Friday, February 28, 2014

Teva v. NATCO: Analysis of the Delhi High Court’s decision

Earlier in the day, I had broken the news that the Delhi High Court had returned Teva Pharma’s plaint in its suit, C.S. (O.S) 3193/2012, for alleged infringement of its process patent 190759 on the manufacture of glatiramer acetate (sold under the name “Copaxone”) by Hyderabad-based NATCO Pharma. The decision was passed in an application under Order VII, Rule 10 of the CPC filed by NATCO seeking return of the plaint on grounds that the Delhi High Court was not the appropriate court to be seized of the matter. Here's a link to the decision

The 2007 Litigation- First Indian Suit
Teva had filed its first Indian suit against NATCO in 2007, CS (OS) No. 1708 of 2007, seeking injunction against infringement of its process patent 190759. One of the prayers sought was to restrain NATCO from exporting the allegedly infringing drugs, formulations/bulk drugs outside India. Issues were framed in this suit in May 2012, and trial is underway in it.

The 2009 US Litigation
In 2009, Hyderabad-based Mylan Labs filed an abbreviated new drug application (‘ANDA’) in the US seeking approval to manufacture and sell glatiramer acetate before the expiration of Teva's US patents. Teva sued Mylan and NATCO in the Southern District Court of New York alleging infringement of US Patent Nos. 7199098, 6939539, 6054430, 6620847, 5981589, 6342476, 5800808, 6048898 and 6362161. 

The US District court came to the conclusion that the product sought to be sold by the defendants in the US infringed the process claims of US6054430 and 6048898. However, the Federal Circuit invalidated the process claims in both these patents last year, which surprisingly has not been dealt with in the decision of the Delhi High Court.

The 2012 Litigation- Second Indian Suit
Teva filed its second Indian suit, C.S. (O.S) 3193/2012, on grounds that NATCO’s manufacture of glatiramer acetate in India for sale in the US and elsewhere infringed its Indian Patent 190759. Teva admitted that its suit was a quia timet action which was based on the apprehension that NATCO, having tied up with Hyderabad-based Mylan labs for manufacture of the drug and having secured regulatory approval, was bound to use its patented process in India. Reliance was ostensibly placed on The Hindu Business Line article of January 17, 2012 and NATCO’s annual report for 2010-2011 which referred to the tie up between Mylan and NATCO.

If NATCO’s annual report for 2010-11 already disclosed this tie up according to the plaintiff, which is the stated basis for filing of the second suit, why was the suit filed in November 2012, and not earlier? Also, since one of the prayers in the 2007 suit was to restrain NATCO from exporting drugs which infringe the process patent, where was the need to file the second suit again seeking a cognate prayer with respect to the same patent?

From Para 8 of the decision, it also appears that the second Indian suit was filed on the basis of the US District Court’s finding of infringement of process claims of the US patents, and parity was sought to be drawn between the US patents and the Indian patent 190759. In other words, according to the plaintiff, since the US District Court had come to the conclusion of infringement of process claims of the US patents by the defendants, the Indian Court had to apply the US District Court's findings to the corresponding Indian patent as well..... To me, this goes against the very grain of territoriality of patent rights. After all, every national Court has the right to come to a different conclusion with respect to infringement based on national standards.

Also, if the US Federal Court had ultimately invalidated the US process claims, wouldn’t it have a bearing on the maintainability of the 2012 Indian suit given that the plaintiff’s prayers in the suit were based on the findings of the US District Court which were no longer valid? If yes, why did the plaintiff not deem it fit to bring the US Federal Court's decision to the Delhi High Court's attention?...

Anyways, on the issue of jurisdiction, according to the plaintiff:
A.      The defendants had secured regulatory approval for glatiramer acetate; 
B.      They had distribution networks in New Delhi;
C.      Glatiramer acetate was being sold in New delhi by the defendants

Consequently, the plaintiff invited the Court to assume that glatiramer acetate being sold in New Delhi was manufactured using the plaintiff’s patented process. The question that comes to my mind is, if the patent is admittedly over the process, is it sufficient for a patentee to institute a suit for infringement of the process patent in Delhi merely on the basis of the above ingredients?

