/2023 INSC 0711/
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
on   the   basis   of   four   Show   Cause   Notices.     The   notices C.A.No.4007 of 2019 etc.
Page  1  of  152023 INSC 711

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:
Show Cause
Notice Date Period Demand under
Taxable Service
19/10/2009 1.4.2004 to
31.3.2009 Maintenance &
Repair
20/10/2010 1.4.2009 to
31.3.2010 Information
Technology
Software
21/10/2011 1.4.2010 to
31.3.2011 Information
Technology
Software
22/10/2012 1.4.2011 to
31.3.2012 Information
Technology
Software
2. The   adjudication   in   respect   of   Show   Cause   Notices
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.
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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
assessee   from   10 th
  April   2004   up   to   15 th
  May   2008   in
relation   to   software   need   to   be   classified   under   the C.A.No.4007 of 2019 etc.
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category   of   “Intellectual   Property   Service”   defined   under
Section  65 (55b) of  the Finance  Act.    It  was further  held
that   from   16 th
  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
impugned judgment dated 18 th
 September 2018, CESTAT
held   that   the   services   subject   matter   of   dispute   were
classifiable   under   the   category   of   “Information
Technology Software” with effect from 16 th
  May 2008 and
for   the   earlier   period   up   to   15 th
  May   2008,   the   same C.A.No.4007 of 2019 etc.
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services   were   classifiable   under   the   category   of
“Intellectual   Property   Service”.     The   Tribunal   held   that
the   show   cause   notice   dated   19 th
  October   2019   covering
the   period   up   to   16 th
  May   2008   was   not   justified.
However,   the   Tribunal,   for   the   period   on   and   after   16 th
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
first show cause notice dated 19 th
 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
the   first   show   cause   notice   up   to   15 th
  May   2008   could C.A.No.4007 of 2019 etc.
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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
CESTAT   dated   14 th
  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.
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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
Secretary,   Ministry   of   Commerce   and   others 1
rendered   on   27 th
  December   2018   which   has   been
confirmed   by   this   Court   on   26 th
  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
of 2023 against judgment and order dated 1 st
  September
2022 in  Service Tax  Appeal  No. 86312 of  2018  preferred
by the present appellant before CESTAT.
8. The   learned   counsel   appearing   for   the   assessee
submitted that CESTAT committed an error in upholding
1  2018 SCC OnLine Hyd 767 C.A.No.4007 of 2019 etc.
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the   demand   confirmed   by   the   respondent   for   the   period
from 16 th
  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
period   from   1 st
  April   2004   to   31 st
  March   2009.     The
demand   under   the   said   show   cause   notice   dated   19 th
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
Service”   till   16 th
  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.
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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
Technology Software” with effect from 16 th
  May 2008.   In
fact,   the   CESTAT   relied   upon   the   clarification   given   by
CBEC   by   Circular   dated   29 th
  February   2008   which
clarifies the position, as stated above. 
10. It is pertinent to note here that the first show cause
notice   dated   19 th
  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
said   software   to   their   clients.     Thus,   prior   to   16 th
  May C.A.No.4007 of 2019 etc.
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2008, such service was classifiable under the category of
“Intellectual   Property   Service”   and   with   effect   from   16 th
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.
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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.
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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.
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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.
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back   to   him   for   consideration   of   the
exemption   in   respect   of   services
supplied to SEZ unit/developer.” 
14. Therefore,   we   cannot   find   fault   with   the   reasoning
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.
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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
c. There will be no order as to costs.
…………………….J.
(Abhay S. Oka)
.…………………...J.
(Sanjay Karol)
New Delhi;
August 14, 2023. C.A.No.4007 of 2019 etc.
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