Exemption from service tax

If the aggregate value of the taxable services provided by a service provider in a financial year is up to Rs 4 Lakh, there is no liability on the service provider to pay the service tax as it is exempted vide Notification No 6/2005-service Tax dated 1 March 2005. However, the benefit of exemption is available subject to the following conditions:

a) Service is not provided by the service provider under a brand name or trade name
b) Value of service shall be aggregate value not exceeding Rs 4 Lakh from one or more premises and from one or more taxable service
c) In the last preceding financial year, aggregate value of all taxable services provided from one or more premises does not exceed Rs 4 Lakh
d) It is obvious that service provider should not avail the credit of service tax paid on the input service under the CENVAT Credit Rules, 2004
e) In case aggregate value of taxable service exceeds Rs 4 lakh, the first consecutive payments upto Rs 4 Lakh will be exempted. Subsequent payments will be subject to tax. Further, in the subsequent year, the benefit of exemption will not be available as the aggregate value of the preceding year will exceed Rs 4 Lakh
f) The exemption is not available for the services in respect of which the service receiver is liable to pay the service tax on the services availed by him, as in the case of Goods Transport Agency Service. Irrespective of the aggregate value of taxable service provided by a corporate service provider, if any freight has been paid, service tax has to be paid by the company.

Intellectual Property Service

India is a developing country with a growth rate of about 7 to 9%. Service Industry is developing rapidly than manufacturing sector and growth rate in agricultural sector is the lowest.

To increase the tax base and tape new areas for revenue, Government of India has started imposing Service Tax on designated services since 1994. Initially, a few services were taxed, but over the years, the list of taxable service is expanding and at present 105 services are under tax net.

This blog seeks to demystify the service tax on Intellectual Property Service.

1. Meaning and Scope

Intellectual property (‘IP’) refers to legal entitlements which are attached to certain types of information, ideas, or other intangibles in their expressed form. The holder of this legal entitlement is generally entitled to exercise various exclusive legal rights in relation to the subject matter of the IP. IP right owner(s) may sell, transfer, assign, licence or permit the right to use of IP to another person for a consideration. Vide Finance Act 2004, IP service has been brought within the ambit of service tax w.e.f. 10 September 2004 to tax the payments received/made toward transfer/acquisition of such rights.
Section 65(105) (zzr) of the Finance Act, 1994 (‘the Finance Act’) seeks to levy service tax on service provided to any person, by the holder of intellectual property right, in relation to intellectual property service.
As per Section 65 (55a) of the Finance Act, “intellectual property right” (‘IPR’) means any right to intangible property, namely, trade marks, designs, patents or any other similar intangible property, under any law for the time being in force, but does not include copyright.
As per Section 65 (55b) of the Finance Act, “intellectual property service” means,
(a) transferring temporarily; or
(b) permitting the use or enjoyment of any intellectual property right

2. Key ingredients

• Service is provided by the holder of IPR
• IPR is recognized under the Indian law
• IPR does not pertains to copyright
• IPR law should be in force at relevant time
• IPR is transferred temporarily or permitted to use without transfer
• Service is provided to a client

2.1 IPR holder:

IP reflects the idea that the subject matter is product of the mind or the intellect of a person. Once this fact is recognized by the law, the law protects the right to use and such person becomes the IPR holder and entitled to exclusive rights to use the idea. Generally, the inventor of the idea is the IPR holder. However, as IPRs are transferable, a person who acquires such rights legally may also be an IPR holder, even though he may not be the inventor of such idea. If a person renders intellectual property service for an IPR, to which he is not legal holder, then such service can not be taxed.