Importantly, the plaintiff's product patent application on glatiramer acetate, 93/Del/2003, was rejected by the Indian Patent Office in March 2009. In light of this, doesn’t the 2012 suit have the effect of circumventing the rejection of the product patent application since the suit was based on a mere assumption that the product being sold was manufactured using the patented process? Doesn’t the plaintiff have the burden of proving that the patented process was being worked within the territory of Delhi, particularly when the act of manufacturing took place in Hyderabad according to the defendant?

The plaintiff also claimed that two processes were used by the defendants to manufacture the drug. Here’s the extract from the plaintiff’s reply to the 7/10 application on its stance with respect to the two processes allegedly employed by the defendants:

The Defendants have two different Glatiramer Acetate (GA) products – one for sale within India and the other for export to Mylan, and are using two different manufacturing processes to make these products. The Defendants admit this in paragraph 5 of their Written Statement as well as in the affidavit dated 6th July 2013 filed by Dr. AKS Bhujanga Rao. This suit does not concern the process used by Defendants for making the Glatiramer Acetate product sold by them for the Indian market (hereinafter referred to as the “GA-first product”). The present suit concerns the process for making the Glatiramer Acetate product that the Defendants are manufacturing in India on behalf of Mylan for sale outside India (hereinafter referred to as a “GA-second product”). This submission is without prejudice to the Plaintiffs’ reasonable apprehension that the Defendants might also be selling the “GA-second product” in India including New Delhi....

....Therefore, the cause of action in suit CS (OS) No. 1708 of 2007 is different from that of CS (OS) No. 3193 of 2012 and also the prayers contained therein are clearly distinct. As explained above, the earlier suit pertained to the GA – first product, sold in India, and the present suit pertains to the separate and distinct GA - second product made in India for export to the US and other countries. This necessitated the filing of the present suit.”

However, nowhere in the Plaint was it alleged that the process was being used by the defendants within the Delhi High Court’s jurisdiction. It wasn’t even alleged that the plaintiff apprehended the use of the patented process in New Delhi. It is worthwhile to note here that NATCO had categorically denied the use of the patented process within the Court’s jurisdiction, and had also denied export of the drugs from New Delhi. In light of this categorical rebuttal, which reportedly was never countered by the plaintiff, there was not enough material for the Delhi High Court to entertain the suit.

Following are the relevant observations of the Court:

22. At the outset, it must be stated that it was repeatedly stressed by learned Senior counsel for the Plaintiffs that CS (OS) No. 3193 of 2012 is a quia timet action. Only an apprehension has been expressed that Natco, having tied up with Mylan, is likely to export the infringing Copolymer-I to US and other countries....

28. It is, therefore, clear that the case of the Plaintiffs concerns the infringement of the process involved in the GA-second product, which the Plaintiffs term as the ‘Mylan process’ and about the possible infringement for the purposes of ‘export’ of the said product to the US and elsewhere.

30. In light of the above legal position, the averments in the plaint in the instant case would have to be examined to ascertain if there is any specific plea that there is a violation of the process patent within the jurisdiction of this Court. The Court finds that there is no such specific averment. There is no averment that the process patent i.e. Indian patent No.190759, or for that matter the ‘Mylan process’, is being practised/infringed by Natco within the jurisdiction of this Court. 

This has also to be seen in the context of the fact that there is no denial by the Plaintiffs that there is no manufacture of the GA- second product in Delhi. There is also no denial by the Plaintiffs that Natco has at present its manufacturing facilities only in Hyderabad.

