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Taxation of tech know-how a contentious issue
February, 26th 2007
Technical know-how means a body of accumulated knowledge and experience in any technical field for doing or executing a particular activity. It constitutes an economic asset, which belongs to whoever has developed it or has properly acquired it. It is not tangible in nature and is represented through drawings, designs, formulae etc. 
 
Technical know-how, although in the nature of intangible goods, is nevertheless goods under VAT/ sales tax laws and is hence chargeable to State VAT. A permanent transfer of technical know-how is taxed as a sale of intangible goods and a temporary transfer of the right to use technical know-how, i.e. licensing thereof, is taxed as a transfer of the right to use intangible goods. 
 
Taxation of technical know-how under service tax law has been a contentious issue for quite a while. The problem is limited to the transfer of the right to use technical know-how since a permanent transfer of such know-how can only be treated as a sale and cannot constitute a service at all. For a very long time, the Department was of the view that the activity of licensing of technical know-how would be covered under the heading of consulting engineering services and chargeable to service tax since the time of introduction of this heading in July 1997. Consulting engineer as defined under service tax law is a professionally qualified person who directly or indirectly renders any advice, consultancy or technical assistance, in any manner to a client, in any discipline of engineering. This definition of consulting engineer contemplates that advice, consultancy or technical assistance is a service. In case of technical know-how, the information exists as a body knowledge that can be sold or licensed to any one, without being intended to be a service to a particular client. Therefore, the issue of taxability of such licensing of technical know-how as a consulting engineering service has been a subject of litigation all these years. In a number of cases, the Tribunal has held that payments for the transfer or use of technical know-how are not subject to service tax under the taxable heading of consulting engineering services. Nevertheless, the Department had been issuing notices to assessees demanding service tax on the transfer of technical know-how, under the consulting engineering service category, based on the argument that the transfer of technical know-how necessarily requires the provision of technical assistance to the transferee, in order to enable him to use the know-how, and since the activity of technical assistance would be covered under consulting engineering services, the entire transaction of licensing of technical know-how should be subject to service tax. 
 
In a recent judgement in the case of Indian Farmers Fertilisers Co-operative Limited, the Tribunal has held that in case the agreement is a composite one and speaks of both licensing rights in the know-how and also the provision of technical assistance to be rendered in context thereof, the entire consideration relatable to the licensing of technical know-how will not be chargeable to service tax and only the consideration relatable to the provision of technical assistance will be chargeable. 
 
However, much the more important challenge on the service tax is with regard to the new definition of Intellectual Property (IP) Services. This definition was introduced in September 2004 and, as currently in force, holds that the taxable service consists of transferring temporarily, or permitting the use or enjoyment of any intellectual property right. It can therefore be seen that the permanent transfers of IPR of any kind is not chargeable to service tax. As to the IPRs covered under the definition of taxable service, the provision say that 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. 
 
The issue of taxing the transfer of technical know-how under the aforesaid heading has become critical. As defined, the IP services can only relate to those IPRs (except copyright) that are prescribed under the laws that are for the time being in force relating thereto. The phrase for the time being in force implies that the laws that are envisaged are those applicable in India alone and hence IPR covered under present Indian law are alone chargeable to service tax. The Department is itself of this view in terms of the Circular No. 80/10/2004 dated 17-09-2004, issued on the point. The question is whether technical know- how is at all covered under the present Indian IPR legislation. This is a moot point and it appears that the better view is the technical know-how cannot be patented under Indian patent law and is consequently not an IPR that is prescribed under the laws that are for the time being in force in India. 
 
S Madhavan
The writer is leader, indirect tax practice, PricewaterhouseCoopers
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