Same Activity Can Be Taxed As ‘Goods’ & ‘Services’ : Supreme Court Upholds Levy Of Service Tax On “Engineering Design & Drawings”

The Supreme Court has held that the import of “Engineering Design & Drawings” falls under the category of “design services” under section 65(35b) read with Section 65(105) (zzzzd) of the Finance Act, 1994, and are subject to levy of service tax. On the sole ground that “Engineering Design & Drawings” prepared and supplied by sister company were shown as ‘goods’ under the Customs Act and in the bill of entry, such services cannot be excluded from the definition of “design services” under the Finance Act, 1994.

The Bench comprising of Justice M.R. Shah and Justice Krishna Murari, while adjudicating an appeal filed in Commissioner of Customs, Central Excise & Service Tax v M/S Suzlon Energy Ltd., has further held that same activity can be taxed as ‘goods’ and ‘services’ provided the contract is indivisible and on the aspect of services there may be levy of service tax.

BACKGROUND FACTS

Suzlon Energy Ltd. (“Respondent”) is a manufacturer of Wind Turbine Generators (WTG). The Respondent entered into ‘product development and purchase agreement’ with M/s Suzlon Energy GmbH (“M/s SEG”), which is its sister concern situated in Germany, to be used exclusively for manufacturing of WTG in the territory of India.

M/s SEG reduced the designs to a blue print on paper and exported the same to India. While importing the designs, the Respondent filed Bill of Entry with the Custom authorities and classified the same as “Paper” and claimed benefit of ‘Nil’ rate of customs duty. The Respondent claimed that since the designs and drawings received by it via customs route by filing the Bill of Entry were “goods” and not “services”, it was not required to pay the service tax.

During audit it was noticed that the Respondent had not paid service tax on “Engineering Design & Drawings” of various models used in the manufacturing of WTG, which was classifiable under the category of “Design Services” for the period from June, 2007 to September, 2010.

On 25.03.2012, the Commissioner of Customs, Central Excise & Service Tax (“Appellant”) held the Respondent liable to pay service tax as “design services” on importing various models of “Engineering Design & Drawings” for the purpose of manufacturing of Wind Turbine Generator (WTG), as defined under Section 65(35b) r/w section 65(105)(zzzzd) of the Finance Act, 1994. The Appellant also levied interest as well as penalty on Respondent.

When Respondent filed an appeal, the Custom Excise and Service Tax Appellate Tribunal (“CESTAT”) set aside the Appellant’s order for payment of service tax. CESTAT held that “design and drawings” are ‘goods’ and not ‘service’. It was further held that the taxation of goods and services are mutually and explicitly conceived levies, therefore the same activity cannot be taxed as both goods and services.

The Appellant filed an appeal against the CESTAT order before the Supreme Court.

ISSUE

Whether activity of import of “Engineering Design & Drawings” from the sister companies is classifiable under taxable category “design services” under section 65(35b) read with Section 65(105) (zzzzd) of the Finance Act, 1994?

SUPREME COURT VERDICT

“Engineering Design & Drawings” imported from sister companies are classified as “design services” and are amenable to service tax

The Bench observed that the Respondent engaged its German sister concern for preparation of “Engineering Design & Drawings” to be used in manufacturing of WTG. The design was reduced as blue print on paper and delivered to the Respondent on the same medium. It was held that such “designs” were subjected to the service tax even as per the clarification by the Board dated 18.03.2011 on the issue of applicability of indirect taxes on packaged software. Therefore, the Respondent was liable to pay service tax on the “design services” received from abroad under reverse charge.

Further, M/s SEG is a subsidiary of the Respondent. Accordingly, the amount received by M/s SEG from the Respondent for its service in preparing the “Engineering design & drawings” was liable to service tax under reverse charge, in terms of the concept of ‘associated enterprise’.

On the issue of blue print of design being treated as “paper” and claim of no duty payable on the same, the Bench observed neither any custom duty was paid due to exemption from payment of duty treating it as ‘paper’ nor the service tax was paid. It was observed as under:

“By a detailed judgment and order, the Commissioner held that the respondent was liable to pay the service tax under taxable category ‘”design services”. However, by the impugned judgment and order, the CESTAT has held that the respondent is not liable to pay the service tax under “design services” under the Finance Act, 1994 mainly on the ground that the custom authority considered the same as ‘goods’ and therefore the same activity cannot be taxed as ‘goods’ and ‘services’. The aforesaid view is absolutely erroneous.”

Same activity can be taxed as ‘goods’ and ‘services’ provided the contract is indivisible

Reliance was placed on the judgment in BSNL v. Union of India, (2006) 3 SCC 1, wherein it was held that there can be two different taxes/levies under different heads by applying the aspect theory.

It was opined that the same activity can be taxed as ‘goods’ and ‘services’ provided the contract is indivisible and on the aspect of services there may be levy of service tax. On the sole ground that “Engineering Design & Drawings” prepared and supplied by sister company were shown as ‘goods’ under the Customs Act and in the bill of entry, such services cannot be excluded from the definition of “design services” under the Finance Act, 1994.

There being a distinction between the sale of goods and a contract of service, the intention of the contracting parties must be ascertained as to whether they intend transfer of both goods and services, either separately or in an indivisible manner or in a composite manner.

The Bench held that the view taken by the CESTAT that the same activity cannot be taxed as goods and services is erroneous and accordingly the CESTAT order has been set aside.

“In view of the above and for the reasons stated above, the impugned judgment and order passed by the CESTAT holding that the respondent is not liable to pay service tax as “design services” on importing various models of “Engineering Design & Drawings” for the purpose of manufacturing of Wind Turbine Generator (WTG), as defined under Section 65(35b) r/w section 65(105)(zzzzd) of the Finance Act, 1994 is hereby quashed and set aside.”

Case Title: Commissioner of Customs, Central Excise & Service Tax v M/S Suzlon Energy 

Citation : 202LiveLaw(SC) 298

Counsel for Appellant: Shri N. Venkataraman (Additional Solicitor General)

Counsel for Respondent: Shri V. Sridharan (Sr. Adv.)

Click Here To Read/Download Judgment