31. Since the suit concerns a process patent, the pleadings as regards the product being sold in Delhi or elsewhere, or the possibility of it being launched in Delhi or elsewhere cannot justify the jurisdiction of this Court. To recapitulate, in para 40 of the plaint it is averred that “The US Court decision leads to an incontrovertible conclusion of infringement of rights of Plaintiffs No. 1 and 2 in IN ‘759 based on the manufacture of glatiramer acetate by Defendant No.2 for export and sale in the United States.” 

In para 41 it is stated that Natco’s act of manufacturing the glatiramer acetate product “for sale in the US and elsewhere” amounts to infringement of the process patent. The averment is not that such manufacturing of the product for export to the US and elsewhere is happening or is apprehended to happen within Delhi. In the circumstances, the invocation of Section 48(b) of the Patents Act 1970 by the Plaintiffs to urge that the product obtained as a result of infringement of process is sold or apprehended to be sold in Delhi appears to be misconceived. 

The fact that Natco may have an office in Delhi or a distributor in Delhi is not relevant given the fact that the subject matter of the suit is a process patent, and the action brought forth is for alleged infringement of that process for the purposes of export to the US and elsewhere.

Breaking News: Delhi High Court Returns Teva Pharma’s Suit for Patent Infringement against NATCO for Want of Jurisdiction

Based on information from reliable sources, it is learnt that the Delhi High Court has today returned Teva Pharmaceutical’s plaint in its suit for infringement of the process to manufacture the multiple sclerosis drug Copaxone  against NATCO Pharma (C.S.(O.S) 3193/2012). The plaint was returned by Hon’ble Justice S.Muralidhar for want of jurisdiction under Order 7 Rule 10 of the Code of Civil Procedure, 1908, considering that NATCO is a Hyderabad-based entity.

Reproduced below is the said provision of the CPC:

10. Return of plaint.- (1) Subject to the provisions of rule 10A, the plaint shall at any stage of the suit be returned to be presented to the court in which the suit should have been instituted.

Explanation: For the removal of doubts, it is hereby declared that a court of appeal or revision may direct, after setting aside the decree passed in a suit, the return of the plaint, under this sub-rule.

(2) Procedure on returning —On returning a plaint, the Judge shall endorse thereon the date of its presentation and return, the name of the party presenting it, and a brief statement of the reasons for returning it.

Late last year, NATCO had won the right to introduce the generic version of Copaxone in the US.  We will undertake a detailed analysis of the Delhi HC’s decision as soon as we have a copy of it. I thank the blog's well-wishers for bringing this development to my attention.

Thursday, February 27, 2014

Delhi High Court declares “Brahmos” as a Well-known Mark and restrains FIIT JEE from using it

On February 24, 2014, in a 32-page decision delivered in a suit for trademark infringement instituted by Brahmos Aerospace Private Limited against FIIT JEE limited, the Delhi High Court declared the plaintiff’s mark “BRAHMOS” as well-known and granted an interim injunction restraining the defendant from using the trademark BRAHMOS in relation to educational activities or as part of its domain name and in any manner which could cause confusion and deception.

As most of our readers must be aware, the plaintiff is a joint venture between the Defence Research and Development Organization (DRDO) of India and the Federal State Unitary Enterprise of Russia, with DRDO being the majority shareholder. The plaintiff is popularly known as the manufacturer of the world’s fastest supersonic cruise missile, Brahmos.

The first defendant is a popular private institution which coaches students who aspire to successfully crack the Joint Entrance Examination (JEE) conducted by the prestigious Indian Institutes of Technology (IITs). The second defendant is USA University Quest (UUQ) which partners with the FIIT JEE to help Indian students secure admissions to US universities.

It was the plaintiff’s case that its well-known trademark BRAHMOS was being used by the defendants in connection with their aptitude tests, which had led to actual confusion. Further, according to the plaintiff, the mark BRAHMOS was being used by the plaintiff in connection with its training and education programmes as well. Consequently, according to it, the likelihood of confusion was higher. To this end, the plaintiff cited instances wherein it had received queries from students asking if taking the Brahmos aptitude test of the defendants would improve their chances of securing employment with the plaintiff.

