TaxTMI 
TaxTMI 
2023 (5) TMI 768
X X X X Extracts X X X X
X X X X Extracts X X X X
....vice tax on the services provided to the other ISPs through NIXI, and they have raised invoice for such services provided, on NIXI, and have also admitted to pay service tax." 2. Mahanagar Telephone Nigam Limited, Delhi [the appellant] is a public sector unit of the Government of India in the Ministry of Communications & Information Technology. It is engaged in the business of telecom and information technology related services, including 'internet telecommunication service'. 3. Intelligence was gathered by the officers of the department that various 'internet service providers', including the appellant, had entered into bilateral domestic private 'peering arrangements' with each other for carrying internet traffic on each other's backbone, but they were not discharging service tax on the value of the services provided to other internet service providers. The officers also believed that the services rendered by the appellant to other internet service providers was covered under 'internet telecommunication service' as defined under section 65(57a) of the Finance Act, 1994 [the Finance Act] and made taxable under section 65(105)(zzzu) of the Finance Act from....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hange and updating of information between the peered ISPs, typically using the Border Gateway Protocol. Peering parties interconnect at network focal points such as the network access points (NAP) and at regional switching points. Initially, peering arrangements did not include an exchange of money. More recently, however, some large ISPs have charged smaller ISPs for peering. Each major ISP generally develops a peering policy that states the terms and conditions under which it will peer with other networks for various types of traffic." (emphasis supplied) 5. Internet peering is, therefore, an arrangement of traffic exchange between internet service providers. Internet service providers with their own networks agree to allow traffic from other internet service providers in exchange for traffic on their backbones. It involves two networks coming together to exchange traffic freely and for mutual benefit. Internet peering is considered to be settlement free as neither party pays the other for access to their customers as it would normally be of equal value. Usually, therefore, the internet service providers do not charge each other for such an arrangement. 6. During i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Provide and maintain the physical connection of the peering router of ISP to the NIXI shared medium; ii. Provide rack space to MTNL at its site; iii. Allow access to the core area only to authorized personnel of member under supervision of NIXI staff; iv. Provide 24 X 7 watch of MTNL's equipment; v. Provide installation and support services; vi. Provide network management related services; vii. Provide any other services as declared by the NIXI Board. d) The member i.e. MTNL shall: i. Make payments to NIXI as per the determined Schedule: ii. At his own cost ensure the faultless connection of its network through leased line to the NIXI network, as per the Technical Requirements of NIXI; iii. Ensure that its usage of the Connection/NIXI's network is not detrimental in any way and does not cause damage to the NIXI network/infrastructure or to the usage of NIXI by other members or to the traffic exchange thereon; iv. As member may allow other ISP's to connect to NIXI and handover their traffic through its own facilities." 10. It is seen in terms of the Membership Agreement entered....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s above for the period: 01.04.2008 to 30.06.2012, vide their letter dated 19th August 2013. The value of services for April, 2008 has been excluded, and the rest value so determined has been considered as total taxable value for determining tax liability since M/s MTNL did not provide data separately w.e.f. 16.05.2008. 9.4 Prior to 01.04.2011, the ST was payable on recipient basis, and thereafter (i.e. since 01.04.2011), ST is payable on Invoice basis in terms of the POT-R. In the instant case, since the amounts paid or payable by M/s NIXI to M/s MTNL-D is the settlement amount, i.e. after adjustment or deduction of amounts payable by M/s MTNL, then it cannot be said that the amounts have not been grossly charged or grossly received by M/s MTNL. Therefore, irrespective of gross amount received or otherwise in case of settlement by M/s. MTNL, they appeared to be liable for payment of ST. Moreover, even though invoices were not issued by M/S MTNL-D, but monthly data of out-traffic or in-traffic have been supplied by M/s NIXI to M/s MTNL-D, and rates per GB is also known to M/s MTNL-D. LIABILITY TO PAY ST 10. Therefore, it appeared that during the period 16t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gh NIXI, the said services squarely fall under the provisions of Section 65(105(zzzu) read with Section 65(56b) and Section 65(57a) with effect from 16.05.2008 supra and are thus, taxable services for the purpose of levy of Service Tax. 18.1 "Requester Pays" implies that for traffic exchange at a NIXI node between ISP 'A' and ISP 'B', 'B' will pay to 'A' (through NIXI) a pre-determined amount per Giga byte x [traffic from 'A' to 'B' - traffic from 'B' to 'A']. Thus, the "requested" traffic from ISP 'A' to ISP 'B' is measured and subtracted from the "requested" traffic from ISP 'B' to ISP 'A'. 