Commissioner of Customs, Central Excise & Service Tax v. M/S Suzlon Energy Ltd.
M. R. SHAH, J.
1. Feeling aggrieved and dissatisfied with the impugned judgment
and order dated 02.05.2018 passed by the Customs, Excise and Service
Tax Appellate Tribunal, West Zonal Bench at Mumbai (hereinafter referred
to as the ‘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 (hereinafter referred to as the ‘respondent’)
and has held that “Engineering Design & Drawings” of various models
imported by the respondent for the purpose of manufacturing of Wind
Turbine Generator (for short, ‘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.
2. That the respondent herein was providing various taxa ble
services. The respondent 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.
2.1 The respondent had entered into an agreement da ted
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 ag reement
to be used exclusively for manufacturing of WTG in the terr itory of
India. The products were exclusively defined in para 1.10 of t he said
agreement.
2.2 The respondent, while importing these designs filed Bill of
Entry with the Custom authorities and classified the same as “Paper”
under Chapter Sub-heading No. 49119920 of the Customs Tariff and
claimed benefit of ‘Nil’ rate of customs duty under Notification No. 021/
COMMISSIONER OF CUSTOMS, CENTRAL EXCISE & SERVICE
TAX v. M/S SUZLON ENERGY LTD.
2002 for BCD and Notification No. 020/2006 for CVD. 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.
2.3 During the course of 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, 2 007 to
September, 2010.
2.4 The appellant herein – Commissioner of Customs, Central
Excise and Service Tax, Pune issued a show cause no tice 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 respondent was also called upon to
pay the interest leviable under Section 75 and penalty under Section 76
and 78 of the Finance Act. For the subsequent period , i.e., Oct ober,
2010 to September, 2011, another show cause notice was issued on
20.04.2012 demanding service tax of Rs.3,36,28,515/- on the value of
“design service” from M/s SEG and M/s Suzlon Blade Technology,
Netherlands.
2.5 Vide Order-in-original dated 25.03.2012, the Commissioner –
appellant herein confirmed the demands made in the show cause notices
as provider of “design services” taxable under Section 65(105)(zzz zd)
and in accordance with the definition of the services in Section 65(35b)
of the Finance Act, 1994. The Commissioner also levied interest as well
as the penalty.
2.6 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 CESTA T. By the impugned
common order, the CESTAT has allowed the said appeals, relying upon
its earlier decision in the case of Sojitz Corporation v. Commissioner
of Service Tax, New Delhi, reported in 2009 (14) ST R 642 (Tri.
Delhi) and has held that the said design and drawings are ‘goods’ and
not ‘service’. The CESTAT has also observed and held that the taxation
of goods and that of services are mutually and explicitly conceived levies,
and therefore the same activity cannot be taxed as goods and as services.
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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.
2.7 Feeling aggrieved and dissatisfied with the impugned common
order passed by the CESTAT, the Revenue has preferred the present
appeals.
3. Shri N. Venkataraman, learned Additional Solicitor General of
India appearing on behalf of the Revenue has submitted that the substantial
question of law arises for the consideration of this Court is , “whether
“Engineering Design & Drawings” of various models imported by the
respondent for the purpose of manufacturing of WTG are levia ble to
service tax under the category of “Design Services” as defi ned under
section 65(35b) r/w section 65(105)(zzzzd) of the Finance Act, 1994
during the period June, 2007 to September, 2010?
3.1 Shri N. Venkataraman, learned ASG has submitted that t he
contentions of the respondent that any intellectual property put in a media
at all times would only get classified as ‘goods’ and never as ‘services’
may not be the correct statement of law. It is submitt ed that merely
because the intellectual property put in a media, it would not per se
make them goods. It would depend on whether the contracting parti es
have understood it as a transfer or a sale of goods. It is submitted that
importation of a set of tailor made or readymade drawings will constitute
a sale of goods, whereas if a person engages a painter to draw a picture
of his choice and to his specifications and the delivery of the painting,
even though on a canvas duly framed, may only constitute to a service,
since the painter has engaged his entire intellectual effort in drawing the
painting for a particular customer and to his specifications and as he
progresses with the painting, the same is for a specific customer.
3.2 It is submitted that this can also happen in the case of “designs
& drawings”. It is submitted that a set of tailor made dr awings and
designs or readymade drawings and designs would constitute a distinct
clause when compared to preparation of drawings and designs under a
contract of service for a specific customer to suit his specifications.
