The Supreme Court of India quashed the Show Cause notice and held that penalty under section 76 of the Goods and Service Tax (GST Act) shall not be levied based on Incorrect Mentioning of the Category of Service in the Show Cause Notice.
The notices were issued under Section 73 of the Finance Act, 1994 (“the Finance Act”) against 3I Infotech Ltd, the respondent for the demand of service tax. 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.
The Commissioner held that the services rendered by the assessee from 10th April 2004 up to 15th May 2008 about 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 16 May 2008 onwards, regarding 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.
On appeal, the Customs Excise and Service Tax Appellate Tribunal (CESTAT) held that the services a 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” and held the show cause notice was not justified.
The management, maintenance and repair services of computer hardware as well as software under the annual maintenance contract were covered by the category of “Management, Maintenance or Repair” services which was defined under Section 65(64) of the Finance Act.
The court observed that 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 require that the adjudication based on show cause notice should be made only based on the classification stated in the show cause notice. Assessee cannot be subjected to a penalty based on a show cause notice containing a completely erroneous category of service. Therefore, the demand made based on the first show cause notice was illegal.
A two-judge bench of Justice Abhay S Oka and Justice Sanjay Karol found no fault with the reasoning adopted by CESTAT.
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