Grant of exclusive right to use know how is not intellectual property right
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
The Text of the Order as follows :
This appeal has been filed by M/s Modi Mundipharma Beauty Products Pvt. Ltd.1, formerly known as Modi Revlon Pvt. Ltd., to assail the order dated 23 December, 2016 passed by the Commissioner, Service Tax, Delhi-II2 on the two show cause notices issued to the Appellant. In regard to the first show cause notice dated 26 December, 2012, the Commissioner has confirmed the demand of service tax amounting to Rs. 5,06,62,452/- for the period 2007-08 to March, 2012 under section 65(105)(zzr) of the Finance Act, 19943. The remaining demand under “goods transport agency” service has been dropped. In regard to the second show cause notice dated 17 April 2014, the Commissioner has confirmed the demand amounting to Rs. 26,91,973/- under section 65 (105) (zzr) of the Finance Act for the period April, 2012 to June, 2012 but the demand under „goods transport agency‟ service has been dropped.
2. The Appellant is engaged in manufacture of cosmetics and skin care products. It has its corporate office at New Delhi but its factory is situated at Ghaziabad. Two agreements, both dated 27 July, 1994, were entered into by the Appellant with Revlon Mauritius Limited4 at Mauritius and Freya Holdings Limited5 at British Virgin Island. Under the former agreement6, Revlon Mauritius granted to the Appellant the exclusive right to use the “know how” in any plant approved by Revlon Mauritius in accordance with the processes, specifications and recipes thereof in connection with the manufacture, marketing, sale and distribution of Revlon products in the territory. „Know how‟ has been defined to mean formulae, processes, recipes, product specifications, technical and manufacturing data, information, equipment specification of raw materials, and other technical information and data necessary to manufacture Revlon products. In consideration of the grant of license rights to the Appellant, the Appellant was required to pay to Revlon Mauritius, a royalty of 5 per cent of its net sales per annum. This Agreement, executed on 27 July, 1994 was initially up to August, 2002 but was extended from time to time and the last extension was to expire in March, 2012.
3. The latter agreement dated 27 July, 19947 was executed between the Appellant and Freya Holdings under which Freya Holdings granted to the Appellant an exclusive license to use the Licensed Marks as trademarks and all other intangible rights and the exclusive right to import, make, have made and sell Revlon Products subject to the terms and conditions of the agreement. Freya Holdings granted a further right to the Appellant to use the name „Revlon‟ in its corporate name. The agreement further provided that Freya Holdings shall not grant any rights to manufacture or sell cosmetics, toiletry, beauty treatment, fragrance or skin care product to any third party without first offering such a product to the Appellant.
4. A show cause notice dated 26 December, 2012 was, however, issued to the Appellant for the period 2007-08 to March 2012 mentioning therein that a letter dated 30 August, 2012 had been received from the office of the Deputy Commissioner at Ghaziabad to inform the Department that the Appellant was receiving „inward freight‟ and „intellectual property right‟ service from a provider situated outside India but was not paying service tax on the gross value paid for receiving the said services. The Appellant was, therefore, asked to provide details of taxable/non-taxable receipts. On scrutiny of the documents provided by the Appellant, it transpired that the Appellant had made technical collaboration with foreign companies for which royalty was paid to the foreign collaborators. It was further stated that the Appellant had on the sales made by it, paid royalty to Revlon Mauritius for use of their trademark/name in India and made payment to Revlon Australia for use of their printing and stationery. The department, therefore, formed an opinion that the said activities related to „intellectual property right‟ service, which were taxable under section 65(105) (zzr) of the Finance Act. The show cause notice also made reference to short payment of service tax on the GTA service rendered by the Appellant.
5. A second show cause notice dated 17 April, 2014 was also issued to the Appellant for the period April 2012 to June 2012 for payment of service tax under „intellectual property right‟ service and for short payment of service tax under GTA service.
