Sale of domain name is Sale of goods, Service tax not payable

M/s Spectranet Limited Vs Commissioner of Service Tax (CESTAT Delhi)

(i) So far the first issue of levy of service tax on the monthly rentals charged by the foreign internet service provider for procuring band with, under reverse charge mechanism, we hold that such foreign internet service provider are not Telegraph authority, which is a condition precedent for levy of service tax. Admittedly, the provider of such service is not a Telegraph authority under the Indian Telegraph Act. Accordingly, we hold that no taxable service is rendered by the foreign service provider and accordingly no amount of tax is payable.

(ii) The next issue is regarding service tax on rental charge by the appellant from its customers/ subscribers towards rent of its wireless routers/ radio. Admittedly, this activity qualify as deemed sale of goods as the said activity tantamount to ^“transfer of right to use these goods”. Admittedly, in the transaction, the goods in question were delivered by the appellant and the effective possession and control of the goods have been given. Thus, the said activity amounts to sale, on which admittedly appellant have paid VAT / sale. Accordingly, no service tax is payable by the appellant on the rental of wireless/ router or radio.

(iii) So far the demand based on rental / lease charges (Interconnectivity charges) received by the appellant from other ISP for providing use of its optical fiber cable is concerned, it is a service provided by one Telegraph authority to another. Service Tax under the provisions of lease circuit service or telecommunication service is exigible only when service is provided by a Telegraph authority to a subscriber. This has also been clarified by the CBEC vide Circular No. B/11/1/2001-TRU and such view have also been taken by the Coordinate bench of this Tribunal in the case of Reliance Telecom (supra).

(iv) So far the demand for sale of domain name is concerned, the issue stands decided in favour of the appellant in the case of Tata Sons Limited (supra) wherein it has been held that transaction in domain name is a transaction in property in the goods and amounts to transaction of sale of goods. Domain name are akin to trade mark, making them the property of the person who owns it.

FULL TEXT OF THE CESTAT JUDGMENT

Appellant is filing the present appeal against the Order-in-original No. 48 to 50/AKM/ CST/ ADJ/2013 dated 01.08.2013.

2. The appellant is engaged in the business of providing Internet Services to various customers and registered with the Service Tax Department under category of ‘Leased Circuit Services’ & ‘Online Information & Database Access Services’.

3. During the period 2002-03 till 2006-07, the appellant had entered agreements with foreign internet service providers, for procuring band with on undersea cables laid between countries for purpose of its business. For this, monthly rentals were charged by such foreign internet service providers and remitted by the appellant in foreign exchange.

4. Further, appellant provides internet connectivity to various customers through underground fibre cables. However, in case a customer desires wireless connection, it provides the customer a wireless router which converts internet signals into radio waves. This router/ radio is connected to the fibre cable of the appellant’s network. This wireless router/ radio is either purchased by the customer from the appellant, or given on rent to it. When given on rent, the appellant charges rental charges on which it has been paying VAT.

5. The appellant gives certain portion of its optical fibre cables on lease to other Internet Service Providers (ISP). In such cases, the other ISP use the fibre cable of appellant to provide Internet Services to their customers. In this regard, the appellant charges certain rental/ lease charges from the ISPs.

6. The appellant has been purchasing domain names from ICANN accredited Registrars, such as Directi Internet Solutions P. Limited. These domain names are further sold to the appellant’s customers, for which it charges a price.

7. The appellant is registered with the Service Tax Department and have been filing regular returns and depositing the admitted tax on self assessment basis. Pursuant to audit by the Revenue of the appellant’s record, show cause notices were issued as follows:

8. The aforemention demands were raised under each of the show cause notices, the details are:

(a) Demand was raised under Section 66A (RCM) of the Finance Act, 1994 on the remittances made by the appellant as monthly rentals charged by foreign internet service providers for procuring bandwith under the category of ‘Leased Circuit Services/ Telecommunication Services’.

(b) Demand was raised on the rental charges charged by the appellant from its customers for the rent of its wireless routers/ radio under the category of ‘Leased Circuit Services / Telecommunication Services’.

(c) Demand was raised on the rental/ lease charges (Interconnectivity Charges), charged by the appellant from other ISP for the rent/ lease of its optical fibre cables under the category of ^„Leased Circuit Services/ Telecommunication Services’.

(d) Demand was raised on the amounts received by the appellant for the sale of domain names to various customers. The category of services was never specified; however loose reference was made in the Notices to ^„Online Information and Database Access or Retrieval Services’.

(e) Proposal was also made for imposition of interest & penalties under the respective provisions.

9. Learned Commissioner vide common impugned order in original, has confirmed the proposed demand, alongwith penalty under Section 77 and 78 of the Act recording the following findings:

(i) That the foreign internet providers are “Telegraph Authorities” under their respective laws, in their place of business and hence procuring bandwith from them would tantamount to receiving leased circuit/ telecommunication services. Therefore, ld. Commissioner has held that the foreign remittances are taxable at the hands of the appellant for the period post the introduction of Section 66A (w.e.f. 18.04.2006) of the Act. Hence, ld. Commissioner has dropped the demand on this count for the period prior to 18.04.2006.

(ii) That wireless routers/radios are used to provide a link between two different locations, for use by a customer for transmission of data/speech through internet. It was held, that without these routers, a customer will not have access to the Appellant’s network. Consequently, it was held that the leasing of wireless router/radio would be taxable under leased circuit/telecommunication services.

(iii) That the leasing of optical fibre/duct to other ISPs, also tantamount to leased circuit/ telecommunication services because these ducts provide link for availing telecommunication services. It has been held that these fibres act as a bridge, that provides connectivity between two points.

(iv) That the domain names are tools to reach another person through a computer network. It is a dedicated link between two different locations to transmit data and includes all types of information processed on a computer network. Therefore, the same is liable be taxed under category of ^„computer network services/online information & database access or retrieval services‟.

(v) That the Best Judgment undertaken in terms of Section 72 of the Act, is just & proper.

(vi) That extended period of limitation was held applicable as the bifurcation of the tax demand pertaining to the periods under SCN-I & SCN-II was unavailable to the Ld. Commissioner.

(vii) That Appellant was held liable under Section 76, 77 & 78 of the Act, for non-payment of service tax under the taxable heads of services.

10. Learned Counsel for the appellant have made the following arguments ground wise:

(i) As regards demand made on the remittances made by the appellant, as monthly rentals, charged by foreign internet service provider for procuring band with, under the category of leased circuit service/telecommunication services.

10.1 The appellant have entered into an agreement with FLAG Atlantic and REACH for procuring bandwith on undersea cables, laid between several countries for rendering internet services. In lieu of these services, the appellant was paying monthly rentals for the period 2002-03 to 2006-07. The present case involves levy of service tax on the ^„rentals paid by the appellant to FLAG Atlantic and REACH under the category of ^„leased circuit services‟ as defined under Section 65(60) of the Finance Act, 1994 read with Section 65(105)(zd) of the Act, on reverse charge basis.

10.2 The contention of revenue is that ^„leased circuit service‟ have been rendered by FLAG Atlantic and REACH to the Appellant. It is submitted that leased circuit services have been defined to mean services, in relation to a leased circuit, rendered by a telegraph authority to a subscriber. [Section 65 (105)(zd)].

10.3 Section 65(111) of the Act, borrows the meaning of the term ^„telegraph authority‟ from Section 3(6) and Section 4(1) of the Indian Telegraph Act, 1885, which includes either the Director-General of Posts and Telegraphs or a person who has been given a license, by the Central Government to establish, maintain and work telegraphs.

10.4 In the present case, it is clear that neither FLAG Atlantic nor REACH qualify the definition of ^„telegraph authority‟. Thus, on strict construction of the provisions of the Act, FLAG Atlantic and REACH cannot be said to have provided ^„leased circuit services‟ to the Appellant. In this regard, the Appellant relies upon the following circulars and judicial decisions:

a. Circular F. No. 137/21/2011-ST dated 15.07.2011 which provides that a foreign telecom service provider cannot constitute a telegraph authority in India and therefore cannot provide leased circuit/telecommunication services in India;

b. Vodafone Essar Mobile vs.CST, 2017 (9) TMI 359-CESTAT New Delhi

c. TCS-Serve Ltd. vs. CST, 2014 (33) STR 641 (Tri-Mum)

d. Infosys Ltd. vs. CST, 2014 TIOL 409 (Tri-Bang)

11. As regards demand on the rental charges charged by the appellant from its customers towards the rent of its wireless routers/ radio, under the category of leased circuit service/ telecommunication services the learned Counsel submits-

11.1 The Appellant has entered into an agreement with various Indian Customers wherein it provides wireless routers on rent. The routers remain under the possession and control of the customers during the period of the agreement, and in return, the Appellant charges monthly rentals. The Appellant discharges service Tax on the internet services, however no service tax is discharged on the monthly rentals. The impugned OIO has confirmed the demand of service tax on monthly rentals under the category of ^„leased circuit services‟.

11.2 It is submitted that the demand is not sustainable for the following reasons:

The transactions between the Appellant and its customers tantamount to ^„transfer of right to use goods‟, which is construed as a ^„deemed sale‟ on which no service tax is leviable. In this regard, the Appellant places reliance on the case of Bharti Telemedia Limited vs. State of Tripura, 2015-VIL-227-TRI wherein it was held that when the possession and control of goods has been passed, it would amount to transfer of right to use. Reliance is also placed on Circular No. 334/1/2008-TRU dated 29.02.2008 which explains the scope of transfer of right to use goods;

The demand is not sustainable under ^„lease circuit services‟ for the reason that by provision of router on lease, the Appellant has not provided any ^„dedicated link to a subscriber‟. Thus, the definition provided under Section 65(60) of the Act is not satisfied.

