Court Rules Interim Deposits as Mere Judicial Security, Not Royalty Consideration; Rejects Service Tax Demand, Affirms Taxation Only on Post-Settlement Royalty Payment under GST
In a significant judgment delivered on September 21, 2026, the Delhi High Court (Division Bench comprising Justices Avneesh Jhingan and Shail Jain) dismissed the appeal filed by the Principal Commissioner, CGST Delhi South Commissionerate, against M S Micromax Informatics Ltd. The case revolved around a tax dispute concerning amounts deposited in court pursuant to interim orders during a patent litigation between Micromax and Telefonaktiebolaget LM Ericsson, Switzerland.
The dispute originated from a suit filed by Ericsson alleging unauthorized use of its patented technology by Micromax. During the litigation, the court had directed Micromax to deposit approximately Rs. 154.79 crores as a judicial deposit pending the suit's resolution. The Central Goods and Services Tax (CGST) department, through the Directorate General of Central Excise Intelligence (DGCEI), contended that these deposits constituted royalty payments to a foreign entity, thereby attracting service tax liability under the Finance Act, 1994. A show cause notice demanding Rs. 17.50 crores in service tax, along with interest and penalties, was issued.
However, before adjudication, the parties reached an out-of-court settlement wherein Micromax paid Rs. 96 crores as royalty to Ericsson. By this time, the GST regime had replaced the service tax regime, and Micromax discharged Integrated Goods and Services Tax (IGST) on the settlement amount.
The adjudicating authority and the Customs Excise & Service Tax Appellate Tribunal (CESTAT) had earlier ruled that the interim deposits were not consideration for royalty but merely a security deposit as per court orders, and hence not taxable under service tax law. The tribunal also noted that tax liability arose only on actual payment of royalty post-settlement, on which IGST was duly paid.
The appellant challenged these findings before the High Court, raising substantial questions of law including whether the interim deposits should be treated as taxable royalty payments under reverse charge provisions, and whether paying IGST on the settlement amount extinguished service tax liability on earlier deposits.
The Court upheld the tribunal's concurrent findings, emphasizing that:
- The interim deposits were ordered by the court as security during litigation and did not create any vested right in Ericsson to receive the amount.
- The nature of the deposits was not adjudicated as royalty payments; thus, service tax could not be levied on these amounts.
- The subsequent settlement and payment of Rs. 96 crores towards royalty under the GST regime was rightly subjected to IGST, reflecting the applicable tax law at the time of payment.
- Precedents such as Commissioner of Central Excise and Customs v. Idea Mobile Communication Ltd. (2011) were distinguished on facts, as the character of the payment was yet to be crystallized during interim deposit.
- The appeal was dismissed as no substantial question of law arose warranting interference.
This judgment clarifies the tax implications of judicial deposits during intellectual property disputes and reinforces that tax liability accrues only upon definitive payment of royalty under the prevailing tax regime. It also underscores the principle that the substance of payment and timing are critical for determining taxability, not merely the nomenclature or interim procedural orders.
Bottom Line:
Service Tax / GST - Amount deposited in Court under interim orders during pendency of patent dispute is a mere deposit and not consideration/royalty for taxable IPR service - No vested right accrues in favour of claimant till adjudication or settlement - On subsequent out-of-court settlement, royalty actually paid becomes taxable as per prevailing tax regime, and payment of IGST on settlement amount was valid - No substantial question of law arises.
Statutory provision(s):
Finance Act, 1994 Sections 66A, 68(2), 75, 78; Central Excise Act, 1944 Section 35G; GST provisions (Integrated Goods and Services Tax Act)
