Classification of Web hosting service received from foreign service provider.

Case:-M/s ACL MOBILE LTD Vs COMMISSIONER OF SERVICE TAX, DELHI

Citation:-2014-TIOL-924-CESTAT-DEL

Brief Facts:-The appellant is registered with the service tax department in respect of telecommunication services for 'managed mobility services', 'business auxiliary service' and 'development and content supply services'. The period of dispute in this case is from 01/10/03 to 31/03/08. The first activity of the appellant is in respect of "development and content supply services". The appellant have entered into agreements with various Telecom service Provider for supplying the content including user generated contents which enable the mobile phone subscribers receive advertisements, ring tones, general information like cricket scores etc. by the way of SMS. The Department was of the view that this service provided by the appellant to various telecom service providers during the period from 01/5/06 to 31/05/07 is "business support service" taxable under Section 65 (105) (zzzq) readwith Section 65 (104c) of the Finance Act, 1994. The department raise service tax demand for the period from 01/05/06 to 31/05/07 is on this basis. The second activity of the appellant in respect of which the service tax has been demanded is in respect of their joint venture with a foreign partner M/s Technology Aided Systems, Kuwait (TASK). The appellant entered into this joint venture with TASK to work together for smooth implementation of ACL Wireless Instant Messenger (WIM) application on M/s Mobile Telecommunication Company, Kuwait's (MTC's) network in its territory. In terms of the appellant's agreement with TASK, they work together to implement ACL WIM application built on open internet standards for MTC's network in its territory. Out of total revenue generated from the use of the application from the subscribers of M/s MTC, M/s MTC retains 45% of the gross revenue and pays the remaining 55% to ACL (the appellant) who, in turn, as per the agreement between them (the appellant) and TASK, share this revenue earned by the joint-venture in the ratio of 54.45%: 45.55%. The revenue share of the TASK is remitted by the appellant (ACL) to TASK. The Department has alleged that the appellant have received Business Auxiliary Service of marketing of their services from TASK and accordingly has sought to levy service tax on the TASK'S revenue share, as the same had been shown in the books of accounts of the appellant company (ACL) as commission, while according to the appellant, it is only the share of revenue earned from joint venture within payable to TASK. The Revenue raise service tax demand for the period from 01/10/03 to 31/03/07 is on this basis. The appellant company has entered into an agreements with some parties abroad for providing virtual space to them on their servers to enable the Appellant to upload documents or personal or business information about themselves and their products and services, from where the same can be accessed by their customers by internet. For these services, they have made payment to those parties in convertible foreign exchange. The department is of the view that the services provided by the foreign parties to the appellant is "business support service" taxable under Section 65 (105) (zzzq) readwith Section 65 (104c) of the Finance Act, 1994. In this regard Revenue raise service tax demand for the period from 01/05/06 to 31/03/08 is on this basis. The appellant company during period from 09/07/04 to 17/04/06 are alleged to have receive the taxable service of maintenance or repair from foreign service providers and according to the department, since this is import of service, the same would be taxable under Rule 2 (1) (d) of Service Tax Rules, 1994. On this basis Revenue raise demand of service tax for the period from 09/07/04 to 17/04/06 is sought to be recovered from them. Similarly the appellant during the period from 01/01/05 to 31/03/06 are alleged to have received Management Consultancy Service from offshore service providers and according to the Department this service, the appellant as service recipient in respect of would be liable to pay service tax under Rule 2 (1) (b) (IV) of the Service Tax Rules, 1994. The Revenue raised demand of service tax is on this basis.

The Commissioner, Service Tax, issued of show cause notice passed on the basis of above mentioned allegations and an order-in-original has been passed by him. OIO has confirmed the service tax demand against the appellant alongwith interest thereon under Section 75 of the Finance Act, 1994 and beside this, while imposed penalty of equal amount on them under Section 78, on them under Section 77 of the Finance Act, 1994.

Aggrieved by this order in original of the Commissioner, the appellant filed appeal alongwith stay application. The miscellaneous applicant for early hearing of the stay application has been filed, as the department is pressing hard for recovery. The miscellaneous application for early hearing of the stay application is allowed.

