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OIO No. 58/STC/AHD/ADC(JSN)/2012-13

BRIEF FACTS OF THE CASE

M/s. Torrent Pharmaceutical Ltd. situated at Torrent House, Near Dinesh Hall, Ashram Road, Ahmedabad (hereinafter referred to as the “M/s TPL”/said assessee), are engaged in providing taxable service falling under Category of Technical Testing and Analysis and Scientific and Technical Consultancy Service and having Centralized service tax Registration No.AAACT5456AST002.

2. On scrutiny of records by CERA, it was revealed that M/s TPL had executed an agreement with Dr. Reddy’s Laboratories Limited (hereinafter referred to as ‘DRL’) for selling its products in Russia, in which M/s DRL had been granted exclusive distribution rights for selling its products in Russia, to market, directly or indirectly, distribute, sell the Products (Listril and Listril Plus) and use Trade Marks in relation to the Products in the Territory (Russia) during the terms of the Agreement. M/s. TPL had received a sum of Rs.31.68 lakh as one time lump sum towards the consideration for execution of this Agreement. That was the consideration received for the ‘Trade Mark which M/s TPL had given to DRL for utilization in Russia. Further, clause 2@ of the agreement revealed that M/s. TPL shall continue to occur the registration of the produces in the territory during the currency of agreement and beyond also.

2.1. As per clause 7(e), M/s DRL must procure every year the minimum guaranteed order quantity. As per clause 8(f) M/s DRL shall pay to M/s. TPL a royalty @ 7% of the total cost on transfer pricing for quantities in excess. Thus, the recital of the agreement revealed a temporary transfer of IPR to M/s DRL and was falling under the category of ‘Intellectual Property Rights as per section 65 of the Finance Act, 1994 which attracted the service tax @12.24%. This resulted in to non-levy of service tax to the tune of Rs.3,87,200/- (Rs.31, 68,000 x 12.24%).

3. The assessee vide their letter dated 14.02.2012 submitted that M/s TPL are engaged in export of Pharmaceuticals products in various countries. The importer of their goods is required to get registration from regulatory of concerned Territory to import, market and selling of pharmaceutical products. For registration of product, importer requires product dossier. M/s. TPL has provided such information/dossier for limited purposes, subject to exclusive purchase of the said goods from M/s TPL. M/s TPL has charged/received the amount against such service.

3.1. The said agreement provides M/s DRL exclusive distribution rights to market/distribute/sell their products namely. “Listril” and “Listril Plus” in Russia and the transaction are on principal to principal basis.

3.2. On further analysis of the said agreement and transactions with M/s DRL, they realized one time amount equivalent to USD 70,630/- received under the said agreement and that may be considered as income toward providing services under “Intellectual Property Right” even though

- The agreement is mainly for supply of the products to DRL for

Russia

- Consideration was fixed in convertible currency

- Services were provided for and used outside India.

3.3. They further analyzed all the agreements and transactions with DRL and other parties and paid service tax along with interest on such transactions including transactions covered under other agreements for other products to all service recipients located in India under “Intellectual Property Right” services for the period October 2006 to January 2012. They enclosed following documents.

1. Statement showing Dossier income and other related income during the period October’ 2006 to January’ 2012 provided to service recipients located in India.

2. Copy of GAR 7 challan along with the details of service tax paid.

3. Copies of invoices issued

4. Statement of Shri Sachindra H Patel, Assistant General Manager of M/s Torrent Pharmaceutical Ltd Ahmedabad was recorded on 12.03.2012 wherein he, interalia, stated that he was working as Assistant General Manager of M/s Torrent Pharmaceutical Ltd since the last 3 years and was looking after the work related to Excise and Service Tax and other miscellaneous work.

