A show cause notice must identify the taxable service; appellate authorities cannot introduce a new classification.

M/s. Murugappa Management Services Ltd. was registered with the Service Tax Department.

The dispute concerned service-tax liability under reverse charge on foreign-currency expenditure incurred during 2005–06 to 2014–15, including foreign travel, tuition and training fees, memberships, subscriptions, publications, study material and professional services.

The Department issued SCN No. 657/2010, covering 2005–06 to 2009–10, proposing service-tax demand of ₹25,41,033 under Section 66A read with Rule 2(1)(d)(iv), followed by further statements of demand for subsequent periods.

The adjudicating authority dropped the pre-1 July 2012 demands and penalties.

On the Department’s appeal, the Commissioner (Appeals) classified tuition payments as Commercial Training or Coaching Service and membership payments as Club or Association Service, restoring a demand of ₹27,69,126 with interest and imposing a penalty of ₹19,54,482 under Section 78.

The assessee challenged the appellate order on the ground that the Commissioner (Appeals) had introduced new classifications not proposed in the show-cause notices.

Whether the service-tax demands for the period prior to 1 July 2012 could be sustained when the relevant notices did not identify the specific taxable service under Section 65(105), and whether the Commissioner (Appeals) could introduce new taxable classifications for the first time at the appellate stage?

Whether the consequential interest and penalty under Section 78 could survive once the substantive demand was held unsustainable?

Whether the findings relating to the subsequent statements of demand for the post-1 July 2012 period could be reopened in the assessee’s appeals?

During the pre-1 July 2012 positive-list regime, Section 65(105) of the Finance Act, 1994 identified taxable services, while Section 66A provided the reverse-charge mechanism for specified taxable services received from outside India; therefore, foreign-currency expenditure alone could not establish taxability.

A show-cause notice is the foundation of adjudication and must disclose the precise taxable service and basis of the proposed demand so that the assessee can effectively defend itself.

The adjudicating or appellate authority cannot introduce a new substantive basis of demand not contained in the notice, as recognised in R. Ramadas v. Joint Commissioner of Central Excise, Thirumurugan Enterprises v. CESTAT, Principal Commissioner, Service Tax v. Shubham Electricals, Precision Rubber Industries Pvt. Ltd. v. Commissioner of Central Excise, and Hindustan Polymers Co. Ltd. v. Collector of Central Excise.

Interest is consequential upon a legally sustainable tax liability, and penalty under Section 78 requires the statutory ingredients for invoking the extended period, including suppression with intent to evade, to be established.

The post-1 July 2012 negative-list regime was materially different from the earlier positive-list regime, and later tax treatment could not, by itself, establish taxability under the earlier regime.

The notices grouped heterogeneous expenditure—travel, tuition or e-learning, memberships, subscriptions, publications, study material and professional fees—without specifying the taxable service allegedly received.

This was not merely an incorrect classification in an otherwise identified charge; the notices omitted the taxable category altogether.

By classifying tuition payments as Commercial Training or Coaching Service and membership payments as Club or Association Service, the Commissioner (Appeals) supplied the essential statutory basis of the demand for the first time and thereby altered the case the assessee was required to meet.

The fact that the assessee knew the nature of its own expenditure did not establish that it knew the particular statutory charge intended by the Department.

Accordingly, the appellate authority could not cure the foundational defect by undertaking a fresh classification.

Since the substantive demand failed, interest and the Section 78 penalty also failed; moreover, the available record of maintained books and produced expenditure documents did not supply the necessary foundation for alleging suppression with intent to evade.

The later-period proceedings were separately examined by the adjudicating authority and were not the subject of the Department’s challenge leading to the impugned order; they therefore remained undisturbed.

It held that the pre-1 July 2012 demands covered by SCN No. 657/2010, SOD No. 41/2011, SOD No. 90/2013 and SOD No. 47/2013 could not be sustained because the notices did not identify the taxable services and the Commissioner (Appeals) impermissibly introduced new classifications at the appellate stage.

The demand of ₹27,69,126, consequential interest and penalty of ₹19,54,482 under Section 78 were set aside, and the Order-in-Original was restored to that extent.

The adjudicating authority’s findings concerning the subsequent SOD Nos. 42/2014, 05/2015 and 02/2016, including amounts already paid or accepted, were left undisturbed.

The appeals were accordingly allowed with consequential relief in accordance with law.