CESTAT Mumbai Rules Skoda’s Technology Licence Outside Consulting Engineer Service Tax Net
Background of the Dispute
The Mumbai Bench of CESTAT has allowed the appeal of Skoda Auto Volkswagen India Pvt. Ltd. Vs Commissioner of Central Excise & Service Tax, quashing a substantial service tax demand of Rs. 2,31,03,922, together with associated interest and penalties, for the years 2001-02 to 2003-04.
The core controversy stemmed from an agreement dated 01.10.2001 under which M/s. Skoda Auto AS., Czech Republic (Skoda Czech) granted Skoda Auto Volkswagen India Pvt. Ltd. the right to use its pre-existing technology, technical documentation, know-how and trademarks relating to passenger car manufacture and assembly in India.
In return, the Indian entity agreed to pay:
- A lump sum fee of USD 45 million in six instalments; and
- A running royalty of 5% on domestic sales and 8% on exports.
The Revenue authorities treated this arrangement as a provision of “Consulting Engineer Services” under Section 65 of the Finance Act, 1994, and proceeded to levy service tax from the Indian assessee under a reverse charge approach, even though Skoda Czech had no office in India.
Show Cause Notice and Order-in-Original
Show Cause Notice Allegations
Relying on the technical assistance and supply of technical know-how under the agreement, the Department issued a Show Cause Notice dated 14.05.2004 proposing to:
- Recover Rs. 2,31,03,922 as service tax from the assessee under
Section 68andSection 73(a)of the Finance Act, 1994 read withSection 11of the Central Excise Act, 1944; - Impose penalties under
Section 75A,Section 76,Section 77andSection 78of the Finance Act, 1994; and - Recover interest under
Section 75of the Finance Act, 1994.
The Show Cause Notice proceeded on the footing that:
- Skoda Czech was rendering advice, consultancy or technical assistance in one or more disciplines of engineering;
- Such services squarely fell within Consulting Engineer Services as per
Section 65; and - As Skoda Czech had no office in India, the Indian assessee was liable to discharge service tax on its behalf.
Commissioner’s Findings
The Order-in-Original dated 28.02.2017 upheld the Department’s stand and confirmed the demand by holding that:
- The technical assistance and supply of technical know-how supplied by Skoda Czech constituted taxable services under the head “Consulting Engineer”;
- Consequently, Skoda Czech was liable to pay service tax; and
- In view of Skoda Czech having no establishment in India, the Indian assessee was bound to pay service tax on its behalf.
The assessee challenged this order before CESTAT Mumbai.
Key Legal Issues Before the Tribunal
The Tribunal framed two principal questions:
Classification issue
- Whether the technical assistance and supply of technical know-how provided by Skoda Czech under the agreement dated 01.10.2001 could be categorised as “Consulting Engineering Services” under
Section 65of the Finance Act, 1994?
- Whether the technical assistance and supply of technical know-how provided by Skoda Czech under the agreement dated 01.10.2001 could be categorised as “Consulting Engineering Services” under
Reverse charge issue (pre-Section 66A period)
- Assuming the arrangement could be treated as Consulting Engineer Services, whether the Indian service recipient could be fastened with service tax liability for 2001-02 to 2003-04, i.e., prior to the insertion of
Section 66A(effective from 18.04.2006), which first enabled levy of service tax on recipients of services from abroad?
- Assuming the arrangement could be treated as Consulting Engineer Services, whether the Indian service recipient could be fastened with service tax liability for 2001-02 to 2003-04, i.e., prior to the insertion of
Nature and Character of the 01.10.2001 Agreement
Essence of the Arrangement: Licence of Existing IP
On an in-depth reading of the agreement, the Tribunal highlighted that:
- The dominant purpose of the contract was to grant Skoda Auto Volkswagen India Pvt. Ltd. a licence to use Skoda Czech’s pre-existing technology, technical documentation, know-how and trademarks.
- The assessee neither requested Skoda Czech to develop any new technology nor to design or engineer any product, process or solution tailored to its specific needs in India.
The agreement defined “Technical Documentation” (Article 1) as:
“any documents, such as drawings, photographs, diagrams, tapes, magnetic tapes, video tapes, information systems, etc. pertaining to deliveries, assembly /manufacture, testing and quality assurance developed by Skoda and concerning the Contractual Products, including regular continuous engineering and year model alterations.”
The Tribunal noted the following crucial characteristics: