Code Over Consultancy: CESTAT Exempts 3i Infotech from Service Tax
Case Title : Commissioner of Service Tax, Mumbai II Vs. M/s. 3i Infotech Ltd
Case No. : Civil Appeal No. 4007 of 2019
Dated on : 14.08.2023
Quorum: Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), Mumbai
Hon’ble Judges Abhay S. Oka and Sanjay Karol
Facts of the Case-
The respondent in this case, 3I Infotech Ltd. , deals in software services as well as software consultancy services. There was a notification in this regard by the Commissioner of Service Tax to 3I Infotech Ltd holding that the company failed to pay service tax for some services provided by it during the period from April 2004 to March 2007. The demand was made under the premise that the services offered and rendered by the respondent pertain to ‘Management Consultancy Services’ and ‘Information Technology Software Services’ that are taxable under the Finance Act of 1994. The respondent raised an objection and stated that the services rendered by them were more or less information technology services which would not be under any service tax during that time period.
Issues-
1.Whether the services provided by 3I Infotech Ltd are correctly included in the ‘Management Consultancy Services’ or they rightly belong to the ‘Information Technology Software Services’.
Legal Issues-
1.Section 65(105)(r) of the Finance Act, 1994 – Relates to ‘Management Consultancy Services’.
2.Section 65(105)(zzzze) of the Finance Act, 1994 – Relates only to ‘Information Technology Software Services’.
3.Section 73 of the Finance Act, 1994 – ?Refers to the issue of recovery of service tax that has not been paid or paid insufficient or has been wrongly refunded.
4.Section 78 of the Finance Act, 1994 – Concerning punishment for cover-up of information.
Contentions of the Appellant-
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1.The appellant contended that the services provided by 3I Infotech Ltd. amounted to consultancy and advisory functions as defined under ‘Management Consultancy Services’.
2.The claim was that these were not services of information technology but had substantial elements in the nature of management consultancy.
3.The appellants have contended that 3I Infotech Ltd. had not disclosed material facts to the Revenue and therefore was liable for service tax, interest as well penalties etc.
Contentions of the Respondent-
1.The appellant submitted that their services were purely of the nature of information technology services, which were exempt from service tax during the relevant period.
2.They argued that there was no management consultancy element within the services, as their role was purely one of software development and implementation.
3.On another front, the respondent contended that there was no suppression of facts as they had consistently informed the authorities about the nature of their services.
Court Analysis-
The CESTAT examined the nature of the services provided by 3I Infotech Ltd. and the relevant legal provisions. The tribunal observed that the principal work of the respondent is the development and use of a software solution for its client. Some elements of advisory and consultancy may also be present, but it observed that such elements were only incidental to the principal service of development of software.The tribunal derived reference to the relevant definitions given in the Finance Act, 1994, and earlier judicial pronouncements for deciding the classification of the service under consideration. It noted that the functions carried out by 3I Infotech Ltd. were not strategic planning, business policy formulation, and operational research that usually go with the territory of ‘Management Consultancy Services’.
Judgment-
CESTAT held that the services provided by 3I Infotech Ltd. cannot be said to be ‘Management Consultancy Services’ but were mainly ‘Information Technology Software Services’, which are exempt from service tax during the relevant period. The tribunal held that demand for service tax, interest and penalty is not sustainable. Accordingly, the appeal filed by Commissioner of Service Tax was dismissed.
Conclusion-
The judgment thus laid emphasis on the correct classification of services for taxation and made it clear that incidental components of consultancy do not alter the principal nature of service. The decision of the tribunal had brought clarity on demarcation between management consultancy from information technology services and spared the entities from undue taxation for the same. Thus, this case holds that the core of the service, not incidental elements, determines its taxability.
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Judgement Reviewed by : Payal Devnani
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