4.1. He had been shown Audit report no. LAR/169/07-08. He has gone thorough the same and put his dated signature on the same. As per the audit report they had executed an agreement with Dr. Reddy’s for selling their products in Russia, in which M/s. TPL had granted exclusive distribution rights for selling their products in Russia, to market, directly or indirectly, distribute, sell the Products (Listril and Listril Plus) and use Trade Marks in relation to the Products in the Territory (Russia) during the terms of the Agreement. M/s. TPL received a sum of Rs.31.68 lakh as one time lump sum towards the consideration for execution of this Agreement. That was the consideration received for the Trade Mark which the Torrent had given to Dr. Reddy’s for utilization in Russia. Further as per clause 2@ of the agreement revealed that M/s. Torrent Pharmaceuticals Ltd. shall continue to occur the registration of the produces in the territory during the currency of agreement and beyond also. Further as per clause 7(e), Dr. Reddy’s must procure every year the minimum guaranteed order quantity and as per clause 8(f) Dr. Reddy’s shall pay to M/s. TPL a royalty @ 7% of the total cost on transfer pricings for quantities in excess. Thus, the recital of the agreement revealed a temporary transfer to IPR to the Reddy’s which was falling under the category of “Intellectual Property” Rights as per section 65 of the Finance Act, 1994 which attracted the service tax @12.24%. This has resulted in to non-levy of service tax to the tune of Rs.3,87,200/- (Rs.31, 68,000 x 12.24%).

4.2. On being asked, he stated that M/s Torrent Pharmaceutical Ltd were engaged in export of Pharmaceuticals products in various countries. The importer of their goods is required to get registration from regulatory of concerned Territory to import, market and sell of pharmaceutical products. For registration of product, importer requires product dossier. M/s TPL has provided such information/dossier for limited purposes, subject to exclusive purchase of the said goods from M/s Torrent Pharmaceutical Ltd. M/s Torrent Pharmaceutical Ltd has charged/received the amount against such service.

4.3. On being asked why they had not paid service tax on the amount received from Dr. Reddy’s Laboratories Ltd., he stated that the said agreement provided Dr. Reddy’s Laboratories Limited exclusive distribution rights to market/distribute/sell their products namely. “Listril” and “Listril Plus” in Russia and the transaction were on principal to principal basis and agreement was mainly for supply of the products to Dr. Reddy’s Laboratories Limited for Russia and consideration was fixed in convertible currency and services were provided for and used outside India, therefore they have not paid service tax on the same.

4.4. However, on further analysis of the said agreement and transactions with Dr. Reddy’s Laboratories Ltd., they realized that one time amount equivalent to USD 70630/- received under the said agreement is to be considered as income toward providing services under “Intellectual Property Right” even though agreement was mainly for supply of the products to Dr. Reddy’s Laboratories Limited for Russia and consideration was fixed in convertible currency and services were provided for and used outside India.

4.5. On being asked, he stated that they have analyzed all the agreements and transactions with Dr. Reddy’s Laboratories Limited and other parties and paid service tax along with interest on such transactions including transactions covered under other agreements for other products to all service recipients located in India under “Intellectual Property Right” services for the period October 2006 to January 2012.

5. Thus, from the records of M/s. TPL and statement of Shri Sachindra H. Patel, Assistant General Manager, it appeared that they had provided Intellectual Property Services during October-2006 to January-2012 and they were aware that the Intellectual Property Service provided by them were taxable and they had also paid service tax on the amount of Rs.12,00,000/- received on 23.03.2010 from M/s. Glowchem Industries Ltd.. Thus, from the aforesaid facts and circumstances as well as documentary evidences available on records and statement recorded clearly revealed that M/s. TPL had suppressed material facts from the department with an intent to evade service tax. It was observed that M/s. TPL had not discharged their service tax liabilities on the gross amount received.

5.1. The service tax liability had been worked out by the Range Office as per Annexure-A. As per the said Annexure-A, M/s. TPL had received an amount of Rs.1,26,39,714/- from October-2006 to January-2012. The service tax payable was Rs.14,58,634/- on the above amount. However they had paid service tax of Rs.1,23,600/- only and had short paid service tax amounting to Rs.13,35,034/-, which they subsequently paid along with the interest.

