Summary
A wind turbine manufacturer imported tailor-made engineering designs and drawings from its German and Dutch sister companies under a product development and purchase agreement, classifying them as paper under the Customs Tariff at nil duty and paying no service tax. The Commissioner confirmed service tax under design services on reverse charge, but the CESTAT held the drawings were goods and that the same activity cannot be taxed as both goods and services. The Supreme Court held that view erroneous: under the aspect theory recognised in BSNL the same activity can be taxed as goods and as services, the definition of design services is wide, and treatment of the drawings as goods in the bill of entry does not take the service out of it. The levy was upheld and the matter remitted only on whether a foreign entity's services fall within design services and on limitation.
Issues
- Whether import of engineering designs and drawings prepared by foreign sister companies for manufacture of wind turbine generators is taxable as design services under Section 65(35b) read with Section 65(105)(zzzzd) of the Finance Act, 1994, notwithstanding that the drawings were cleared through customs as goods.
Provisions considered
- Section 65(35b) and Section 65(105)(zzzzd), Finance Act, 1994Design services is a wide and inclusive definition excluding only fashion designing and interior decoration; tailor-made engineering designs and drawings supplied by a related foreign entity fall within it and attract service tax on reverse charge. (¶¶ 5, 5.1, 7, 8)
- Sections 73, 75, 76 and 78, Finance Act, 1994Demand of service tax with interest and penalties was raised through show cause notices and confirmed by the Commissioner before being set aside by the CESTAT. (¶¶ 2.4, 2.5)
Held
- The CESTAT's view that because customs authorities treated the drawings as goods the same activity cannot also be taxed as a service is absolutely erroneous; as held in BSNL, two levies under different heads are permissible on the aspect theory, and the same activity can be taxed as goods and as services provided the contract is indivisible, with service tax on the service aspect. Showing the drawings as goods in the bill of entry cannot take the service out of the definition of design services. (¶ 8)
- The distinction between sale of goods and a contract of service turns on the intention of the contracting parties and whether they intended transfer of both goods and services separately, indivisibly or compositely; the issue is covered by BSNL in favour of the Revenue, and the CESTAT discussed nothing further on the Commissioner's findings. (¶ 9)
- Since the CESTAT did not decide the assessee's grounds that services rendered by a foreign entity fall outside design services and that the extended period of limitation could not be invoked, the matter is remitted to decide those two grounds and none other. (¶¶ 9, 10)
Result
Appeals disposed of; CESTAT order dated 02.05.2018 holding that the import of engineering designs and drawings was not liable to service tax as design services quashed and set aside and the levy decided in favour of the Revenue; matter remitted to the CESTAT only to decide whether services rendered by a foreign entity fall outside design services and whether the extended period of limitation was validly invoked; no costs.