Tribunal modifies orders, remands issue for re-quantification of demand, directs reassessment of penalties, grants appellant hearing.

The Tribunal modified the orders and remanded the issue for re-quantification of the demand, directing reassessment of penalties after providing the appellant a hearing. The judgment was pronounced on 09-02-2018.

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Issues Involved:

1. Classification of Finacle software under Central Excise Tariff.
2. Nature of Finacle software - customized vs. packaged/canned.
3. Applicability of Central Excise duty and Service Tax.
4. Overlap and double taxation concerns.
5. Eligibility for exemption notifications.
6. Validity of demand and penalties.
7. Time-barred demand argument.

Detailed Analysis:

1. Classification of Finacle Software under Central Excise Tariff:
The core issue was whether Finacle software should be classified under heading 8523 8020 as Information Technology Software, liable for Excise duty. The adjudicating authority concluded that Finacle software is packaged or canned software, thus subject to Excise duty.

2. Nature of Finacle Software - Customized vs. Packaged/Canned:
The appellant argued that Finacle software is customized for each bank, not capable of being sold off the shelf, and thus should be exempt from Excise duty. The adjudicating authority, however, determined that despite customization, the software is essentially packaged, as it is sold to multiple users and not developed ab initio for each customer.

3. Applicability of Central Excise Duty and Service Tax:
The appellant contended that their activities fall under Information Technology Software Service (ITSS) as per Section 65(105) (zzze) of the Finance Act, 1994, and they were paying service tax accordingly from 16/05/2008. The adjudicating authority maintained that the Finacle software is subject to Excise duty under Tariff Heading 8523, and service tax applies to additional services provided.

4. Overlap and Double Taxation Concerns:
The appellant argued against double taxation, stating that once service tax is paid, Excise duty should not be levied on the same value. The adjudicating authority noted that the value recovered as a license fee for the software is subject to Excise duty, while additional service charges fall under ITSS and are liable for service tax.

5. Eligibility for Exemption Notifications:
The appellant claimed exemptions under various notifications (No.6/2006-CE, No.22/2009-CE, No.17/2010-CE, No.14/2011-CE, and No.11/2016-CE). The adjudicating authority denied exemption under Notification No.6/2006, as the software was not deemed customized. However, exemptions under successor notifications were acknowledged, provided conditions were met.

6. Validity of Demand and Penalties:
The adjudicating authority upheld the demand for Excise duty and imposed penalties, stating that the software was packaged and liable for duty. The appellant’s argument for set-off of service tax paid against Excise duty was noted, allowing for potential cenvat credit.

7. Time-Barred Demand Argument:
The appellant argued that the demand was time-barred since the Department was aware of their service tax payments from 16/05/2008. The adjudicating authority dismissed this argument, stating that the appellant's activities warranted the demand within the permissible period.

Conclusion:
The Tribunal modified the impugned orders and remanded the issue to the adjudicating authority for re-quantification of the demand, considering the detailed observations. The authority was directed to reassess penalties after providing the appellant an opportunity for a hearing. The judgment was pronounced on 09-02-2018.

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