SC holds import of customized Designs and Drawings on paper was liable to service tax

This tax alert summarizes the recent ruling of the Supreme Court (SC) on whether the import of tailor- made engineering design and drawings on a paper would be leviable to service tax under the category of “Design Services”.

Assessee in the present case procured engineering design and drawings from its overseas sister concerns. While importing these designs during the period June 2007 to September 2010, assessee filed bill of entry classifying the same as "paper" and claimed benefit of “Nil” rate of customs duty.

Revenue raised demand of service tax contending that the said activity was covered under the category of “Design Services” as per the relevant provisions of the Finance Act, 1994.

CESTAT held that the said designs and drawings were goods and not services. The taxation of goods and services are mutually and explicitly conceived levies, and therefore, the same activity cannot be taxed as both. 

Disposing the appeal filed by Revenue, SC held that assessee was liable to pay service tax on import of “Design Services” under reverse charge. 

SC placed reliance on the BSNL judgment wherein, it was observed that there can be two different taxes/ levies under different heads by applying the aspect theory. As per the settled position of law, the same activity can be taxed as “goods” and “services” provided the contract is indivisible. 

Accordingly, the impugned order passed by the CESTAT was quashed and set aside.

Comments

In light of apex court ruling, the cases where the transaction is in the nature of service but imported on media or paper, the levy and valuation aspects may have to be evaluated from customs perspective. 

The argument taken in the past by the taxpayer that once the transaction is treated as sale of goods by the state authorities, the same cannot again be taxed as service by the central authority, or vice versa. This may not hold good considering SC’s observations.  

SC has re-emphasized on the intent of contracting parties for determining whether the transaction is of sale of goods or provision of service.