Service Tax show cause was illegal as classification of services mentioned was completely erroneous – Supreme Court
In a recent judgment the Supreme Court has held a service tax show cause notice illegal as the classification of services mentioned in it was completely erroneous.
ABCAUS Case Law Citation:
ABCAUS 3792 (2023) (08) SC
Important Case Laws relied upon:
GMR Aerospace Engineering Limited, and Another v. Union of India
In the instant case, service tax demands had been made on the basis of four Show Cause Notices (for four different periods) issued under Section 73 of the Finance Act, 1994 (the Finance Act). The demand raised pertained to software development.
The adjudication in respect of all Show Cause Notices was made by the Commissioner which was challenged before the CESTAT.
The CESTAT 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. With the above observations, an order of remand was passed by the CESTAT.
On the basis of the remand order, the Commissioner adjudicated all the four SCN and apart from correcting the classification mistake, 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 also passed by the Commissioner.
Being aggrieved by the said Order, the assessee preferred another appeal before the CESTAT.
The CESTAT observed that the services were classifiable under the category of “Information Technology Software” and earlier they were classifiable under the category of “Intellectual Property Service”.
The CESTAT held that the first show cause notice covering the period up to 16th May 2008 was not justified as it was issued demanding service tax under the wrong category of “Management, Maintenance and Repairs”. However, CESTAT upheld the demand covered for three SCN on the sale of standardised software and resale of the hardware.
On the legality of the first show cause notice, the Department challenged the order of the CESTAT by approaching the Hon’ble Supreme Court.
Before the Hon’ble Supreme Court, the stand of the Department was that despite mistake in classification of services in first SCN, the assessee was always aware that in fact the demand was covered under the category “Intellectual Property Service” and hence, the notice could not be said to be illegal.
The Hon’ble Supreme Court observed that first SCN contained a demand for service tax under the taxable service of “Management, Maintenance and Repair” and the rest of the three notices contained a demand under classifiable service “Information Technology Software”.
The Hon’ble Supreme Court further observed that earlier such service was classifiable under the category of “Intellectual Property Service” and later, it was classifiable under the category of ‘Information Technology Software”. The Apex Court noted that 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.
The Hon’ble Supreme Court opined 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.
The Hon’ble Supreme Court further stated that the elementary principles of natural justice requires 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.
Accordingly, it was held that the demand made on the basis of the first show cause notice was illegal.
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