Interconnection charges between internet service providers were not taxable where a binding circular excluded them from service tax.

Interconnection charges recovered by one internet service provider from another were treated as outside service tax under the Online Information Access and Database Retrieval Service category. A binding departmental circular had clarified that ISP interconnection is a commercial and technical arrangement enabling access to data or information, and that such charges are not taxable. The contrary departmental view could not override that clarification, and there was no indication that downstream ISPs had failed to discharge tax on customer collections. The result was that the levy on interconnection charges was unsustainable.

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Issues: Whether interconnection charges recovered by one internet service provider from other internet service providers were liable to service tax under the category of Online Information Access and/or Database Retrieval Service.

Analysis: The Board's circular on the newly introduced service category clarified that interconnection of one ISP to another was a commercial and technical arrangement to enable customers to access data or information, and that interconnection charges paid by one ISP to another were not liable to service tax. The Court also noted that the departmental stand could not run contrary to the Board's own clarification, and there was nothing to show that the downstream ISPs had failed to discharge tax on the amounts collected from their customers.

Conclusion: The interconnection charges were not taxable, and the demand was unsustainable.

Ratio Decidendi: Where a binding departmental circular expressly excludes interconnection charges between ISPs from service tax, the revenue cannot sustain a contrary levy under the same service category.

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