18.2 It is also evident on record that till 30.06.2012, NIXI was paying the amount in respect of the difference of In-traffic and Out-traffic to the MTNL when [In-traffic (-) Out Traffic] was in negative, i.e. when out traffic (upload) was more than In-traffic (download), otherwise MTNL had to pay the amount of the difference to NIXI." (emphasis supplied) 17. The Commissioner then examined whether the appellant had provided the said taxable services against consideration, par....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nition of taxable service under the category of Internet Telecommunication Service qua the admitted facts make it very clear that the service provided by the appellant in the form of 'pearing arrangement' is squarely covered by the above mentioned definition under section 65(57(a) of the Finance Act, 1994. The appellant has not denied this very fact. We find that the appellant have issued an invoice on M/s. NIXI on 09.10.2013 after initiation of investigation by the DGCEI. It has been the contention of the appellant all along that amount of Rs.7,44,19,477/- for which the invoice has been issued to M/s. NIXI also includes service tax element of Rs.70,93,529/-. Thus in a way, the appellant had admitted their service tax liability on the services provided to other ISP companies through M/s. NIXI in the form of pearing arrangement. The only contention of the appellant is that since they have not received any payment against the pearing services or against the invoice dated 09.10.2013 and therefore, legally they are not bound to pay any service tax on the same. We find that the arguments undertaken by the appellant is not sustainable in the light of legal provisions as existed with ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er "the appellant is liable to pay service tax on the services provided to the other ISPs (internet service providers) through NIXI, and they have raised invoice for such services provided, on NIXI, and have also admitted to pay service tax". This question has arisen because of the views expressed by the learned Member (Technical). 23. To appreciate the two issues raised in this appeal, it would be appropriate to first refer to the required statutory definitions. 24. 'Internet' has been defined under section 65(56b) of the Finance Act as follows: "65(56b) "internet" means a global information system which is logically linked together by a globally unique address, based on Internet Protocol or its subsequent enhancements or upgradations and is able to support communications using the Transmission Control Protocol or Internet Protocol suite or its subsequent enhancements or upgradations and all other Internet Protocol compatible protocols." 25. 'Internet telecommunication service' has been defined in section 65(57a) of the Finance Act as follows: "65(57a) "internet telecommunication service" includes,- (i) internet backbone services, includ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 67 of the Finance Act read with rule 3 of the Service Tax (Determination of Value) Rules, 2006 [2006 Valuation Rules], which at the relevant time provided for valuation of taxable service where the value was not wholly or partially consisting of money. 30. The show cause notice proposed that the said value shall be the out-traffic (in GB) multiplied by the rate per GB, which according to the show cause notice is the rate in ordinary course of business. For this purpose the Department had sought information from the appellant regarding the out-traffic and the rate per GB and the appellant provided the said data. 31. It is on the basis of this data that the department computed the quantum of the proposed service tax. The said amount was neither received nor receivable by the appellant. This was only a notional value, but it formed the basis for issuance of the show cause notice. This would be clear from Annexure A to the show cause notice which is reproduced below: Period Out Traffic at NIXI (in GB) Rate per GB Charges for out traffic (in Rs.) ST Rate ST Total ST (ST + Edn cess + S & HEC) 1 2 3 4 5 6 9 16.05.08 to 23.02....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and there is no provision for payment for out traffic data and payment of in traffic data. No book adjustment is made and what was payable or receivable is computed on a formula provided by NIXI. The appellant received only one payment of Rs. 3.71 lakhs from NIXI based on the aforesaid calculation. NIXI merely provides a platform for interchange and it is not a platform for earning on 'out-traffic'. Thus, a single transaction of providing peering cannot be split into two transactions, nor is it permissible to artificially vivisect a composite indivisible commercial transaction and examine one part for taxability purposes. 34. It needs to be remembered that NIXI is a non-profit government company and was set up for peering of internet service providers and operators on a neutral basis in line with the best practices. This is what was observed by the Supreme Court in Assistant Commissioner of Income Tax (Exemptions) vs. Ahmedabad Urban Development Authority [Civil Appeal No. 21762 of 2017 decided on 19.10.2022] and the relevant observations are as follows: "209. The Revenue has appealed the decision of Delhi High Court in which the National Internet Exchange of India ....