Allahabad CESTAT Sets Aside ₹22.84 Crore HCL Infosystems Service Tax Demand As Time-Barred

On 10 August, the Allahabad Customs, Excise and Service Tax Appellate Tribunal (CESTAT) set aside the Rs. 22.84 crore service tax demand against HCL Infosystems Ltd., holding that the demand up to September 2014 was barred by limitation.

A Bench comprising Judicial Member P.K. Choudhary and Technical Member K. Anpazhakan also clarified that the demand for the post-1 July 2012 period was unsustainable on the basis of the provisions invoked by the Department. It observed:

"Thus, we concur with the submissions of the appellant the Department had no reason whatsoever for the belated issuance of the impugned SCN after an inordinate gap of almost 3 years for demanding Service Tax from July '10 onwards. Such a lethargic action on the part of the Department is fatal for the impugned order and the same is liable to be set aside on this ground alone."

The dispute arose from a special audit of HCL Infosystems' accounts conducted under Section 14AA of the Central Excise Act between 12 March and 16 March 2012, covering the period from April 2011 to February 2012.

The Department communicated the audit objections to HCL Infosystems in June 2012 and sought further information from the company in October 2012. HCL Infosystems furnished the information in November 2012. However, the Department issued the show cause notice only on 23 October 2015, proposing a Rs. 22.84 crore demand for the period from July 2010 to June 2015.

The demand, along with interest and equivalent penalty, covered several activities, including reimbursement of employee operating costs by group companies, printing services, reimbursements under Intel's "Intel Inside" programme, supply of courseware and Comprehensive Service & Maintenance Contract (CSMC) services.

The Tribunal found that the Department's case was based on the special audit conducted about three and a half years before the show cause notice was issued, while the relevant documents and information had been available with the Department since 2012. It held that there was no justification for the delay and concluded that the demand raised and confirmed up to September 2014 was barred by limitation.

The Bench also considered the demand for the period after 1 July 2012, when the negative-list regime under the Finance Act, 1994 came into force. HCL Infosystems argued that the show cause notice and adjudication order continued to classify the alleged services under Section 65(105) of the Finance Act, 1994, even though the provision no longer governed taxable services after the introduction of the negative-list regime. It accepted the contention and held that a demand based on a provision that had ceased to operate could not be sustained. It held:

"Thus, by following the decisions cited supra, we hold that the demand of service tax confirmed for the period from 1.7.2012 to September 2013, by invoking a non-existent provision of law is untenable and the same liable to be set aside on this ground itself."

On the individual components of the demand, the Tribunal held that reimbursement of employee operating costs by group companies did not amount to Business Support Services, as the group companies had not outsourced any business functions to HCL Infosystems. It also held that merely displaying Intel's logo on computers manufactured by HCL Infosystems did not amount to providing advertising agency services, as Intel had supplied the logo and HCL Infosystems had neither designed nor conceptualised the advertisement.

Regarding CSMC services, the Tribunal found that HCL Infosystems had supplied goods such as toner, developer and spares while providing maintenance services. It held that the company was entitled to the benefit of Notification No. 12/2003-ST, as it had paid VAT/Sales Tax on the goods component.

It concluded that the service tax demands confirmed in the impugned order were unsustainable and set aside the adjudication order. It also held that the corresponding interest and penalties could not survive once the underlying demands failed,

Accordingly, the CESTAT allowed HCL Infosystems' appeal with consequential relief.

Counsel for Appellant: Shri B.L. Narasimhan, Advocate

Counsel for Revenue: Shri N. Mohan Krishna and Shri Santosh Kumar, Authorised Representatives