2025 (11) TMI 599 - AT - Service Tax

Ringtone provisioning treated as OIDAR and taxable under POPS rules for 01/07/2012-31/07/2016; exports denied assessable when served from Indian servers

M/s. Onmobile Global Ltd, Mr. Rajiv Pancholy, Managing Director and Chief Executive Officer, Mr. Praveen Kumar K.J, Chief Financial Officer, Sasikiran N, Senior Manager - Taxation Versus The Commissioner of Central Excise and Central Tax, Mangalore

CESTAT BANGALORE - AT held the appellant's ringtone provisioning is OIDAR, not ITSS, because third-party content is stored, modified and served from the ... Classification of services - Online Information Database Access and Retrieval Services (OIDAR) or Information Technology Software Services (ITSS)? - extended period of limitation - HELD THAT:- The RBT provided to the subscribers is actually obtained from the third parties and such content is uploaded on to the appellant server and is managed by the appellant. The appellant carries out requisite modifications on the quality and then it is uploaded to the tone player which is a combination of hardware and software owned by the appellant which integrates with the telecom operators equipment. In other words, the mobile switching center of the telecom operator is connected to the MVAS solution pursuant to which the callers to the subscribers are able to hear the ringtone when a caller places a call to the subscriber of the telecom service the originator of the call i.e, the caller is connected to the MSG of the telecom service provider and is able to hear a ringing tone. In place of the ringing tone where the subscriber has opted for a customized ring back tone service, the customized tone would be played by the appellant servers through which the originator of the call shall hear the customized tone, this tone is heard until the subscriber answers the call. Under no circumstances, the services rendered by the appellant can be considered as ITSS since this is not a simple process of hardware and software services. In fact, the third-party data obtained by the appellant is stored in their servers and based on the agreement with the telecom operators, the data stored in their services as per the requirements of the subscribers is retrieved by the telecom operators and forthwith forward it to the subscribers. This data retrieval from the appellant to the subscribers through that telecom operators is nothing but Online Information Data Access Retrieval service. Therefore, they are rightly classifiable under OIDAR Services. Whether the claim of the appellant that they are export of services needs to be analyzed for the disputed from 1/7/2012 to 31/7/2016? - HELD THAT:- With the introduction of the Negative List and the issue of POPS Rules 2012 in terms of Rule 9 of the place of provision of OIDAR services shall be the location of the service provider and therefore, the data retrieved from the appellants GNOC location in India to be considered as service provider in India, hence, the OIDAR services rendered to the subscribers abroad also are liable to tax as the same cannot be considered as Export of Service. This definition read with Rule 6A of Export of Services Rules, the provision of any services provided or agreed to be provided shall be treated as export of service when the above conditions are fulfilled. There is no dispute that the appellant is providing the above services to the customers both located in India and abroad - With regard to services rendered to Jammu and Kashmir based on the location of the service provider the services rendered from Bangalore where the appellant is registered is the taxable territory to the customers located in Jammu and Kashmir, hence the same is chargeable to service tax. With regard to the various branch offices in overseas, it is stated that in order to provide seamless services to the telecom operators and to comply with the local laws of the respective countries, requisite hardware and deployment / installation related activities with respect to provisioning of subscription to MVAS Solution is undertaken by such foreign branch offices itself. However, the data retrieval happens from the GNOC located in Bangalore (India) and therefore, the location of the service provider is in India. As per the POPS Rules, the service provider’s location is the criteria for deciding liability of service tax on OIDAR services. Hence, the demand during this period even for the branches needs to be sustained. Time limitation - HELD THAT:- The SCN was issued on 29.12.2017 for the period from 01.07.2012 to 01.07.2016. There is no dispute that the appellant had declared OIDAR services from 2008 onwards and only later reclassified them as ITSS services. The fact that they were regularly filing the ST-3 returns and declared these services from time to time is not in dispute. Considering these facts, there are no reason to invoke suppression with intention to evade payment of duty, since these facts were known to the Department through the ST-3 returns. The services rendered by the appellant fall under OIDAR services and hence, the tax stands confirmed for the normal period - it is a fit case to remand the matter for the purpose of re-determination of service tax liability in terms of our above observations and the demand is to be restricted to the normal period - there are also no reason to sustain the penalties imposed on the appellant. Appeal allowed by way of remand. ISSUES PRESENTED AND CONSIDERED 1. Whether the services rendered by the service provider (MVAS platform, content storage, management and real-time delivery) fall within the definition of 'Online Information and Database Access or Retrieval' (OIDAR) or within 'Information Technology Software Services' (ITSS). 