Introduction
No Service Tax on Royalty for Permanent Right to Use Trademark is a key takeaway from a landmark Supreme Court decision. Many Indian businesses pay royalties for intellectual property—this blog explains when service tax applies and when it doesn’t, using verified case law and government clarifications.
Background: Royalty Payments & Service Tax
- Under the erstwhile Service Tax regime, licensing intellectual property was taxable as a ‘Declared Service’ under Section 66E(c) of the Finance Act, 1994.
- However, whether a permanent transfer qualifies as a taxable ‘service’ has been disputed.
Key Case Law: Supreme Court Clarification
The recent Supreme Court judgment in M/s Hero Motocorp Ltd. vs Commissioner of Central Excise & Service Tax clarified:
| Point | Supreme Court Ruling |
|---|---|
| Nature of Right | If the agreement permanently transfers all rights of the trademark to the buyer, it is a sale, not a service. |
| Tax Implication | No Service Tax is payable on such royalty payments because there is no ‘service’ involved. |
| Previous Confusion | Earlier, authorities demanded service tax on royalty even when the trademark was permanently assigned. |
Legal Basis:
- Finance Act, 1994 – Declared Services (Section 66E(c))
- Supreme Court Citation: 2024-TIOL-35-SC-ST
What This Means for Businesses
✅ Permanent Transfer = No Service Tax
✅ Temporary License = Service Tax Applicable
✅ One-time Lump Sum for Sale = Exempt
✅ Recurring Royalty for License = Taxable
Businesses must check their Intellectual Property Agreements carefully:
- Assignment Agreement: Ownership permanently passes. No service tax.
- License Agreement: Only usage rights for limited period. Service tax applies.
Expert Tip
Ambiguous contracts often lead to tax disputes and avoidable litigation.
How to Stay Compliant
- Review IP agreements with a tax advisor.
- Maintain proper documentation showing permanent transfer if claiming exemption.
- Refer to relevant CBIC circulars and case laws to justify your stand.
FAQ
Q1: Is GST applicable on permanent IP transfers?
A: Under GST, ‘sale of IP’ is treated as supply of goods (Section 7, CGST Act). So GST may apply unless exempt. Consult your tax professional.
Q2: Does this ruling apply to copyrights or patents?
A: The principle applies to any IP: permanent sale is a goods transaction; licensing is a service.
Summary
Businesses must differentiate between licensing (taxable) and permanent assignment (non-taxable) to avoid tax disputes. Always use clear agreements. Learn more at Efiletax.
Conclusion
The ruling on No Service Tax on Royalty for Permanent Right to Use Trademark protects businesses from wrongful tax demands. For expert help in drafting compliant IP agreements and handling audits, contact Efiletax today.