The defendants contended that:
A.       the mark BRAHMOS was not being used as a trademark, but was used only to indicate a connection in the course of trade. Further, FIIT JEE continued to be used by the first defendant as its flagship trademark, and BRAHMOS was being used only in connection with one of the several aptitude tests conducted by it.
B.      the plaintiff and the defendants were in entirely different spheres of activity. Consequently, there was no possibility of confusion and deception and that the use was bonafide.
C.      BRAHMOS was not a distinctive mark since terms such as “Brahmo Samaj” have been in vogue for a long time.
D.      the Plaintiff was using Brahmand and not Brahmos, for its training programmes. Therefore, there could be no confusion/deception in the field of education/training.

The Court took the view that the trademark BRAHMOS was not a dictionary word, but a coined word, a portmanteau formed from the names of the rivers Brahmaputra and Moskva.

Citing the decisions in Bloomberg Finance LP vs. Prafull Saklecha & Ors and Rolex Sa vs. Alex Jewellery Pvt. Ltd. and Ors, the Court relied upon Section 29(4) to conclude that the mark BRAHMOS was well-known and that the defendants’ use of the mark was “without due cause”/valid justification. The Court rejected the defendants’ contention that their use of the mark was not in a trademark sense given that it was being used in the course of trade. Consequently, the defendants were restrained from the using the mark in any manner which could cause confusion/deception.

It is to be noted that sub-sections (1)-(4) of Section 29 do not require the mark to be used as the flagship mark for it to be infringing. Only Section 29(5) deals with use of the mark as a trade name, or part of the trade name, or as the name of his concern or a part thereof by the defendant in respect of identical goods or services. However, "use in the course of trade" being broader in scope, includes use of the mark as a tradename or as part of the tradename or business concern by the defendant.

Sunday, February 23, 2014

Section 111 of the Patents Act: “Innocent” Infringement

In suits for patent infringement, Section 111 of the Patents Act appears to place certain restrictions on the power of the Court to award damages or account of profits against defendants in three limited situations which are spelt out in the provision. Following are the three situations (which however do not limit the power of the Court to grant injunctions):

1.   If the defendant proves that at the date of infringement, he was not aware and had no reasonable grounds to believe that a patent existed on the subject-matter/technology used by him
2.  If the act of infringement is committed after a failure by the patentee to pay renewal fee for his patent within the prescribed statutory period (which does not include the period of extension sought, if any, by the patentee to pay the renewal fee)
3.    If a patent specification is amended by way of a disclaimer, correction or explanation after the publication of the specification, no damages or account of profits may be granted until the date on which the amendment is allowed, unless the Court is satisfied that the specification as originally published was “framed in good faith and with reasonable skill and knowledge”.

A few questions come to my mind. Can ignorance of publication of the patent specification be legitimately argued as a defence under the first situation? I am not sure since publication of a patent specification is treated as constructive legal notice to all third parties. Further, under Situation 3, precisely because publication is deemed as constructive notice, any changes made to the published specification by way of amendment deprives the patentee from claiming damages for the period between the publication of the un-amended specification and date of allowance of the amendment.

Under Situation 3, how would a Court satisfy itself that the originally published un-amended specification was “framed in good faith and with reasonable skill and knowledge”, and not with a mischievous intent to hold back enabling disclosure from all third parties?

The broader question that could also be asked is, unless the existence of a patent is specifically brought to the notice of an alleged infringer/future defendant, can constructive notice by publication be deemed to give rise to the allegation of “wilful infringement” by the defendant? Also, is it fair and reasonable to expect all third parties to proactively look up every patent office journal to scan for and inspect published patent applications which they might be infringing?

