2025 (11) TMI 508 - AT - Service Tax

Appellant's compilation of public-domain verification reports is not OIDAR; service-tax demand and time-barred claim rejected

CESTAT, All. AT held the appellant's activity-compiling public-domain verification materials into reports for a client-does not constitute OIDAR services ... Classification of service - Online Information and Database Access or Retrieval (OIDAR) Services or not - recovery of service tax with interest and penalty - Invocation of charge of suppression of facts - HELD THAT:- It is observed that respondent is engaged only in assimilating the verification documents and information available in public domain into a final verification report to its client entities Dataflow Dubai. Respondent do not have any ownership or contract out the data and is not disseminating the same through the network appearing for public for uses against the cost, these the verification report created or transmitted through by the appellant to its clients/entities namely Dataflow Dubai by using network of computers. In case of Philips Electronics India Ltd. [2018 (11) TMI 1093 - CESTAT CHENNAI] it was held that 'The impugned infrastructure services cannot by any stretch of imagination be brought within the fold of “Online Information and Database Access or Retrieval”.' It is found that the above decision is to be squarely applicable on the present case, there are not much merits in the demand made. Invocation of extended period of limitation - HELD THAT:- It is noted that the SCN has been issued on 18.10.2021 making a demand for the period 2016-17 invoking extended period of limitation. Appellant had been filing the Income tax return showing these services as sale of services, the charge of suppression to invoking extended period of limitation for making this demand should fail for this reason itself - the demand is also barred by limitation. There are no merits in the impugned order and the same is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the services rendered constituted 'online information and database access or retrieval services' (OIDAR) within the meaning of the Service Tax Rules/IGST Act, having regard to the requirement of delivery mediated by information technology, essential automatism, minimal human intervention and ownership/dispensation of data. 2. Whether receipts for the relevant period qualify as 'export of services' under the Service Tax Rules (Rule 6A and Place of Provision Rules) with effect from 01.12.2016, in light of amendments deleting Clause (b) of Rule 9 and amending the proviso to Rule 3. 3. Whether the departmental demand (service tax, interest and penalties) based on classification as OIDAR is sustainable, including whether the extended period of limitation invoked is maintainable given the taxpayer's prior disclosure in income tax returns. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Classification as OIDAR services Legal framework: OIDAR is defined under the Service Tax Rules/IGST Act to mean services whose delivery is mediated by information technology over the internet or an electronic network, the nature of which renders their supply essentially automated and involving minimal human intervention and impossible to ensure in the absence of information technology; illustrative inclusions and exclusions are set out in the statutory definition and in departmental explanatory material (education guide and circular). Precedent treatment: Administrative guidance and tribunal/high court decisions (as considered by the Court) distinguish truly automated, content-owner/ content-provider models from specialized, human-intensive IT/consultancy/support services that merely use electronic means for communication or transfer of files. Interpretation and reasoning: The Court examined the contract terms and factual matrix showing that the provider received client data, performed encoding/processing and returned processed data to the client; the provider did not own, disseminate or commercially make available the data to the public. The Court applied the OIDAR tests cumulatively: (i) delivery mediated by IT; (ii) supply essentially automated; (iii) minimal human intervention; (iv) impossible without IT; and (v) ownership/dispensation of data/content ordinarily with the service provider. While delivery involved IT, the nature of the service was found to be bespoke encoding/processing requiring human intervention and specialist work rather than an automated supply of digital content by a data-owner/provider. The Court relied on explanatory material which clarifies that mere use of internet to communicate or transfer files does not convert a specialized service into OIDAR, and on precedential reasoning that services involving significant human expertise/processing are not OIDAR merely because electronic transmission occurs. Ratio vs. Obiter: Ratio - where a service consists of processing/encoding client-owned data and involves substantial human intervention and specialised work, it does not qualify as OIDAR despite being delivered via electronic networks. Obiter - explanatory remarks on illustrative lists in departmental guidance and broader policy considerations about ownership of data. Conclusion: The services in issue were not correctly classified as OIDAR; they constituted specialized IT/consultancy/processing services (not automated OIDAR) because the provider processed client-owned data and the supply required human intervention and specialised work. Issue 2 - Treatment as Export of Services after Rule amendments (with effect from 01.12.2016) Legal framework: Notification deleting clause (b) of Rule 9 of the Place of Provision Rules and amending proviso to Rule 3 (effective 01.12.2016) and Rule 6A conditions govern when services qualify as export of services; post-amendment, the place of provision for OIDAR is the location of the service receiver, and export treatment may apply where statutory conditions are satisfied. Precedent treatment: The Court considered the amended statutory scheme and administrative amendments; earlier interpretations treating place of provision differently before amendment were implicitly distinguished. Interpretation and reasoning: Because the Tribunal found the services were not OIDAR (Issue 1), the amended Rule 9/Rule 3 framework for OIDAR-specific place of provision is inapplicable to reclassify the underlying services. The Court nonetheless observed that had the services been OIDAR, the post-01.12.2016 amendment would make place of provision the location of receiver and could support export treatment; however, factual findings showed receipt in convertible foreign exchange and travel outside India by the provider, but those facts do not convert a non-OIDAR, bespoke processing service into OIDAR for the purpose of export classification. Ratio vs. Obiter: Ratio - statutory amendments altering place of provision for OIDAR do not assist where services are not OIDAR in character. Obiter - observations that, for genuine OIDAR services provided after 01.12.2016, place of provision would be receiver's location so long as other export conditions are satisfied. Conclusion: The amended place-of-provision rules do not render the impugned services exports because the services are not OIDAR; therefore export treatment under Rule 6A is not available on the basis of OIDAR classification in this case. Issue 3 - Validity of demand, penalties and limitation/extended period Legal framework: Show cause, demand, interest and penalties were raised under relevant provisions of the Finance Act and allied rules; extended period of limitation may be invoked where suppression is established. Precedent treatment: Jurisprudence and statutory principles require actual suppression or concealment to invoke extended limitation; prior disclosure in statutory filings undermines the charge of suppression. Interpretation and reasoning: The Court noted that the receipts were declared in income-tax returns for the period and that documentary evidence (contracts, invoices, FIRC) had been on record. In absence of material showing deliberate suppression or concealment, invocation of extended period was unwarranted. Further, because the foundational classification as OIDAR was unsustainable, the demand for service tax and corresponding penalties premised on that classification lacked merit. The Court also considered that the adjudicating authority had relied primarily on a single contract to characterize the entire receipts as OIDAR, whereas the provider had rendered services to other clients as well; this undermined the broad classification and demand. Penalty impositions based on suppression and non-furnishing of documents were set aside in view of findings on disclosure and limitation. Ratio vs. Obiter: Ratio - Demand and penalties based on an incorrect classification and where amounts were disclosed in statutory returns cannot be sustained; invocation of extended limitation requires proof of suppression which was absent. Obiter - comments on administrative reliance on single contract for wholesale classification. Conclusion: The demand for service tax, interest and penalties based on OIDAR classification and extended limitation was unsustainable. For these reasons the impugned order confirming demand and penalties was set aside and the appeal allowed.