Supreme Court Upholds Levy of Service Tax on Engineering Design & Drawings: Same Activity can be Taxed as ‘Goods & Services’

Supreme Court Upholds Levy of Service Tax on Engineering Design & Drawings: Same Activity can be Taxed as ‘Goods & Services’

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.

The division bench of Justice M.R. Shah and Justice Krishna Murari 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.

In the present case the respondent- 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, or the activity of “Engineering Design & Drawings” used in manufacturing of WTG, that was reduced as blue print on paper and delivered to the respondent on the same medium.

The respondent while importing these designs filed Bill of Entry with the Custom authorities and classified the same as “Paper” and claimed benefit of ‘Nil’ rate of customs duty. That respondent claimed that since the designs and drawings received by it vis customs route by filing the Bill of Entry were “goods” and not “services”, it was not required to pay the service tax.

On 25 March, 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 Commissioner also levied interest as well as penalty on Respondent.

Aggrieved by the Order-in-original passed by the Commissioner confirming the demands of service tax and also levying the interest and penalty, the respondent filed appeals before the Customs, Excise & Service Tax Appellate Tribunal (CESTAT). Consequently, the CESTAT has set aside the Order-in-original on the ground that “drawing and design” are to be treated as goods and therefore it cannot be treated as service.

Feeling aggrieved and dissatisfied with the impugned common order passed by the CESTAT, the Revenue preferred appeals before the Apex Court.

The issue that came for consideration before the bench was whether activity of import of “Engineering Design & Drawings” from the sister companies by the notice during the period under dispute i.e., June, 2007 to September, 2010 is classifiable under taxable category “design services” under section 65(35b) read with Section 65(105) (zzzzd) of the Finance Act, 1994.

The Court considered the definition of “design services” under the Finance Act, 1994, and noted that the definition of “design services” is a wide and conclusive one, specifically excluding only fashion design and interior designing, which were already taxable under separate taxable category.

In the present case, the respondent was engaged in manufacture of Wind Turbine Generator (WTG). It entered into ‘product development and purchase agreement’ with three of its sister companies.

The bench noted that the said designs were to be exclusively used by the respondent in the territory of India and it was a tailormade design. The respondent engaged the sister concern M/s SEG for the activity of “Engineering Design & Drawings” used in manufacturing of WTG, that was reduced as blue print on paper and delivered to the respondent on the same medium. Such “designs” were subjected to the service tax even as per the clarification by the Board dated 18 March, 2011 on the issue of applicability of indirect taxes on packaged software.

Therefore, the bench stated that, as such, the respondent was liable to pay service tax on the “design services” received from abroad under reverse charge. It was also found that M/s SEG was a related unit, i.e., subsidiary of the assessee and the amount received for service by M/s SEG from the assessee-respondent for the said “Engineering design & drawings” services therefore was liable to service tax under reverse charge in terms of the concept of associated enterprise.’

The Court held CESTAT view to be absolutely erroneous.

The Court while referring to the decision passed in the case of BSNL v. Union of India, reported in (2006), held there can be two different taxes/levies under different heads by applying the aspect theory.

In this regard, the bench observed, “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.”

The Court remarked that the aforesaid aspect was not at all been considered by the CESTAT while passing the impugned judgment and order.

“The definition of “design services” is very clear and it is wide enough to cover all “design services.” 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,” averred the bench.

In view of the above, the impugned judgment and order passed by the CESTAT holding that the respondent was 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) read with section 65(105)(zzzzd) of the Finance Act, 1994 was quashed and set aside by the Apex Court.

However, at the same time, the Court asserted that the other grounds raised before the CESTAT, namely, “whether the services (if any) rendered by a foreign entity will or will not fall within the purview of “design services” and invocation of extended period of limitation were not considered by the CESTAT and therefore learned counsel for the respondent was justified in praying to remand the matter to CESTAT to decide the aforesaid two grounds.