Import Of Technical Designs Not 'Design Service'; No Extended Limitation Or Penalty: CESTAT Mumbai

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Mumbai has delivered a significant ruling holding that import of technical know-how, engineering drawings and designs transferred permanently for manufacturing in India cannot be taxed as “Design Services” under the Finance Act, 1994.

A Bench comprising S.K. Mohanty (Judicial Member) and M.M. Parthiban (Technical Member) set aside the entire Service Tax demand of ₹21.79 crore, along with interest and penalties, confirming that the transaction was an outright purchase of Intellectual Property Rights (IPR) and not a taxable service.

The Bench observed:

“In order to constitute a 'service', there must be involvement of three essential ingredients, i.e., a service provider, a service receiver and there should be a consideration for provision of the service. In the case in hand, the appellants had not engaged either of their group companies to design the industrial products according to their specifications. If that be the case, then the activities of designing would fall under the category of design services, defined under the Act of 1994. In this case, the agreement clearly provides that the products in question would be sold by the foreign entity to the appellants in India. Thus, the relationship existed between the parties were of 'seller and buyer' and not that of 'service provider and service receiver'. “

The assessee, M/s Suzlon Energy Ltd. had entered into agreements with its group companies in Germany and the Netherlands to obtain technical know-how, engineering drawings and product development documents used for manufacturing wind turbine generators (WTGs) in India.

The assessee imported these designs, filed Bills of Entry, paid applicable Customs duties and R&D Cess, and used the material to build turbines in India.

The Revenue conducted an excise audit and claimed that the designs were actually “Design Services”, taxable under Section 65(36b) read with Section 65(105)(zzzzd) of the Finance Act, 1994.

Two Show Cause Notices were issued alleging a tax liability of more than ₹21 crore under reverse charge, along with penalties under Sections 77 and 78.

The assessee argued that the transaction was a one-time sale of IPR/designs, not a service. Further, the agreements clearly showed ownership was permanently transferred to Suzlon for use in India.

The assessee also argued that no service provider–service recipient relationship existed, rather, it was a buyer-seller transaction.

The Revenue argued that the imported engineering designs fit within the statutory definition of “Design Services”.

Also argued that since Suzlon received design-related material from abroad, reverse charge liability applied.

The CESTAT noted that the foreign entities sold and permanently transferred all rights, title and interest in the designs and technical documents. That the assessee became the absolute owner, free to license or sell the rights in India, and therefore, the consideration paid was not for a service, but for the IPR itself, calculated on a cost-plus basis.

The Bench observed:

On careful analysis of the contents in the agreement vis-à-vis the statutory provisions, we express our views that such transactions should appropriately be considered as IPR related services. The Intellectual Property Right service has also been considered in the service tax statute, as a taxable service, as the definition provided under Sections 65(55a), (55b) read with Section 65(105)(zzr) of the Act of 1994. However, the transaction in question, should not be exigible to service tax, firstly for the reason that the right to intellectual property was permanently transferred to the appellants and that on such transfer, the person(s) i.e., the group companies selling these rights, no longer remain as the holder of such intellectual property rights, so as to come within the purview of such taxable service; secondly, the IPR in question was not covered under any Indian law in force.”

The Bench held that such transactions fall under IPR, not “Design Services”, and permanent transfer of IPR is not taxable, as clarified by TRU Circular.

The Bench noted that the agreements did not provide any separate price for design service. The Department's attempt to “artificially bifurcate” the consideration into a service portion was legally unsustainable.

In view of the Bench allowed he appeals filed by the assessee in entirety holding that the demand of Service Tax, interest and penalties is unsustainable both on merits and on limitation.

Case Title: Suzlon Energy Ltd. v. Commissioner of Central Excise & Service Tax, Pune-III

Appeal Nos.: ST/87589/2013 & ST/87590/2013

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