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2023 Supreme(SC) 759
SUPREME COURT OF INDIA
ABHAY S. OKA, SANJAY KAROL, JJ.
Commissioner of Service Tax, Mumbai – Appellant
Versus
M/s 3I Infotech Ltd. – Respondent
Civil Appeal No. 4007 of 2019
WITH
M/s 3I Infotech Ltd. – Appellant
Versus
Commissioner of Service Tax, Mumbai – Respondent
Civil Appeal No. 7155 of 2019
Decided On : 14-08-2023
For the Appellant(s) : Mr. Vipin Jain, Adv. Mr. Mahesh Agarwal, Adv. Mr. Girish Raman, Adv. Mr. Vishal Agarwal, Adv. Ms. Sayaree Basu Mallik, Adv. Mr. Karan Verma, Adv. Mr. Abhinabh Garg, Adv. Ms. Tuhina, Adv. Mr. K. Ajit Singh, Adv. Mr. E. C. Agrawala, AOR Mr. V.C. Bharathi, Adv. Mr. Mukesh Kumar Maroria, AOR Mr. H.R. Rao, Adv. Mr. A.K. Kaul, Adv. Ms. Nisha Bagchi, Adv. Mr. Prashant Singh (i), Adv.
For the Respondent(s): Mr. V.C. Bharathi, Adv. Mr. Mukesh Kumar Maroria, AOR Mr. H.R. Rao, Adv. Mr. A.K. Kaul, Adv. Ms. Nisha Bagchi, Adv. Mr. Prashant Singh (i), Adv. Mr. Vipin Jain, Adv. Mr. Mahesh Agarwal, Adv. Mr. Girish Raman, Adv. Mr. Vishal Agarwal, Adv. Ms. Sayaree Basu Mallik, Adv. Mr. Karan Verma, Adv. Mr. Abhinabh Garg, Adv. Ms. Tuhina, Adv. Mr. K. Ajit Singh, Adv. Mr. E. C. Agrawala, AOR
IMPORTANT POINTS
(1) Adjudication on the basis of show cause notice should be made only on the basis of classification stated in show cause notice – Assessee cannot be subjected to a penalty on the basis of a show cause notice containing a completely erroneous category of service.
(2) Octroi charges cannot be a part of value of taxable services.
Headnote:
(A) Finance Act, 1994 – Section 73 – Special Economic Zones Act, 2005 – Section 26(2) – Demand of service tax – Show Cause Notices – Demand was made on account of services provided by assessee in respect of the supply of third-party software, software developed in-house or customised software – Elementary principles of natural justice required that adjudication on the basis of show cause notice should be made only on the basis of classification stated in show cause notice – Assessee cannot be subjected to a penalty on the basis of a show cause notice containing a completely erroneous category of service – Demand made on the basis of first show cause notice was illegal – Other three show-cause notices mentioned correct classification – Findings rendered by Tribunal call for no interference. (Paras 10 and 11)
(B) Special Economic Zones Act, 2005 – Section 26(2) – Grant of exemption – Only when by exercising power under sub-section (2) of Section 26 of SEZ Act, exemption is granted by Central Government that assessee can claim exemption – Octroi charges cannot be a part of value of taxable services – However, remand was ordered to enable assessee to produce evidence regarding amounts paid towards Octroi charges – In proceedings pursuant to remand, it will be open for assessee to show that exemption was available under sub-section (2) of Section 26 of SEZ Act. (Paras 12, 14 and 15)
Facts of the case:
These two appeals arise out of service tax demands on the basis of four Show Cause Notices. Notices were issued under Section 73 of the Finance Act, 1994 for the demand of service tax.
Findings of Court:
Civil Appeal No. 4007 of 2019 is dismissed; Civil appeal No. 7155 of 2019 is also dismissed subject to the clarification made to paragraph no.10.16.
Result : Civil Appeals dismissed.
JUDGMENT :
ABHAY S. OKA, J.
FACTUAL ASPECTS
1. These two appeals arise out of service tax demands on the basis of four Show Cause Notices. The notices were issued under Section 73 of the Finance Act, 1994 (for short “the Finance Act”) for the demand of service tax. The brief particulars of Show Cause Notices are as under:
| Show Cause Notice Date | Period | Demand under Taxable Service |
| 19.10.2009 | 1.4.2004 to 31.3.2009 | Maintenance and Repair |
| 20.10.2010 | 1.4.2009 to 31.3.2010 | Information Technology Software |
| 21.10.2011 | 1.4.2010 to 31.3.2011 | Information Technology Software |
| 22.10.2012 | 1.4.2011 to 31.3.2012 | Information Technology Software |
2. The adjudication in respect of Show Cause Notices was made by the Commissioner which was challenged before the Customs, Excise and Service Tax Appellate Tribunal, West Zonal Bench at Mumbai (CESTAT). An order of remand was passed by CESTAT. In the order of remand, CESTAT observed that it is not borne out from the impugned order of the Commissioner how service tax liability has been computed. CESTAT further observed that if the assessee has purchased software from third parties and sold the same on payment of VAT and supplied hardware on payment of VAT, the same would not be liable to service tax. It was further held that the liability to service tax would arise only in respect of the software which the assessee has developed as per customers’ specifications and supplied to their customers. The Tribunal further observed that it was necessary to go through the agreements entered into by the assessee with his clients, bills raised for services rendered, the goods supplied and the payments made towards the service tax liability.
3. On the basis of the order of remand, the Commissioner of Service Tax, Mumbai-II made adjudication on the four Show Cause Notices. The Commissioner held that the services rendered by the assessee from 10th April 2004 up to 15th May 2008 in relation to software need to be classified under the category of “Intellectual Property Service” defined under Section 65 (55b) of the Finance Act. It was further held that from 16th May 2008 onwards, in relation to the software, the classification of service rendered should be under the category of “Information Technology Software” defined under Section 65 (53a) of the Finance Act. Thirdly, it was held that the value of the computer hardware items consumed for providing the services is required to be included in the valuation of the respective services in terms of Section 67 of the Finance Act. Consequential orders regarding payment of interest and penalty were passed by the Commissioner.
4. Being aggrieved by the said Order-in-Original, the assessee preferred an appeal before the CESTAT. By the impugned judgment dated 18th September 2018, CESTAT held that the services subject matter of dispute were classifiable under the category of “Information Technology Software” with effect from 16th May 2008 and for the earlier period up to 15th May 2008, the same services were classifiable under the category of “Intellectual Property Service.” The Tribunal held that the show cause notice dated 19th October 2019 covering the period up to 16th May 2008 was not justified. However, the Tribunal, for the period on and after 16th May 2008 passed a limited order of remand.
5. Civil Appeal No. 4007 of 2019 has been preferred by the Revenue against the same order and Civil Appeal No. 7155 of 2019 has been filed by the assessee.
SUBMISSIONS
6. In support of Civil Appeal No. 4007 of 2019, learned ASG, Shri Mr. N.Venkatraman submitted that though the first show cause notice dated 19th October 2009 has been issued demanding service tax under the category of “Management, Maintenance and Repairs” the assessee was always aware that in fact the demand was covered under the category “Intellectual Property Service.” He urged