Thursday, February 20, 2014

Enercon India v. Enercon GmBh: Supreme Court Directs Parties to Arbitrate and Cloaks Indian Courts with Exclusive Jurisdiction

In a recent decision dated February 14, 2014, the Supreme Court of India has partly upheld the decision of the Bombay High Court in the contractual litigation between Enercon India (Indian entity) and Enercon GmBh (German entity) by holding that there exists a valid arbitration agreement entered into by and between the parties. However, the Supreme Court differed with the Bombay High Court in that it took the view that merely because the venue of arbitration is London, it did not follow that UK Courts could be approached by either party to seek interim measures during the course of arbitration.

In other words, according to the Supreme Court, “venue” of arbitration is not the same as “seat” of arbitration. While the former is merely the geographical location of the arbitration proceedings which is chosen based on convenience, the latter decides the appropriate court which shall be cloaked with exclusive jurisdiction to support the arbitration proceedings. Consequently, it is the seat of arbitration, and not the venue that must be considered in resolving the issue of appropriate Court. The exception to this approach is when the agreement is completely silent on the “seat”. In such a situation, venue may not only be a critical factor, but may also be conclusive in deciding the appropriate court.

In this case, although the venue of arbitration is London, the seat of arbitration is India since the law governing the contract as well as the arbitration clause are Indian. Further, the subject-matter of the agreements entered into between the parties pertain to setting up of Enercon India, allocation of shares of Enercon India, and transfer of know-how from the German entity to the Enercon India. Considering the India-centric nature of the transactions, the dispute between the parties too have the closest intimate connection with India. Consequently, according to the Apex Court, Indian Courts alone have jurisdiction over the arbitration proceedings.

The Apex Court further differed with the Bombay High Court on the latter’s vacation of the anti-suit injunction granted by the Daman Trial Court which restrained the German entity from pursuing judicial remedies in UK Courts. According to the Supreme Court, the anti-suit injunction was rightly granted since having decided that there exists a valid arbitration clause between the parties with India as the seat of arbitration, the German entity being a party to arbitration proceeding cannot not be allowed to pursue litigation in UK Courts.  

Severability of the Parent Contract and the Arbitration Clause
Extracted below are the relevant portions of the Intellectual Property License Agreement (IPLA), which according to the Indian entity, had not been entered into and consequently there was no concluded contract on the issue of arbitration as well. To address this issue, the Court relied on the following clauses of the agreement:

“3. Governing Law and Jurisdiction
3.1 This paragraph is legally binding.
3.2 This Heads of Agreement is (and all negotiations and any legal agreements prepared in connection with the IPLA shall be) governed by and construed in accordance with the law of Germany.
3.3 The parties irrevocably agree that Clause 18 of the proposed draft IPLA shall apply to settle any dispute or claim that arises out of or in connection with this memorandum of understanding and negotiations relating to the proposed IPLA.

...Clause 18.3---- All proceedings in such arbitration shall be conducted in English. The venue of the arbitration proceedings shall be London. The arbitrators may (but shall not be obliged to) award costs and reasonable expenses (including reasonable fees of counsel) to the Party(ies) that substantially prevail on merit. The provisions of the Indian Arbitration and Conciliation Act, 1996 shall apply

Based on the above clauses, the Apex Court took the view that the existence of an agreement on the issue of arbitration is incontrovertible. Also, extracted below is Section 16 of the Indian Arbitration and Conciliation Act, 1996:

16.Competence of arbitral tribunal to rule on its jurisdiction.- (1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose------
(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and
(b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause

The clear and express mandate of Section 16, according to the Supreme Court, is “that the main contract and the arbitration agreement form two independent contracts." The Court further observed as follows:

"Commercial rights and obligations are contained in the underlying, substantive, or the main contract. It is followed by a second contract, which expresses the agreement and the intention of the parties to resolve the disputes relating to the underlying contract through arbitration. A remedy is elected by parties outside the normal civil court remedy. It is true that support of the National Courts would be required to ensure the success of arbitration, but this would not detract from the legitimacy or independence of the collateral arbitration agreement, even if it is contained in a contract, which is claimed to be void or voidable or unconcluded by one of the parties.

