Taxability of Online Information and Database Services (Part- I)

[Dr. Sanjiv Agarwal]

Service tax has been imposed on online information and database access/retrieval services with effect from 16th July, 2001 vide Notification No. 4/2001-ST dated 9th July, 2001. The gross amount charged by service provider including Internet Service Providers (ISP’s) and paid websites for services rendered shall be chargeable to service tax under this category.

Meaning of Online Information and Database Access/Retrieval

Section 65(75) defines ‘online information and database access/retrieval’ as under—

“on-line information and database access or retrieval” means providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network.

As per Section 65(75), on-line information and database access or retrieval means provision of a data or any information, whether retrievable or not, to a customer, in electronic form through a computer network.

To be covered under the definition, following basic tests are important —

(1) There should be provision or providing of any data or information. Data has been defined under Section 65(36) and information under Section 65(53);

(2) The data or information so provided may be either retrievable or non-retrievable;

(3) The service should be provided to the beneficiary, the customer;

(4) It should be provided in electronic form; and;

(5) Computer network should be used;

(6) Services should be rendered by a commercial concern; and

(7) Services should be rendered for a charge and must not be free;

This definition includes certain terms and words such as “data, information, electronic form and computer network” which have been defined in the Information Technology Act, 2000.

Replacement of ‘customer’ with ‘any person’ (w.e.f. 16.5.2008)

Finance Act, 2008 has substituted the words ‘to any person’ for the word ‘to a customer’ (w.e.f. 16.5.2008) as the service tax is levied on service and status of recipient of taxable service should not determine the tax treatment of a given service.

Meaning of Data

Section 65(36) defines ‘data’ as under—

“data” has the meaning assigned to it in clause (o) of sub-section (1) of section 2 of the Information Technology Act, 2000.

As per Section 65(36), data has been defined under Section 2(1)(o) of the Information Technology Act, 2000 to mean a representation of information, fact, knowledge, concepts or instructions which are being prepared or have been prepared in a formalised manner, and is intended to be processed, is being processed or has been processed in a computer system or computer network and may be in any form (including computer print outs, magnetic or optical storage media, punched cards, purchased tapes) or stored internally in the memory of the computer. Information includes data and data bases.

Data is information in a form suitable for processing by a computer, such as the digital representation of text, numbers, graphic images, or sounds. Etymologically, data is derived from the Latin word “datum” meaning an item of information. A representation of information, knowledge, facts, concepts or instructions which are being prepared or have been prepared in a formalized manner, and is intended to be processed, is being processed or has been processed in a computer system or computer network, and may be in any form (including computer printouts magnetic or optical storage media, punched cards, punched tapes) or stored internally in the memory of the computer.

Meaning of Information

Section 65(53) defines ‘information’ as under —

“information” has the meaning assigned to it in clause (v) of sub-section (1) of section 2 of the Information Technology Act, 2000.

As per Section 65(53), information has been defined under Section 2(1)(v) of the Information Technology Act, 2000 to include the following modes of information storages or transmission. Since information is invisible under the computer based environment, it shall cover any or all of the following —

(i) data,

(ii) text,

(iii) images,

(iv) sound,

(v) voice,

(vi) codes,

(vii) computer programmes,

(viii) software,

(ix) data bases,

(x) micro film, and

(xi) computer generated micro fiche.

Meaning of Electronic Form

Section 65(39) defines ‘electronic form’ as under —

“electronic form” has the meaning assigned to it in clause (r) of sub-section (1) of section 2 of the Information Technology Act, 2000.

As per Section 65(39), electronic form has been defined in Section 2(1)(r) of Information Technology Act, 2000 with reference to information. Accordingly, it means any information generated, sent, received or stored in media, magnetic, optical, computer memory, microfilm, computer generated micro fiche or any similar device. Thus, electronic form refers to storage of data in any form presently in use or to be used in future.

Electronic form with reference to information means any information generated, sent, received or stored in media, magnetic, optical, computer memory, micro-film, computer generated micro fiche or similar device. It is digitally encoded and displayed on a user’s computer screen. Such forms can be used from ordering merchandise to competing surveys.

Meaning of Computer Network

Section 65(30) defines ‘computer network’ as under —

“computer network” has the meaning assigned to it in clause (j) of sub-section (1) of section 2 of the Information Technology Act, 2000.

As per Section 65(30), computer network would have the meaning as per

Section 2(1)(j) of the Information Technology Act, 2000. It implies the inter connection of one or more than one computer through:

(i) use of satellite, microwave, terrestrial line or any other communication media and

(ii) terminals or a complex consisting of two or more inter connected computers whether or not the inter-connection is maintained on a continuous basis.

