COMMISSIONER OF CUSTOMS, CENTRAL EXCISE & SERVICE TAX Versus M/S SUZLON ENERGY LTD.
COMMISSIONER OF CUSTOMS, CENTRAL EXCISE & SERVICE TAX Versus M/S SUZLON ENERGY LTD.
Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS.11400-11401/2018
COMMISSIONER OF CUSTOMS, CENTRAL
EXCISE & SERVICE TAX …APPELLANT
Versus
M/S SUZLON ENERGY LTD. …RESPONDENT
J U D G M E N T
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
Civil Appeal Nos.11400-11401/2018 Page 1 of 21
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
taxable 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
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 manufacturing of WTG in the territory of
India. The products were exclusively defined in para 1.10
of the said agreement.
2.2 The respondent, while importing these designs filed
Bill of Entry with the Custom authorities and classified the
Civil Appeal Nos.11400-11401/2018 Page 2 of 21
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. 021/2002 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,
2007 to September, 2010.
2.4 The appellant herein – 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
respondent was also called upon to pay the interest
leviable under Section 75 and penalty under Section 76
Civil Appeal Nos.11400-11401/2018 Page 3 of 21
and 78 of the Finance Act. For the subsequent period ,
i.e., October, 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)(zzzzd) 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 CESTAT. 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) STR 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
Civil Appeal Nos.11400-11401/2018 Page 4 of 21
conceived levies, and therefore the same activity cannot
be taxed as goods and as services. 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
leviable to service tax under the category of “Design
Services” as defined 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 the 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 submitted that merely
because the intellectual property put in a media, it would
Civil Appeal Nos.11400-11401/2018 Page 5 of 21
not per se make them goods. It would depend on whether
the contracting parties 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 drawings 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. On the
decision of this Court in the case of BSNL (supra) and
Civil Appeal Nos.11400-11401/2018 Page 6 of 21
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 approach since the expression goods
had not been altered by the 46th 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 professional services, where during the course of
rendering such services, there may be a transfer of
goods;
Civil Appeal Nos.11400-11401/2018 Page 7 of 21
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 pass 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;
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 sale of goods? If there was no
Civil Appeal Nos.11400-11401/2018 Page 8 of 21
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 otherwise 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 the 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 service
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
Civil Appeal Nos.11400-11401/2018 Page 9 of 21
contracted for both the sale of goods and the rendition
of service.
ii) A patient is under medical treatment at a hospital
and the 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.
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 sale (not deemed sale)
Civil Appeal Nos.11400-11401/2018 Page 10 of 21
of customises drawings/designs contained in a medium
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
supply 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 material 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, reported in (2001) 4
SCC 593. It is submitted that in the said decision, this
Court has held that any media which contain drawings or
Civil Appeal Nos.11400-11401/2018 Page 11 of 21
designs would 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
counsel 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 cannot
be levied on pure sale of goods, the said decision is
certainly an authority for the proposition that designs on a
medium will be treated as goods under the natural
definition of goods. It is submitted that the said decision 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
Civil Appeal Nos.11400-11401/2018 Page 12 of 21
be “goods” and as such assessable to sales tax under the
Andhra Pradesh General 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 theory 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.
Civil Appeal Nos.11400-11401/2018 Page 13 of 21
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
senior 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.
5. We have heard learned counsel for the respective
parties 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 .
Civil Appeal Nos.11400-11401/2018 Page 14 of 21
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 relation
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
design 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.”
Civil Appeal Nos.11400-11401/2018 Page 15 of 21
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 separate taxable
category.
6. 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. 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
SEG 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;
Civil Appeal Nos.11400-11401/2018 Page 16 of 21
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 time, and all other improvements developed
and incorporated within the above.
1.10.6 Intellectual property and intellectual property
rights relating thereto in so far it belongs to
German Inventions Law.
7. At this stage, 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. It
was also found that M/s SEG was a related unit, i.e.,
Civil Appeal Nos.11400-11401/2018 Page 17 of 21
subsidiary of the assessee and the amount received for
service by M/s SEG from the assessee-respondent for the
said “Engineering design & drawings” services therefore
was liable to service tax under reverse 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 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. By a detailed judgment and order, the
Commissioner held 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
Civil Appeal Nos.11400-11401/2018 Page 18 of 21
law now, the same activity can be taxed as ‘goods’ and
‘services’ provided the contract is indivisible and on the
aspect of services 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 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.
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 contracting 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
Civil Appeal Nos.11400-11401/2018 Page 19 of 21
absolutely erroneous. Nothing further has been
discussed by the CESTAT, more particularly on the
findings recorded by the Commissioner recorded from
para 20 onwards. Under the circumstances, the
impugned judgment and order passed by the CESTAT
setting aside the levy of service tax is unsustainable 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 services” 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, 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 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. However, the matter is remitted
Civil Appeal Nos.11400-11401/2018 Page 20 of 21
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
assessee.
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.
………………………………J.
[M.R. SHAH]
NEW DELHI; ………………………………J.
APRIL 10, 2023. [KRISHNA MURARI]
Civil Appeal Nos.11400-11401/2018 Page 21 of 21
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