Service Tax | Assessee Cannot Be Penalised Based On Show-Cause Notice Mentioning Erroneous Category Of Service : Supreme Court

A Division Bench of the Supreme Court, comprising Justices Abhay S. Oka and Sanjay Karol, while hearing appeals, held that “Assessee cannot be subjected to a penalty on the basis of a show cause notice containing a completely erroneous category of service.” Therefore, Court rendered the demand made on the basis of the said show cause notice illegal.

The present appeals had arisen out of service tax demands on the basis of four Show Cause Notices. The notices were issued under Section 73 of the Finance Act, 1994 (Finance Act) for the demand of service tax. The details of the show-cause notices are as follows:

1. Show-cause notice dated: 19/10/2009 (Issued for the period of 1.4.2004 to 31.3.2009)
2. Show-cause notice dated: 20/10/2010 (Issued for the period of 1.4.2009 to 31.3.2010)
3. Show-cause notice dated: 21/10/2011 (Issued for the period of 1.4.2010 to 31.3.2011)
4. Show-cause notice dated: 22/10/2012 (Issued for the period of 1.4.2011 to 31.3.2012)

Brief Background  

In the impugned judgment, dated 18th September 2018, CESTAT held that the services 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.”   Further, the Tribunal held that the show-cause notice dated 19th October 2019 covering the period up to 16th May 2008 was not justified. However, the Tribunal, for the period on and after 16th May 2008, passed a limited order of remand. Being aggrieved by this judgment, both revenue and assesse filed an appeal. 

Court’s Observations

The Court first decided the appeal of the revenue, which was confined to the first show cause notice. The demand under the said show-cause notice dated 19th October 2009 was for taxable service of “Management, Maintenance, and Repair.” The Court observed that the demand was made on account of services provided by the assesse in respect of the supply of third-party software, software developed in-house, or customized software. The assesse had temporarily transferred the right to use the said software to their clients. Thus, prior to 16th May 2008, such service was classifiable under the category of “Intellectual Property Service,” and with effect from 16th May 2008, it was classifiable under the category of ‘Information   Technology   Software’.

Based on these observations, the Court held that the classification mentioned in the first show-cause notice was completely erroneous and refused to interfere with the findings of CESTAT. 

It elucidated: “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.”

Moving forward, the Court decided on the appeal preferred by the assesse. In this, the Court delved into the validity of the other three show-cause notices. With respect to this, the Court observed that other three show-cause notices mentioned correct classification, and the findings are based on a careful consideration of the factual and legal aspects. In view of the same, Court refused to interfere and dismissed the appeal. 

Case Title: Commissioner of Service Tax, Mumbai-II v. M/s 3I Infotech Ltd., CIVIL APPEAL NO.4007 OF 2019

Citation : 2023 LiveLaw (SC) 675

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