Royalty
This query is : Resolved
05 February 2011
Dear Friends!
Ours company is engaged in manufacturing of Auto parts. We avail services w.r.t to design and drawing through mail for a foreign company which has no existence in India. Even that foreign company do not come to India for providing its technical support. We also do not use its brand name. The final products are sold in our brand name only.
Understanding with the Foreign Company:
We have to pay as Royalty @ 2% on the basic sales price of the product which are manufactured by using its design and drawing.
My Query:
1. Is the payment of Royalty attract Service Tax?
2. If yes, then what is its procedure to be followed?
3. Can the service tax if so charged be availed as MODVAT Credit?
Your earlier response to this will be highly appreciable.
Thanks
Ours company is engaged in manufacturing of Auto parts. We avail services w.r.t to design and drawing through mail for a foreign company which has no existence in India. Even that foreign company do not come to India for providing its technical support. We also do not use its brand name. The final products are sold in our brand name only.
Understanding with the Foreign Company:
We have to pay as Royalty @ 2% on the basic sales price of the product which are manufactured by using its design and drawing.
My Query:
1. Is the payment of Royalty attract Service Tax?
2. If yes, then what is its procedure to be followed?
3. Can the service tax if so charged be availed as MODVAT Credit?
Your earlier response to this will be highly appreciable.
Thanks
05 February 2011
1. Yes it attract service tax under the head design services.
2. As service receiver , you have to deposit the service tax in this case.
3. Cenvet credit is allowed of service tax paid.
2. As service receiver , you have to deposit the service tax in this case.
3. Cenvet credit is allowed of service tax paid.
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07 February 2011
Thanks for your earlier response!
In continuation to this query I would like to have clarity on
1. Under which section shall we take the credit of the Service Tax Paid
In continuation to this query I would like to have clarity on
1. Under which section shall we take the credit of the Service Tax Paid
22 July 2025
Here’s a detailed response to your follow-up query on service tax credit on Royalty payments for design services:
1. Is the payment of Royalty attract Service Tax?
Yes, the payment of Royalty for design and drawing services provided by a foreign company (even if it has no physical presence in India) is liable to service tax under the category of "intellectual property services" or "design services" as per the service tax laws applicable before GST.
Since the foreign company provides design/drawing services and you are paying Royalty on the basic sales price, this falls under service tax on imported services — which is payable by the recipient under the reverse charge mechanism (RCM).
2. Procedure to be followed
As the service receiver (your company), you are required to self-assess the service tax liability on the Royalty paid.
Deposit the applicable service tax (at that time, 10.3% approx including education cess) under the reverse charge mechanism within the prescribed due dates.
File the service tax returns disclosing the reverse charge services and tax paid.
Maintain all documents like invoices, payment proof, and correspondence with the foreign company.
3. Can the service tax be availed as MODVAT (input) credit?
Yes, the service tax paid on Royalty under reverse charge is eligible for input service credit (MODVAT credit as per older terminology).
You can claim this credit to set off against your output service tax liability.
Ensure that the credit is claimed in your service tax returns as per prescribed rules.
4. Under which section shall we take the credit of Service Tax paid?
Service tax credit on such imported services is claimed under Section 68 of the Finance Act, 1994, which allows credit of input services.
You should maintain the documentation of tax paid under reverse charge for claiming the input service credit in your service tax returns.
1. Is the payment of Royalty attract Service Tax?
Yes, the payment of Royalty for design and drawing services provided by a foreign company (even if it has no physical presence in India) is liable to service tax under the category of "intellectual property services" or "design services" as per the service tax laws applicable before GST.
Since the foreign company provides design/drawing services and you are paying Royalty on the basic sales price, this falls under service tax on imported services — which is payable by the recipient under the reverse charge mechanism (RCM).
2. Procedure to be followed
As the service receiver (your company), you are required to self-assess the service tax liability on the Royalty paid.
Deposit the applicable service tax (at that time, 10.3% approx including education cess) under the reverse charge mechanism within the prescribed due dates.
File the service tax returns disclosing the reverse charge services and tax paid.
Maintain all documents like invoices, payment proof, and correspondence with the foreign company.
3. Can the service tax be availed as MODVAT (input) credit?
Yes, the service tax paid on Royalty under reverse charge is eligible for input service credit (MODVAT credit as per older terminology).
You can claim this credit to set off against your output service tax liability.
Ensure that the credit is claimed in your service tax returns as per prescribed rules.
4. Under which section shall we take the credit of Service Tax paid?
Service tax credit on such imported services is claimed under Section 68 of the Finance Act, 1994, which allows credit of input services.
You should maintain the documentation of tax paid under reverse charge for claiming the input service credit in your service tax returns.
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