4. Valuation

The value of any taxable service is determined as per the provisions of the Service Tax (Determination of Value) Rules, 2006 [‘the Valuation Rules’]. Generally, whenever, the IPR holder grants licence or permits uses of the registered IP, a written agreement specifying the terms, condition and restrictions is required to be registered under the respective IP law and written agreement contains details of the licence fee to be paid by the licensee/registered user to the IPR holder. Therefore, licence fee will be the taxable amount for levy of service tax.

4.1
As per Rule 3 of the Valuation Rules, the value of taxable service, where the consideration received is not wholly or partly consisting of money, is determined by the service provider in the following manner :-

(a) the value of such taxable service is equivalent to the gross amount charged by the service provider to provide similar service to any other person in the ordinary course of trade and the gross amount charged is the sole consideration;

(b) where the value cannot be determined in accordance with clause (a), the service provider is required to determine the equivalent money value of such consideration which shall, in no case be less than the cost of provision of such taxable service.

4.2
Further, as per Rule 5(1) of the Valuation Rules, where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs are includable in the value for the purpose of charging service tax on the said service.

4.3
However, as per Rule 5(2) of the Valuation Rules, the expenditure or costs incurred by the service provider as a pure agent of the recipient of service, are excluded from the value of the taxable service if all the following conditions are satisfied,

(i) the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured;

(ii) the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service;

(iii) the recipient of service is liable to make payment to the third party;

(iv) the recipient of service authorises the service provider to make payment on his behalf;

(v) the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party;

(vi) the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;

(vii) the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and

(viii) the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.

4.4
The amount of cess paid under the Research and Development Cess Act, 1986 on payment made towards import of technology i.e. royalty or lump sum fee for technical know how or licence fee is exempted from payment of service tax (Notification No. 17/2004-S.T. dated 10-9-2004 refers).