Appellant’s Contention:-The appellant pleaded that the service tax demand in respect of repair and maintenance service is in respect of the services of maintenance of Versant software being used by the appellant and for which payment in foreign currency had been made to M/s Versant Corporation, Germany and similarly the Management Consultancy Service had been received from foreign service providers during period from 01/10/03 to 31/03/07 in respect of which service tax demand has been made, that the service of maintenance of software and Management Consultancy Service had been received during period prior to 18/04/06, while Section 66A providing for recovery of service tax from the recipient of the service in India in case of service provided by an offshore service provider had been introduced w.e.f. 18/04/06 and, hence, during period prior to 18/04/06, in respect of taxable services received from offshore service provider, the service tax cannot be demanded from the service recipient in India and in this regard he relies upon the judgment of Hon'ble Bombay High Court in the case of Indian National Shipowners Association vs. Union of India reported in 2009 (13) S.T.R. 235 (Bom.) = 2008-TIOL-633-HC-MUM-STand thus the service tax demand in respect of repair and maintenance service and service tax demand in respect of Management Consultancy Service received from offshore service providers is not sustainable, that as regards the service of supply of software content to telecom companies, this service became taxable w.e.f. 01/06/07 by insertion of clause (zzzzb) in Section 65 (105) and, hence, during period prior to 01/06/07, the same service cannot be taxed as business support service under Section 65 (105) (zzzq) and, hence, service tax demand on this basis is not sustainable, that as regards service tax demand on the basis of allegation that the appellant company have received the taxable service of Business Auxiliary Service from M/s TASK, Kuwait during period from 01/10/03 to 31/03/07, the amount mentioned in the appellant's books of accounts as commission paid to TASK, Kuwait is actually the revenue share of M/s TASK, Kuwait, that the appellant have entered into a joint venture with TASK, Kuwait to work together for smooth implementation of the appellant's wireless instant messenger service on MTC's network that this joint venture had received 55% of the gross revenue generated from the subscribers of MTC by the use of this application and this revenue has been shared by the appellant and TASK in the ratio of 54.45% and 45.55%, that what has been given by the appellant to TASK is the share of revenue of TASK and not commission for any service received from them, that in view of this, the service tax demand under business auxiliary service on the amount paid to TASK is without any basis, that as regards the service of Web hosting received from certain foreign service providers, this service is Information Technology Service covered by Section 65 (105) (zzzze) which became taxable only w.e.f. 16/05/08 and, hence, during the period of dispute i.e. during period from 01/05/06 to 31/03/08, the same was not taxable and it is totally wrong to charge service tax in respect of this service by treating the same as business support service. The appellant further pleaded that the impugned order is not sustainable and that they have a strong prima facie case in their favour. The appellant also pleaded for waiver from requirement of pre-deposit for hearing of their appeal and stay on recovery thereof till the disposal of the appeal.

Respondent’s Contention:-The respondent opposed the stay application by reiterating the findings of the Commissioner in the impugned order. The respondent pleaded that the supply of content including user generated contents like SMS through software to the Telecom Service Providers to enable the mobile telephone subscribers to receive advertisements, ring tones, general information etc. is 'Business support Service' taxable w.e.f. 01/05/06 under Section 65 (105) (zzzq) read with Section 65 (104c) of the Finance Act, 1994, that it is well known that telecom operators besides providing telephone service through mobile network, also provide other services like SMS, internet, Email, internet banking and informative service etc. to their clients and the appellant provide software to enable the telecom service providers to provide these auxiliary services and, hence, the services provided by the appellant have to be treated as business support service, that just because w.e.f. 01/6/07 a new clause (zzzzb) was inserted in Section 65 (105) to cover the services in relation to development or supply of content for use in telecom services, it does not mean that during period prior to 01/6/07, this activity could not be taxed as business support service under Section 65 (105) (zzzq), that the amount paid by the appellant to TASK, Kuwait is for the services of business auxiliary service commission agent/marketing) received from them and, hence, service tax on the same would be chargeable from the appellant as service recipient, that the appellant in fact have received the service of promotion and marketing of their service products from TASK and, hence, the amount paid by the appellant to TASK has to be treated as the payments for this service, and that as regards the service of Web hosting received by the appellant during the period from 01/5/06 to 31/3/08 from several foreign service providers, the same is business support service and, hence, the appellant would be liable to pay service tax on the same under reverse charge mechanism under Section 66A. The respondent pleaded that in view of the above submissions, this is not the case for waiver from the requirement of pre-deposit.

