By TIOL News Service

MUMBAI, AUG 05, 2014: THIS is the second round of appeal and the Service Tax demanded is Rs.86.42 crores with loads of penalties and interest. Four SCNs covering the period from 01.04.2004 to 31.03.2013 make up for the proceedings.

Before the CESTAT, the appellant submitted that as regards the first show cause notice, the proposal in the notice was that the services rendered by the appellant falls under the category of “maintenance and repair services”, whereas the adjudicating authority has confirmed the demand under the category of “Intellectual Property Rights Services” (IPR) for the period prior to 15/05/2008 and under “Information technology services” with effect from 16/05/2008.

It is also pointed out that during the previous round of adjudication the adjudicating authority had confirmed the demand under 'maintenance and repair services' up to 15/05/2008 and under 'information technology service' from 16/05/2008.

In other words, the adjudicating authority, in the second round of litigation, has taken a completely different stand proposing to classify the services as “Intellectual Property Rights Services” without following principles of natural justice. Therefore, confirmation of service tax demand under “Intellectual Property Rights Service” is clearly not sustainable in law and the demand confirmed should be set aside, submitted the appellant.

To recapitulate the issue, the appellant submitted that the transactions which are under dispute can be categorised mainly under three categories -

+ One is sale of third party's standardised software products to the appellant's clients wherein they purchase standardised software from others on payment of VAT and resell them on payment of VAT to their clients.

+ The second set of activity undertaken by the appellant is sale of in-house developed customised software. This software is also used by all class of buyers and they sell the software on payment of VAT.

+ The third set of service undertaken by them is sale of hardware, such as, computers and servers purchased from hardware manufacturers on payment of excise duty/VAT and resell them as such again on payment of VAT.

It is their contention that the activity undertaken by the appellant is trading in software/hardware products and, therefore, cannot be levied to service tax under “Information Technology Service” or “Intellectual Property Rights Service” or under any other category. Reliance is placed on the apex court decision in Tata Consultancy Services Ltd. 2004-TIOL-87-SC-CT-LB. It is also submitted that as regard to the supply of services made to the SEZ Units there is no liability to pay service tax/or claim refund on the services rendered to SEZ units; that balance service tax demand pertains to receipts such as, reimbursement of Octroi charges, etc. and these are not taxable to service tax; appellant had discharged the service tax liability of Rs.1.37 crore towards their service tax liability but which has not been adjusted. Accordingly, the appellant pleads for grant of stay.

The Bench inter-alia observed -

+ As far as the first show cause notice is concerned, the service tax demand is for an amount of Rs.61.34 crore and is for the period 2004-05 to 2008-09. The proposal in the show cause notice was for classification of the services rendered under “maintenance and repair services” whereas in the impugned order, the demand has been confirmed under “IPR services” for the period prior to 16/05/2008 and under “information technology services” post 16/05/2008. Thus, there is a substantial variation between the proposal in the notice and the classification of service in the impugned order. The appellant should have been put to notice about the classification under “IPR Service” or “Information Technology Service”, as the case may be. Without putting the appellant to notice and without giving an opportunity to the appellant to rebut the same, no demand can be confirmed as that would amount to complete denial of principles of natural justice and the settled legal position is that such demands cannot sustain.

++ Sale of third party software and hardware or sale of standardised software developed in-house cannot come under the category of IPR services; transaction involved is one of sale of goods; software developed in-house are standard software, which are sold to a particular class of buyers, such as banks, insurance companies, mutual funds and various other financial service providers, under a trade/brand name and, therefore, they appear to be goods, which can be marketed or sold. Inasmuch as the appellant has discharged the sales tax/VAT liability on such software, there is merit in the contention of the appellant that liability to pay service tax does not arise on a sale transaction.

++ As regards the services provided to the SEZ unit involving a service tax demand of Rs.1,40,08,000/- the law prescribes a refund mechanism for operationalizing the exemption from service tax and, therefore, prima facie in the absence of compliance to the procedure prescribed, the appellant cannot claim exemption from levy of service tax.

The appellant was directed to make a pre-deposit of Rs.1.40 crore and report compliance for obtaining stay.

In passing : Perhaps what was paid (Rs.1.37 crores), as claimed, needs to be set off.

(See 2014-TIOL-1424-CESTAT-MUM)