2.2 Recognition under Indian law:

IPR should be conferred to a person under Indian law. Service rendered by a person whose IPR is not recognized under Indian law cannot be brought within the ambit of service tax. IP laws in India are listed below:
• The Trade Marks Act, 1999
• The Patent Act, 1970
• The Copyright Act, 1957
• The Design Act, 2000
• The Geographical Indication of Goods (Registration and Protection) Act, 1999
• The Protection of Plant Varieties and Farmers Right Act, 2001
• The Semiconductor Integrated Circuits Layout Design Act, 2000
• The Biological Diversity Act, 2002

2.2.1 The Trade Marks Act, 1999

The Trade Marks Act, 1999 (‘the Trade Mark Act’) provides for registration and protection of trade marks for goods and services and prevent use of fraudulent marks.
As per Section 2(zb) of the Trade Marks Act, "trade mark" means a mark capable of being represented graphically and which is capable of distinguishing the goods or services of one person from those of others and may include shape of goods, their packaging and combination of colours.
Under section 18 of the Trade Mark Act, any person claiming to be the proprietor of a trade mark, used or proposed to be used by him, may apply for the registration and on registration, under section 28 thereof, registered proprietor of the trade mark acquires exclusive right to use same in relation to the goods in respect of which the trade mark is registered and to obtain relief in respect of the infringement of the trade mark. As per section 38 of the Trade Marks Act, registered trade marks can be assigned and transmitted to another person and on the registration of such assignment and transmission, such person becomes the proprietor of trade marks or registered proprietor.
As per section 27 of the Trade Marks Act, proprietor of unregistered trade mark does not get any exclusive right of use and therefore he can not be considered as IPR holder. Therefore, only the registered proprietor of the registered trade mark can be considered as IPR holder.
Further, as per section 48 of the Trade Marks Act, a person other than registered proprietor of a trade mark may be registered as the registered user on the execution of a written contract between the registered proprietor and proposed registered user and such registered user will be entitled to use and enjoy the benefit of the trade mark.

2.2.2 The Patent Act, 1970

The Patent Act, 1970 (‘the Patent Act’) provides for registration of patent and protection to the inventors from copying the products or adopting the methods by other persons.
As per section 2(j) of the Patent Act, invention means a new product or process involving an inventive step and capable of industrial application. A patent for the invention can be applied by any person who claims to be the true and first inventor of the invention. Once a patent is granted, under section 48 of the Patent Act, the registered proprietor acquires exclusive right to prevent third parties, who do not have his consent, from making, using, offering for sale, selling or importing patented product in India, and using the patented process, or using, selling or importing product in India obtained directly by patented process. As per section 60 of the Patent Act, a patent can be assigned and transmitted to another person and on the registration of such assignment and transmission, such person becomes the proprietor of patent or registered proprietor. The registered proprietors of the patents are the IPR holders.
Under section 70 of the Patent Act, IPR holders have powers to grant licence to make, use, offer for sale, sell or import patented product or use the patented process in India as per the conditions of the written contract.

2.2.3 The Copyright Act, 1957

Copyright Act, 1957 (‘the Copyright Act’) is not included within the purview of the IPR as per the definition given in section 65 (55a) of the Finance Act. A literary, dramatic or musical work, a computer programme, an artistic work, a cinematograph film and a sound recording is the subject matter of the Copyright Act.

2.2.4 The Design Act, 2000

The Design Act, 2000 (‘the Design Act’) grants copyright to the designer and prevent piracy of the registered designs.
As per section 2(d) of the Design Act, design means only the features of shape, configuration, pattern, ornament or composition of lines or colours applied to any article whether in two dimensional or three dimensional or in both forms, by any industrial process or means, whether manual mechanical or chemical, separate or combined, which in the finished article appeal to and are judged solely by the eye; but does not include any mode or principle of construction or anything which is in substance a mere mechanical device, and does not include any trade mark or property mark or any artistic work.
As per section 5 of the Design Act, any person claiming to be the proprietor of a design may apply for the registration and on registration the registered proprietor of the design gets the copyright in the design. As per section 30 of the Design Act, a design can be assigned and transmitted to another person and on the registration of such assignment and transmission, such person becomes the proprietor of design or registered proprietor. The registered proprietors of designs are the IPR holders.
Section 22 of the Design Act prohibits application of a registered design or imitation thereof on any article meant for sale or import of any article for sale to which the registered design or imitation thereof has been applied without the consent of the IPR holder.
Under section 30 of the design Act, IPR holders have powers to grant licence to use the registered design as per the conditions of the written contract.

