing of payment of consideration does not qualify the nature of the transfer itself. The demand of service tax is not sustainable and is set aside entirely. Penalties under Sections 77 and 78 are equally unsustainable as they are premised on a non-existent obligation to register and the appellant's bona fide and arguable interpretation of law coupled with its correspondence with the department since 2010-11 constitute reasonable cause under Section 80 warranting waiver of penalties - The impugned order is set aside and the appeal is allowed
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