whether the service taken by branch situated abroad, from a company in abroad, of maintaining the network to retrieve data within branches a import of service?

PJ/CASE LAW/2015-16/2744

Case:-STATE BANK OF INDIA VersusCOMMISSIONER OF SERVICE TAX, MUMBAI-II

Citation :-2015 (37) S.T.R. 340 (Tri. - Mumbai)

Brief facts:-The appellant was in appeal against the impugned order confirming Service Tax duty demand of 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 were 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 enabled 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 was 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 IP VPN architecture is comprised of Customer Edge (CE), Provider Edge (PE), and Provider (P) 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 Revenue was that the applicant received the Taxable service from Equant defined in the Finance Act, 1994 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 which was provided by Equant was meant for SBI in India. It was further alleged that since the foreign offices of SBI were not separately constituted establishments, the service received by these foreign offices was 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 and 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 provided secure IP internetworking which enabled connectivity and therefore the service provided was 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 had provided computer network to access or retrieve data even if the original data did not emerge from the service provider and therefore, the bandwidth provider Equant had provided online information and data base access to SBI which was a taxable service under Section 65(105)(zh). The Adjudicating Authority however, conceded that the demand before 18-4-2006, the date when Section 66A came into force, was not sustainable. He confirmed the demand only for the period after 18-4-2006 and imposed penalties as against the demand raised for the period April, 2005 to March, 2010.

Appellant’s contention:-The contention of the ld. advocate was that the SBI, IT department had two verticals, catering to Domestic Office (DO) and the Foreign Office (FO) located in the USA, Canada, UK, etc. The two verticals used different core banking solutions (CBS) platform. It was not possible for the DO to have access to FO network and vice versa. Equant and C&W were two bandwidth providers located outside India providing bandwidth to FOs outside India. As per the appellant, the Revenue seemed to have accepted the appellant’s contention about non-applicability of Service Tax in respect of C&W because there had been no notice served upon the appellants in respect of service provided by C&W. The present case dealt with the service provided by Equant. The connectivity of various FOs to the server on data centre, which was also located abroad, was provided in the form of VPN and bandwidth (Cable lines) through which data can travel. Equant did not provide any routers, computers or equipments. They only provide VPN connectivity through bandwidth which enabled FOs to connect to data centre which also belonged to SBI abroad, for accessing data. Therefore, it was clear that the service provider and service recipient were both located abroad. The bills raised by Equant were also issued to FOs and the payment was made by FO to Equant. Therefore, according to the ld. counsel, there was no import of service in this case.
The other point emphasised by the ld. advocate was that for the activity to fall under “Online information and database access or retrieval” there are four essential ingredients namely :-
(a)        There must be provision of data.
(b)        Data must be retrievable
(c)        Must be provided in electronic form.
(d)        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 = 2009 (14)S.T.R.212 (Tribunal).
Respondent’s contention:-The ld. special counsel Shri K.M. Mondal, reiterated the findings of the Commissioner. He contended that the appellants were clearly covered under the “Online information and database access or retrieval of data” and SBI received 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:- they carefully considered the rival submissions. First of all, it was observed that revenue had not been able to controvert certain facts stated by the appellants. These facts were that the service provider was 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 was not understood how the Revenue was alleging that the service provided amounts to service received in India from outside India. The appellants had made a positive statement to the effect that the foreign offices were connected to the data centre abroad through VPN and it was not possible for the domestic offices to have any access to FO network. In the absence of contradiction by the revenue on these facts, they cannot but agree with the appellant that the said service was not covered under Section 66A read with Rule 3(iii) of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006.
They examined the case vis-à-vis the coverage of Section 65(105)(zh), here again the department was on a weak footing. The very description under the contract between SBI and Equant showed that Equant IP VPN was a managed network service that provides secure IP internetworking which enabled connectivity. The IP VPN network did not allow customers routers in different VPNs to connect with one another. Therefore, it was clear that the said VPN did not provide connectivity between SBI domestic office and the SBI foreign office. Further, on going through the definition in Section 65(75) it was seen that the same describes the service to be “providing data or information retrieval or otherwise to a customer.” In the present case, it had nowhere been disputed by revenue that the data centre was located abroad to which the foreign offices had access for data and its retrieval. The ownership of data was quite clearly with the SBI foreign offices. Equant had not provided any data for access/retrieval. They had simply enabled the connectivity. They had provided connectivity which enabled the FOs to access/retrieve data online. The responsibility of Equant was to ensure that etwork VPN functions properly. The Commissioner had totally misread the meaning of “Service 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 had to relate to information access/retrieval. And Equant had not provided information and database. The ownership of data was with the FOs. This was a vital fact. The Commissioner’s finding that it was not necessary that the original data should emerge or originate from the provider of VPN network was an incorrect reading of Sections 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 1-7-2007 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 would more aptly fall under telecommunication service if provider was licensed under Indian Telegraph Act. Reliance was placed on the case of United Telecom Ltd. (supra). However, the provider of telecommunication service would be Equant but this was not the subject matter of the present dispute.
For the reasons enumerated in paragraphs above, it was held that SBI India had not received “Online information and database access or retrieval” service from Foreign Service providers. Therefore, demand of Service Tax, interest, fees and penalty was not sustainable.
The impugned order is set aside. Appeal allowed.

Decision:-appeal allowed

Comment:-the gist of this case is that the foreign office of the assessee took the services from a company situated abroad of taking a virtual private network. There was no provision of information or database by the company and the foreign office had the control over data, therefore it clearly did not fell into the category of “Online information and data base access or retrieval” service. The service could be classified into “telecommunication service” but As the service provider was outside India service receiver was outside India and provision of service was also outside India there is no way to charge service tax on same.

{prepared by:- Prayushi Jain}

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PJ/CASE LAW/2015-16/2744

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