Service received outside India from foreign service provider is not liable to service tax under reverse charge mechanism.

Case:- STATE BANK OF INDIA Vs. COMMISSIONER OF SERVICE TAX, MUMBAI-II

Citation:- 2014-TIOL-2097-CESTAT-MUM

Brief Facts:- The appellant is in appeal against the impugned order confirming service tax duty demand of Rs. 2,61,06,556/- with appropriate interest and imposition of penalty under sections 76, 77 and 78 of the Finance Act, 1994.

The brief facts of the case are that the applicant State Bank of India (SBI for short) entered into a contract with M/s Equant Pte. Ltd. (Equant for short) for providing Virtual Private Network (VPN) which enables the SBI and SBI branches to retrieve data from the data centre maintained by the applicants in different countries abroad. Under the agreements the service description for Equant IP/VPN Service as described as follows:

“Equant IP VPN is a managed network service that provides secure IP internet working, which enables connectivity between many customer routers in an “any-to any” environment using IP switching. As customer has elected Customer-Managed (Gold Lite) IPVPN service, customer shall supply, install manage and maintain the CE routers. The CE router, installed at the customer location, connects to the PE router through an access medium that is fully transparent to the service. The CE router must be equipped with one or more LAN interface types that connect the Customer's LAN to the Equant IP VPN network”.

The case of the Revenue is that the applicant received the Taxable service from Equant defined in the Finance Act, 194 in section 65(105)(zh) as - “Taxable service means any service provided or to be provided to any person by any person in relation to on-line information and database access or retrieval or both in electronic form through computer network, in any manner.” In view of the definition of “Online information and data base access or retrieval” under Section 65(75) which reads as “Online information and database access or retrieval means providing data or information, retrievable or otherwise, to a customer, in electronic form through a computer network” for the period April 2005 to March 2010. Service Tax became chargeable under Section 66A on reverse charge basis mechanism on services received from outside India. It was alleged that the services were provided by the company abroad (Equant) to an Indian entity i.e. SBI, in India under section 66A read with Rule 3(iii) of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006.

According to the show-cause notice issued to the appellant, all the information/data of the SBI through computer network/band width is provided by Equant is meant for SBI in India. It was further alleged that since the foreign offices of SBI are not separately constituted establishments, the service received by these foreign offices is for use in relation to business of SBI established in India. The appellant had contended before the adjudicating authority that they had only provided the VPN for use by foreign offices/branches of SBI and not by SBI, Head office in India. It was also contended that Equant had an office in India also hence section 66A would be inapplicable. They had only provided the link between all foreign offices of SBI to their respective data bases in the SBI data centres abroad to which the foreign offices were attached. They only provided network service that provides secure IP internet working which enables connectivity and, therefore, the service provided is only that of bandwidth provider and not of online information and data base access/retrieval. Rejecting the appellant's contention, the adjudicating authority held that bandwidth provider, Equant has provided computer network to access or retrieve data even if the original data did not emerge from the service provider and therefore bandwidth provider Equant has provided online information and database access to SBI which is a taxable service under section 65(105)(zh). The Adjudicating Authority however, conceded that the demand before 18.04.2006, the date when section 66A came into force, is not sustainable. He confirmed the demand only for the period after 18.04.2006 and imposed penalties as against the demand raised for the period April 2005 to March 2010.

Appellant contentions:- The other point emphasized by the ld. Advocate is that for the activity to fall under “Online information and database access or retrieval” there are four essential ingredients namely,

- There must be provision of data.
- Data must be retrievable
- Must be provided in electronic form
- Must be provided through computer network

They emphasised that they neither provided data nor retrieved the data. They relied on the decision of Tribunal in the case of United Telecom Ltd. 2009(18) STT 495.

Respondent Contentions:- The ld. Special counsel Shri K.M.Mondal, reiterated the findings of the Commissioner. He contended that the appellants are clearly covered under the “Online information and database access or retrieval of data” and SBI receives the data from the foreign offices. On time bar, he stated that there was clear suppression of facts as the matter of providing connectivity of various branches with the data centre was not declared to the department.