Reasoning of Judgment:-The Tribunal have considered the submission from both the sides and perused the records.

The Tribunal finds that the service tax demand in respect of maintenance and repair service in respect of software to have been received from foreign service providers during period from 09/07/04 to 17/04/06 and service tax demand in respect of management consultancy service received by the appellant from foreign service providers during period from 01/01/05 to 31/03/06, since these services had been received during period prior to 18/04/06 when there was no provision in the Finance Act, 1994 for charging service tax in respect of services received by a person in India from an offshore service provider, in view of the judgment of Hon'ble Bombay High Court in the case of Indian National Shipowners Association vs. Union of India(supra) these service tax demands would not be sustainable and thus in respect of these demands, the appellant have strong prima facie case in their favour.

The Tribunal also finds that service tax demand in respect of supply of software content for use in telecommunication service, prima facie Tribunal in view that this service had become taxable by inserting clause (zzzzb) in Section 65 (105) of the Finance Act, 1994 w.e.f. 01/06/07 and, therefore, for the period prior to 01/06/07 no service tax could be charged by treating this service as business support service. It is well settled law that when a new entry regarding taxation of a service is introduced in the Act from a particular date, it has to be presumed that during the period prior to introduction of the new entry, that service was not taxable.

The Tribunal further considered that service tax demand in respect of the amount paid by the appellant company to their joint venture partners M/s TASK, Kuwait, it is not disputed that the appellant company had entered into a joint venture agreement with M/s TASK, Kuwait to work together for smooth implementation of wireless instant messenger application on the network of M/s Mobile Telephone Company, Kuwait (M/s MTC) and in terms of this joint venture agreement, the earnings of the joint venture from this activity were to be shared by the appellant and the TASK in the ratio of 54.45% to 45.55% i.e. 54.45% of the revenue of the joint venture from the activity of wireless instant messenger application on MTC's network was to be retained by the appellant company and the remaining 45.55% of the revenue was to be given to TASK. Prima facie, we are of the view that there is nothing in the joint venture from which it can be inferred that TASK, Kuwait were providing the service of marketing or promotion of the services of the appellant and, as such, this joint venture agreement cannot be said to be an agreement between the service provider and the service recipient. We are, therefore, of prima facie view that the service tax demand in respect of the appellant's joint venture agreement with TASK, Kuwait is not sustainable.

The Tribunal also finds that the service tax demand in respect of the service of Web hosting received by them from foreign service providers, the Tribunal finds that this service is providing virtual space to the appellant on services owned by the foreign service providers to enable the appellant to upload the documents and the business information about themselves and their company and also their products and services to such virtual space, from where the same can be accessed by their customers via internet. The appellant's plea is that this service is information technology service covered by Section 65 (105) (zzzze) which came into force w.e.f. 16/05/08 and, hence, the same was not taxable during the period of dispute i.e. from 01/05/06 to 31/03/08. On the other hand the contention of the department is that this activity is business support service taxable w.e.f. 01/05/06 under Section 65 (105) (zzzq) readwith Section 65 (104c) of the Finance Act, 1994.

