Supreme Court: No Penalties can be imposed for Service Tax showing Wrong Category in Show Cause Notices

Supreme Court: No Penalties can be imposed for Service Tax showing Wrong Category in Show Cause Notices

A Division Bench of the Supreme Court, consisting of Justices Abhay S. Oka and Sanjay Karol, has concluded that imposing a penalty on the assessee due to a show-cause notice that inaccurately identifies the service category is not justified. Consequently, the Court declared the demand raised, based on this flawed show cause notice, to be unlawful.

The current appeals originated from service tax claims stemming from four distinct show-cause notices. These notices were issued under Section 73 of the Finance Act, 1994, with the intention of recovering service tax amounts.

In the contested judgement dated September 18, 2018, the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) concluded that the disputed services were appropriately categorized as "Information Technology Software" from May 16, 2008, onwards. For the preceding period until May 15, 2008, the same services were classified as "Intellectual Property Service."

Additionally, the Tribunal ruled that the show-cause notice dated October 19, 2019, which pertained to the period up until May 16, 2008, was deemed unjustifiable. However, concerning the period starting May 16, 2008, the Tribunal issued a restricted order of remand. Both the revenue department and the assessee expressed dissatisfaction with this judgment, prompting them to file an appeal.

The Court initially addressed the revenue's appeal, which solely concerned the first show-cause notice. This notice, dated October 19, 2009, pertained to the taxable service labelled as "Management, Maintenance, and Repair." The Court observed that the demand originated from the assesse's provision of services involving third-party software, internally developed software, and customised software. The assesse had temporarily granted their clients the right to use the aforementioned software. Consequently, before May 16, 2008, such services were categorised as "Intellectual Property Service," and starting from May 16, 2008, they fell under the classification of "Information Technology Software."

Derived from these observations, the Court determined that the categorisation outlined in the initial show-cause notice was entirely inaccurate. As a result, the Court declined to intervene with the conclusions reached by the CESTAT.

The Court clarified that fundamental principles of natural justice mandated that the adjudication process, guided by the show-cause notice, should exclusively rely on the classification detailed within that notice. It emphasised that subjecting the assessee to penalties based on a show cause notice featuring a grossly incorrect service category was impermissible.

The Court then addressed the appeal presented by the assessee. Within this context, the Court scrutinised the legitimacy of the remaining three show cause notices. In relation to this matter, the Court noted that the three additional show-cause notices accurately specified the appropriate classifications. The findings were arrived at through a meticulous evaluation of both factual and legal facets. Consequently, the Court opted not to intervene and rejected the appeal.