By TIOL News Service

MUMBAI, JUNE 07, 2018: THE CCE, Pune confirmed a total tax demand of Rs.52 crores for the period June 2007 to September 2011 against the appellant on the ground that they had failed to pay service tax under the category of “Design Services”.

It is pertinent to note that the CESTAT had granted an unconditional waiver from pre-deposit of the adjudged dues and stayed the recovery during the pendency of the appeals by observing thus –

"5…From the records it is clear that the appellant has imported drawings and designs in terms of the product services agreement with the foreign entity and have declared the entire consideration paid as value for the purpose of customs duty and the customs duty liability has been discharged accordingly. Therefore, the entire transaction was treated as supply of goods for the purpose of customs duty and if that be so, we do not understand how the very same transaction can be treated as supply of service and levy of service tax can be made on the entire value of transaction once again…"

We had reported this order as 2014-TIOL-1397-CESTAT-MUM.

The appeals were heard in December 2017 and the final orders were passed recently.

To recapitulate facts - The appellant, a manufacturer of wind turbine generators, has three subsidiary companies situated in Germany and Netherland with whom product development and purchase agreement had been entered into. In accordance with these agreements the subsidiaries provided technical know-how used by the appellant for manufacture of wind turbine generators. According to the appellants, technical know-how that is procured were all obtained by the supplying subsidiaries in their respective countries and that territorial assignment to the appellant by these subsidiary companies was an outright sale with full ownership vested with the appellant.

Challenging the order passed by the original authority, the appellant submitted that the outright transfer or purchase of technical know-how being excluded from the definition of 'intellectual property service', the attempt to bring it under the coverage of 'design service' when intellectual property service other than the excluded component is specifically subject to tax is not legal and proper.

It is further contended that the technical know-how was imported against the bills of entry even though not liable to duty and that the 'design service' would indicate that the legislature intended taxing only the service simpliciter .

As the 'technical know-how' was imported against bill of entry, bringing such imports within the frame work of 'design service' is not tenable, the appellant submitted.

Reliance is placed on the decisions in Mitsui & Co Ltd - 2010-TIOL-479-CESTAT-KOL, Associated Cement Companies Ltd - 2002-TIOL-08-SC-CUS-LB and Tata Consultancy Services - 2004-TIOL-87-SC-CT-LB to contend that taxability of goods was not limited to the tangible; thatdrawings and designs are to be treated as goods.

The AR relies on the decision in Oracle India Pvt Ltd.-2015-TIOL-1766-CESTAT-DEL to contend that there is no prohibition of simultaneous levy under different taxing statutes.

To this submission, the appellant placed reliance on the decisions in Bharat Aluminium Company Ltd - 2017-TIOL-1983-CESTAT-DEL, Kirloskar Brothers Ltd - 2013-TIOL-1456-CESTAT-MUM and the apex court decision in Associated Cement Companies Ltd. to contend that designs and drawings having been classifiable as goods cannot be taxed as a service.

The Bench extracted the apex court decision in Associated Cement Companies Ltd. (supra) and the Tribunal decision in Oracle India Pvt. Ltd. (supra) and inter alia observed –

++ It is seen that the engineering designs and drawings had been included as part shipment in accordance with contract for wind generators. That bills of entry have been filed by the appellant is also a matter of record.

++ The question that arises for consideration is the taxability of drawings and designs independent of its assessment under the Customs Act,1962 as resorted to at the time or Import. ++ The attempt in the impugned order has been to widen the scope for interpreting the definition of 'design services' in section 65(105)(zzzzd) of Finance Act, 1994; it is further held that supplies from the overseas subsidiaries was intended for implementation of the manufacturing process and, therefore, this could not be treated as goods.

++ In view of the various decisions rendered by the Tribunal that the taxation of goods and that of services are mutually and explicitly conceived levies, it is clear that the same activity cannot be taxed as goods and as services.

Holding that the alternate view canvassed by the AR is not tenable, the impugned order was set aside and the appeals were allowed.

(See 2018-TIOL-1700-CESTAT-MUM)

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