Supreme Court Rules on Service Tax Applicability for Imported Engineering Design & Drawings

The Supreme Court of India has delivered an important judgment in the case of Commissioner of Customs, Central Excise & Service Tax v. M/s Suzlon Energy Ltd., clarifying whether imported ‘Engineering Design & Drawings’ can be taxed as a service under the Finance Act, 1994. The case revolved around whether such designs imported by Suzlon for manufacturing wind turbine generators (WTG) should be classified as goods or a taxable service.

The Court ruled in favor of the Revenue, holding that the engineering design and drawings imported by Suzlon from its overseas subsidiaries qualify as a taxable service under ‘Design Services’ as defined in Section 65(35b) read with Section 65(105)(zzzzd) of the Finance Act, 1994. However, it remanded the matter to the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) to decide on two remaining issues: whether services rendered by a foreign entity fall within the scope of design services and whether the extended period of limitation was rightly invoked.

Case Background

Suzlon Energy Ltd., a company engaged in the manufacture of WTG, entered into a product development and purchase agreement with its subsidiary companies based in Germany and the Netherlands. These subsidiaries supplied ‘Engineering Design & Drawings’ for the exclusive use of Suzlon in India.

While importing these designs, Suzlon classified them as ‘paper’ under Customs Tariff Sub-heading No. 49119920, thereby availing a nil rate of customs duty. However, during an audit, the Revenue found that Suzlon had not paid service tax on these imports, which it argued fell under ‘Design Services’ for the period from June 2007 to September 2010.

Arguments Presented Before the Supreme Court

Revenue’s Arguments

The Additional Solicitor General Shri N. Venkataraman argued that:

Intellectual property transferred via a physical medium does not automatically qualify as goods; it depends on the nature of the transaction.
If a contract involves a custom-designed service for a specific client, it qualifies as a service, even if the end result is transferred via a physical medium.
The agreement between Suzlon and its subsidiaries showed that the designs were developed for Suzlon’s exclusive use, making it a service rather than a sale of goods.
Reliance was placed on the Supreme Court’s judgment in BSNL v. Union of India (2006), which held that the ‘dominant nature’ of a contract determines whether it is a sale of goods or a service.

Respondent’s Arguments

Suzlon, represented by Shri V. Sridharan, argued that:

The imported designs were classified as ‘goods’ under Customs law, and the same activity cannot be taxed as both goods and services.
The designs were transferred in a tangible form (on paper) and therefore constituted goods.
Relying on Associated Cement Companies Ltd. v. Commissioner of Customs (2001), Suzlon argued that customized drawings and designs are to be treated as goods.
The transaction was a simple import of goods, and no service was rendered by the foreign entities to Suzlon.

Supreme Court’s Observations and Ruling

Definition of Design Services

The Court examined the statutory provisions under the Finance Act, 1994, which define ‘Design Services’ as including services provided in relation to designing of industrial products, graphics, websites, and corporate identity, among others. The Court noted that the definition is broad and does not explicitly exclude technical drawings.

Distinction Between Sale of Goods and Service

Referring to the judgment in BSNL v. Union of India, the Court emphasized that:

“The test for deciding whether a contract falls into one category or another is to examine the substance of the contract, otherwise called the dominant nature test.”

Applying this test, the Court found that the agreements between Suzlon and its subsidiaries primarily involved the rendering of design services, rather than the sale of a tangible product.

Rejection of Suzlon’s Claim

The Court rejected Suzlon’s argument that the imported designs were purely goods and could not be classified as a service. It ruled:

“Merely because the design was transferred in physical form does not take away the fact that what Suzlon received was fundamentally a service. The classification under customs law does not override the service tax provisions.”

Remand for Further Consideration

While deciding the main issue in favor of the Revenue, the Court remanded the matter to CESTAT for further consideration on two specific points:

Whether the services, if any, provided by the foreign entity fall under ‘Design Services’ under Indian law.
Whether the extended period of limitation could be invoked for demanding service tax.

Implications of the Judgment

This ruling clarifies that intellectual property transferred through a medium can still be considered a service, depending on the nature of the transaction. The judgment reinforces the principle that mere physical embodiment does not automatically classify an item as a good.

Businesses engaged in cross-border transactions involving intellectual property must assess whether their agreements involve the rendering of services, as they could be liable for service tax under Indian law.

Petitioner Name: Commissioner of Customs, Central Excise & Service Tax.
Respondent Name: M/s Suzlon Energy Ltd..
Judgment By: Justice M.R. Shah, Justice Krishna Murari.
Place Of Incident: India.
Judgment Date: 10-04-2023.

Don’t miss out on the full details! Download the complete judgment in PDF format below and gain valuable insights instantly!

Download Judgment: commissioner-of-cust-vs-ms-suzlon-energy-lt-supreme-court-of-india-judgment-dated-10-04-2023.pdf

Directly Download Judgment: Directly download this Judgment

See all petitions in GST Law
See all petitions in Tax Evasion Cases
See all petitions in Judgment by Mukeshkumar Rasikbhai Shah
See all petitions in Judgment by Krishna Murari
See all petitions in allowed
See all petitions in Remanded
See all petitions in supreme court of India judgments April 2023
See all petitions in 2023 judgments

See all posts in Taxation and Financial Cases Category
See all allowed petitions in Taxation and Financial Cases Category
See all Dismissed petitions in Taxation and Financial Cases Category
See all partially allowed petitions in Taxation and Financial Cases Category