2.2.5 The Geographical Indication of Goods (Registration and Protection) Act, 1999

The Geographical Indication of Goods (Registration and Protection) Act, 1999 [‘the GIG Act’] seeks to prevent misuse of well known names traditionally used to indicate and identify some particular produce or articles where a given quality, reputation or other characteristic of such goods is essentially attributable to its geographical origin. Basmati Rice, Kancheevaram Saree, Benaras Saree are some of the geographical indication.
Section 11 of the GIG Act empowers an association of persons to apply for the registration of geographical indication. On the registration of geographical indication, only authorized users are eligible to use geographical indication on their products.
However, as per section 24 of the GIG Act, any right to a registered geographical indication can not be assigned, transmitted or licensed. Therefore, there cannot be any taxable IPR service under the GIG Act.

2.2.6 The Protection of Plant Varieties and Farmers Right Act, 2001

The Protection of Plant Varieties and Farmers Right Act, 2001 (‘the Plant Varieties Act’), inter alia, seeks to encourage the development of new varieties of plants and protect plant breeders’ right.
As per section 16 of the Plant Varieties Act, any person claiming to be breeder of that variety of plant may seek registration under section 14 thereof and on registration, the breeder is conferred an exclusive right to produce, sell, market, distribute, import or export that variety of plant or seed.
The Plant Varieties Act recognizes assignment of the right and on such assignment, assignee is recognized as breeder. Breeders recognized under the Plant Varieties Act are the IPR holders.
The Plant Varieties Act also permits appointment of agents and licensees to produce, sell, market, distribute, import or export registered plant or seed.

2.2.7 The Semiconductor Integrated Circuits Layout Design Act, 2000

The Semiconductor Integrated Circuits Layout Design Act, 2000 (‘the IC Design Act’) seeks to protect IPR relating to layout-design (topographies) of the Integrated Circuits (‘IC’) as envisaged under Agreement on Trade Related Aspects of Intellectual Property Rights.
As per section 2(h) of the IC Design Act, layout-design means a layout of transistors and other circuitry elements and includes lead wires connecting such elements and expressed in any manner in a semiconductor IC.
As per section 8 of the IC Design Act, any person claiming to be the creator of a layout-design seek registration reproducing the layout-design in an IC or importing and selling registered layout-design or a IC or an article containing such layout-design will be infringement of the rights of registered proprietor. As per section 20 of the IC Design Act, layout-design rights can be assigned and transmitted and on the registration of such assignment and transmission, such person becomes the proprietor of layout-design. The registered proprietors of layout-designs are the IPR holders.
Under section 25 of the IC Design Act, IPR holders have powers to grant licence to use the registered design as per the conditions of the written contract.

2.2.8 The Biological Diversity Act, 2002

The Biological Diversity Act, 2002 (‘the Bio Diversity Act’) seeks to provide conservation of biological diversity, sustainable use and equitable sharing of the biological resources, knowledge and connected matters. It does not confer any exclusive rights to any person. Hence, there cannot be any taxable service arising under the bio Diversity Act.

2.3 IP law should be in force

As per the definition, the IP law should be in force in India. Provisions pertaining to registration under the Plant Varieties Act and the IC Design Act have not been notified. Therefore, at present, there cannot be any taxable service arising under the Plant Varieties Act and the IC Design Act.
A trade secret (which is sometimes either equated with, or a subset of,"confidential information") is secret, non-public information concerning the commercial practices or proprietary knowledge of a business. However, if such trade secret is not covered by the Indian laws, then it will not be covered under taxable service.

2.4 Temporary transfer of IPR or permission to use without transfer

A person acquires a legal right over the IP when he is recognized as the proprietor under the IP laws. On assignment and transmission, the assignee or the person to whom the rights are transmitted is recognized as the proprietor of the IPR. The service tax is levied when the holder of the IPR provides some service. Hence, consideration received by the original holder on assignment or transmission is not taxable as the IPR is transferred permanently and permanent transfer is not covered within the scope as it amounts to sale and person selling the rights no longer remains a holder of intellectual property rights.
Only a temporary transfer or grant of licence for use of IPR, which does not effect change in the proprietorship of the IPR is within the ambit of service tax.
Traditionally, most of the IPRs are owned by foreigners, who are also registered under Indian laws. It may be possible that they sell their IPRs under Indian laws permanently to their Indian partner and hold the same for rest of the world. In this case, as the Indian buyer becomes the proprietors of the IPR or IPR holder, such transfer will not be within the ambit of service tax, even though, the foreigner is IPR holder in other countries. It is immaterial whether the Indian buyer makes a lump sum payment or pay over a period of time. However, if the payment is made based on the production, it may fall within the ambit of taxable event.

