Charged paid by Foreign Telecommunication Operators not taxable under telecommunication services

Vodafone Essar East Limited Vs Commissioner of Service Tax (CESTAT Kolkata)

CESTAT Kolkata held that the charges paid for services rendered by the FTOs (i.e. Foreign Telecommunication Operators) cannot be taxed under head ‘telecommunication services’. Accordingly, demand set aside.

Facts- The Appellant, M/s. Vodafone Essar East Limited, are engaged in providing a comprehensive range of ‘Telecommunication Services’ in India. An investigation was initiated by the DGCEI, Kolkata Zonal Unit against the Appellant.

On the basis of the investigation, a Show cause Notice was issued to the Appellant demanding service tax of Rs. 2,87,23,940/- along with interest and penalty. The Notice was adjudicated by Commissioner vide Order-in-Original, wherein he confirmed the demand of Rs.2,04,56,485/- along with interest and dropped the remaining demands made in the Notice. He also imposed penalty equal to the duty confirmed u/s. 78 of the Finance Act, 1994.

Being aggrieved, both revenue and appellant has preferred the present appeal.

Conclusion- Held that during the relevant period only telecommunication services provided by a ‘Telegraph Authority’ to a person were taxable. In the instant case, FTOs located abroad providing the connectivity services would not fall within the ambit of ‘Telegraphy Authority’ as defined under Section 65(111) of the Finance Act, 1994 read with Section 3(6) of the India Telegraph Act, 1885. Accordingly, we observe that the charges paid for the services rendered by the FTOs cannot be taxed under head “telecommunication services” on the Appellant.

FULL TEXT OF THE CESTAT KOLKATA ORDER

M/s. Vodafone Essar East Limited (The “Appellant”) are engaged in providing a comprehensive range of ‘Telecommunication Services’ in India. An investigation was initiated by the DGCEI, Kolkata Zonal Unit against the Appellant on 08.04.2009 on the following aspects:

1. Whether the Appellant has discharged service tax on upfront/arrangement fees paid to foreign financial institution/banks for providing finance in nature of external commercial borrowing (ECB),

2. Whether the Appellant has discharged service tax on roaming charges paid to foreign telecom operators (FTO), and

3. Whether the Appellant had discharged service tax on various expenditures made in foreign currency.

2. On the basis of the investigation, a Show cause Notice dated 04.2011 was issued to the Appellant demanding service tax of Rs. 2,87,23,940/-along with interest and penalty. The Notice was adjudicated by Commissioner vide Order-in-Original dated 31.05.2012, wherein he confirmed the demand of Rs.2,04,56,485/- along with interest and dropped the remaining demands made in the Notice. He ordered appropriation of an amount of Rs.50,06,485/- paid by the Appellant towards duty and Rs.2,39,205/- paid towards interest. He also imposed penalty equal to the duty confirmed under Section 78 of the Finance Act, 1994. Aggrieved against the impugned order, the Appellant has filed the present appeal. The department has filed appeal against dropping of the demand.

3. In their submissions, the Appellant summarized the findings of the Commissioner in the impugned order as below:

4. In respect of demand raised under “banking and other financial services”, the Appellant submits that since the entire amount of disputed tax along with interest was deposited before issuance of SCN, therefore, SCN ought not to have been issued and penalty ought not to have been imposed in light of Section 73(3) of the Finance Act, 1994. Section 73(3) of the Finance Act, 1994 states that where service tax short paid or not paid is ultimately paid by the Appellant on his own ascertainment or on being pointed out by a central excise officer before issuance of SCN and details of such payment is informed to the department, no SCN is required to be issued. Further, Explanation 2 to Section 73(3) states that no penalty shall be imposed on such circumstances.

