2023 (5) TMI 768 - AT - Service Tax

Levy of service tax - invoice raised on NIXI - existence of relationship of service provider and service recipient between the appellant and NIXI or not - Appellant claimed that NIXI is not the ISP (internet service provider) and hence neither the service provider nor the service receiver, hence not liable to pay service tax - it is alleged that all services provided by the appellant to the other internet service providers (outgoing traffic) through NIXI is the output service provided by the appellant on which service tax is payable - extended period of limitation - period prior to the negative list regime i.e. prior to 01.07.2012 - difference of opinion between technical members and judicial members - HELD THAT - It is seen that for domestic peering NIXI charges port charges and member fees. The appellant was paid by NIXI when the difference between the in-traffic and out-traffic was in the negative, otherwise the appellant had to pay to NIXI. It is not in dispute that the settlement amount is received by the appellant, as an internet service provider, only if the quantum of traffic used by the other internet service providers through the appellant port (outgoing traffic) is less than 5 times the traffic used by the appellant on other internet service providers networks (incoming traffic). The Commissioner bifurcated an inserverable activity of peering into two parts namely, out-traffic and in-traffic as independent transactions leviable to be taxed separately. Admittedly, peering is a multilateral agreement and is generally settlement free. It is a business relationship where internet service providers provide access on a reciprocal basis to the customers. In fact, without giving access to each other's network and the data contained therein, internet cannot function. It is, therefore, because of a technical requirement that internet service providers provide access to each other's network. An activity has to be seen from a commercial stand point and cannot be artificially split. The dominant intent test/substance of the transaction has to be seen and in this connection reference can be made to the decision of the Supreme Court in THE STATE OF PUNJAB VERSUS ASSOCIATED HOTELS OF INDIA LTD. 1972 (1) TMI 80 - SUPREME COURT holding that The transaction in question is essentially one and indivisible, namely, one of receiving a customer in the hotel to stay. Even if the transaction is to be disintegrated, there is no question of the supply of meals during such stay constituting a separate contract of sale, since no intention of the part of the parties to sell and purchase food-stuff supplied during meal times can be realistically spelt out. The Commissioner merely assumed that the appellant would have received payment for the out-traffic. NIXI provides for computation of the amount only on the difference in data traffic 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 - 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. Thus, the appellant is not a service provider nor NIXI is a service receiver. An amount of Rs. 3.71 lakhs received by the appellant, therefore, could not have been subjected to levy of service tax. What also needs to be noted is that as per the Agreement, invoices had to be raised by NIXI and not by the appellant. The application filed by the appellant also contains as Annexure A an invoice dated 01.04.2010 issued by NIXI to the appellant. The two issues that have been referred are, accordingly, answered in the following manner (i) There is no relationship of service provider and service recipient between the appellant and NIXI and, therefore, the appellant is not liable to pay service tax; and (ii) Mere raising of an invoice by the appellant on NIXI during the course of investigation would be of no consequence as the appellant had not provided any service to NIXI and would, therefore, not be required to pay service tax. The matter may now be placed before the regular division bench for hearing of the appeal.

Summary

Issues Involved:
1. Liability of the appellant to pay service tax on invoices raised on NIXI.
2. Whether the appellant is liable to pay service tax on services provided to other ISPs through NIXI.

Summary:

1. Liability of the appellant to pay service tax on invoices raised on NIXI:

The division bench referred the issue of whether the appellant is liable to pay service tax on invoices raised on NIXI, as NIXI is not an ISP and hence neither the service provider nor the service receiver. The Member (Judicial) held that the appellant is not liable to pay service tax on invoices raised on NIXI because NIXI is only a facilitator and not an ISP. The Commissioner observed that the appellant had entered into a service transaction with NIXI, where MTNL is the service provider, and NIXI is the service recipient. However, the Member (Judicial) concluded that the demand for service tax on such bills raised by the appellant on NIXI is misconceived as there is no relationship of service provider and service receiver.

2. Liability to pay service tax on services provided to other ISPs through NIXI:

The Member (Technical) held that the appellant is liable to pay service tax on services provided to other ISPs through NIXI, as the appellant had raised an invoice on NIXI and admitted to pay service tax. The Commissioner confirmed the demand for service tax, stating that the appellant had provided taxable services against consideration, calculated based on the "requester pays" policy of NIXI. The Member (Technical) noted that the appellant had issued an invoice to NIXI after the investigation, which included the service tax element, and hence the service tax is payable from the date of invoice.

Conclusion:

The third member concluded that there is no relationship of service provider and service recipient between the appellant and NIXI, and therefore, the appellant is not liable to pay service tax. Mere raising of an invoice by the appellant on NIXI during the investigation would be of no consequence as the appellant had not provided any service to NIXI. The matter will now be placed before the regular division bench for hearing of the appeal.