6. The Appellant filed a reply to both the show cause notices stating therein that the Appellant had not entered into any agreement with Revlon Mauritius for use of trademark license since the agreement with Revlon Mauritius was only for providing „know how‟. It was also pointed out that the agreement for use of trademark was with Freya Holdings, for which no consideration was paid by the Appellant. It was also stated that the Appellant had not entered into any agreement with Revlon Australia or Revlon South Africa and did not also procure any services from them. It was specifically stated that „know how‟ was not covered in the definition of „intellectual property right‟ service. It was also pointed out that courier charges could not have been included in the GTA service and the Appellant had correctly discharged the service tax liability under GTA since the amount spent on freight was within the exemption limit.
7. The Commissioner did not accept the contentions advanced by the Appellant in regard to the service tax to be paid on „intellectual property right‟ service but accepted the contention regarding GTA service. Accordingly, the demand made for payment of service tax under „intellectual property right‟ service was confirmed but the demand made for GTA service was dropped.
8. This Appeal has, accordingly, been filed to assail the order dated 23 December, 2016 passed by the Commissioner to the extent it confirms the demand made under „intellectual property right‟.
9. Shri A.K. Sood, learned Counsel appearing for the Appellant submitted:-
(i) The Commissioner completely misread the First Agreement dated 27 July, 1994 entered into between the Appellant and Revlon Mauritius and wrongly concluded that „know how‟ received by the Appellant from Revlon Mauritius would fall within the taxable category of „intellectual property right‟ service;
(ii) The dominant nature of the First Agreement entered into between the Appellant and Revlon Mauritius is only for transfer of „know how‟ and „know how‟ is not covered under the definition of „intellectual property right‟ services. In support of this contention, learned Counsel placed reliance upon decisions to which reference shall be made at the appropriate stage;
(iii) Benefits from the service procured at the time when the First Agreement was executed in 1994 were not subjected to levy of service tax and when the said agreement was renewed in 2003, there was no change in the clauses of the agreement. The entire payment made and likely to be made in future under the First Agreement relates to services received much before the introduction of service tax on „intellectual property right‟ with effect from 10 September, 2004;
(iv) The arrangement between the appellant and Revlon Australia is on cost sharing basis and there is complete absence of any service element between the Appellant and Revlon Australia;
(v) The order has confirmed the demand on a ground not mentioned in the show cause notice and, therefore, the order deserves to be set aside for this reason alone;
(vi) The demand for a substantial period that has been confirmed is barred by limitation; and
(vii) Penalty nor interest could have been imposed.
10. Shri Vivek Pandey, learned Authorized Representative of the Department has, however, supported the impugned order and submitted that:-
(i) The First Agreement dated 27 July, 1994 between the Appellant and Revlon Mauritius provides for payment of royalty as a consideration for the grant of license rights and as per clause 2 of the agreement, license grants covers not only „know how‟ but also patent licenses, improvements and maximization of sales;
(ii) Clause 2.02 of the First Agreement stipulates that the Appellant has been granted the exclusive right to use the patents in the manufacture, distribution and sale of Revlon products in the territory. Thus, it is not correct for the Appellant to urge that the First Agreement is only for „technical know how‟ as the consideration includes all the four elements, namely know how, patents, improvements and maximization of sales; and
(iii) As per clause 1.07 of the First Agreement, the meaning of „know how‟ includes „processes‟, which is covered by the term „process‟ contained in section 2(l)(j) of The Patents Act, 1970. Hence, „know how‟ is covered by the Patents Act and is, therefore, an „intellectual property right‟ under the Finance Act.
11. The contentions advanced by the learned counsel for the Appellant and the learned Authorized Representative of the Department have been considered.