Section 65 (105) (zzzze) introduced in the Finance Act, 1994 w.e.f. 16/03/08 is reproduced below :-

"[(zzzze) service provided to any person, by any other person in relation to information technology software [* * *] including,
-
(i) development of information technology software,

(ii) study, analysis, design and programming of information technology software,

(iii) adaptation, upgradation, enhancement, implementation and other similar services related to information technology software,

(iv) providing advice, consultancy and assistance on matters related to information technology software, including conducting feasibility studies on implementation of a system, specifications for a database design, guidance and assistance during the start-up phase of a new system, specifications to secure a database, advice on proprietary
information technology software,

(v) [providing] the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell information technology software and right to use software components for the creation of and inclusion in other information technology software products,

(vi) [providing] the right to use information technology software supplied electronically.]"

Section 65 (105) (zzzq) covers service provided to any person by any other person in relation to support services of business or commerce in any manner. Section 65 (104c) defines the expression "support service of business or commerce" as under:-

"[(104c) "support services of business or commerce" means services provided in relation to business or commerce and includes evaluation of prospective customers, telemarketing, processing of purchase orders and fulfillment services, information and tracking of delivery schedules, managing distribution and logistics, customer relationship management services, accounting and processing of transactions, [operational or administrative assistance in any manner], formulation of customer service and pricing policies, infrastructural support services and other transaction processing.

Explanation. - For the purposes of this clause, the expression "infrastructural support services" includes providing office along with office utilities, lounge, reception with competent personnel to handle messages, secretarial services, internet and telecom facilities, pantry and security;]"

On perusal of Section 65 (105) (zzzze), The Tribunal is prima facie view that the service of Web hosting being received by the appellant from foreign service providers is not covered by clause 65 (105) (zzzze), as this clause covers various services in relation to information technology software including development of information technology software, study, analysis, design and programming of information technology software, acquiring the right to use the information technology software supplied electronically etc. On the other hand the Web hosting services received by the appellant involved providing of space by a service provider in his server to another person to enable that person to upload information about his business or his company which can be accessed by his customers, friends and other individuals through internet. The Web hosting service is a service which is used by person for marketing of his products and, therefore, in our prima facie view, the same has to be treated as support service of business or commerce. Therefore, in respect of the service tax demand on this service, the appellant do not appear to have prima facie case in their favour.

Thus, in view of the above discussion, out of total service tax demand of Rs. 1,40,45,132/-, the service tax demand of about Rs. 35,84,039/- appears to be sustainable. Though the appellant have pleaded that substantial portion of this demand would be time barred as the show cause notice had been issued on 02/04/09 for demand of allegedly short paid service tax for the period from 01/05/06 to 31/03/08 and there is no evidence that this short payment took place on account of any willful misstatement, suppression of fact etc, on the part of the appellant, the plea of limitation being mixed question of fact and the law can be considered only at the time of final hearing.

In view of the above discussion, the Tribunal is of the view that this is not the case for total waiver from the requirement of pre-deposit. Taking into account the overall facts and circumstances of the case, Tribunal direct the appellant to pay an amount of Rs. 30,00,000/- (Rupees Thirty Lakhs) within a period of eight weeks from the date of this order. On deposit of this amount within the stipulated period, the requirement of pre-deposit of balance amount of service tax demand, interest thereon and penalty shall stand waived and recovery thereof stayed.

Decision:-Pre- deposit ordered.

Comment:-There were 3 issues in this case:

In respect of maintenance and repair service in respect of software to have been received from foreign service providers prior to 18/04/06 is not taxable in view of the judgment of Hon'ble Bombay High Court in the case of Indian National Shipowners Association vs. Union of India.

In respect of supply of software content for use in telecommunication service, this service had become taxable by inserting clause (zzzzb) in Section 65 (105) of the Finance Act, 1994 w.e.f. 01/06/07 and, therefore, for the period prior to 01/06/07 no service tax could be charged by treating this service as business support service. It is well settled law that when a new entry regarding taxation of a service is introduced in the Act from a particular date, it has to be presumed that during the period prior to introduction of the new entry, that service was not taxable.

In respect of Web hosting service, the Web hosting service is a service which is used by person for marketing of his products and the same has to be treated as support service of business or commerce. Accordingly, the demand under this category was held to be prima facie sustainable.

Prepared by: Bharat Rathore

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