Levy Of Custom Duty And Service Tax Not Mutually Exclusive

In a recent ruling of Commissioner of CCE Vs Suzlon Energy Ltd dated 10th Mar, 2023, arising out of CA Nos.11400-11401/2018, Supreme Court held that the same activity can be taxed as ‘goods’ and ‘services’ provided the contract is indivisible.

Case involved Suzlon Energy Ltd, India which had entered into an agreement 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. While importing these designs Bill of Entry was filed 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. 021/2002 for BCD and Notification No. 020/2006 for CVD. Suzlon India 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

Service Tax Department cited BSNL v. Union of India, reported in (2006) 3 SCC 1 in support of submission on the distinction between sale of goods and a contract of service. Whereas, Suzlon cited Hindustan Shipyard Ltd. v. State of A.P., reported in (2000) 6 SCC 579, in which 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.

Heavy reliance was also placed on Associated Cement Companies Ltd. v. Commissioner of Customs, reported in (2001) 4 SCC 593. In the said decision, this Court has held that any media which contain drawings or 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 tailor made would not make any difference. It was pleaded that it 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.

It was further canvassed that in Tata Consultancy Services v. State of A.P., (2005) 1 SCC 308, the question was, as to whether canned software sold by the appellants can be termed ?“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.”

However, the Apex Court observed that 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’. This view was found absolutely erroneous by the Apex Court and held that as observed and decided 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 services there may be levy of service tax.

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.