2023 (4) TMI 409 - SC - Service Tax

Levy of Service Tax - Design Services or not - 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? - HELD 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. It is required to be 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 18.03.2011 on the issue of applicability of indirect taxes on packaged software. Therefore, as such, the respondent was liable to pay service tax on the design services received from abroad under reverse charge - M/s SEG raised the invoice/bill on the assessee treating it as paper . However, when the said bill of entry was presented treating the same as paper for which the duty payable was Nil . Therefore, neither any custom duty was paid due to exemption from payment of duty treating it as paper nor the service tax was paid. 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. The order of CESTAT to the extent 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 matter is remitted back to the CESTAT to consider the grounds raised on behalf of the respondent, namely, whether the services (if any) rendered by a foreign entity will not fall within the purview of design services and that the department was not justified in invoking the extended period of limitation. Appeal disposed off.

Summary

Issues Involved:
1. Classification of "Engineering Design & Drawings" as goods or services.
2. Applicability of service tax on imported designs under the category of "Design Services".
3. Invocation of the extended period of limitation.

Summary:

1. Classification of "Engineering Design & Drawings" as goods or services:
The respondent, engaged in manufacturing Wind Turbine Generators (WTG), imported "Engineering Design & Drawings" from its sister companies and classified them as "goods" under the Customs Tariff, thereby claiming a 'Nil' rate of customs duty. The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) initially held that these designs were "goods" and not "services," relying on the case of Sojitz Corporation v. Commissioner of Service Tax, New Delhi, and observed that the same activity cannot be taxed as both goods and services.

2. Applicability of service tax on imported designs under the category of "Design Services":
The Supreme Court examined whether the "Engineering Design & Drawings" imported by the respondent for manufacturing WTGs were liable to service tax under "Design Services" as defined in Section 65(35b) read with Section 65(105)(zzzzd) of the Finance Act, 1994. The Court noted that the definition of "Design Services" is broad, excluding only fashion design and interior decorating. The Court emphasized that the same activity can be taxed as both goods and services under different heads by applying the aspect theory, as established in BSNL v. Union of India. The Court concluded that the CESTAT's view that the same activity cannot be taxed as both goods and services was erroneous and that the designs fall under the taxable category of "Design Services."

3. Invocation of the extended period of limitation:
The respondent argued that the services rendered by a foreign entity might not fall within the purview of "Design Services" and contested the invocation of the extended period of limitation. The Supreme Court remitted the matter back to the CESTAT to specifically address these two grounds, as they were not considered in the initial judgment.

Conclusion:
The Supreme Court set aside the CESTAT's judgment, holding that the respondent is liable to pay service tax on the imported "Engineering Design & Drawings" under "Design Services." The matter was remanded to the CESTAT to consider whether the services rendered by a foreign entity fall within the purview of "Design Services" and the justification for invoking the extended period of limitation.