6. Thus, it appeared from the foregoing discussion that M/s TPL had contravened the provisions of:

6.1 Section 68 of the Finance Act, 1994 provides that every person providing taxable service to any person shall pay service tax at the specified rates and in such manner and within such period as may be prescribed. Further, Rule 6 of the Service Tax Rules, 1994 stipulated that service tax shall be paid to the credit of the Central Government, by the 5th of the month immediately following the calendar month, in which the payments are received, towards the value of taxable services. M/s TPL had contravened the provisions of the said section as they had failed to make the payment of Service Tax amounting to Rs.13,35,034/- including Ed. Cess as explained in foregoing para for the services provided by them during the period October-2006 to February-2012 to the credit of the Government within the stipulated time limit.

6.2 Section 69 of the Finance Act, 1994 read with Rule 4 of the Service Tax Rules, 1994 provides that every person liable to pay service tax should make an application within a period of thirty days from the date on which the service tax under Section 66 of the Finance Act, 1994. M/s TPL had contravened the provisions of the said section in as much as they failed to obtain service tax registration under “Intellectual Property Services”.

6.3 Section 70 of the Finance Act, 1994, provides that every person liable to pay the service tax shall himself assess the tax due on the services provided by him and shall furnish to the Superintendent of Central Excise, a return in such form and in such manner and at such frequency as may be prescribed. Rule 7 of the Service Tax Rules, 1994, prescribes that every assessee shall submit a half-yearly return in Form ST-3 or ST-3A as the case may be, along with a copy of the Form TR-6, in triplicate for the months covered in the half-yearly returns. Further sub-rule [2] thereto also provides that every assessee shall submit the half yearly return by the 25th of the month following the particular half-year. M/s TPL had contravened the provisions of the said section in as much as they had failed to self assessee correct service tax liability under the category “Intellectual Property Services”.

6.4 All the above acts of contravention on the part of the said service provider appeared to have been committed by way of suppression of facts with an intent to evade payment of service tax and, therefore, the said service tax not paid/short paid was required to be demanded and recovered from them under Section 73(1) of the Finance Act, 1994 by invoking extended period of five years. All these acts of contravention of the provisions of Section 68, 69 and 70 of the Finance Act,1994 read with Rule 6, 4 and 7 of Service Tax Rules,1994 appeared to be punishable under the provisions of Section 76 and 77 of the Finance Act,1994 as amended from time to time.

7. From the evidence, it appeared that the said assessee had not taken into account all this income for the purpose of self assessment and payment of applicable service tax and thereby not complied their tax liabilities. It appeared that the deliberate efforts to mis-declare the value of taxable service in ST-3 Returns and not paying the correct amount of service tax was utter disregard to the requirements of law and breach of trust deposed on them is certainly not in tune with Governments efforts in the direction to create a voluntary tax compliance regime.

8. Therefore, the said service provider M/s. Torrent Pharmaceuticals Ltd. situated at Torrent House, Near Dinesh Hall, Ashram Road, Ahmedabad was issued a show cause notice no. STC/4-109/O&A/ADC/D-II/11-12 dated 18.04.2012 by the Additional Commissioner, Service Tax, Ahmedabad as to why: -

(i)  The Service Tax amounting to Rs.13,35,034/- ( Rupees Thirteen Lakh thirty five thousand and thirty four only) under the category of “Intellectual Property Services” should not be demanded and recovered from them under the proviso to Section 73 (1) of the Finance Act, 1994, invoking the larger period of five years. The amount of Rs.13,35,034/- already paid should not be appropriated against the demand;

(ii)  Interest, at appropriate rate, should not be charged upon them under Section 75 of the Finance Act 1994. Interest amount of Rs.6,21,098/- already paid by the assessee should not be adjusted against the interest liability under Section 75 of the Finance Act, 1994 as amended from time to time;

(iii) Penalty should not be imposed upon them under Section 76 of the Finance act, 1994 for the failure to make payment of Service Tax payable by them within the time stipulated;

(iv) Penalty should not be imposed upon them under Section 77 of the Finance act, 1994 for the failure to apply for addition of services under the category of “Intellectual Property Services” in their service tax registration and to file prescribed service tax return within the stipulated time; and