2025 (10) TMI 180 - AT - Service Tax

IT-enabled services to foreign clients treated as exported services, not OIDAR; service tax demand, interest and penalty set aside

M/s Vantage Net Services Pvt. Ltd. Versus Commissioner of Central Excise & CGST, Lucknow

CESTAT ALLAHABAD - AT held the contested services are IT-enabled services, not OIDAR, and the provider did not own the data; services rendered to foreign ... Classification of services - services described as Search Engine Optimization (SEO) / IT-enabled services - Online Information Database Access and Retrieval (OIDAR) services or not - Export of services or not - recovery of service tax with interest and penalty - HELD THAT:- It is quite evident that services provided by the appellant are covered under the category of IT Enabled Services not under the OIDAR. For qualifying the services under OIDAR it is necessary that the service provider owns the data which is being shared or provided through internet against the received consideration. As it is found that the services do not qualify under OIDAR and these services have been provided to foreign clients for which appellant have produced invoices alongwith Bank Statement showing realization. On examination of this realization, it is found that these amounts are received towards exports of service. This Tribunal in the case of M/s Wildnet Technologies Pvt. Ltd. [2024 (7) TMI 1002 - CESTAT ALLAHABAD] have held that 'Web development services encompass creating, building, and maintaining websites or web applications. It combines technical skills, programming languages, and design elements to develop functional and visually appealing online platforms. The above service is limited to clients only who order to develop such software to the Appellant. The world wide viewers click the said software on the website of the clients. The said services cannot be considered to be OIDAR services.' There are no merits in the impugned order and the same is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the services described as Search Engine Optimization (SEO) / IT-enabled services qualify as Online Information Database Access and Retrieval (OIDAR) services or as non-OIDAR IT-enabled/support services for the purpose of service tax classification. 2. Whether receipts in foreign convertible exchange for services rendered to foreign clients qualify as export of services (and thus not liable to domestic service tax) in the absence of certain documents initially, in light of Rule 6A of the Service Tax Rules and place-of-provision rules (including Rule 9(b) of POPS Rules, 2002). 3. Whether penalties and late fees under Sections 77, 78 and Rule 7C (Finance Act/Service Tax Rules) could be sustained where the taxability/demand in respect of exported IT-enabled services was disputed and whether procedural non-production of documents justified penal consequences. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Classification: SEO / IT-enabled services as OIDAR or non-OIDAR Legal framework: Classification under the Service Tax regime requires determining whether a service is OIDAR (online information and database access or retrieval) or some other taxable service (e.g., IT-enabled/support services). Relevant criteria include whether the service provides information/database for retrieval, whether the service is globally accessible to anyone, and whether the provider supplies/owns the database or merely performs processing/support functions for a specific client. Precedent treatment: Tribunal decisions cited and followed include prior rulings holding that online training, infrastructure support, web/app development and campaign setup are not OIDAR where the provider does not furnish a global database/information service but provides specific support to a client (decisions referenced: Dewsoft Overseas, Philips Electronics, United Telecom, and the Tribunal's decision in M/s Wildnet Technologies). These precedents were followed, not distinguished or overruled. Interpretation and reasoning: The Tribunal analyzed the nature of SEO work submitted by the appellant: website audit, keyword research, on-page/off-page/technical SEO, and analytics reporting performed remotely for specific client websites. It held that such activities constitute processing/technical improvement and business support services directed to particular clients rather than provision of information/database for retrieval by the public at large. Emphasis was placed on absence of ownership/provision of a global database, the limited client-specific nature of the services, and analogies to recognized support services and software/web development activities which are not OIDAR. Ratio vs. Obiter: Ratio - SEO and similar client-specific IT-enabled/support services do not qualify as OIDAR where the provider does not supply a global information/database for public retrieval and instead performs processing/support for a specific client. Obiter - extended discussion of distinctions with Google Ads and other advertising platforms served as contextual support but the central holding is the non-OIDAR classification for SEO/support services. Conclusion: The Tribunal concluded that SEO/IT-enabled services in question are not OIDAR services and should be classified as non-OIDAR IT-enabled/support services. Issue 2 - Export of services and applicability of Rule 6A / place of provision Legal framework: Export of services exemption requires satisfaction of conditions (inter alia consumption outside India, contract with a person outside India, payment in convertible foreign exchange, and performance location rules) as set out under the Service Tax Rules (Rule 6A) and place-of-provision rules (including Rule 9(b) of POPS Rules, 2002). Documentation (agreements, invoices, bank statements) bears on whether export conditions are met. Precedent treatment: The Tribunal relied on its prior decision in Wildnet Technologies and other authorities applying place-of-provision principles and distinguishing OIDAR classification to determine place of consumption and export status; those authorities were followed. Interpretation and reasoning: While lower authorities initially faulted the appellant for not producing agreements/invoices, the Tribunal examined the nature of services (client-specific SEO performed remotely) and the financial realization evidence subsequently produced (invoices and bank statements showing receipt in foreign convertible currency). The Tribunal held that where services are not OIDAR and are consumed outside India (applied to foreign-hosted websites and used by the foreign client), Rule 9(b) of the POPS Rules (placing of provision of service) would not apply to classify the service as domestically consumed. The Tribunal further found that the appellant's invoices and bank statements, together with the nature of work, were sufficient to establish export of services under Rule 6A conditions despite earlier absence of some documents before the lower authority. Ratio vs. Obiter: Ratio - client-specific IT-enabled services (non-OIDAR) rendered remotely and consumed outside India, supported by invoices and receipts in convertible foreign exchange, qualify as export of services and are not liable to domestic service tax; absence of initial production of agreements is not dispositive where sufficient corroborative evidence (invoices, bank realizations, nature of service) establishes export. Obiter - remarks regarding the irrelevance of certain balance sheet entries without corroborating invoices are explanatory of evidentiary weight rather than dispositive legal standards. Conclusion: The Tribunal concluded that the receipts shown in foreign convertible exchange were for export of services and thus not subject to domestic service tax, as the appellant's services satisfied the export conditions and were not OIDAR; consequently, tax demand premised on those receipts was unsustainable. Issue 3 - Validity of penalties and late fee imposed under Sections 77, 78 and Rule 7C Legal framework: Penalties under Sections 77, 78 and late fees under Rule 7C are contingent upon established tax liability or specific statutory non-compliances (suppression of facts, failure to maintain/produce documents, non-payment). Imposition requires that the foundational demand for tax/interest be legally sustainable and that requisite mens rea or statutory breach be proved as per the respective provisions. Precedent treatment: The Tribunal applied the general principle that penalties cannot be sustained where the underlying tax demand is not maintainable; it also treated precedent holdings on classification and export status as determinative for the punitive consequences. The cited decisions distinguishing OIDAR and treating similar services as export/international consumption were followed to deny penal consequences flowing from an incorrect tax classification. Interpretation and reasoning: Having held that the services were not taxable domestic services (being export of services), the Tribunal found no legal basis to sustain penalties and late fees predicated on the tax demand. Although the appellant initially failed to produce some documents, the decisive issue was whether taxable liability actually arose; where liability is negated by correct classification and export status, penal consequences tied to that liability cannot be maintained. The Tribunal therefore set aside the impugned order which confirmed tax and imposed penalties/late fee. Ratio vs. Obiter: Ratio - penalties and late fees grounded on an unsustainable tax demand are liable to be set aside; procedural non-production of documents does not independently sustain punitive penalties if the substantive tax liability is negated by later-accepted evidence establishing export/non-taxable character. Obiter - observations on the evidentiary sufficiency of different types of documents (agreements vs invoices vs balance sheet entries) explain weight of proof but do not form separate binding rules beyond the case facts. Conclusion: Penalties under Sections 77, 78 and late fee under Rule 7C, insofar as they were imposed in relation to the disputed receipts treated as taxable, could not be sustained and were set aside along with the tax demand. Overall Disposition The Tribunal allowed the appeal, set aside the impugned order sustaining service tax demand and penalties in respect of the receipts characterized as export proceeds for SEO/IT-enabled support services, and concluded that such services are not OIDAR and qualify as export of services when provided remotely to foreign clients with payment in convertible foreign exchange.