3.3 Shri N. Venkataraman, learned ASG has heavily relied upon
the decision of this Court in the case of BSNL v. Union of India, reported
in (2006) 3 SCC 1 (paras 44 & 45), in support of his submission on the
distinction between sale of goods and a contract of service. O n the
COMMISSIONER OF CUSTOMS, CENTRAL EXCISE & SERVICE
TAX v. M/S SUZLON ENERGY LTD. [M. R. SHAH, J.]
decision of this Court in the case of BSNL (supra) and the distinction
between sale of goods and a contract of service, Shri N. Venkataraman
has made the following submissions:
a) it held that sale in the conventional sense would mean the
Gannon Dunkerly test and, deemed sale involving both goods and
services would be limited only to a work contract and food contract;
b) It made it clear that Article 366(29A) does not give a license to
assume that a transaction is a sale and then to look around for
what could be the goods. This would be an incorrect approac h
since the expression goods had not been altered by the 46 th
amendment and the ingredients of sale continues to have the same
definition;
c) However, this does not mean that the content of the concepts
remain static, and the Courts must move with times;
d) It proceeded to hold that Article 366(29A) does not seek to
cover hospital services, lawyer services and other profe ssional
services, where during the course of rendering such services, there
may be a transfer of goods;
e) Treatment of a patient in a hospital and administration of pills in
the course of a treatment would not tantamount to sale;
f)When a doctor writes out and hands over a prescription or a
lawyer drafts a document and delivers it to his/her client, strictly
speaking, with a payment of fees, consideration does not pa ss
from the patient or client to the doctor or lawyer for the documents
in both the cases;
g) However, these are mere services and do not involve a sale for
the purposes of Entry 54 List 2;
h) The reason is that ultimately one has to apply the Gannon
Dunkerly test. If there is an instrument of contract which may be
composite in form, in any case other than the exceptions in Article
366(29A), unless the transaction in truth represents two distinct
and separate contracts and is discernible as such, then the State
would not have the power to separate the agreement to sell from
the agreement to render service and impose tax on sale;
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i)The test, therefore, for service contracts, other than the two
contracts falling under Article 366(29A), would be ‘did the parties
have in mine or intend separate rights arising out of the s ale of
goods? If there was no such intention, there is no sale even if the
contract could be disintegrated.’; and
j)The test for deciding whether a contract falls into one category
or another is, as what is the substance of the contract othe rwise
called, the dominant nature test.
3.4 It is submitted that therefore what is required to be considered
is, did the contracting parties intend transfer of both goods and services,
either separately or in an indivisible manner or in a composite manner.
3.5 Shri N. Venkataraman, learned ASG has also submitted t he
following illustrations in support of his submission that the “Engineering
Design & Drawings” of various models imported by the respondent for
the purpose of manufacture of WTG are leviable to servic e tax and
cannot be taxed as goods:
i) If a contracting parties A and B agree to the purchase of a
huge boiler for erection, installation and commission in a factory,
the intention of the contracting parties would envisage the sale
of a boiler as goods and a rendition of erection, installation and
commissioning as services. This contract can be either divisible,
indivisible or composite. Whatever may be the nature of the
contract, the intending parties have contracted for both the
sale of goods and the rendition of service.
ii) A patient is under medical treatment at a hospital and t he
doctor had advised for a heart surgery and insertion of a stent.
Here again, it involves two elements. The transfer of the stent
from the hospital into the body of the patient and the rendition
of medical services by the doctor through the hospital. Even
though it involves both goods (stends) and services (medical
services/hospital services), the contracting parties, namely, the
patient and the hospital, do not intend to buy and sell a stent
and also a rendition of medical services as 2 items of sale and
service. The contract is essentially for the rendition of medical
services and in the course of rendition, based on the advice of
the doctor, a stent is inserted into the body of the patient.
COMMISSIONER OF CUSTOMS, CENTRAL EXCISE & SERVICE
TAX v. M/S SUZLON ENERGY LTD. [M. R. SHAH, J.]
3.6 Making above submissions, it is prayed to allow the present
appeals.
4. Shri V. Sridharan, learned senior counsel appearing on behalf
of the respondent has submitted that the precise question involved in the
present appeal is, “whether service tax can be levied on pure s ale (not
deemed sale) of customises drawings/designs contained in a medi um
prepared as per the specifications given by the customer.”
4.1 It is submitted that as per the settled position of law, supply of
goods as per specifications given by the customer is also treated as sale
of goods.