4.1. The Appellant stated that demand raised under the instant head amounts to Rs. 95,22,267/- out of which the Ld. Commissioner gave the benefit of Section 73(3) against payment of service tax amounting to Rs. 82,67,455/- and interest of Rs. 85,393/- thereon on service charges remitted to Vodafone Overseas Finance on 26.08.2010. The Appellant states that Rs. 82,67,455/- was paid on 05.10.2010 and interest of Rs. 85,393/- thereon was paid on 20.01.2011 on being pointed out by the department vide inquiry letter dated 08.11.2010. The Ld. Commissioner has rightly observed that since this amount has been paid suo moto by the Appellant, therefore, no malafide intention to evade payment of service tax can be attributed to the Appellant and the benefit of Section 73(3) of the Finance Act, 1994 has been rightly conferred on the Appellant. In light of the same, the department’s appeal is liable to be dismissed.

4.2. In respect of demand amounting to Rs.12,54,812/- ,the Appellant submits that the Ld. Commissioner failed to give the benefit of Section 73(3) in light of Section 73(4) of the Finance Act, 1994 by observing that since payment was made beyond 1 year from the due date of payment of tax, therefore, there was malafide intention on part of the Appellant to evade payment of service tax. In this regard, the Appellant submits that, the Ld. Commissioner failed to notice that this tax amount was deposited by them on being pointed out by the department pursuant to inquiry letter dated 08.04.2009. The Ld. Commissioner erred in not taking into account the payment made on 06.08.2009 i.e., within a period of four months from the date of objection raised by the department. The non-payment of service tax on these charges was on account of inadvertent error arising out of the bonafide interpretation on the part of the Appellant regarding the non-taxability of these charges. The Appellant being one of the biggest telecom service providers, having pan-India operations and paying hundreds of crores in taxes, cannot have an intent to evade Rs. 12,54,812/-. It is submitted that in such circumstances, no malafide can be attributed to the Appellant and benefit of Section 73(3) of the Finance Act, 1994 should have been given.

4.3. In support of the aforesaid submissions the Appellant placed their reliance on the following rulings:

• CCE & ST., LTU, Bangalore vs. Adecco Flexione Workforce Solutions Ltd, 2012 (26) STR 3 (Kar),
• Commissioner vs. Tejas Agency, 2014 (34) STR 803 (Guj),
• CCE, Panchkula vs. M/s Krishna Cylinders, 2015 (1) TMI 1197 — CESTAT NEW DELHI, and
• Commissioner of Central Tax, Bangalore vs. Lalit Ashok, 2022 (66) GSTL 314 (Kar).

4.4. In view of the above, they submitted that no SCN ought to have been issued in the instant case and the demand confirmed on this count is liable to be set aside.

5. In respect of service tax demand confirmed under the head “Telecommunication services” on roaming charges paid to FTOs, the Appellant submits that demand of service tax amounting to Rs. 1,54,50,000/- has been confirmed on roaming charges paid to Foreign Telecommunication Operators (FTOs). The payment of roaming charges was made by them to FTOs for providing connectivity services to their subscribers when they are abroad. It is submitted that during the relevant period only telecommunication services provided by a ‘Telegraph Authority’ to a person was taxable. In the instant case, FTOs by no means of construction can be brought within the ambit of ‘Telegraphy Authority’ as defined under Section 65(111) of the Finance Act, 1994 r/w Section 3(6) of the India Telegraph Act, 1885, hence, under no circumstances roaming charges can be taxed under the head “telecommunication services”.

5.1. It is submitted that the instant issue is no longer res-integra and has been settled by the CESTAT, New Delhi in case of one of their group Companies, viz. Vodafone Essar Mobile vs. CST, New Delhi, 2017 (6) GSTL 67 (Tri-Del). The Tribunal in the aforesaid ruling held that roaming services provided by foreign telecom company cannot be taxable under the head “business auxiliary service”.

5.2. The Appellant submits that similar observation was made again by CESTAT, Mumbai in Idea Cellular Ltd vs. Commissioner of Service Tax, Mumbai – IV, 2021 (55) GSTL 326 (Tri­Mumbai)fol lowing the Vodafone (supra) ruling.

5.3. In light of the aforesaid decisions, the instant demand is not sustainable. Since the demand is not sustainable consequently, demand of interest and penalty is also not sustainable.