12. In order to appreciate the contentions, it would be useful to reproduce the relevant clauses of the First Agreement dated 27 August, 1994 entered into between the Appellant and Revlon Mauritius. They are as follows:
FIRST AGREEMENT
(Between the Appellant and Revlon Mauritius)
THIS AGREEMENT dated as of July 27,1994 between REVLON MAURITIUS LIMITED, a Mauritius corporation (“Licensor”) and MODI-REVLON PRIVATE LIMITED, an Indian corporation (‘Licensee”)
WITNESSETH
WHEREAS, Licensor possesses technical Know How, information, data, processes, formulae, experience and skill required for the manufacture, distribution and sale of Revlon Products (hereafter defined); and
WHEREAS, Licensee desires to obtain from Licensor such technical Know How, information, data, processes, formulae, experience and skill;
Now, THEREFORE, in consideration of these premises and the terms and conditions hereinafter set forth, Licensor and Licensee hereby agree as follows:
1. DEFINITIONS.
For the purpose of this Agreement, the following expressions used herein shall have the meaning hereinafter assigned to them.
1.07 “Know How” shall mean formulae, processes, recipes, product specifications, technical and manufacturing data, information, equipment specification, specification of raw materials, and other technical information and data necessary to manufacture Revlon Products.
****
1.10 “Patents” shall mean all patents and such other industrial property rights relating to the manufacture of the Revlon Products which are owned by or licensed to or are licensed hereafter to Licensor with right to sublicense including without limitation those listed on Exhibit A hereto.
***
1.12 “Revlon Products” shall mean (i) all cosmetic, toiletry, beauty treatment, skin care and fragrance products and lines of such products now or hereafter sold by Licensor or its Affiliates in any country of the world under the brand names identified in Exhibit B (“Category I Products”); (ii) all cosmetic toiletry, beauty treatment, skin care or fragrance products hereafter acquired by Licensor or its Affiliates (“Acquired Products”) or any cosmetic, toiletry, beauty treatment, skin care or fragrance products incorporating new technologies hereafter developed or owned by Licensor or its Affiliates or to which Licensor or its Affiliates hereafter obtain rights (“New Technology Products”), *********
1.13 “Technical Services” shall mean the technical services to be performed by Licensor under this Agreement, including training of personnel of the Licensee, and other related activities in accordance with the provision of this Agreement.
2. LICENSE GRANTS.
2.01 Know How License. Subject to the provisions of this Agreement from the Effective Date, Licensor hereby grants to Licensee the exclusive right to use the Know How, in any Plant approved by Licensor, in accordance with the processes, specifications and recipes thereof in connection with the manufacture, marketing, sale and distribution of Revlon products in the Territory.
2.02 Patent License. Subject to the provisions of this Agreement from the Effective Date, Licensor hereby grants to Licensee the exclusive right to use the Patents in the manufacture, distribution and sale of Revlon Products in the Territory.
2.03 Improvements. Licensor shall provide Licensee, free to cost, all modifications and improvements made by it to the Know How, and Licensee agrees that any right to register and obtain patents in any respect of such modifications and improvements vests exclusively in Licensor, and Licensee undertakes to sign and furnish all such waivers, acknowledgments and other writings as may be required in connection therewith. Any improvement relating to Revlon Products discovered by Licensee or by a Contract Manufacturer all belong to and be the property of Licensor. Any improvement or beneficial modification in process, design or otherwise related to the manufacture of Revlon Products, whether discovered by Licensee or otherwise, shall be considered part of the “Know How” licensed hereunder except that Licensor gives no representation, warranty or indemnity with respect to any such improvement or modification originating from Licensee or its Affiliates or a Contract Manufacturer.
2.04 Maximize Sales. Licensee accepts the grant set forth in Sections 2.01 and 2.02 and shall use its best efforts to exploit the rights granted herein including, without limitation, selling the maximum quantity of Revlon Products consistent with the terms of this Agreement.
6. PATENTS
6.01 No Infringement. Licensor declares that to the best of its knowledge no patents or other similar industrial property rights of third parties in the Territory shall be infringed by the use of the Know How by Licensee pursuant to this Agreement.
6.02 Notices. Licensee shall notify Licensor in writing of any claims, demands, actions, suits and proceedings made on or against it for infringement of any patent or industrial property rights by reason of Licensee’s use in the Territory of the Know How. Licensor shall have the sole right and responsibility for the defense thereof, and Licensee shall assist Licensor in such defense as Licensor may reasonably require.
