Name of the case: Commissioner of Service Tax, Mumbai II Vs. M/s. 3i Infotech Ltd.

Case Number: Civil Appeal No. 4007 of 2019

Name of the case: M/s. 3i Infotech Ltd. Vs. Commissioner of Service Tax, Mumbai

Case Number: Civil Appeal No. 7155 of 2019

Name of Judges: Hon’ble Judges Abhay S. Oka and Sanjay Karol

Order Date: 14.08.2023

Facts of the Case:

• These two appeals arise 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 (for short “the Finance Act”) for the demand of service tax.
• The Commissioner’s adjudication on the Show Cause Notices was appealed at the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) in Mumbai. CESTAT issued a remand order, citing ambiguity in the Commissioner’s computation of service tax liability. It clarified that service tax wouldn’t apply to software procured from third parties and sold with VAT, or to hardware supplied with VAT. CESTAT highlighted that service tax liability arose only for software developed as per customer specifications. It emphasized reviewing agreements, invoices, goods supplied, and related service tax payments.
• Following the remand order, the Commissioner of Service Tax in Mumbai assessed the Show Cause Notices. The Commissioner classified services rendered by the assessee between April 10, 2004, and May 15, 2008, as “Intellectual Property Service” under Section 65(55b) of the Finance Act. For services after May 16, 2008, involving software, they were classified as “Information Technology Software” under Section 65(53a) of the Finance Act. The Commissioner also noted that the value of computer hardware used for services must be included in the valuation under Section 67 of the Finance Act. This resulted in orders for interest and penalties.
• Challenging this, the assessee appealed to CESTAT. The tribunal’s judgment on September 18, 2018, categorized the disputed services as “Information Technology Software” from May 16, 2008, and as “Intellectual Property Service” for the earlier period until May 15, 2008. The tribunal deemed the notice covering the period until May 16, 2008, unjustified. However, for the period after that date, a limited remand was ordered. This led to two appeals: Civil Appeal No. 4007 of 2019 by the Revenue and Civil Appeal No. 7155 of 2019 by the assessee.

The Hon’ble Supreme Court Observed and Held as Follows:

Appeal of Revenue

• The appeal by the Revenue pertains to the first show cause notice covering the period from April 1, 2004, to March 31, 2009. This notice demanded service tax for “Management, Maintenance and Repair” services. The CESTAT determined that until May 16, 2008, the service of transferring intellectual property rights fell under “Intellectual Property Service” and was taxable under Section 65(105)(zzr) of the Finance Act. With the 2008-09 Union Budget, a separate service classification, “Information Technology Software,” was introduced under Section 65(53a) of the Finance Act. Accordingly, software use rights became taxable as “Information Technology Software” from May 16, 2008, a classification backed by a CBEC Circular from February 29, 2008.
• The Court noted that the demand was made on account of services provided by the assessee in respect of the supply of third party software, software developed inhouse or customised software.
• The assessee had provisionally granted their clients the right to use the software temporarily. Before May 16, 2008, this service fell under the classification of “Intellectual Property Service.” Starting from May 16, 2008, it was reclassified as “Information Technology Software.” Furthermore, the maintenance and repair of computer hardware and software, including services under annual maintenance contracts, were categorized as “Management, Maintenance or Repair” services, in accordance with Section 65(64) of the Finance Act.
• The Court reasoned that erroneous classification in the initial show cause notice led the CESTAT to rightly declare it illegal. Adjudication must align with the classification in the notice, and penalizing the assessee based on an incorrect category is unjust. Thus, the demand from the flawed notice was unlawful, rendering the Revenue’s appeal meritless.

Appeal of Revenue

• The Court in relation to the other three show cause notices, reviewed CESTAT’s findings thoroughly and held that these notices correctly mentioned the classification. The earlier remand order did not determine the merits, leaving the issue open. CESTAT’s conclusions, after considering factual and legal aspects, were upheld as they were well-founded.
• The Court also observed that the CESTAT also addressed the argument regarding exemptions under the Special Economic Zones (SEZ) Act. Section 26(1)(e) of the SEZ Act refers to exemptions from service tax for services provided to SEZ units. Section 51(1) of the SEZ Act establishes its supremacy over inconsistent provisions. And 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 mentioned applies.
• The Court held valid the reasoning of the CESTAT that the 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 are not available to the appellant during the relevant period and the issue needs to be remanded back to the Commissioner for consideration of the exemption in respect of services supplied to SEZ unit/developer. The Court, however, held that 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. The court also held that octroi charges, related to goods transportation, shouldn’t be part of taxable service value. However, evidence of octroi charges payment was sought, prompting a remand for this purpose.
• The Court finally held that no further intervention was necessary except for the clarification provided above and dismissed Civil Appeal No. 4007 of 2019 and also Civil appeal No. 7155 of 2019 was dismissed subject to the clarification made and that there will be no order as to costs.