2008 (8) TMI 191 - AT - Service Tax

Tribunal rules in favor of appellants on Service Tax exemption for online services.

The Tribunal ruled in favor of the appellants, determining that they were not liable to pay Service Tax under the category of 'Online Information and ... Online Information and Database Access or Retrieval Service - ownership of data as determinative factor in taxable online services - private network service - Telecommunication Service (private network and data transmission) - uptime obligation - Board circular on internet service providers and taxable online servicesOnline Information and Database Access or Retrieval Service - ownership of data as determinative factor in taxable online services - uptime obligation - Board circular on internet service providers and taxable online services - private network service - Telecommunication Service (private network and data transmission) - Whether the appellant's activities in building, owning and operating APSWAN amounted to 'Online Information and Database Access or Retrieval Service' attracting service tax for the period 16.7.2001 to 30.3.2005, and whether penalties and interest could be imposed - HELD THAT: - The Tribunal examined the contractual obligations of the appellant and the technical character of APSWAN. The appellant supplied specified network equipment (multi-service switches, routers, firewall, network management and accounting services) placed at State and District Networking Centres and was contractually responsible for equipment uptime, while leased communication lines and user terminals were procured and owned by the Andhra Pradesh Government. The data transmitted over the network was generated and controlled by the Government; the appellant did not provide or control the data, but only maintained parts of the network infrastructure necessary for transmission. The Tribunal held that mere provision and maintenance of network equipment and uptime, without ownership, control or provision of the information/database, cannot be equated with provision of online information or database access/retrieval services. Reliance on the Board circular relating to internet service providers was rejected as inapposite because the appellant's functions were not analogous to an ISP that provides access to thirdparty websites and databases. The Tribunal further noted that subsequent statutory classification of private network services within Telecommunication Service (introduced later) demonstrates that exclusive-use network links and data-transmission facilities are conceptually distinct from online information/database access services. On these grounds the original demand for service tax was held unsustainable. Because the demand failed on merits, imposition of penalties and interest was not justified. [Paras 7]Demand of service tax under 'Online Information and Database Access or Retrieval Service' for 16.7.2001 to 30.3.2005 set aside; consequential interest and penalties vacated and appeal allowed.Final Conclusion: The Tribunal allowed the appeal, holding that the appellant's supply and maintenance of parts of APSWAN and obligation for equipment uptime did not constitute 'Online Information and Database Access or Retrieval Service'; the service tax demand, interest and penalties for the period 16.7.2001 to 30.3.2005 were set aside with consequential relief. Issues Involved:1. Liability of the appellant to pay Service Tax under the category of 'Online Information and Database Access and/or Retrieval Service'.2. Interpretation of the contract between the appellant and the Government of Andhra Pradesh.3. Applicability of the extended period for demand and penalties under the Finance Act, 1994.Issue-wise Detailed Analysis:1. Liability of the appellant to pay Service Tax under the category of 'Online Information and Database Access and/or Retrieval Service':The core issue is whether the appellant is liable to pay Service Tax under the category of 'Online Information and Database Access and/or Retrieval Service'. The Commissioner had concluded that the appellants provided services defined under Section 65(75) of the Finance Act, 1994, and therefore, were liable for Service Tax. Consequently, a demand of Rs. 88,66,501/- was confirmed for the period from 16.7.2001 to 30.3.2005, along with interest under Section 75 and penalties under Sections 76 and 77.The appellants argued that they were only responsible for providing hardware and software for the network's proper functioning, connecting State and District centers for better administration. They contended that they did not control or own the data on APSWAN, which belonged to the Government of Andhra Pradesh. They further argued that setting up part of a computer network does not amount to providing online services and that their services were not analogous to those typically falling under 'online data access/retrieval services' like 'Tax India Online' or 'Bharat Matrimony'.The respondents countered that the appellants provided a medium for accessing data, which fell under the said service category. They argued that providing access to information or data through a network is a service covered by 'Online Information and Database Access or Retrieval Service'.2. Interpretation of the contract between the appellant and the Government of Andhra Pradesh:The contract required the appellants to build, own, and operate a Wide Area Network (WAN) for voice, video, and data communication services. The appellants provided network interfaces like multi-service switches, routers, firewalls, and network management services, but the entire network was not provided by them. The Andhra Pradesh Government leased lines from BSNL, and the appellants were responsible only for the uptime of their equipment.The Tribunal noted that the appellants' responsibility was limited to maintaining the uptime of the equipment they supplied. The data was generated and owned by the Andhra Pradesh Government, and the appellants did not provide or control the data. The Tribunal concluded that the appellants' role in maintaining network equipment did not equate to providing 'Online Information and Database Access or Retrieval Services'.3. Applicability of the extended period for demand and penalties under the Finance Act, 1994:The appellants argued that the issue involved interpretation of the statute, and there was no suppression of facts as the department regularly audited their books. They claimed a bona fide belief that their services were not taxable, thus contending that penalties were unjustified.The respondents argued that the appellants did not make efforts to ascertain the taxability of their services for five years and that the bona fide belief was not acceptable. They justified the penalties under Sections 76, 77, and 78 of the Finance Act.The Tribunal found that the appellants were not liable for Service Tax under the disputed category and, therefore, penalties were not warranted. The Tribunal allowed the appeal with consequential relief, emphasizing that the appellants' services did not fall within the ambit of 'Online Information and Database Access or Retrieval Service'.Conclusion:The Tribunal concluded that the appellants were not liable to pay Service Tax under the category of 'Online Information and Database Access and/or Retrieval Service'. The appellants' role was limited to providing and maintaining network equipment, and they did not control or provide the data. The Tribunal allowed the appeal, setting aside the demand and penalties, and granted consequential relief to the appellants.