6. Regarding the demand of Rs. 37,51,673/-, the Appellant submits that the demand confirmed on this count is not sustainable due to revenue neutral situation. The Appellant submitted that Rs. 37,51,673/- has been demanded as service tax towards receipt of telephone/telecommunication services from foreign service providers without specifying the nature of services or the head under which it is taxable. The demand is raised only on the ground that on certain remittances, service tax was paid and on certain remittances it was not paid. It is submitted that such a demand has been made by invoking Section 66A of the Finance Act, 1994. Under Section 66A, liability is on the recipient of service to pay service tax under reverse charge mechanism. The nature of these services and service providers is largely akin to service provided by Foreign Telecommunication Operators (FTOs) as mentioned in para 5 supra. However, on insistence of department, they have paid the demand amount at the time of investigation stage itself and availed Cenvat credit thereon, making the entire situation revenue neutral. Since the tax payable by them under reverse charge mechanism is available to them as CENVAT credit, the demand of tax per se is not sustainable and the whole exercise is revenue neutral.

6.1. In this regard, reliance is placed on the following rulings, wherein the demand of service tax on various services, where the liability to pay service tax was on recipient under RCM and the tax so paid was available as Cenvat credit to the recipient, was set aside on the grounds of revenue neutrality:

• Jet Airways (I) Ltd vs. Commissioner of Service Tax, Mumbai, 2016 (44) STR 465 (Tri-Mumbai). Affirmed by SC reported in 2017 (7) GSTL J35 (SC).
• Thrillophilia Travel Solutions Pvt Ltd vs. Commissioner of C. , Jaipur, 2023 (71) GSTL 178 (Tri-Del)
• Varaha Infra Ltd vs. Commissioner of CGST, Jodhpur, 2023 (70) GSTL 469 (Tri-Del
• K-Air Speciality Gases Pvt Ltd vs. Commissioner of C. Ex., Pune, 2017 (4) GSTL 379 (Tri-Mumbai)
• Texyard International vs. Commissioner of Central Excise, Trichy, 2015 (40) STR 322 (Tri-Chennai).

6.2. In light of the above, they submitted that since demand is not sustainable, no interest and penalty is payable. It is submitted that even though they have paid the demand amount of Rs.37,51,673/- before issuance of SCN, since the situation is revenue neutral,the demand of interest is not sustainable.

6.3. In this regard reliance is placed on the following rulings:

• M/s Steel Authority of India Limited vs. CCE, Bolpur, Final Order No. 76646-76645/2023 dated 1 5.09.2023
• M/S. Jai Balaji Industries Ltd. v. Commissioner of Central Excise, Bolpur, 2023 (6) TMI 1102 – CESTAT KOLKATA

7. The Appellant stated the demands raised in the Notice were barred by limitation. The SCN in this case was issued on 13.04.2011 for the period 01.10.2005 to 31.03.2010. Therefore, SCN is barred by limitation for the period 01.10.2005 to 30.09.2009. It is a settled position of law that extended period is not invocable when demand is revenue neutral. In this regard reliance is placed on the following rulings:

• Hyundai Motor India Pvt. Ltd. vs. CCE & ST, LTU, Chennai, 2019 (29) GSTL 452 (Tri. – Chennai), affirmed by SC reported in 2020 (32) GSTL J154 (Supreme Court),
• Reliance ADA Group Pvt. Ltd. vs. Commr. of ST, Mumbai-IV, 2016 (43) STR 372 (Tri. -Mumbai), and
• Vedanta Ltd. vs. CCE, Tirunelveli, 2019 (28) GSTL 258 (Tri. Chennai)

8. In view of the above submissions, the Appellant stated the demand of service tax confirmed in the impugned order is not sustainable. No penalty is imposable on the demands which have been paid, as there was no malafide intention to evade the tax. Also, no interest or penalty is payable where the demand confirmed is revenue neutral.

