Relief to Standard Chartered: CESTAT Quashes Service Tax Demand as SCN Failed to Specify Relevant BAS Sub-Clause [Read Order]

The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) granted relief to Standard Chartered Finance Pvt. Ltd. by setting aside a service tax demand on the ground that the show cause notice was vague and defective.

Standard Chartered Finance Pvt. Ltd. was registered under taxable service categories including Maintenance and Repair Services, Business Auxiliary Services and Real Estate Agent Services. The dispute related to the period from August 1, 2005 to April 30, 2006.

During audit, the department observed that the appellant had not paid service tax on amounts received as “Data Processing Fee” before May 2006. The appellant stated that such activities were Information Technology Enabled Services and were excluded from Business Auxiliary Services till May 1, 2006.

The department rejected the explanation and issued show cause notice demanding service tax of Rs. 2,73,40,175 with interest and penalties. The Commissioner confirmed the demand, holding that the appellant’s activities were covered under Business Auxiliary Services.

The appellant’s counsel argued that the show cause notice was defective because it did not specify the exact sub-clause of Section 65(19) under which the services were proposed to be taxed. It was argued that Business Auxiliary Service had seven different sub-clauses, and failure to mention the applicable sub-clause denied the appellant proper opportunity to defend the case.

On merits, the appellant’s counsel argued that its activities were data capture, data conversion, data processing, storage and document processing, which fell within Information Technology Services and were excluded from tax during the relevant period.

The revenue counsel argued that the appellant’s activities were business process activities performed for the bank and did not qualify as Information TechnologyServices. The revenue argued that the services could fall under sub-clauses (vi) and (vii) of Section 65(19).

The two-member bench comprising Ajay Sharma (Judicial Member) and A.K. Jyotish (Technical Member), observed that the show cause notice mentioned only Business Auxiliary Services in general and did not identify the specific sub-clause under Section 65(19).

The tribunal explained that a show cause notice is the foundation of tax proceedings. If a law has several separate taxable categories, the notice must clearly state which one is being invoked. The tribunal pointed out that the adjudicating authority cannot later cure this defect by selecting sub-clauses during adjudication. It held that this violated principles of natural justice.

The tribunal set aside the demand of service tax, interest and penalties. The tribunal left the merits open and did not decide whether the appellant’s data processing activities were Information Technology Services.

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