Further, according to the Court, since the scope of the arbitration clause extends to even disputes “in connection with”/relating to the very existence of a valid IPLA, and not just disputes “arising out of” the IPLA, the arbitral tribunal is capable of deciding whether there exists a valid IPLA.

The net result for both parties to the litigation is that, the Indian entity which did not wish to take part in the arbitration will now have to be party to it, and the German entity which wanted UK Courts to be vested with simultaneous jurisdiction over the arbitration proceedings, cannot have recourse to UK Courts since Indian courts have exclusive jurisdiction over the arbitration proceedings.

I strongly recommend a reading of this decision to understand various aspects of arbitration and contractual litigation since these issues are bound to present themselves in contractual disputes relating to patent licenses as well. 

Tuesday, February 11, 2014

The Elusive Quest for the Definition of Obviousness: Patent Law’s Holy Grail

The title of this post is the title of my paper which I had authored as an undergraduate law student and which was selected as the best essay in the international essay competition organized in the year 2008 by the International Association for the Advancement of Teaching and Research in Intellectual Property (ATRIP). Although dated, I am sharing the essay for the benefit of those of our readers who may wish to read it. For those interested, a modified and much more refined version of the paper was subsequently published in 2010 in the International Review of Intellectual Property Law and Competition Law (41 IIC 410 (2010)).

The central exercise attempted in the essay was to understand and compare the standards of obviousness adopted by the US Supreme Court in KSR v. Teleflex and the UK House of Lords in Angiotech Pharmaceuticals Inc v. ConorMed Systems Inc. Extracted below are a few excerpts from it:

Restatements sometimes, rather most of the time, help us understand concepts better and may even lead to new theories. This is particularly true of the concept of obviousness; though obviousness has been the subject-matter of quite a number of decisions and disquisitions, every subsequent judicial pronouncement brings out a feature of its mien which hasn’t been dealt with before or which when restated brings out a new perspective. This is not because the concept is nebulous, but because it is inherently fluid and subjective. As more and more hitherto unknown or unfathomable situations present themselves, obviousness too adapts itself accordingly without giving up what is characteristic of it- Change and the ability to map change....

This criterion necessarily has to remain dynamic in its application for it reflects the rate of change of technology or to give it a negative definition, it mirrors the changing standards of evaluation of obscurity or obsolescence of knowledge. In fact, such semantic agility suitably equips it to keep pace with technology, which is an ideal quality expected of every branch and precept of law- to mirror life.
The Supreme Court of the United States in KSR v. Teleflex (2007) lent a touch of dynamism to the concept of obviousness by advocating a more flexible approach without altogether replacing the three step Teaching-Suggestion-Motivation (TSM) test.  

More recently, the House of Lords of the United Kingdom, in Angiotech Pharmaceuticals Inc v. Conor Medsystems Inc (2008) uncovered, though not with complete success, another facet of obviousness in the process of adjudicating the issues involved. Though both these judgments in general discuss obviousness, there exists an important distinction between the two; where KSR elaborates on the pros and cons of an “obvious to try” standard vis-à-vis a rigorous standard of obviousness, Angiotech deals with the principle of sound prediction of the technological success of an invention revealed in the patent. It must be understood that the principle of sound prediction has a close connection to an “obvious to try” line of argument.”....

....“4.5.1 The Metaphorical Pyramid of Logic
Let us assume that the logical structure is in the form of a pyramid with the focus becoming sharper as one moves towards the polygon vertex, generally referred to as the apex of the pyramid. The apex represents the specific inventive step of the patented invention while the building blocks leading to the apex allude to the path taken to reach the apex, and the very foundation of the pyramid refers to prior art...

...6. Conclusion
It must be understood that obviousness is mixed issue of fact and law and therefore turns on the nature and standard of evidence submitted. The corollary to this proposition is that an “obvious to try” standard is subsumed in the standard of obviousness. Where it suffices to show that to venture in a particular direction is itself obvious with no possibility of new results than the ones already known, then no matter what one calls it, one is going by the “obvious to try” standard. It follows that if the so-called “invention” is so manifest that its banality can be proved by the very act of trial, then it should not be much of a fight for a challenger to go one step forward and establish the obviousness of the invention itself rather than limiting himself to proving that it was too obvious to try.

