Same Activity Can Be Taxed As 'Goods' & 'Services' Provided Contract Is Indivisible: SC 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 were 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 could not be excluded from the definition of “design services” under the Finance Act, 1994.

The Court has also held that the same activity could be taxed as ’goods’ and ‘services’ provided the contract was indivisible and on the aspect of services there may be levy of service tax.

The Bench of Justice MR Shah and Justice Krishna Murari observed that “...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.”

Additional Solicitor General N. Venkataraman appeared for the appellant and Senior Advocate V. Sridharan appeared for the respondent.

Factual Background

The respondent- Suzlon Energy Ltd. is a manufacturer of Wind Turbine Generators (WTG) had entered into product development and purchase agreement with M/s Suzlon Energy GmbH (M/s SEG), Germany, a sister concern for the product development and purchase agreement 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.

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

On March 25, 2012, the appellant held respondent liable to pay service tax as “design services” on importing various models of “Engineering Design & Drawings” for the purpose of manufacturing of WTG, as defined under Section 65(35b) read with section 65(105) (zzzzd) of the Act. The appellant also levied interest as well as penalty on respondent.

Thereafter, the respondent filed an appeal before the Custom Excise and Service Tax Appellate Tribunal (CESTAT) wherein the appellant’s order for payment of service tax was set aside. The CESTAT held that the said design and drawings are ‘goods’ and not ‘service’. It was also held that the taxation of goods and that of services were mutually and explicitly conceived levies, and therefore the same activity could not be taxed as goods and as services.

Aggrieved of the order, the appellant approached the Apex Court.

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

The Apex Court 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 a blueprint on paper and delivered to the respondent on the same medium. It was held that such designs were subjected to service tax even as per the clarification by the board dated March 18, 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.

The Apex Court further relied upon the judgment of BSNL v. Union of India (2006) 3 SCC 1 wherein it was held that there could be two different taxes/levies under different heads by applying the aspect theory.

“As per the settled position of law now, 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.... Merely because “Engineering Design & Drawings” prepared and supplied by sister company were shown as ‘goods’ under the Customs Act and in the bill of entry, by that itself cannot be a ground to take such services out of the definition of “design services” under the Finance Act, 1994.” said the Court.

Therefore, the Court held that the view taken by the CESTAT that the same activity could not be taxed as goods and service was erroneous and accordingly, the CESTAT order was 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.” the Court said.

Cause Title- Commissioner of Customs, Central Excise & Service Tax v. M/S Suzlon Energy Ltd. 

Click here to read/download the Judgment