Supreme Court Holds Import of "Engineering Design & Drawings" for Manufacturing WTGs Taxable Under "Design Services"

In a significant ruling, the Supreme Court of India has held that the import of "Engineering Design & Drawings" for the purpose of manufacturing Wind Turbine Generators (WTGs) is subject to service tax under the category of "design services." The judgment, delivered by Justice M.R. Shah, clarified the taxability of such imports under the Finance Act, 1994.

The case before the apex court, titled Commissioner of Customs, Central Excise & Service Tax vs. M/S Suzlon Energy Ltd., pertained to an appeal filed by the Revenue against the decision of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT). The CESTAT had ruled in favor of Suzlon Energy Ltd., holding that the "Engineering Design & Drawings" imported for the manufacturing of WTGs were not liable to service tax under the category of "design services."

The court examined the definition of "design services" under Section 65(35b) of the Finance Act, 1994, and found it to be comprehensive, encompassing various types of design services such as furniture, consumer products, industrial products, logos, graphics, websites, and corporate identity designing. The only exclusions under this definition were fashion design and interior designing.

Suzlon Energy Ltd., a manufacturer of WTGs, had entered into an agreement with its sister companies for the exclusive use of designs and drawings in India. The company classified these designs as "goods" for customs purposes and claimed exemption from service tax. However, the court held that the designs fell within the ambit of "design services" as defined under the Finance Act, 1994.

The court rejected the argument that treating the designs as goods for customs purposes would exempt them from service tax. It emphasized that the same activity can be taxed as both goods and services if the contract is indivisible and involves the transfer of both. Referring to the earlier decision in BSNL v. Union of India, the court held that the intention of the contracting parties to transfer both goods and services is crucial in determining the taxability.

While setting aside the CESTAT's judgment, the Supreme Court remanded the case back to the CESTAT to consider additional grounds raised by Suzlon Energy Ltd., including whether services rendered by foreign entities fall under "design services" and the invocation of the extended period of limitation.

Date: April 10, 2023

Commissioner of Customs, Central Excise & Service Tax vs. M/S Suzlon Energy Ltd.