Court-directed interim deposits are not royalty consideration absent a determination of patent use.

Micromax was involved in patent litigation with Ericsson. During the suit, the Delhi High Court directed Micromax to deposit approximately ₹154.79 crore.

The Department treated the deposits as royalty for imported intellectual property services and issued a show-cause notice demanding service tax, interest and penalties. The adjudicating authority dropped the proceedings, finding that the deposits remained subject to the outcome of the suit and were not then established as royalty; the Tribunal affirmed that decision.

After the parties settled the suit for ₹96 crore in 2017, Micromax paid IGST on that amount. The Department’s appeal to the High Court challenged the Tribunal’s decision

1. Whether the amounts deposited pursuant to the interim court orders constituted consideration for use of Ericsson’s patented technology and were therefore liable to service tax

2. Whether the later settlement and payment of IGST on ₹96 crore affected the asserted service-tax liability on the earlier court-directed deposits

3. Whether the Tribunal erred in sustaining the dropping of interest and penalties, including in light of the Department’s reliance on Dharmendra Textile Processors

The Department invoked Sections 66A and 68(2) of the Finance Act, 1994, read with Rule 2(1)(d)(iv) of the Service Tax Rules, 1994, concerning service tax on imported services under the reverse-charge mechanism, as well as Sections 75 and 78 of the Finance Act concerning interest and penalty

It also raised Section 174(2)(e) of the CGST Act, 2017 and relied on Commissioner of Central Excise and Customs v. Idea Mobile Communication Ltd., (2011) 23 STR 433, and Dharmendra Textile Processors

The Court’s dispositive principle was that a court-directed deposit subject to the outcome of litigation is not, without a determination that it is consideration for a taxable service, established as royalty or taxable consideration; the later settlement payment, once made as royalty, was taxed under the regime then in force

The interim deposits did not give Ericsson a vested right to receive the money: they remained subject to the suit’s outcome, and the Court had not determined that Micromax had used Ericsson’s patents or owed royalty.

The suit ended by settlement before that question was decided, and the deposits were directed to be released to the parties. The Court therefore rejected the Department’s characterization of the deposits as royalty.

It distinguished Idea Mobile, observing that the nature of the payment in that case was not in dispute in the same way; here, the deposits had not been adjudicated as payment for taxable services.

The ₹96 crore subsequently paid as royalty under the settlement was subjected to IGST, so the Tribunal’s findings disclosed no factual or legal error

Finding no perversity or other legal error and no substantial question of law, the Court dismissed the appeal