Commissioner Of Service Tax Mumbai Ii vs M/S. 3I Infotech Ltd.

Non­Reportable

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.4007 OF 2019

Commissioner of Service Tax, Mumbai­II … Appellant

versus M/s 3I Infotech Ltd. … Respondent

with Civil Appeal No.7155 OF 2019

M/s 3I Infotech Ltd. … Appellant versus

Commissioner of Service Tax, Mumbai … Respondent

JUDGMENT

ABHAY S. OKA, J.

FACTUAL ASPECTS

Signature Not Verified Digitally signed by

1. These two appeals arise out of service tax demands Anita Malhotra Date: 2023.08.14 17:42:52 IST

on the basis of four Show Cause Notices. The notices Reason:

C.A.No.4007 of 2019 etc. Page 1 of 15

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 Period Demand under Notice Date Taxable Service 1.4.2004 to Maintenance & 19/10/2009 31.3.2009 Repair 1.4.2009 to Information 20/10/2010 31.3.2010 Technology Software 1.4.2010 to Information 21/10/2011 31.3.2011 Technology Software 1.4.2011 to Information 22/10/2012 31.3.2012 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

C.A.No.4007 of 2019 etc. Page 2 of 15 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, Mumbai­II 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

C.A.No.4007 of 2019 etc. Page 3 of 15 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 Order­in­Original, 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 16 th May 2008 and

for the earlier period up to 15 th May 2008, the same

C.A.No.4007 of 2019 etc. Page 4 of 15 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 16 th

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 that in any case, only a part of the demand under

the first show cause notice up to 15 th May 2008 could

C.A.No.4007 of 2019 etc. Page 5 of 15 have been held to be illegal and not for the subsequent

period. The learned counsel appearing for the assessee

supported the finding of CESTAT on the first show cause

notice.

7. The learned counsel appearing for the assessee in

support of its appeal firstly urged that by the judgment of

CESTAT dated 14th January 2013, it was held that the

software purchased by the assessee from third parties

and sold the same on payment of VAT and the hardware

sold on payment of VAT will not be subject to service tax.

Secondly, as regards the finding recorded in paragraph

no.10.16 of the impugned judgment regarding exemption

in respect of supplies to a developer or unit in SEZ, he

urged that in view of sub­section (2) of Section 26 of

Special Economic Zones Act, 2005 (for short, ‘SEZ Act’),

an exemption was available in the light of what is

provided in the Special Economic Zone Rules, 2006 (for

short, ‘SEZ Rules’). He submitted that in view of the

availability of exemption, the finding of the CESTAT that

C.A.No.4007 of 2019 etc. Page 6 of 15 the assessee was required to pay service tax and

thereafter, SEZ developer or unit located in SEZ could

have claimed the exemption by way of refund, is

completely erroneous. The learned counsel appearing for

the assessee thirdly submitted that on the same point,

there is a decision of the High Court of Judicature at

Hyderabad in the case of GMR Aerospace Engineering

Limited, and Another v. Union of India, through the

Secretary, Ministry of Commerce and others 1

rendered on 27th December 2018 which has been

confirmed by this Court on 26th July 2019 in SLP (Civil)

Dy.No. 22140 of 2019. He pointed out that based on the

said decision, this Court dismissed Civil Appeal No. 549

of 2023 against judgment and order dated 1 st September

2022 in Service Tax Appeal No. 86312 of 2018 preferred

by the present appellant before CESTAT.

8. The learned counsel appearing for the assessee

submitted that CESTAT committed an error in upholding

1 2018 SCC OnLine Hyd 767

C.A.No.4007 of 2019 etc. Page 7 of 15 the demand confirmed by the respondent for the period

from 16th May 2008 on the sale of standardised software

and resale of the hardware.

OUR VIEW

APPEAL OF REVENUE

9. We have given careful consideration to the

submissions. Firstly, we deal with the appeal preferred by

the Revenue. The appeal is confined to the first show

cause notice. 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 19 th

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 2008­09, a new service under the head

“Information Technology Software” was defined separately

C.A.No.4007 of 2019 etc. Page 8 of 15 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 16 th May 2008. In

fact, the CESTAT relied upon the clarification given by

CBEC by Circular dated 29th February 2008 which

clarifies the position, as stated above.

