Same Drawing and Design can be treated as Goods & Service: SC upholds Levy of Service Tax on ' Engineering Design & Drawings’ [Read Judgement]

The Supreme Court in its recent judgement has held that the same activity of drawing and design can be treated as goods & services provided the contract is indivisible and on the aspect of services there may be a levy of service tax and upheld the levy of service tax on ' Engineering Design & Drawings’.

The revenue challenged the impugned judgment and order dated 02.05.2018 passed by the Customs, Excise and Service Tax Appellate Tribunal, West Zonal Bench at Mumbai (CESTAT) in Appeal Nos. ST/87589 & 87590/2013, by which the CESTAT has allowed the said appeals preferred by the respondent – M/s Suzlon Energy Limited and has held that “Engineering Design & Drawings” of various models imported by the respondent for manufacturing of Wind Turbine Generator (WTG) are not leviable to service tax under the category of “Design Services” as defined under Section 65(35b) read with Section 65(105)(zzzzd) of the Finance Act, 1994 during the period June 2007 to September 2010, the Revenue has preferred the present appeals.

The respondent was providing various taxable services and was also in the manufacture of WTG.  It has three subsidiary companies situated in Germany and Netherlands with whom product development and purchase agreement had been entered into.

The respondent had entered into an agreement dated 01.04.2007 (w.e.f. 01.01.2007) with M/s Suzlon Energy GmbH, Germany, a sister concern for the product development and purchase agreement to be used exclusively for the manufacturing of WTG in the territory of India. 

The respondent claimed that since the designs and drawings received by it vis the customs route by filing the Bill of Entry were “goods” and not “services”, it was not required to pay the service tax.

During the 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.

The appellant, Commissioner of Customs, Central Excise and Service Tax, Pune issued a show cause notice dated 15.12.2001 to the respondent calling upon it to show cause as to why the service tax to the tune of Rs.18,42,99,652/- on the value of taxable services provided by it under the provisions of Section 73 of Chapter V of the Finance Act and cess under Section 85 of Chapter VI of the Finance Act be not demanded. 

The appellant confirmed the demands made in the show cause notices as the provider of “design services” taxable under Section 65(105)(zzzzd) and following the definition of the services in Section 65(35b) of the Finance Act, 1994. 

The respondent engaged the sister concern M/s SEG for the activity of “Engineering Design & Drawings” used in the manufacturing of WTG, which was reduced as a 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 18.03.2011 on the issue of the applicability of indirect taxes on packaged software. 

The Bench comprising of Justice M.R. Shah and Justice Krishna Murari observed that merely because “Engineering Design & Drawings” prepared and supplied by a 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.

The Court quashed and set aside 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 manufacturing of Wind Turbine Generator (WTG), as defined under Section 65(35b) r/w section 65(105)(zzzzd) of the Finance Act, 1994.

To Read the full text of the Order CLICK HERE

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