No Service Tax leviable on Royalty paid towards the permanent right to use of trade mark

The CESTAT, New Delhi in Bajaj Resources Ltd. v. Commissioner of Central Excise & CGST, Udaipur [Final Order No. 50874-50875/2025 dated June 06, 2025] held that royalty paid towards the right to use a registered trademark constitutes a ‘deemed sale’ and is not leviable to service tax; accordingly, the demand under Section 73(1) was set aside.

Facts:

M/s Bajaj Resources Limited (“the Appellant”), formerly known as M/s Bajaj Consumer Care Limited, was registered under the category of ‘Intellectual Property Services’ and was paying service tax on royalty received from M/s Bajaj Corp Limited (“BCL”) for the use of its trademark. Initially, under the Trademark License Agreement dated March 12, 2008, a non-exclusive right to use the trademark in Andhra Pradesh was granted. This was subsequently novated on February 24, 2010, to grant an exclusive worldwide license for 99 years. Despite the long-term and exclusive nature of the agreement, the Appellant continued paying service tax under the said category until April 2014.

The Appellant later took the view that the arrangement amounted to a permanent transfer of the right to use the trademark, and hence qualified as a ‘deemed sale’ under Article 366(29A) of the Constitution of India. Since ‘deemed sales’ are excluded from the definition of ‘service’ under Section 65B(44) of the Finance Act, 1994, the Appellant claimed refund of service tax paid for the year 2013–14 amounting to ₹79,52,935. The refund claim was rejected by the Commissioner of Central Excise (“the Defendant”)  on the ground that the license did not involve a legal transfer of possession and therefore continued to fall within the ambit of taxable services.

Meanwhile, a subsequent show cause notice was also issued based on audit findings alleging non-payment of service tax on royalty income during 2014–15, on the basis that the royalty was consideration for temporary transfer of intellectual property rights, which constituted a ‘declared service’ under Section 66E(c) of the Finance Act, 1994. The department treated the activity as taxable and proposed a demand of service tax along with interest and penalties.

The Appellant contended that after the novation of the agreement in 2010, it no longer retained control or ownership of the right to use the trademark, and that such permanent transfer constituted a ‘deemed sale’ falling outside the scope of service tax. The Appellant further submitted that there was no suppression or fraud and that service tax, if at all applicable, would have been revenue neutral since the recipient could claim credit or refund.

Aggrieved by the rejection of refund and confirmation of demand, the Appellant preferred the present appeals before the Tribunal.

Issues:

• Whether royalty paid under an exclusive, long-term trademark license agreement constitutes a ‘deemed sale’ and hence not leviable to service tax?
• Whether refund of service tax erroneously paid on such royalty, can be denied on the ground of unjust enrichment?

Held:

The CESTAT New Delhi in Final Order No. 50874-50875/2025 held as under:

• Observed that, the novation agreement dated February 24, 2010 granted M/s Bajaj Corp Ltd exclusive rights to use the trademark for a period of 99 years, worldwide, to the complete exclusion of the Appellant.
• Noted that, such exclusive transfer of the right to use a trademark satisfies all five conditions laid down by the Hon’ble Supreme Court in Bharat Sanchar Nigam Ltd. Vs. Union of India for a transaction to qualify as a deemed sale under Article 366(29A)(d) of the Constitution.
• Observed that the Appellant, having transferred the right to use the trademark exclusively and relinquished its own rights, could no longer be considered a holder of the intellectual property during the term of the license.
• Held that, the transaction constituted a “deemed sale” and hence fell outside the ambit of “service” as defined under Section 65B(44) of the Finance Act, 1994. Accordingly, service tax could not be levied on such transaction.
• Further noted that Section 66E(c), which defines temporary transfer of intellectual property rights as a declared service, did not apply, as the transfer in the present case was exclusive and long-term in nature, and that permanent transfer of intellectual property is outside the scope of taxable service as per CBEC Circular No. V2/8/2004 dated September 10, 2004.
• Consequently, the Tribunal set aside the order confirming the service tax demand for the year 2014–15. However, with respect to the refund claim for service tax paid during the earlier period (2013–14), the Tribunal held that though the payment was not legally due, it was made under a mistaken belief and not under legal compulsion.
• Noted that, the Appellant had admittedly collected service tax from the recipient and failed to produce any evidence of reversal of such amount or of refunding the same to the recipient.
• Held that in absence of evidence to rebut the presumption of unjust enrichment, refund of the amount could not be allowed, even if the payment was otherwise not due. Accordingly, the rejection of refund claim was upheld.

Our Comments:

Article 366(29A)(d) of the Constitution of India defines “sale” to include the transfer of the right to use goods, whether temporary or otherwise, as a deemed sale within the meaning of sales tax law. The Supreme Court in Bharat Sanchar Nigam Ltd. Vs. Union of India [2006 (3) TMI 1] laid down a five-factor test to determine whether a transaction amounts to such a transfer. In the present case, the grant of an exclusive right to use the trademark for 99 years with the licensor restrained from further use satisfies the test, making the transaction a “deemed sale” and thus outside the ambit of taxable services.

Section 65B(44) of the Finance Act, 1994, explicitly excludes transactions which are deemed sales under Article 366(29A) from the definition of “service.” This provision reinforces that exclusive and long-term transfers of intellectual property rights do not qualify as service transactions liable to service tax.

Section 66E(c) of the Finance Act covers declared services involving temporary transfers or licenses of intellectual property rights. However, exclusive and permanent transfers such as those in the instant case cannot be treated as declared services under Section 66E(c) but are properly classified as deemed sales. The Tribunal has distinguished between temporary licenses and permanent transfers.

The CBEC issued Circular No. V2/8/2004 dated September 10, 2004, clarifies that permanent transfer of intellectual property rights is not a taxable service since the transferor ceases to be the holder of the right. This circular supports the position that exclusive trademark licensing agreements for long duration fall outside the service tax net.

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