7. CONSIDERATION AND TAXES.
7.01 Royalty. In consideration of the grant of license rights to it hereunder, Licensee shall pay to Licensor during the subsistence of this Agreement a royalty of 5% net of taxes, of its Net Sales per annum (the “Royalty”).
13. The relevant clauses of the Second Agreement executed between the Appellant and Freya Holdings are as follows:
SECOND AGREEMENT
(Between the Appellant and Freya Holdings)
AGREEMENT, dated as of December 30, 1993 between “FREYA HOLDINGS LTD.,” a British Virgin Islands corporation (“Licensor”) and MODI-REVLON PRIVATE LIMITED, an Indian corporation (“Licensee”).
WITNESSETH
WHEREAS, Licensor has obtained the right to license to Licensee the Licensed Marks (as defined below) for Revlon Products (as defined below); and
WHEREAS, Licensee desires to obtain a license to use the Licensed Marks in connection with the importation, manufacture, merchandising, marketing, promotion, advertising, sale and distribution of Revlon Products, and Licensor is willing to grant such license subject to all the terms of this Agreement;
NOW, THEREFORE, in consideration of these premises and the terms and conditions hereinafter set forth, Licensor and Licensee hereby agree as follows:
1. Definitions.
The following definitions shall be applicable throughout the Agreement:
1.03 “Licensed Marks” shall mean the trademark “Revlon,” such other trademarks as are used on the Revlon Products as set forth in Exhibit A hereto, and any trademark hereafter registered in the Territory for use in connection with Revlon Products and with respect to which Licensor obtains the right to license Licensee hereunder.
1.06 “Revlon Products” shall mean the cosmetic, toiletry, beauty treatment, skin care and fragrance products and lines of such products now or hereafter sold in any country of the world under the brand names identified in Exhibit B utilized by Revlon Consumer Products Corporation, a Delaware corporation and its Affiliates (collectively, “RML”) and all cosmetic, toiletry, beauty treatment, skin care and fragrance products and lines of such products with respect to which Licensor hereafter obtains the right to license Licensee in the Territory.
2. License Grant.
2.01 Grant. Licensor hereby grants to Licensee an exclusive license throughout the Territory during the Term to use the Licensed Marks as trademarks and all other intangible rights referred to in Section 8.06 in connection with the Business, and the exclusive right to import, make, have made and sell Revlon Products in the Territory subject to all the terms and conditions of this Agreement. Licensor further grants to Licensee the right, during the Term, and only so long as it is engaged in the Business, to use the name “Revlon” in its corporate name, “Modi-Revlon Private Limited,” subject to the limitations on use set forth in this Agreement, including Section 8.02 and 8.08 hereof. Upon execution of this Agreement, Licensee shall deliver to Licensor or such party as may be designated by Licensor a duly executed irrevocable Power of Attorney of the Licensee in the form attached as Exhibit C (“Power of Attorney”) and such other document as would enable Licensor or such designated party to take all such steps as may be required by law to enable it immediately to amend the corporate charter of Licensee to change its name in accordance with the provisions of Section 8.02 hereof. Licensor shall not grant any rights to manufacture or sell any cosmetic, toiletry, beauty treatment, fragrance or skin care product to which Licensor obtains rights to any third party with respect to the Territory without first offering such product to Licensee under this Agreement.
8 Trademarks.
8.01 Limited Use. (a) Licensee will use the Licensed Marks only in such form and manner as is specifically permitted hereby or otherwise approved for use by Licensor. Licensee shall use the Licensed Marks strictly in accordance with any and all applicable trademark and other laws and shall use such legends, markings or notices in connection therewith as are required by law or otherwise as may be reasonably required to protect rights thereto.****
8.03 All Rights in RML. Licensee acknowledges that the Licensed Marks (including the name “Revlon”) have acquired valuable goodwill with the public and that any products bearing the Licensed Marks have acquired a reputation of high quality, prestige and style “Licensee acknowledges that Revlon Manufacturing, Ltd (“RML”) is the owner of all right, title and interest in and to the Licensed Marks, and of the goodwill attached to the Licensed Marks including that which arises from the sale of Revlon Products hereunder. All use by Licensee of the Licensed Marks shall be deemed to have been made by and for the benefit of RML, and all uses of the Licensed Marks by Licensee, or by any permitted sublicensee or assignee, and any goodwill arising therefrom, shall inure to the sole and exclusive benefit of RMI.