4.2 It is submitted that the first question is, whether suppl y of
goods as per specifications given by the customer is a contract of sale of
goods or merely a contract for work on labour. It is submitted that in the
case of Hindustan Shipyard Ltd. v. State of A.P., reported in (2000 )
6 SCC 579, it is held that if the thing to be delivered has any individual
existence before the delivery as the sole property of the party who is to
deliver it, then it is a sale. Further, if the bulk of mat erial used in
construction belongs to the manufacturer who sells the end product for
a price, then it is a strong pointer to the conclusion that the contract is in
substance one for the sale of goods and not one for labour.
4.3 Learned senior counsel appearing on behalf of the respondent
has heavily relied upon the decision of this Court in the case of Associated
Cement Companies Ltd. v. Commissioner of Customs, rep orted in
(2001) 4 SCC 593. It is submitted that in the said decision, this Court
has held that any media which contain drawings or designs woul d be
regarded as goods under the provisions of the Customs Act. It is observed
that these items are movable goods and would be covered by Section
2(22)(e) of the Customs Act. It is observed and held that the fact that
the technology or ideas is tailormade would not make any difference.
4.4 It is submitted by Shri V. Sridharan, learned senior couns el
appearing on behalf of the respondent that it may be true that the decision
of this Court in the case of Associated Cement Companies Ltd. (supra)
may not be an authority for the proposition that service tax c annot be
levied on pure sale of goods, the said decision is certainly an authority
for the proposition that designs on a medium will be tre ated as goods
under the natural definition of goods. It is submitted that the said decision
333
is also an authority for the proposition that the amount paid by the importer
to the original supplier is nothing but price for sale of such goods.
4.5 Shri V. Sridharan, learned senior counsel has also relied upon
the Constitution Bench decision of this Court in the case of Tata
Consultancy Services v. State of A.P., reported in (2005) 1 SCC 308.
It is submitted that in the said decision, the question was, as to whether
canned software soled by the appellants can be termed to be “goods”
and as such assessable to sales tax under the Andhra Pradesh G eneral
Sales Tax Act, 1957. It is submitted that in the said decision, this Court
affirmed the decision in the case of Associated Cement Companies
Ltd. (supra) and held that intellectual property, once it is put on to a
media, whether it be in the form of books or canvas (in case of painting)
or computer discs or cassettes and marketed would become “goods .”
4.6 It is further submitted that the intent of service tax legislation
is not to levy service tax on sale of goods. It is submitted that sales tax is
levied on sale of goods whereas the service tax is levied on provision of
service. It is submitted that therefore a transfer of goods for a price
cannot be subject to service tax.
4.7 It is submitted that it is true that different aspects of a transaction
can be taxed through separate provisions. The aspect theor y permits
taxation of two different aspects or features of a transaction. For instance,
in a catering contract, supply of food was subject to value added tax and
the service aspect was subject to service tax. However , in the case of
BSNL (supra), this Court has observed that the aspect theory does not
allow the value of goods to be included in services and vice versa.
Reliance is placed on the observations made in para 88 of the said
judgment.
4.8 It is further submitted by Shri V. Sridharan, learned seni or
counsel appearing on behalf of the respondent that before the CESTAT,
the respondent raised a specific ground that the services (if any) rendered
by a foreign entity will not fall within the purview of “design services”.
The respondent also raised a specific ground that the extended period of
limitation cannot be invoked. However, though the said submissions have
been noted be the CESTAT, the CESTAT has not dealt with those
contentions and therefore it is prayed that the matter may be remanded
to the CESTAT to decide all these questions.
COMMISSIONER OF CUSTOMS, CENTRAL EXCISE & SERVICE
TAX v. M/S SUZLON ENERGY LTD. [M. R. SHAH, J.]
5. We have heard learned counsel for the respective partie s at
length.
The issue to be decided in the present appeals is “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 .
5.1 While considering the aforesaid issue, the definition of “design
services” under the Finance Act, 1994, as it stood during the
impugned period, is required to be considered, which reads as
under:
SECTION 65. Definitions. -In this chapter, unless the context
otherwise requires,
……….
(36b) design services” includes services provided in relati on to
designing of furniture, consumer products, industrial products,
packages, logos, graphics, websites and corporate identity designing
and production of three dimensional models:
……….
(105) (zzzzd) “taxable service” means any service provided or to
be provided,
(zzzzd) to any person, by any other person in relation to desi gn
services, but does not include service provided by-
(i) an interior decorator referred to in sub- clause (q); and
(ii) a fashion designer in relation to fashion designing referred
to in sub-clause (zv):
and the term “service provider” shall be construed accordingly.”
