The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that charges collected by the Software Technology Parks of India (STPI) for certification of SOFTEX forms, issuance of No Objection Certificates (NoCs) and allied assistance to software-exporting units are taxable as Business Support Services under the Finance Act, 1994.
The Bench comprising Member (Technical) P. Anjani Kumar and Member (Judicial) Angad Prasad framed the central issue as whether STPI’s activities constituted taxable Business Support Services or sovereign/statutory functions falling outside the scope of service tax.
The Tribunal rejected STPI’s contention that these activities were sovereign or statutory functions and therefore outside the ambit of service tax. It held that the mere fact that STPI performs the activities under Government authorisation or supervision does not transform them STPI argued that certification of SOFTEX forms and issuance of NoCs were functions entrusted to it under the Foreign Trade Policy, FEMA and relevant RBI circulars.
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According to STPI, these activities were not commercial services supplied to businesses but functions performed pursuant to the regulatory framework governing software exports. It therefore contended that the charges collected for performing these functions could not be treated as consideration for taxable services.
STPI also relied upon Board Circular Nos. 89/2006-ST dated December 18, 2006 and 96/07/2007-ST dated August 23, 2007, which deal with activities performed by public or sovereign authorities in discharge of statutory duties.
The appellant further submitted that its status as a society should not determine the character of its functions. It pointed out that it operates under the administrative control of the Department of Electronics and Information Technology, Government of India, and that the charges were prescribed and controlled by its Governing Council.
The Department opposed the appeals, emphasising that STPI is an autonomous society and not a Central Government department.
According to the Department, the services were rendered to STP units for facilitating and supporting their export businesses, and the amounts collected by STPI represented consideration for those services.
The Department also argued that the charges were not taxes or compulsory statutory levies deposited into the Government Treasury. Instead, the amounts were retained by STPI and used for its administrative and establishment expenditure.
The Tribunal noted that STPI is incorporated as a society under the Societies Registration Act, 1860. Although it functions under Central Government administrative control and performs functions connected with the STP Scheme, it does not thereby become a Government department.
The Bench stressed that an activity being regulated by law, or being performed by an organisation authorised by the Government, does not automatically make the activity a sovereign function.
The Tribunal drew a distinction between functions that can only be performed by the State in exercise of sovereign authority and services rendered by an autonomous organisation for facilitating the business operations of its beneficiaries.
In the Tribunal’s view, SOFTEX certification, issuance of NoCs and related assistance were intrinsically connected with the business activities of software exporters. These activities facilitated exports, foreign exchange realisation and compliance with the applicable regulatory framework.
Consequently, the Tribunal concluded that the activities had a sufficient nexus with business or commerce to fall within the scope of Business Support Service applicable during the relevant period.
The Bench examined the Board circular relied upon by STPI and observed that the circular contemplated circumstances where sovereign or public authorities perform statutory functions and collect amounts in the nature of compulsory statutory levies that are deposited into the Government account.
The Tribunal found that STPI had not established that the amounts collected for SOFTEX certification and related activities constituted compulsory statutory levies.
It observed that neither the Foreign Trade (Development and Regulation) Act nor FEMA had been shown to prescribe the disputed amounts as statutory levies payable to the Government. Instead, STPI’s own submissions showed that the charges were credited to a separate fund maintained by STPI and utilised towards establishment and administrative expenditure.
The Bench therefore held that the amounts could not be equated with a tax, cess, fee or other compulsory Government exaction.
The Tribunal also rejected STPI’s argument based on the fact that its Governing Council had approved the charges.
According to the Bench, approval of charges by the governing body of an autonomous society cannot be equated with a statutory levy imposed by Parliament or under statutory authority.
The distinction was important because STPI sought to rely upon the regulatory character of its functions to establish that the charges were statutory in nature.
The Tribunal, however, focused on the actual legal character of the amount collected rather than merely the regulatory framework within which the activity was performed.
Another contention rejected by the Tribunal was that because SOFTEX certification could be performed only by the designated authority, the activity necessarily acquired a sovereign character.
The Bench held that exclusivity or statutory authorisation alone is not decisive.
The relevant question was whether the amount collected represented a sovereign or statutory extraction or consideration for an identifiable service rendered to a beneficiary. In the present case, the Tribunal found a direct relationship between STPI’s activities, the STP/exporting units receiving the assistance and the charges collected from them.
The Tribunal also took note of the fact that STPI itself was registered under the service tax law and was already paying service tax on various other services, including renting of immovable property, bandwidth services, co-location services and project consultancy.
The Bench clarified that STPI’s status as an organisation functioning under a Government Ministry did not confer general immunity from service tax.
Instead, each activity has to be examined independently based on its nature.
The Tribunal distinguished cases involving statutory taxes, development fees, statutory cesses or compulsory exactions directly arising under legislation from the present dispute, where STPI had failed to establish that the disputed charges were compulsory Government levies imposed by statute.
The Tribunal also examined the Department’s invocation of the extended period of limitation in the appeal concerning 2007-08 to 2011-12.
STPI argued that its activities were known to the Department and that correspondence and records had been made available.
The Tribunal nevertheless found that STPI had not declared the value of the disputed services in its statutory service tax returns and had not discharged service tax on those receipts.
The Bench observed that STPI’s registration under the service tax law and its payment of tax on other services indicated that it was aware of its obligations under the Finance Act, 1994.
The mere availability of information with the Department, or production of records during audit, was held insufficient to establish disclosure of the relevant taxable activity in the prescribed returns.
The Tribunal therefore found no sufficient ground to interfere with the invocation of the extended period.
Having upheld the taxability of the disputed receipts and the extended period, the Tribunal found no legal infirmity in the imposition of penalties.
At the same time, it clarified that any statutory benefit relating to the quantum of penalty would remain available to STPI if the conditions prescribed under the Finance Act, 1994 were fulfilled.
The CESTAT held that certification of SOFTEX forms, issuance of NoCs and allied assistance provided by STPI to STP/software-exporting units could not be treated as sovereign or public-authority functions merely because they were performed under Government authorisation or supervision.
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