2.5 Service is provided to a client

There should be two parties, one being the service provider and other being service receiver to be a taxable event. If the IPR holder himself uses, produces, manufactures, imports and sell the articles in respect of which IPR has been granted under the law, it will not create a taxable event.

3. Who is liable to pay tax

In most of the cases, service provider, i.e., person who is providing taxable service is liable to pay service tax and, hence, the IPR holder providing services is liable for service tax. However, in few cases, exceptions have been made and the service receiver is made to liable to pay service tax. IP laws in India permits foreigners to seek registration and acquire the IPR. So if an IPR holder providing service is non-resident and does not have address or place of business in India, service tax is payable by person receiving taxable service in India [Rule 2(1) (d) (iv)]. In such a case, person receiving the service will have to register and pay service tax.

4. Valuation

The value of any taxable service is determined as per the provisions of the Service Tax (Determination of Value) Rules, 2006 [‘the Valuation Rules’]. Generally, whenever, the IPR holder grants licence or permits uses of the registered IP, a written agreement specifying the terms, condition and restrictions is required to be registered under the respective IP law and written agreement contains details of the licence fee to be paid by the licensee/registered user to the IPR holder. Therefore, licence fee will be the taxable amount for levy of service tax.

4.1
As per Rule 3 of the Valuation Rules, the value of taxable service, where the consideration received is not wholly or partly consisting of money, is determined by the service provider in the following manner :-

(a) the value of such taxable service is equivalent to the gross amount charged by the service provider to provide similar service to any other person in the ordinary course of trade and the gross amount charged is the sole consideration;

(b) where the value cannot be determined in accordance with clause (a), the service provider is required to determine the equivalent money value of such consideration which shall, in no case be less than the cost of provision of such taxable service.

4.2
Further, as per Rule 5(1) of the Valuation Rules, where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs are includable in the value for the purpose of charging service tax on the said service.

4.3
However, as per Rule 5(2) of the Valuation Rules, the expenditure or costs incurred by the service provider as a pure agent of the recipient of service, are excluded from the value of the taxable service if all the following conditions are satisfied,

(i) the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured;

(ii) the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service;

(iii) the recipient of service is liable to make payment to the third party;

(iv) the recipient of service authorises the service provider to make payment on his behalf;

(v) the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party;

(vi) the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;

(vii) the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and

(viii) the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.

4.4
The amount of cess paid under the Research and Development Cess Act, 1986 on payment made towards import of technology i.e. royalty or lump sum fee for technical know how or licence fee is exempted from payment of service tax (Notification No. 17/2004-S.T. dated 10-9-2004 refers).

5. Service Tax Credit

IPR holder avails many input services in the course of providing intellectual property services to their client. A few examples are Advertising Services, Banking and Other Financial Services, Business Support Services, Chartered Accountants Services, Courier Services, Facsimile Services, Telephone Services and a lot other services which are taxed. IPR holder has to bear the incident if service tax charged on these input services.

The Cenvat Credit Rules, 2004 provides that intellectual property services provider can take credit of the service tax paid on input services and setoff the same on payment of service tax on output service namely intellectual property services


in case IPR holder is providing services other than intellectual property services which are not taxed and seperate accounts are not maintained for taxable service and exempted service, then he can avail Cenvat credit only up to 20% of his tax liability.


Similarly, a manufacturer or a service provider can take credit of the service tax paid on intellectual property services and adjust same against his excise duty/ service tax liability.

6. Rate of Service Tax

Presently Rate of service tax is 12% and education cess @ 2% on service tax is also payable.

However, this rate of tax is up to 28 February 2007 only.

It is expected that rate of tax will be increased to 14% in the next budget.


If you have any query or comment, pl do not hesitate to mail at consult_hardin@yahoo.com. I will be obliged to hear you. Your feedback is always welcome.


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