Thus, it can be seen 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 separat e taxable
category.
6. In the present case, the respondent was engaged in manufacture
of Wind Turbine Generator (WTG). It entered into ‘product development
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and purchase agreement’ with three of its sister compa nies. Relevant
clauses of the agreement, more particularly which defined the ‘product’
read as under:
1.10.1 ‘Design and Development’ of all models of rated capacity
geared WTG together with all related and pertinent
components and therein required;
1.10.2 ‘Design and Development’ of ‘Suzlon Flexislip System’
together with all related and pertinent components and
therein required;
1.10.3 All and any products that is developed by M/s S EG
conceived (whether or not actually conceived during
regular business hours), discovered, or made by M/s SEG
and its agents and employees during the course of
performing its obligations under the Agreement;
1.10.4 Documentation including material and documents
containing studies planning activities, manufacturing
process details in respect of above.
1.10.5 All modifications made to the above, from time to tim e,
and all other improvements developed and incorporated
within the above.
1.10.6 Intellectual property and intellectual property r ights
relating thereto in so far it belongs to German Inventions
Law.
7. At this stage, it is required to be noted that the said d esigns
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 pap er and
delivered to the respondent on the same medium. Such “designs” were
subjected to the service tax even as per the clarificati on 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 p ay 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 fr om the
assessee-respondent for the said “Engineering design & drawings”
COMMISSIONER OF CUSTOMS, CENTRAL EXCISE & SERVICE
TAX v. M/S SUZLON ENERGY LTD. [M. R. SHAH, J.]
services therefore was liable to service tax under rever se charge in
terms of the concept of ‘associated enterprise’.
8. Despite the above, 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 d uty 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.
By a detailed judgment and order, the Commissioner hel d that the
respondent was liable to pay the service tax under taxable category
‘“design services”. However, by the impugned judgment and order, the
CESTAT has held that the respondent is not liable to pay the service tax
under “design services” under the Finance Act, 1994 mainly on the ground
that the custom authority considered the same as ‘goods’ and therefore
the same activity cannot be taxed as ‘goods’ and ‘services’. The aforesaid
view is absolutely erroneous. As observed and held by this Court in the
case of BSNL (supra), there can be two different taxes/levies under
different heads by applying the aspect theory. 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 serv ices there
may be levy of service tax. The aforesaid aspect has not at all been
considered by the CESTAT while passing the impugned judgment and
order. As observed hereinabove, 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 sup plied 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.
9. Even otherwise, as observed by this Court in the case of BSNL
(supra), there is a distinction between the sale of goods and a contract
of service. What is relevant is the intention of the contr acting parties
and whether the contracting parties intend transfer of both goods and
services, either separately or in an indivisible manner or in a composite
manner. The issue is squarely covered by the decision of this Court in
the case of BSNL(supra) against the assessee and in favour of the
revenue. Therefore, the view taken by the CESTAT that the same activity
cannot be taxed as goods and services is absolutely erroneous. Nothing
further has been discussed by the CESTAT, more particularly on the
findings recorded by the Commissioner recorded from para 20 onwards.
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Under the circumstances, the impugned judgment and order passed by
the CESTAT setting aside the levy of service tax is uns ustainable and
the same deserves to be quashed and set aside.
However, at the same time, as 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 ser vices” and
invocation of extended period of limitation have not been considered by
the CESTAT and therefore learned counsel for the respondent is justified
in praying to remand the matter to CESTAT to decide the aforesaid two
grounds.
10. In view of the above and for the reasons stated above, t he
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 the
purpose of manufacturing of Wind Turbine Generator (WTG), as defined
under Section 65(35b) r/w section 65(105)(zzzzd) of the Financ e Act,
1994 is hereby quashed and set aside. However, 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.
It is made clear that the matter is remitted back to CESTAT to consider
the aforesaid two grounds and none other. Insofar as the issue of levy of
service tax on the “Engineering Design & Drawings” is concerned, the
same is decided in favour of the revenue and against the ass essee.
11. The instant appeals stand disposed of in terms of the above.
However, in the facts and circumstances of the case, there shall be no
order as to costs.
Divya Pandey Appeals disposed of.
(Assisted by : Abhishek Pratap Singh and Roopanshi Virang, LCRAs)
COMMISSIONER OF CUSTOMS, CENTRAL EXCISE & SERVICE
TAX v. M/S SUZLON ENERGY LTD. [M. R. SHAH, J.]