10. It is pertinent to note here that 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 third­party software,

software developed in­house or customised software. The

assessee had temporarily transferred the right to use the

said software to their clients. Thus, prior to 16 th May

C.A.No.4007 of 2019 etc. Page 9 of 15 2008, such service was classifiable under the category of

“Intellectual Property Service” and with effect from 16 th

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

C.A.No.4007 of 2019 etc. Page 10 of 15 was illegal. Therefore, we find that there is no merit in

the appeal preferred by Revenue.

APPEAL OF ASSESSEE

11. Now, we come to the other three show­cause

notices. We have carefully perused the findings recorded

by CESTAT. As stated earlier, the other three show­

cause notices mentioned the correct classification.

Reliance is placed on the earlier order of remand passed

by CESTAT. However, we find that said order of remand

does not decide any issue on merits and therefore, after

the remand, the issue was wide open. The issue to be

considered was whether in respect of the particular

transactions, service tax was payable under the

classification mentioned in the show cause notices. After

having perused the findings of CESTAT, we find that the

findings rendered by the Tribunal call for no interference.

The findings are based on careful consideration of the

factual and legal aspects.

C.A.No.4007 of 2019 etc. Page 11 of 15

12. In paragraph no. 10.16, CESTAT dealt with the

argument that an exemption was available to the

assessee under SEZ Act in respect of services supplied to

SEZ units. Sub­section (2) of Section 26 of SEZ Act

provides that the Central Government may prescribe the

manner in which and the terms and conditions subject to

which exemptions shall be granted to a developer or

entrepreneur covered by sub­section (1) of Section 26.

Clause (e) of sub­section (1) of Section 26 refers to

exemption from service tax under the Finance Act on

taxable services provided to a developer or unit to carry

on authorised operations in SEZ. Under Sub­section (1)

of Section 51, SEZ Act prevails over other enactments

which are inconsistent to the provisions contained

therein. Thus, only when by exercising the power under

sub­section (2) of Section 26 of SEZ Act, an exemption is

granted by the Central Government that the assessee can

claim exemption. Otherwise, the exemption notification

referred in paragraph 10.16 will apply.

C.A.No.4007 of 2019 etc. Page 12 of 15

13. On this issue, the CESTAT held thus:­

“In terms of Notification No. 9/2009­ST granted exemption to the specific services supplied to SEZ subject to condition that person liable to pay service tax shall pay service tax as applicable on the specified services provided to the developer or units of SEZ and SEZ shall claim refund of service tax on the services provided to the developer of SEZ. Notification No. 9/2009­S.T was substituted by Notification 17­2011­ST which provided exemption from service tax subject to condition specified therein. One of the conditions specified was that the exemption shall be provided by way of refund of service tax.

Accordingly, during the entire period the service provider is not eligible for first stage exemption from payment of service tax. He was required to pay service tax and either SEZ developer or unit located in SEZ could have claimed the exemption by way of refund of service tax. Further in the present case, appellant has not produced any evidence to show that the services provided by them or only or partly consumed within the SEZ or outside.

Thus, there is no dispute about the fact that said exemption or not available to the appellant during the relevant period. Since Commissioner has not considered the matter on this aspect the issue needs to be remanded

C.A.No.4007 of 2019 etc. Page 13 of 15 back to him for consideration of the exemption in respect of services supplied to SEZ unit/developer.”

14. Therefore, we cannot find fault with the reasoning

adopted by CESTAT. However, in the proceedings

pursuant to remand, it will be open for the assessee to

show that an exemption was available under sub­section

(2) of Section 26 of the SEZ Act.

15. In paragraph 10.17, it was held that octroi charges

are in the nature of levy for transportation of goods.

Therefore, octroi charges cannot be a part of the value of

the taxable services. However, a remand was ordered to

enable the assessee to produce evidence regarding the

amounts paid towards octroi charges.

16. After having perused the entire judgment of CESTAT

and the Commissioner, we find that except for the

clarification that we have issued in paragraph 14 above

as regards paragraph no.10.16, no other interference is

called for.

C.A.No.4007 of 2019 etc. Page 14 of 15

17. Accordingly, we pass the following order:

a. Civil Appeal No. 4007 of 2019 is dismissed;

b. Civil appeal No. 7155 of 2019 is also dismissed

subject to the clarification made to paragraph

no.10.16; and

c. There will be no order as to costs.

…………………….J. (Abhay S. Oka)

.…………………...J. (Sanjay Karol) New Delhi;

August 14, 2023.

C.A.No.4007 of 2019 etc. Page 15 of 15