Mgmt. Service of Marketing can't be called 'Consulting Engineering Service' HC.

Facts in Brief:

1. Appellant a company, registered under the Company Act, are inter-alia engaged in the manufacture of Medicaments at the plant at Turbha Naka, Navi Mumbai where they are registered as an assessee under the Central Excise Act, 1944. They entered into an agreement with M/s Pfizer Inc 235 East 42 Street New York USA (herein after referred to as Pfizer) a foreign company. They hold 40% stake in the appellant company and in the Capacity of an investor/promoter of the appellant company agreed to disclose Technical know-how to the appellant in relation to certain pharmaceutical product as also allowed the use of the patents held for the products. The appellants made consequent payment for the same after the Reserve Bank of India approvals.

2. During the period 1997-98 & 2000-01 pursuant to the agreements for the use of the patented Technology an amount of Rs. 21.26 crores was paid to Pfizer. A cess @ 5% under R&D Cess in the said amount to Pfizer as Royalty and know how fee.

3. Department has on 5.7.2002, issued a notice to the appellants to show cause as a Service Tax, assessee 'service provider' as to why--

(i) the Rs. 21.26 crores paid as 'engineering consultancy' to Pfizer & the amount having been paid as 'technical know fees' and 'Royalty' during 1997-2001 on which no Service Tax was paid for the services received by the appellants should not be covered under 'Consulting Engineer Service'.

(ii) Service Tax demands at 5% on the Gross amount of Royalty and Technical fees paid be made.

(iii) for failure to get Registered under the Service Tax as an assessee and having failed to pay the Tax, liability for violation of the Service Tax Rules and penalties should not be determined and interest also not be recovered.

4. The Dy. Commissioner determined the Tax Demands alongwith interest and imposed penalties for breach of the Service Tax Law provisions. In appeal the Commissioner (Appeals) heard the application for waiver of the pre-deposit and the appeal together and dismissed the application and the appeal for contravention of Section 35F of the Central Excise Act, 1944 and on merits.

5. Hence this appeal.

HC held as under,

6. It is submitted that in the instant case, the transaction in question took place between a licensor supplying certain technical know-how and a licensee who is the recipient of such know-how. The relationship between a licensor-licensee is quite different from the relationship between a consultant-client. It is respectfully submitted that the Ld. Commissioner (Appeals) has failed to appreciate that for Service Tax to be payable, a service provider-client relationship has to exist, which is clearly not the case in the transaction between the Appellants and Pfizer. The term "client" is not defined under the Act and has to be examined as per its dictionary definitions. "Client" has been defined as:

"an individual, corporation, trust or estate that employs a professional to advice or assist it in the professional's include but are not limited to attorneys, accountants, architects etc." (Black's Law Dictionary) 'a person who engages the professional advice or services of another.' (Merriam Webster's Collegiate Dictionary) The dictionary meaning of the word 'client' thus suggests that a 'client' is a person who hires, engages or employs services of a professional. It is submitted that the Appellants have entered into a license Agreement with Pfizer, whereby Pfizer provides technical know-how to the Appellants. This cannot be construed as a client-consultant relationship, and therefore, no Service Tax is payable on such a transaction.

7. We find force in the agreements, the decision in the case of Tata Consulting Service, 2001 (77) ECC 694 (Kant) : 2001 (130) ELT 726 (Kar) & MN Dastoor & Co. Ltd., 2002 (140) ELT 341 (Cal) relied by the Ld. DR will not help the case only to bring Pfizer under the coverage of the term 'person', it will not cast a liability of Consulting Engineer or Engineering Services having been provided.

(b) The period of demand in this case is 1997 to 2001. The insertion of Sub-clause (iv) in Rule 2(1)(d) of the Service Tax Rules vide Notification 12/2002 dt 1.8.2002 providing that in relation to taxable services provided by a person who is a non-resident or is from outside India, then the person receiving the Service shall be liable. Therefore, in this present case, the demands made and determined as a liability on the appellants and consequence of penalty interest etc. are required to be held as misdirected.

(c) Following the Tribunal decision in the case of Navinon Ltd., 2004 (172) ELT 400 (Tri) and after perusal of the agreement on finding that the admitted position is the receipt of Technical know how of patented process from the foreign company and payments for the same and for the Royalty cannot be fastened with Service Tax Liability. No contrary decision or provision from the Agreement entered into was shown to arrive at or differ from the Tribunals decision.

(d) The grant, as per the terms of the Agreement, is of a Licence to manufacture, provide Technical assistance including Training and permit the availment of knowledge and expertise in connection with marketing management. Tribunal vide its decision in the case of M/s Avial Chemicals Pvt. Ltd. (ST Final Order No. 24/04-NB dt 7.6.2004 is ST/45/04-NBCA) had not upheld the levy of Service Tax as a consulting engineer on such Licence Agreements and for such use. The other part of the agreement is as regards Management Service of Marketing etc. & cannot be called 'Consulting Engineering Service' under the Service Tax Provisions. When the definition of various services under the Service Tax provision is seen.

8. In view of the findings herein above, the demands of Tax, interest and penalties cannot be upheld and are required to be set aside. 

Case Reference - Pfizer Ltd. vs Commissioner Of Central Excise.