If KSR could be accused of blurring the concept of obviousness in its attempt to be progressive, Angiotech is a step backward; consequently, the locus of obviousness as it stands today can be compared to Salsa. The tragedy in both cases is that while the rest of the world looks up to the US and UK Courts for clarity on patent law, the Apex Courts of both these countries have not risen to the occasion. 

Interestingly, the Federal Circuit in the US and the Court of Appeals in the UK seem to have better track records for being consistent in their approach with the oft-quoted critique being that their consistency over a period of time is a sign of lack of imagination. It would do us a world of good to realise that in our efforts to define certain fundamental concepts of patent law such as obviousness, we should not go to the extreme extent of verbalizing the law beyond a reasonable point. Both form and content should be given their due if patent law is to achieve its objective- better innovation and not necessarily greater number of patents."

Monday, February 10, 2014

IP Taxation: Know-how, Consultancy and Service Tax

As part of my promised initiative to broaden the scope of my cogitation on the blog, I intend to share my thoughts on IP taxation given my interest in taxation. Apart from the obvious need to understand IP taxation, taxation in general helps to bring greater clarity to our perception of what constitutes IP. I had written on this topic elsewhere in 2010, and this post is a slightly modified version of it.

One of the decisions I would urge our readers to read is IFFCO v. Commissioner of Central Excise ((2007)7VST 6 CESTAT) delivered by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on whether all know-how is intellectual property.

The primary issue in this case was the applicability of the definition of “Consulting engineer” in Section 65(31) of the Finance Act, 1994 to an arrangement entered into between Indian Fanner Fertiliser Co-operative Limited (IFFCO) and Haldor Topsoe of Denmark as per Rule 2(1)(d)(iv) of the Service Tax Rules (substituted vide Notification No. 12 of 2002 dated August 1, 2003 having effect from August 16, 2002).

The question that needed to be addressed here was, whether Topsoe rendered engineering consultancy services to IFFCO? If yes, IFFCO was liable to pay service tax under Chapter V of the Finance Act, 1994 for such consultancy services in addition to penalties under the Act.

The facts leading to this issue were as follows:
1. IFFCO entered into 4 agreements with Topsoe for licensed use of Topsoe’s technology for redesigning and modifying the operation of its ammonia and urea plants at Aonla (U.P.) to make the plants more energy efficient.

2. In a statement given under Section 14 of the Central Excise Act, 1944, IFFCO disclosed that it had received taxable services worth approximately Rs.4.22 crores. The tax liability for this amount worked out to approximately Rs.34 lakhs. In addition to this, IFFCO paid an R&D cess of approximately Rs.19.5 lakhs under the R&D Cess Act, 1986. IFFCO could avail an exemption of service to the extent of the R&D cess paid, therefore, the net service tax liability would be approximately Rs.14.5 lakhs.

3. However, IFFCO argued that it was not liable to pay even Rs.14.5 lakhs since the arrangement between IFFCO and Topsoe (hereinafter “the transaction”) was one for transfer of know-how, and not for rendering technical consultancy services. According to IFFCO, the technical consultancy provided by Topsoe was integrally connected to the transfer of technology and that such integral assistance was not within the scope of the definition of “consulting engineer” under the Act.

4. The Commissioner of Central Excise held the contrary and served a show cause notice on IFFCO demanding payment of service tax with interest and proposing imposition of penalties under Sections 76 and 77 of the Finance Act.

5. IFFCO appealed to the Customs, Excise and Service Tax Appellate Tribunal (CESTAT)

IFFCO’s (Appellant) Arguments
As mentioned earlier, IFFCO contended that the transaction was one for transfer of know-how/intellectual property which could be sold or licensed. This “know-how” was a bundled package of technical information and technical assistance, and therefore, was not a service as envisaged under the Act. To make its case, IFFCO drew attention to the nature of arrangement between Topsoe and itself.