9. The Ld. A.R. reiterated the findings in the impugned order.

10. Heard both sides and perused the appeal records.

11. In respect of demand raised under “banking and other financial services”, we observe that the entire amount of disputed tax along with interest was deposited by the Appellant before issuance of SCN. From the impugned order, we observe that out of the total demand of service tax of Rs. 95,22,267/-, the Appellant paid service tax of Rs. 82,67,455/- on 05.10.2010 and interest of Rs. 85,393/- was also paid on 20.01.2011 immediately on receipt of the letter dated 08.11.2010 from the department. In the impugned order, the Ld. Commissioner has rightly observed that there was no malafide intention on the part of the Appellant to evade payment of service tax and accordingly extended the benefit of Section 73(3) of the Finance Act, 1994 and not imposed any penalty. We find that the department has filed appeal against non imposition of penalty. A perusal of the documents available on record indicate that there was no ground for imposition of penalty on this demand, as there was no intention to evade payment of tax. Thus, we hold that the Ld. Commissioner has rightly not imposed penalty. Accordingly, we dismiss the appeal filed by the department on this count.

11.1. Regarding the demand of Rs.12,54,812/-, we observe that the payment on this account was made by the Appellant on 06.08.2009. The interest thereon amounting to Rs.2,39,205/- was also paid on 04.02.2010. Thus, we observe that the payment of service tax along with interest was made much before issue of the Show Cause Notice on 13.04.2011. The Appellant stated that the non-payment of service tax on these charges was on account of inadvertent error arising out of the bonafide interpretation regarding the non-taxability of these charges. We agree with the submission of the Appellant that the benefit of Section 73(3) of the Finance Act, 1994, should have been given for this demand also. In the impugned order, the Ld. Commissioner has not given the benefit by observing that since payment was made beyond one year from the due date of payment of tax, therefore, there was malafide intention on part of the Appellant to evade payment of service tax. We do not agree with the observation of the Ld. Commissioner. Since the payment of service tax along with interest was made before issue of the Notice, we hold that no malafide can be attributed to the Appellant and the benefit of Section 73(3) of the Finance Act, 1994 should have been extended to this demand also. Accordingly, we hold that the penalty under Section 78 of the finance Act, 1994 imposed on the appellant on this count is not sustainable.

12. Regarding the service tax demand of Rs. 1,54,50,000/- confirmed under the head “Telecommunication services” on roaming charges paid to Foreign Telecommunication Operators (FTOs), we observe that the payment of roaming charges was made by the Appellant to FTOs for providing connectivity services to their subscribers when they are abroad. We find that during the relevant period only telecommunication services provided by a ‘Telegraph Authority’ to a person were taxable. In the instant case, FTOs located abroad providing the connectivity services would not fall within the ambit of ‘Telegraphy Authority’ as defined under Section 65(111) of the Finance Act, 1994 read with Section 3(6) of the India Telegraph Act, 1885. Accordingly, we observe that the charges paid for the services rendered by the FTOs cannot be taxed under head “telecommunication services” on the Appellant.

12.1. We find that the issue is no longer res-integra as the issue has been settled by the decision of the CESTAT, New Delhi in case of one of the Appellant’s group Companies, viz. Vodafone Essar Mobile vs. CST, New Delhi, 2017 (6) GSTL 67 (Tri-Del). The Tribunal in the aforesaid ruling was considering whether roaming services provided by foreign telecom company can be taxable under the head “business auxiliary service” wherein the Tribunal has observed as under:

“7. We have heard both the sides and perused the appeal records. The admitted facts of the case are that the subscriber of the appellant while visiting foreign country continue to receive telecom service using the connectivity provided by roaming partner of the appellant in that foreign country. There is no dispute that the services provided by the foreign telecom Company is squarely covered by the tax entry ‘telecommunication service’. However, the tax liability could not be brought in only for the reason that the said provider of service in foreign country is not a Telegraph Authority as required under Finance Act, 1994. The question now is such services, otherwise recognized as telecom service, which can be subjected to tax if provided in India by a Telegraph Authority, can be brought under tax under a different tax entry, namely, Business Auxiliary Service…………………………………”

12.2. We also find that similar observation was made again by CESTAT, Mumbai in Idea Cellular Ltd vs. Commissioner of Service Tax, Mumbai – IV, 2021 (55) GSTL 326 (Tri­Mumbai)fol lowing the Vodafone (supra) ruling.

