APRIL 29, 2023

By Shweta Jain Gupta, Partner, RSA Legal Solutions

IN the case of M/s Suzlon Energy Ltd. - 2023-TIOL-35-SC-ST, Supreme Court held that drawings and designs imported on paper would fall under the category of "design services" under Section 65(35b) read with Section 65(105)(zzzzd) of the Finance Act, 1994 and accordingly would be subject to the levy of service tax.

Supreme Court upheld the principle that the same activity can be taxed as 'goods' as well as 'service', and the latter would attract the levy of service tax, provided the contract between the parties stands to be indivisible.

The Supreme Court further observed that merely because the designs and drawings imported were shown as 'goods' under the Customs Act and in the bill of entry, it would not preclude such services from also falling under the ambit of "design services" under the Finance Act, 1994.

The Hon'ble Apex Court relied on its decision in BSNL and upheld that there can be two different taxes/levies under different heads by applying the aspect theory.

The aim of this article is to examine the implications of this judgment under the GST regime.

Blurring lines

GST law has made a clear distinction between 'goods' and 'services' by clearly defining the scope of both. While Section 2(52) of the Central Goods and Services Tax Act, 2017 defines 'goods' to include every kind of movable property, other than money and securities, 'services' have been defined under Section 2(102) of the CGST Act as anything other than goods, money and securities. Further, to amplify the said distinction, the GST law has within Schedule II of the CGST Act also delineated certain activities that will be treated as either supply of goods or a supply of services.

However, when the decision of the Supreme Court in the M/s Suzlon Energy Ltd case, is examined in light of the GST regime, this line of distinction gets blurred.

In this regard it is pertinent to discuss Sr. No. 5(c) of Schedule II of the CGST Act which classifies "temporary transfer or permitting the use or enjoyment of any intellectual property right" as a supply of service. Since intellectual property is a intangible creation of the human intellect and drawings and designs are a product of such intellect, they are appropriately classifiable under the aforementioned entry as 'supply of service'.

Further, Section 8(a) of the CGST Act defines 'composite supply' as a supply comprising of two or more goods or services, which in the ordinary course of business are naturally bundled and supplied in conjunction with each other. Further, tax liability in such a transaction will be the tax imposed on the principal supply, which is defined under Section 2(90) of the CGST Act as that supply of goods or services which forms the predominant element of such a composite supply and to which the other supplies are only ancillary. Therefore, the supply of the service of design and drawings on paper forms a composite supply.

Since the "goods" supplied has no use other than displaying the printed matter and the underlying transaction is actually the supply of intellect, the principal supply is the supply of service of drawings and designs.

In view of the above, even though the service of drawings and designs forms a 'supply of service' under the purview of GST, when reduced on paper and made to cross the customs frontier, the said goods become subject to levy of customs duty.

Sword of double taxation

Double taxation is a phenomenon leading to considerable increase in the tax liability of an individual or a corporation due to the imposition of taxes more than once, on the same asset, financial transaction or income. The High Court of Karnataka in the case of Hubballi Dharwad Advertisers Association - 2022-TIOL-662-HC-KAR-MISC held that when there are two independent transactions and the incidence of tax on both are different, it would not amount to imposition of double taxation.

Since, in the instant case, customs duty and GST would be levied on a single transaction of import of designs and drawings on paper, the said transaction could fall within the ambit of double taxation.

However, one may argue that the taxability under both the laws is based on different criteria and, hence levying of customs duty, considering it as "goods" and GST considering it as "service" would not amount to double taxation.

It would be prudent if CBIC comes up with a clarification in this regard.