Reasoning of Judgment:- Heard both sides. The contention of the ld. Advocate is that the SBI, IT department has two verticals, catering to Domestic Office (DO) and the Foreign Office (FO) located in the USA, Canada, UK etc. The two verticals use different core banking solutions (CBS) platform. It is not possible for the DO to have access to FO network and vice versa. Equant and C&W are two bandwidth providers located outside India providing band width to FOs outside India. As per the appellant, the Revenue seems to have accepted the appellant's contention about non-applicability of service tax in respect of C&W because there has been no notice served upon the appellants in respect of service provided by C&W. The present case deals with the service provided by Equant. The connectivity of various FOs to the server on data centre, which is also located abroad, is provided in the form of VPN and bandwidth (Cable lines) through which data can travel. Equant does not provide any routers, computers or equipments. They only provide VPN connectivity through bandwidth which enables FOs to connect to data centre which also belongs to SBI abroad, for accessing data. Therefore, it is clear that the service provider and service recipient are both located abroad. The bills raised by Equant are also issued to FOs and the payment is made by FO to Equant. Therefore, according to the ld. Counsel there is no import of service in this case.

The Tribunal has carefully considered the rival submissions. First of all, we observe that revenue has not been able to controvert certain facts stated by the appellants. These facts are that the service provider is located abroad, that the service recipient i.e. foreign offices were located abroad, the services were rendered outside India and payments were made by the foreign office located outside India to the service providers also located outside India. In this situation, it is not understood how the Revenue is alleging that the service provided amounts to service received in India from outside India. The appellants have made a positive statement to the effect that the foreign offices are connected to the data centre abroad through VPN and it is not possible for the domestic offices to have any access to FO network. In the absence of contradiction by the revenue on these facts, we cannot but agree with the appellant that the said service is not covered under section 66A read with rule 3(iii) of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006.

If we examine the case vis-à-vis the coverage of section 65 (105)(zh), here again the department is on a weak footing. The very description under the contract between SBI and Equant shows that Equant IP VPN is a managed network service that provides secure IP internet working which enables connectivity. The IP VPN network does not allow customers routers in different VPNs to connect with one another. Therefore, it is clear that the said VPN does not provide connectivity between SBI domestic office and SBI foreign office. Further, on going through the definition in section 65(75) it is seen that the same describes the service to be “providing data or information retrieval or otherwise to a customer”. In the present case, it has nowhere been disputed by revenue that the data centre is located abroad to which the foreign offices have access for data and its retrieval. The ownership of data is quite clearly with the SBI foreign offices. Equant have not provided any data for access/retrieval. They have simply enabled the connectivity. They have provided connectivity which enables the FOs to access/retrieve data online. The responsibility of Equant is to ensure that network VPN functions properly. The Commissioner has totally misread the meaning of “Services provided in relation to online information and database access or retrieval”. The words “in relation” qualify “information and database access or retrieval”. Clearly the service provided has to relate to information access/retrieval. And EQuant has not provided information and database. The ownership of data is with the FOs. This is a vital fact. The Commissioner's finding that it is not necessary that the original data should emerge or originate from the provider of VPN network is an incorrect Reading of section 65(75) and 65(105)(zh). It would be pertinent to refer to another taxable service on the telecommunication service under section 65(109)(A) brought into effect on 01.07.2007 which means “service of any description provided by means of a transmission, emission or reception of signs, signals, writing, images and sounds or intelligence or information of any nature, by wire, radio, optical, visual or other electro-magnetic means or systems, including the related transfer or assignment of the right to use capacity for such transmission, emission or reception by a person who has been granted the licence under the first proviso to sub-section (1) of section 4 of the Indian Telegraph Act, 1885 and includes - data transmission services including provision of access to wired or wireless facilities and services specifically designed for efficient transmission of data.” The service provided by Equant will more aptly fall under telecommunication service if provider is licensed under Indian Telegraph Act. Reliance is placed on the case of United Telecom Ltd. (supra). However, the provider of telecommunication service would be Equant but this is not the subject matter of the present dispute.

For the reasons enumerated in paragraphs above, we hold that SBI India have not received “Online information and database access or retrieval” service from foreign service providers. Therefore, demand of service tax, interest, fees and penalty is not sustainable.

The impugned order is set aside. Appeal allowed.

Decision:- Appeal allowed.

Comment:- As per Section 65(105)(zh) of Finance Act, for the activity to fall under “Online information and database access or retrieval” there are four essential ingredients namely,
1.    There must be provision of data
2.    Data must be retrievable
3.    Must be provided in electronic form
4.    Must be provided through computer network

In the present case, as the data being retrieved or accessed by applicant is their own it cannot be said that applicant have received service of 'Online information and database access or retrieval. Moreover, as per the facts of the case, the foreign service provider was providing service to foreign office of the appellant and so it cannot be said that there was import of service so as to levy service tax under reverse charge mechanism. Accordingly, the appeal was allowed.

Prepared by:- Meet Jain

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