Supreme Court

Commissioner of Service Tax, Mumbai-II vs. 3I Infotech Ltd.

MANU/SC/0882/2023

14.08.2023

Service Tax

Assessee cannot be subjected to penalty on the basis of show cause notice containing completely erroneous category of service

Present 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 ("the Finance Act") for the demand of service tax.

The first show cause notice covers the period from 1st April 2004 to 31st March 2009. The demand under the said show cause notice dated 19th October 2009 was for taxable service of "Management, Maintenance and Repair". The CESTAT found that the service of transfer of intellectual property rights was classifiable under the category of "Intellectual Property Service" till 16th May 2008 and was taxable in terms of Section 65(105)(zzr) of the Finance Act.

In the Union Budget of 2008-09, a new service under the head "Information Technology Software" was defined separately Under Section 65(53a) of the Finance Act. The said service was made taxable in terms of Section 65(105) (zzzze). Thus, the transfer of the right to use the software was covered by the service classifiable as "Information Technology Software" with effect from 16th May 2008. In fact, the CESTAT relied upon the clarification given by CBEC by Circular dated 29th February 2008 which clarifies the position.

The first show cause notice dated 19th October 2009 contained a demand for service tax under the taxable service of "Management, Maintenance and Repair" and the rest of the three notices contain a demand under classifiable service "Information Technology Software". In the facts of the case, the demand was made on account of services provided by the Assessee in respect of the supply of third-party software, software developed in-house or customised software. The Assessee had temporarily transferred the right to use the said software to their clients. Thus, prior to 16th May 2008, such service was classifiable under the category of "Intellectual Property Service" and with effect from 16th May 2008, it was classifiable under the category of 'Information Technology Software". In fact, the management, maintenance and repair services of computer hardware as well as software under the annual maintenance contract was covered by the category of "Management, Maintenance or Repair" services which was defined Under Section 65(64) of the Finance Act.

Thus, the classification mentioned in the first show cause notice was completely erroneous. Therefore, CESTAT was right in holding that the first show cause was illegal. Elementary principles of natural justice required that ,the adjudication on the basis of show cause notice should be made only on the basis of classification stated in the 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. Therefore, the demand made on the basis of the first show cause notice was illegal.Therefore, there is no merit in the appeal preferred by Revenue. Appeal dismissed.

Tags : Notices Demand Levy

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