8.04 Warranty. It has been represented and warranted to Licensor and Licensor derivately represents and warrants to Licensee that, to its knowledge and except as described in Exhibit E. (i) RML, in the Territory, has good title to the Licensed Marks free and clear of encumbrances of any nature or kind whatsoever, defects of title or rights of others; (ii) there are no material claims, or any material basis for such a claim, of any other person pertaining to the Licensed Marks, and no proceedings have been instituted or challenged which threaten the rights of RML in respect of the Licensed Marks; (iii) none of the Licensed Marks is being infringed by others; (iv) none of the Licensed Marks is dependent upon a foreign registration which has not been made or is subject to any outstanding or threatened order, decree, judgment or stipulation; (v) the Licensed Marks are in full force and effect and have been duly registered, filed or issued in the name of the RML by the relevant India trademark registry, and have been where required, properly renewed, and all fees and taxes with respect thereto have been paid in accordance with all applicable provisions of law and administrative regulations; (vi) no proceedings charging RML with infringement of any adversely held trade name, trade mark, service mark or service name is pending or threatened to be filed; (vii) use of the Licensed Marks does not infringe the rights of third parties; and (viii) no consent of third parties is necessary for Licensee to use the Licensed marks or, if any such consent is necessary, such consent has been obtained by RML.
14. It clearly transpires from the First Agreement executed between Revlon Mauritius and the Appellant that Revlon Mauritius possessed technical know how, information, data, processes, formulae, experience and skill required for the manufacture, distribution and sale of Revlon Products and the Appellant desired to obtain the aforesaid. The Agreement sets out the terms and conditions. The know how has been described in clause 1.07 of the Agreement to mean formulae, processes, recipes, product specifications, technical and manufacturing data, information, equipment specification, specification of raw materials, and other technical information and data necessary for manufacture of Revlon Products. Revlon Products have been defined in Clause 1.12 of the Agreement. Clause 2 deals with License Grants. Under clause 2.01, Revlon Mauritius granted to the Appellant the exclusive right to use „know how‟ in any plant approved by Mauritius Revlon in connection with the manufacture, marketing, sale and distribution of Revlon Products in the Territory. Clause 7 deals with Consideration. Clause 7.01 provides that in consideration of the grant of license rights by Revlon Mauritius, the Appellant shall pay to Revlon Mauritius a royalty of 5 per cent of its net sales per annum.
15. It is the Second Agreement entered into between Freya Holdings and the Appellant that grants the Appellant an exclusive license throughout the Territory to use the Licensed Marks as trademarks and all other intangible rights referred to in clause 8.06 in connection with the business, and the exclusive right to import, make, have made and sell Revlon Products in the Territory. „Licensed Marks‟ have been defined in clause 1.03 to mean the trademark „Revlon‟ and such or other trademarks as are used on the Revlon Products.
16. It is in the light of the aforesaid provisions of the two Agreements that the contents of the first show cause notice dated 26 December, 2012 have to be examined. This show cause notice mentions that a letter dated 30 August, 2012 was sent by the office of the Deputy Commissioner at Ghaziabad (RUD-I) to the Appellant to the Delhi office to inform that the Appellant was receiving „inward freight‟ and „intellectual property right‟ service from a service provider situated outside India but was not paying service tax on the gross value paid for receiving the said service. The show cause notice then refers to a letter dated 19 September, 2012 (RUD-II) sent by the Range Office at Delhi to the Appellant to provide a copy of ST-2 certificate, copy of ST-3 returns for the period 2007-08 to 2011-12 and other documents. It further mentions that these documents were submitted by the Appellant on 28 September, 2012 (RUD-IV).
For Further Details – Read Full Order
Tags: Judgement, Appellant Tribunal
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