2. For services classified as OIDAR, whether such services provided to customers located outside India (including through overseas branches/subsidiaries) constitute taxable services in the taxable territory or qualify as export of services - i.e., the place of provision under the Place of Provision of Services Rules (PoPS Rules), 2012 (Rule 9 and related rules). 3. Whether amounts recovered as reimbursements/expense recoveries constitute 'consideration' for service tax liability for the disputed period (noting the amendment to Section 67/equivalent valuation rule effective 14.05.2015) and the correct treatment of such recoveries for the period 01.07.2012-30.11.2016. 4. Whether the extended period of limitation/longer period for demand (invocation of Section 73 longer period for fraud/collusion/suppression) and imposition of penalties (including personal penalties on officers) were justified. 5. Whether certain matters (notably the exact arrangements with overseas subsidiaries and bifurcation of revenues) require remand for factual verification and re-determination. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Classification: OIDAR v. ITSS Legal framework: Definitions of OIDAR (services providing data or information, retrievable or otherwise, in electronic form through a computer network) and ITSS (services related to information technology software: development, adaptation, implementation, licensing etc.) as in the Finance Act and related PoPS Rules; relevant IT Act definitions of 'data', 'information', 'electronic form' and 'computer network'. Precedent treatment: Cites and relies on earlier authorities and departmental guidance distinguishing automated, content-provision OIDAR services from ITSS; also references decisions where IT enabled/data conversion services were treated as business support services (not OIDAR) where there was no automated delivery to the public. Interpretation and reasoning: The Tribunal examined the factual matrix - ownership, storage and continuous management of content at the central GNOC/servers, ingestion/modification of third-party content in Bengaluru, real-time delivery to telecom operator premises, integration with operator hardware, continuous monitoring and billing based on accesses. The Court emphasised that OIDAR contemplates provision/supply of data/information (previously held by the provider) to a recipient for access/retrieval through electronic networks. The appellant's platform (content management servers, proprietary platform 'Atlantis', ingestion/modification of content, revenue-sharing and subscription access) amounts to providing data/information owned/controlled by the provider and made retrievable by customers/operators. The software/hardware and support are ancillary to the principal activity of storage, maintenance and online delivery of content; content is integral, not incidental. Ratio vs. Obiter: Ratio - where a service provider owns, stores, maintains and makes content/data retrievable through an online platform and provides real-time access to customers (even if via telecom operators), such activity falls within OIDAR and not ITSS. Obiter - detailed commentary on distinctions drawn in other fact patterns (e.g., pure data conversion or business support services) that do not have continuous automated delivery to customers. Conclusion: The services are OIDAR. Classification as ITSS was rejected because the core character of the MVAS solution is provision, storage and retrieval of content; software is a facilitative tool and ancillary to content provision. Prior consistent classification by the provider as OIDAR reinforced the conclusion. Issue 2 - Place of provision / Exportability; branches and subsidiaries; Jammu & Kashmir Legal framework: PoPS Rules 2012 Rule 9 (place of provision of certain specified services including OIDAR shall be the location of the service provider); Rule 3 general rule (place of recipient) and export of services conditions; prior Export of Services Rules and later amendments; treatment of branches/subsidiaries and invoicing practices. Precedent treatment: Reliance on statutory text and guidance that Rule 9 makes location of provider determinative for OIDAR services; authorities interpreting change in place-of-provision rule after introduction of Negative List and PoPS Rules. Interpretation and reasoning: Given classification as OIDAR, place of provision is the service provider's location per Rule 9. Operational facts show central GNOC and content servers in India perform continuous monitoring, storage and retrieval; transaction data and billing are generated from Bengaluru. Thus, services provided to foreign telecom operators, even if delivered to operator hardware abroad, are deemed provided in India. For services to Jammu & Kashmir, the same logic applies: where the provider's location is within the taxable territory (Bengaluru), services are taxable notwithstanding claimed geographical distinctions. Concerning overseas subsidiaries and branch offices, where invoices/agreements show that subsidiaries/branches procure content or bill locally and bear tax locally, those specific arrangements require factual verification; where GNOC India supplies data retrieval to operator sites, location of provider remains India for OIDAR and branch assertions do not automatically displace Indian tax liability. Ratio vs. Obiter: Ratio - For OIDAR classified services, PoPS Rule 9 makes the provider's location the place of provision; centralised content/control in India renders delivery taxable in India even when end-customer/telecom operator is abroad. Obiter - observations that specific subsidiary/branch arrangements might alter the outcome if evidence shows genuine local provision/invoicing