Article: Whether Transfer of IPR is Considered Supply of Service or Supply of Goods Under the GST Regime?

Author: Shreya Das

Introduction

Intellectual Property Rights are becoming more and more integral part of businesses. Right owners are expanding the usage of their intellectual properties by way of giving license or assignment. To expand market share, businesses are acquiring/using each-others’ intellectual properties. Transfer of intellectual property can be done in two ways. Right holders can either give their rights over by way of licensing agreement or by way of an assignment. 

Whereas licensing agreement does not actually transfer proprietary rights, assignment agreement transfers rights permanently, including proprietary rights. The applicable tax for these two different types of transactions is different as well. In this article, I shall be discussing the applicable tax on permanent transfer of intellectual property rights based on its nature.

Pre-GST Regime 

Prior to 2017, permanent transfer of intellectual property was not considered as supply of service. As per the C.B.E. & C. Circular F. No. B2/8/2004-TRU, dated 10-9-2004, “A permanent transfer of intellectual property right does not amount to rendering of service. On such transfer, the person selling these rights no longer remains a “holder of intellectual property right” so as to come under the purview of taxable service. Thus, there would not be any service tax on permanent transfer of IPRs” [1]. 

A permanent transfer of intellectual property right therefore did not amount to rendering of service as the person selling these rights no longer remains a “holder of intellectual property right”. In the case of AGS Entertainment Pvt. Ltd. vs. Union of India, [2013 (32) S.T.R. 129] [4], the High Court of Madras took a similar view. 

Another case wherein the court held that service tax is not applicable on permanent transfer is iIn the matter of SKOL Breweries Ltd. (Now known as Anheuser Busch InBev India Ltd.) Vs C.C.E & C.S.T. [Service Tax Appeal No. 2017 of 2012] [5], the Customs, Excise & Service Tax Appellate Tribunal, [Hon’ble Mr. S.S Garg &, Judicial Member, Hon’ble Mr. P. Anjani Kumar, Technical Member] vide its order dated November 10, 2020, took a similar view, and confirmed that there is no service tax applicable on permanent transfer of the intellectual property rights. With reference to the Finance Act, 1994, noting Section 65(55b) – “Intellectual Property Service”“(a) transferring, [temporarily]; or (b) Permitting the use or enjoyment of, any intellectual property right” read with Section 65(105)(zzr) – “Taxable Service” “to any person, by the holder of intellectual property right, in relation to intellectual property service.”, the Tribunal pointed out that one of the key ingredients for determining if any service related to intellectual property right is taxable under service tax or not, is to see if there has been “…temporary transfer of any intellectual property right OR there has to be the permission to use or enjoy any intellectual property right” [Emphasis supplied].  It is clear when there is a transfer of intellectual property rights, it has to be temporary in nature to apply service tax on the same.

Introduction of GST

As per Section 9 (1) of the Central Goods and Services Tax Act, 2017, “there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, … as may be notified by the Government on the recommendations of the Council…”. As per the Central Tax (Rate), under the category of service, under heading 9973, “Temporary or permanent transfer or permitting the use or enjoyment of Intellectual Property (IP) right in respect of goods other than Information Technology software” is taxed at 12% (6% CGST+6% SGST) [2], and under the category of goods, “Permanent transfer of Intellectual Property (IP) right in respect of goods other than Information Technology software” is taxed at 12 % (6% CGST+6% SGST) [3] [Emphasis supplied]. 

Since  the term ‘permanent transfer’ is mentioned for both categories viz. goods and service, it may seem like all kinds of services are capable, potentially, of involving a permanent transfer. A reference, however, to the heading of 9973 makes it clear that it is not so.  The heading of 9973 reads as  “Leasing / rental services with or without operator”. The heading of 9973 therefore makes clear that the scope of the heading is limited only to the particular services mentioned in the heading. Notwithstanding the broad language of the contents of heading 9973, its scope does not cover services other than those mentioned in the heading.  It is this author’s opinion accordingly that except only for leasing and rental services, all other services entail only a temporary transfer and that even leasing and rental services may on its factual circumstances entail only a temporary transfer.  Goods, on the other hand, always entail a permanent transfer. It would appear therefore that apart from the specific exception,  temporary transfer or licensing is considered as supply of service and permanent transfer of intellectual property as supply of goods. In my opinion therefore, the position of law remains largely unchanged by the introduction of the GST regime.

Conclusion

Over the years, with changing laws, and developing case law, the doctrinal position of law remains the same. A more specific contextual inquiry is called for, though, in relation to leasing and rental services. Permanent transfer of intellectual property law is not considered as supply of service.  Even though the applicable tax on both permanent and temporary transfer of intellectual property rights happen presently to be at the same rate, by the introduction of the GST law, it has been endorsed that it is only permanent transfer of intellectual property rights that is considered as supply of goods and taxed accordingly.  

End Notes:

[1] C.B.E. & C. Circular F. No. B2/8/2004-TRU. http://centralexcisetrichy.gov.in/newcentral/tradenotice/st/yr0405/tn12.pdf 

[2] https://cbic-gst.gov.in/gst-goods-services-rates.html 

[3] https://cbic-gst.gov.in/gst-goods-services-rates.html 

[4] AGS Entertainment Pvt. Ltd. vs. Union of India. https://indiankanoon.org/doc/123738864/  

[5] SKOL Breweries Ltd. Vs C.C.E & C.S.T. (CESTAT Bangalore). https://taxguru.in/wp-content/uploads/2020/12/SKOL-Breweries-Ltd.-Vs-C.C.E-C.S.T.-CESTAT-Bangalore.pdf 

Disclaimer: Views, opinions, interpretations are solely those of the author, not of the firm (ALG India Law Offices LLP) nor reflective thereof. Author submissions are not checked for plagiarism or any other aspect before being posted.

Copyright: ALG India Law Offices LLP