12.3. In light of the aforesaid decisions, we hold that the demand confirmed in the impugned order on this count is not sustainable. Since the demand is not sustainable consequently, demand of interest and penalty is also not sustainable. Accordingly, we set aside the same.

13. Regarding the demand of service tax of Rs. 37,51,673/-, we observe that the demand has been raised on the ground that the Appellant has paid service tax on certain remittances and service tax was not paid on certain other remittances. We observe that such a demand has been made by invoking Section 66A of the Finance Act, 1994. Under Section 66A, liability is on the recipient of service to pay service tax under reverse charge mechanism. We also observe that the nature of these services and service providers is largely akin to service provided by Foreign Telecommunication Operators (FTOs) as mentioned in para 5 supra. However, the Appellant have paid the demand amount at the time of investigation stage itself and availed Cenvat credit thereon, making the entire situation revenue neutral. Since the tax payable by them under reverse charge mechanism is available to them as CENVAT credit, we observe that the whole exercise is revenue neutral. In this regard, reliance is placed on the following rulings, wherein the demand of service tax on various services, where the liability to pay service tax was on recipient under RCM and the tax so paid was available as Cenvat credit to the recipient, was set aside on the grounds of revenue neutrality:

• Jet Airways (I) Ltd vs. Commissioner of Service Tax, Mumbai, 2016 (44) STR 465 (Tri-Mumbai) -demand of service tax under head “OIDAR service” obtained from foreign service providers, on which service tax was payable by the assessee under reverse charge mechanism was set aside, owing to revenue neutrality. Affirmed by SC reported in 2017 (7) GSTL J35 (SC).
• Thrillophilia Travel Solutions Pvt Ltd vs. Commissioner of C. , Jaipur, 2023 (71) GSTL 178 (Tri-Del) – demand of service tax on import of services, by the assessee was set aside on the grounds of revenue neutrality.
• Varaha Infra Ltd vs. Commissioner of CGST, Jodhpur, 2023 (70) GSTL 469 (Tri-Del – demand of service tax on renting of immovable property service obtained from Director (office), which is payable under RCM was set aside owing to revenue neutrality.
• K-Air Speciality Gases Pvt Ltd vs. Commissioner of C. Ex., Pune, 2017 (4) GSTL 379 (Tri-Mumbai)
• Texyard International vs. Commissioner of Central Excise, Trichy, 2015 (40) STR 322 (Tri-Chennai).

13.1. In light of the above decisions, we hold that the entire situation is revenue neutral and under these circumstances no interest and penalty is payable.

14. The Appellant stated that there is no suppression of fact with an intention to evade payment of tax exists in this case. Accordingly, they contended that extended period not invocable in this case. We find that the Appellant has paid the service tax along with interest wherever payable, before issue of the Notice. The department has not brought in any evidence on record to substantiate the allegation of suppression. In the absence of any such evidence, we hold that invocation of extended period to demand service tax is not sustainable. Accordingly, the demands confirmed in the impugned order are liable to be set aside on the ground of limitation also.

15. In view of the above discussions, we pass the following orders:

(i) The demand of Rs. 12,54,812/- along with interest of Rs.2,39,205/- confirmed in the impugned order, is upheld. Penalty imposed under Section 78 of the finance Act, 1994, is set aside.

(ii) The service tax demand of Rs.1,54,50,000/- confirmed in the impugned order under the head “Telecommunication services is set No interest or penalty imposable on this demand.

(iii) In respect of the confirmed demand of service tax of 37,51,673/-, no interest or penalty imposable.

(iv) The appeal filed by the department is dismissed.

(v) The appeals are disposed on the above terms.

(Dictated and pronounced in the open Court)