and local taxation (remand for verification). Conclusion: OIDAR services provided to foreign operators are taxable in India for the disputed period because the provider's operational location and control (GNOC/servers) are in India. Services to J&K are similarly taxable. Matters involving overseas subsidiaries/branches are remanded for fact-finding to determine if services were in fact provided outside taxable territory by the local entity. Issue 3 - Treatment of reimbursements/expense recoveries for valuation Legal framework: Valuation provisions (Section 67 and subsequent amendment effective 14.05.2015 expanding 'consideration' to include reimbursable expenditures); pre-amendment position excluded reimbursables from consideration for the taxable period before 14.05.2015. Precedent treatment: Reliance on authorities holding that pre-amendment reimbursable expenses were not includible in taxable value; later legislative change altered treatment prospectively. Interpretation and reasoning: For the disputed period which spans pre- and post-amendment dates, reimbursements prior to 14.05.2015 do not form part of taxable consideration; amounts recoverable as pure reimbursements without markup (market access fees/administrative service reimbursements shown to be on cost basis) should be excluded for that pre-amendment period. Post-amendment recoveries fall within 'consideration'. The Tribunal accepted that certain reimbursable amounts ought to be excluded and directed re-determination on remand with opportunity to be heard. Ratio vs. Obiter: Ratio - Reimbursements recovered on cost basis prior to the statutory amendment are not includible in taxable consideration for that pre-amendment period; after amendment, such recoveries may be includible subject to statutory conditions. Obiter - detailed factual allocation of which reimbursements pertain to which periods and contractual characterization to be determined on remand. Conclusion: Reimbursable expense recoveries for periods before 14.05.2015 are excluded from taxable value; re-determination required to quantify exclusion and to apply amended law for subsequent period. Issue 4 - Limitation, extended period and penalties Legal framework: Limitation provisions permitting extended period where fraud, collusion or willful suppression exists; principles on invoking longer limitation and imposition of penalties. Precedent treatment: Cites authorities requiring positive proof of fraud/collusion/wilful suppression to invoke extended limitation and to sustain personal penalties. Interpretation and reasoning: The Tribunal noted long-standing prior classification by the taxpayer as OIDAR in domestic ST-3 returns from 2008 onwards. The change in description to ITSS in 2016 coincided with investigation. Records and returns were available to Department. The Tribunal did not find sufficient evidence of suppression with intent to evade - the facts were disclosed in returns and department had knowledge. Although Revenue argued awareness of PoPS Rules and non-payment, the Tribunal held that invocation of extended limitation required proof of intent to suppress or evade; such proof was absent. Consequently, the demand was restricted to normal limitation period and penalties (including personal penalties) were not sustained; remand ordered for redetermination for normal period only with opportunity of hearing. Ratio vs. Obiter: Ratio - Extended period of limitation and personal penalties cannot be sustained in absence of cogent evidence of fraud/collusion/wilful suppression; normal limitation applies where assessment facts were disclosed in statutory returns. Obiter - comments on timing of reclassification and conduct relevant to Revenue's contrary contention but not sufficient to meet high threshold for extended limitation. Conclusion: Extended period of limitation not invocable on the material before the Tribunal; penalties, including personal penalties, are not sustained. Demand to be confined to normal period and reassessed on remand with due process. Issue 5 - Remand for subsidiary / branch factual verification and re-determination Legal framework: Factual allocation of which entity provided services (Indian parent or overseas subsidiary/branch) impacts place of provision and taxability; evidentiary burden and requirement of opportunity of hearing for reassessment. Precedent treatment: Administrative law principle that factual disputes requiring fresh evidence, allocation or verification should be remitted for determination at fact-finding stage with opportunity to be heard. Interpretation and reasoning: The Tribunal observed inadequate discussion in the impugned order on the exact contractual, invoicing and operational arrangements with certain overseas subsidiaries and branch offices. Since resolution of these facts may materially affect taxability (if services genuinely provided and invoiced by overseas entity and taxed locally), the Tribunal remanded these aspects to the adjudicating authority to verify documents, agreements, invoicing, local taxation and operational control and to recompute liabilities for the normal limitation period. Ratio vs. Obiter: Ratio - Where material factual issues (about provider identity, invoicing entity, local taxation) are unresolved in the adjudication record, matter should be remitted for fact finding and recomputation before finalizing liability. Obiter - guidance on matters to be examined on remand (e.g., revenue allocation, market access and administrative services characterization). Conclusion: Remand directed for re-determination limited to the normal period; appellant to be given hearing; certain heads (subsidiary/branch turnover, reimbursement quantification) to be reworked on the verified facts.