In Civil Appeal No. 4007 of 2019 -SC- Assessee not liable for penalties if show cause notice erroneously classifies services: Supreme Court
Justice Abhay S. Oka & Justice Sanjay Karol [14-08-2023]

Read Order: Commissioner of Service Tax, Mumbai-II v. M/s 3I Infotech Ltd

Chahat Varma

New Delhi, August 23, 2023: In a recent significant decision, the Supreme Court of India has ruled that an assessee cannot be held liable for penalties if a show cause notice erroneously classifies the services provided.

Briefly stated, the Commissioner of Service Tax had issued four show cause notices to M/s. 3I Infotech Ltd. (assessee), demanding service tax on the services provided by the company in relation to software. The assessee challenged the show cause notices before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT). The CESTAT remanded the case to the Commissioner for further adjudication. On remand, 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. 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. The assessee then challenged the Commissioner's order before the CESTAT. The CESTAT held that the services, that were 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 CESTAT held that the show cause notice dated 19th October 2019 covering the period up to 16th May 2008 was not justified.

Regarding the appeal filed by the Revenue, the division bench of Justice Abhay S. Oka and Justice Sanjay Karol asserted that the transfer of the right to use software fell under the service category classifiable as Information Technology Software, starting from 16th May 2008.

The bench noted that the initial show cause notice dated 19th October 2009 had presented a demand for service tax under the category of Management, Maintenance, and Repair service, while the remaining three notices pertained to demands under the classifiable service of Information Technology Software. The bench held that the classification mentioned in the first show cause notice was completely erroneous.

“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, we find that there is no merit in the appeal preferred by Revenue,” said the bench.

Regarding the assessee's appeal, the bench observed that the possibility of claiming an exemption arises only when the Central Government grants it by exercising the power stipulated in sub-section (2) of Section 26 of the SEZ Act. Consequently, the bench concluded that there was no basis to question the rationale employed by CESTAT. Nonetheless, the bench clarified that in the proceedings pursuant to remand, the assessee will have the opportunity to demonstrate the availability of an exemption under sub-section (2) of Section 26 of the SEZ Act.