Import Of Technical Designs Is Not ‘Design Service’; Outright Purchase Of IPR Not Taxable: CESTAT Mumbai
Sangeetha Prathap
The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that the import of technical know-how, engineering drawings and designs on a permanent transfer basis for use in manufacturing activities in India cannot be subjected to service tax under the category of “Design Services” under the Finance Act, 1994. The Tribunal set aside the entire service tax demand of ₹21.79 crore, along with interest and penalties, holding that the transaction amounted to an outright purchase of intellectual property rights (IPR) and not the provision of any taxable service.
The Bench comprising S.K. Mohanty, Judicial Member, and M.M. Parthiban, Technical Member, was deciding appeals filed by Suzlon Energy Ltd against an order passed by the Commissioner of Central Excise and Service Tax, Pune-III, which had confirmed service tax demands under the reverse charge mechanism for the period from June 2007 to September 2011.
Suzlon Energy Ltd is engaged in the manufacture of wind turbine generators (WTGs). For facilitating such manufacture in India, the company had entered into Product Development and Purchase Agreements with its group entities based in Germany and the Netherlands. Under these agreements, Suzlon imported technical know-how in the form of engineering drawings, designs and related documentation, which were used for manufacturing WTGs in India. The company filed bills of entry, paid applicable customs duties and research and development cess, and cleared the imported material as goods.
Subsequently, during an excise audit, the Department took the view that the imported drawings and designs constituted “Design Services” as defined under Section 65(36b) read with Section 65(105)(zzzzd) of the Finance Act, 1994. Two show cause notices were issued alleging that Suzlon was liable to pay service tax under the reverse charge mechanism on the consideration paid to its overseas group companies, resulting in a total demand of over ₹21 crore along with interest and penalties under Sections 77 and 78 of the Act.
The assessee contested the demand, asserting that the transaction was a one-time outright purchase of designs and technical know-how, with permanent transfer of all rights, title and interest in the intellectual property for use in India. It was argued that there was no service provider–service recipient relationship and that the consideration paid was for acquisition of IPR, not for any service. The assessee also submitted that the agreements did not provide for any separate consideration for design services and that the Department’s attempt to artificially bifurcate the transaction was legally impermissible.
The adjudicating authority, however, confirmed the demand, holding that the imported designs fell within the scope of “Design Services” and that the transaction could not be treated as IPR services, as the designs were allegedly not protected under Indian law. The authority also invoked the extended period of limitation and imposed penalties.
The matter reached the Tribunal earlier, which had allowed the appeals in favour of Suzlon in 2018. That order was set aside by the Supreme Court, which remanded the matter back to the Tribunal for fresh consideration on the issues of taxability under “Design Services” and the applicability of extended limitation.
Upon reconsideration, the Tribunal closely examined the agreements between Suzlon and its group companies. It noted that the agreements clearly provided for sale and permanent transfer of all intellectual property rights relating to the designs and technical documents for use in India. The Tribunal observed that Suzlon became the absolute owner of the designs and was free to further license, sell or assign those rights. The pricing mechanism under the agreements was based on a cost-plus model for sale of the product, and there was no separate consideration identified for any design service.
The Bench held that in order to constitute a taxable service, there must be a service provider, a service recipient and consideration for provision of a service. In the present case, the relationship between the parties was that of buyer and seller, not service provider and service recipient. The Tribunal observed that if Suzlon had engaged its group companies to design products according to its specifications, the activity could have fallen under “Design Services.” However, where pre-existing designs were sold and rights permanently transferred, the transaction could not be characterised as a service.
The Tribunal further noted that even if the transaction were to be examined under the category of IPR services, permanent transfer of intellectual property does not amount to rendering of a service, as clarified by the Tax Research Unit circulars. It also observed that the IPR in question was not covered under any Indian law in force during the relevant period, which further took the transaction outside the service tax net.
On the issue of limitation, the Tribunal held that invocation of the extended period was not justified. It found that Suzlon had disclosed all relevant facts, filed bills of entry, paid customs duties and R&D cess, and that the entire transaction was within the knowledge of the Department. The dispute involved interpretation of complex legal provisions, and there was no evidence of fraud, suppression or wilful misstatement. Accordingly, penalties imposed under Section 78 were also held to be unsustainable. In view of these findings, the CESTAT set aside the impugned order in its entirety and allowed the appeals filed by Suzlon Energy Ltd, holding that the demand of service tax, interest and penalties was unsustainable both on merits and on limitation.
Cause Title: Suzlon Energy Ltd. v. Commissioner of Central Excise & Service Tax, Pune-III
Case No: Appeal Nos. ST/87589/2013 & ST/87590/2013
Coram: S.K. Mohanty, Judicial Member, M.M. Parthiban, Technical Member