Any mode of connection can be used for computer network. ‘Any other communication media’ shall cover the further technological changes and advances that may take place in future. The inter-connection may not be permanent and even a modem connection shall qualify the definition.

‘Network’ is a set of related, remotely connected devices and communications facilities including more than one computer system with the capability to transmit data among them through the communications facilities.

‘Computer Network’ is an interconnection of one or more computers through —

(i) the use of satellite, microwave, terrestrial line or other communication media; and

(ii) terminals or a complex consisting of two or more interconnected computers whether or not the interconnection is continuously maintained.

Geographically, networks can be classified as under—

(a) Local Area Network (LAN) — Small Network of computers and supporting components used by a group or department to share related software and hardware resources.

(b) Wide Area Network (WAN) — A network that connects terminal situated at long distances from each other. WAN could be intercity, interstate etc.

(c) Metropolitan Area Network (MAN) — Network covering an entire city or metropolitan area and frequently operates at LAN speeds.

It may be noted that a mere computer network is not a taxable service but on-line data information and data base access or retrieval through computer network is subject to service tax. Inter connection charges paid by one Internet Service Provider (ISP) to another for providing connectivity is not a service taxable for the purposes of service tax.

Meaning of Subscriber

Section 65(104) defines ‘subscriber’ as under —

“subscriber” means a person to whom any service of a telephone connection or a facsimile (FAX) or a leased circuit or a pager or a telegraph or a telex has been provided by the telegraph authority.

As per Section 65(104), subscriber means a person who has been provided with (a) a telephone service and/or (b) pager service, or (c) facsimile service, or (d) a leased circuit line, or (e) telegraph, or (f) a telex by the telegraph authorities. This definition has been omitted by the Finance Act, 2007 (w.e.f. 1.7.2007).

Meaning of other related terms used in ‘online information and database access/retrieval services’

Computer

It means any electronic, magnetic, optical or other high speed data processing device or system which performs logical, arithmetic, and memory functions by manipulations of electronic, magnetic or optical impulses, and includes all input, output, processing, storage, computer software, or communication facilities which are connected or related to the computer in a computer system or computer network.

Computer is an electronic data processing device capable of receiving input, storing sets of instructions for solving problems and generating output with high speed and accuracy.

ICAI defines computer in its study material as an electronic data processing device capable of receiving input, storing sets of instructions for solving problems and generating output with high speed and accuracy. It was held in ITO v. Samiran Majumdar (2006) 280 ITR (AT) 74 (Kolkata) that since a printer and scanner could not be used without the computer, they were part of computer system. Thus, the printer and scanner were an integral part of the computer system.

Computer system

It is a device or collection of devices, including input and output support devices and excluding calculators which are not programmable and capable of being used in conjunction with external files, which contain computer programs, electronic instructions, input data and output data, that performs logic, arithmetic, data storage and retrieval, communication control and other functions.

Internet

A network of computer networks. A combination of number of smaller networks which use different networking protocols. The world’s largest computer network, consisting of over 2 million computers being used by over 20 million users spread over 200 different countries. The internet is growing at a phenomenal rate of 10-15 per cent per month, thereby outwitting any reasonable estimate of growth.

E-commerce

The whole gamut of commercial activities taking place in the “cyber medium”. Internet has emerged as the “default” medium of E-Commerce. The exponential growth of Internet has thrown open new vistas of trade and commerce. It is paperless exchange of online business documents using electronic media. It could be through E-mail, electronic bulletin boards, electronic fund transfer, credit cards, electronic data interchange, etc.

ISP

Anyone providing connection to the internet as a service, ranging from small local providers to the better known national ISPs such as VSNL and SIFY. It is a company, usually a local one that provides connections to the internet for a monthly or hourly fee. Services can vary from providing a connection to providing full service, support, and one-site customer internet servers. Many ISPs build a home page, convert files and graphics, forward leads, and update information for one-time creation and monthly maintenance fees. These are considered different to the national online services such as VSNL, Satyam, HCL infinity, Caltiger. Although these services also offer access to the internet, they provide a vast array of original content as well.

Internet Telephony

It provides a means to communicate verbally over the internet without the using telephones, except for access to the internet service provider.

E-mail

For the exchange of text or numeric correspondence to and from individuals and/or groups, ‘electronic mail’ applies a messaging protocol transferred via 7 bit packets to any internet accessing computer throughout the world. E-mail messages consist of a message header and body. The header stores data such as message sender, destination user and address, and details of the message.

Software

A generic term for programs, including both applications programs (for examples, payroll, debtors) and systems programs (for example, operating systems and compilers).

(To be continued)