COMMISSIONER OF SERVICE TAX MUMBAI II vs. M/S. 3I INFOTECH LTD.

2023 INSC 711 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 J U D G M E N T ABHAY S. OKA, J. FACTUAL ASPECTS 1. These two appeals arise out of service tax demands Signature Not Verified Digitally signed by Anita Malhotra Date: 2023.08.14 17:42:52 IST Reason: on the basis of four Show Cause Notices.   The notices 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:

The adjudication in respect of Show Cause Notices 2. 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 th th assessee from 10   April 2004 up to 15   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 th that   from   16   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 th impugned judgment dated 18  September 2018, CESTAT held   that   the   services   subject   matter   of   dispute   were classifiable   under   the   category   of   “Information th Technology Software” with effect from 16  May 2008 and th for   the   earlier   period   up   to   15   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 th the show cause notice dated 19  October 2019 covering th the   period   up   to   16   May   2008   was   not   justified. th However, the Tribunal, for the period on and after 16 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 th first show cause notice dated 19  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 th the first show cause notice up to 15   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 th CESTAT dated 14   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 1 Secretary,   Ministry   of   Commerce   and   others th rendered   on   27   December   2018   which   has   been th confirmed by this Court on 26  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 st of 2023 against judgment and order dated 1  September 2022 in Service Tax Appeal No. 86312 of 2018 preferred by the present appellant before CESTAT. The   learned   counsel   appearing   for   the   assessee 8. 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 th from 16  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 st st period   from   1   April   2004   to   31   March   2009.     The th demand   under   the   said   show   cause   notice   dated   19 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 th Service” till 16   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 th Technology Software” with effect from 16  May 2008.  In fact, the CESTAT relied upon the clarification given by th CBEC   by   Circular   dated   29   February   2008   which clarifies the position, as stated above.  It is pertinent to note here that the first show cause 10. th notice dated 19   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 th said software to their clients.   Thus, prior to 16   May C.A.No.4007 of 2019 etc. Page 9 of 15 2008, such service was classifiable under the category of th “Intellectual Property Service” and with effect from 16 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.”  Therefore, we cannot find fault with the reasoning 14. 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 There will be no order as to costs. c. …………………….J. (Abhay S. Oka) .…………………...J. (Sanjay Karol) New Delhi; August 14, 2023. C.A.No.4007 of 2019 etc. Page 15 of 15