According to IFFCO, if Topsoe were a mere consultant, then IFFCO would not need to take a license for use of such technology; instead, it would have purchased the title to the technology as one whose development was commissioned by IFFCO for its use. Further, Topsoe had sought performance guarantee, which IFFCO argued proved that the transaction was not for provision of consultancy services because consultant engineers did not seek such guarantees.

IFFCO relied upon Navinon limited v. Commissioner of Central Excise where the levy of service tax was set aside on an agreement for technical know-how, expertise and services on grounds that it did not attract the definition of a “consulting engineer”. IFFCO added that since the technical-how had been received in tangible media, they constituted “goods” and therefore, the transaction was a mere purchase of imported goods.

 Besides the fact that no separate payment was made for technical assistance, IFFCO argued that such assistance was incidental and therefore was not in the nature of “consultancy”. IFFCO also submitted that since the development of technology had occurred outside India, there was no service provided in India. To support this argument, Carborundum v. Commissioner of Income Tax (Supreme Court) was cited where it was held that where advice was received from abroad, the fact that the advice was used in India did not render the advice amenable to service tax in India.

Commissionerate’s (Respondent) Response and Ruling of the Tribunal
It was argued by the respondent that the definition of “consulting engineer” included feasibility study, pre-design study/project report, basic design engineering, detailed design engineering, trouble-shooting and technical services including establishing systems and procedures for an existing plant, etc. Since all such services were actively provided for in the transaction between the parties, the respondent argued that the transaction was amenable to service tax.

Having heard both the parties, the Tribunal undertook a detailed perusal of the clauses in the agreements. It observed that although the transaction was primarily for transfer of know-how, at several places in the agreements technical assistance had been provided for. Also, the parties had agreed upon on a method of calculation of the payments to be made for such services on a man-day basis.

Further, contrary to IFFCO’s contention that no service had been provided in India, the Tribunal noted that such technical assistance was meant to be provided at the plants situated in India. Such services included an elaborate study of the plant, which obviously couldn’t have been undertaken without visiting the site in India. It was pointed out that technical assistance of this nature found specific mention in the definition of “consulting engineer”.

From paras 16-20 of the decision, the Tribunal explained in detail the meaning of know-how. It observed thus in para 19:

“”know-how” is a parcel of closely-held information relating to industrial technology, sometimes also referred to as trade secret which enables its user to derive commercial benefit from it. “Know-how” as an intellectual property, would mean a proprietary series of practical, non-patented knowledge, derived from the owner’s experience and tests, which is secret, substantial, and identified…. “Know-how” must be described in a sufficiently comprehensive manner in order to verify whether it meets the secrecy and substantiality criteria.”

In other words, according to the Tribunal, know-how which was out in the public domain and which did not need special knowledge or training for it to be put to use was not intellectual property.

The Tribunal observed that there was no denying that the transaction between the parties primarily dealt with transfer of know-how/intellectual property; the factum of provision of technical assistance by Topsoe to IFFCO proved this further. That said, such technical assistance was not subsumed within the know-how and fell squarely within the definition of “consulting engineer”.

The Tribunal took a middle path between the arguments of IFFCO and that of Commissioner of Central Excise; it held that neither was the transaction completely one for transfer of know-how nor was it entirely for provision of services. It was for both; also, the agreements envisaged two separate methods of payment for each of the components. Therefore, since only a portion of the outstanding tax liability of Rs.14.5 lakhs was for technical assistance, only such portion could be recovered from IFFCO. The approach of the Tribunal does seem reasoned and reasonable.

One of the issues that this decision also raises and partly addresses is- what is the “situs” of a service? I mean, where exactly is a service truly rendered? How would that question be addressed in the context of an opinion rendered by a foreign entity to an India-based party? I’ll address this issue in the next post.