12. So far the demand raised on rental/ lease charges (enter connectivity charges) charged by the appellant from other ISP, under agreement for the rent/ lease of its optical fiber cable, under the category of lease circuit services/ telecommunication services, it is urged-

This third category relates to agreements between the Appellant and Indian ISPs, wherein the ISPs have taken the optical fibre cables on lease for provision of internet services under these agreements, the Appellant only provides the cables on lease and does not render any internet services to the ISPs. The OIO has confirmed the demand under the category of leased circuit services.

12.1 In this regard, it is submitted that the demand is not sustainable as the services, if any, have been provided by one telegraph authority to another, which are not susceptible to service tax. This position has been clarified by the CBEC itself vide Circular No. B.11/1/2001-TRU dated 09.07.2001, which provides that inter-connectivity charges paid by one ISP to another ISP would not be subject to service tax. Further, judicial decisions have also held that a telegraph authority cannot be construed as a ^„subscriber‟, for the levy of service tax under the category of leased circuit services. The following decisions are relied upon:

a. Fascel Ltd. v. CST 2007 (7) STR 299 (Tri-Bang.);

b. Power Grid Corporation of India Ltd vs. CST 2011 (24) STR 307 (Tri-del.)

c. Reliance Telecom Ltd. v. CST 2007 (7) STR 595 (Tri-Ahmd.)

13. As regards the demand of service tax on the amount received by the appellant for the sale of domain name to various customers, it is urged-

The last category relates to demand of service tax on sale of domain name by the Appellant to Indian customers, in return for a consideration. The said demand has been confirmed under the category of ^„computer network services‟ or ^„online information and database access or retrieval service‟ (‘OIDAR’). It is submitted that this demand is not sustainable for the following reasons:

i. The first SCN issued to the Appellant on 08.02.2008 proposes the recovery of demand under ^„computer network services‟, which is not a category of service provided under the provisions of Section 65 of the Act. Given this, the demand itself in not sustainable on the ground of vagueness;

ii. By issuance of domain names, no online information or data has been accessed or retrieved by the customers. Sale of domain names does not involve any provision of ^„information‟ or ^„data‟. Further, the impugned OIO also fails to examine as to how domain names are in the nature of information for the levy of service tax, under OIDAR services; and

iii. Issuance of domain names is in the form of a transaction of sale of goods. This is because domain names have, as on date, achieved the sanctity on the same lines as ^„trademarks‟, making them the property of the person who owns them (Tata Sons Limited vs. Manu Kosuri ILR (2001) I Delhi 236). Given this, no service tax can be levied on the sale of domain names.

13.1 Further, learned Counsel submits that by way of alternative arguments, appellant are entitled to cum tax benefit as admittedly they have neither charged nor collected service tax on the disputed transaction. It is further urged that from the allegation made in the show cause notice, no case of suppression of facts, falsification of record or any malafide is alleged nor found. Thus, the demand is barred for the extended period of limitation, particularly for the period October, 2002 to October, 2006 and January, 2008 to September, 2009. Further, under the facts and circumstances, no penalty is imposable under Section 76 and 78 of the Act.

14. Opposing the appellant, learned Authorised Representative for Revenue urges that lease circuit service was merged with telecommunication service w.e.f. 01.06.2007. Thus, for the demand raised for LCS/ telecommunication service the definition of LCS is relevant till the period 01.06.2007 and thereafter telecommunication service is applicable. The definition of LCS requires service to be provided to a subscriber, while the definition of telecommunication service does not have any such restriction as in place of word subscriber in LCS, the ^„person‟ is mentioned in the telecom service.

15. Further, telecommunication service as defined in Sub-section 109(a) of Section 65 includes data services and also includes data transmission services including provision of access to wired or wireless facilities and services, specifically designed for efficient transmission of data.

15.1 The exclusion clause in the definition of telecommunication service provide for exclusion of any service provided by any person in relation to internet telecommunication service referred to in clause (zzzu) of Section 65(105). The phrase internet telecommunication in the exclusion clause was earlier “internet telephony” till 16.05.2008, when the word telephony was replaced with the word ^„telecommunication‟. Lease circuit means a dedicated link provided between two fixed location for use of the subscriber and includes a speed circuit, data circuit or telegraph circuit. The data circuit can be both wired or wireless.

15.2 So far the demand on the rental charges received by the appellant under agreement titled ^„radio set up and maintenance agreement‟ falls under deemed sale, “transfer of right to use” or under LCS / TCS. The essential / dominant character of the wireless router agreement evidences that appellant is engaged in the business of providing internet services. Their clients have executed an agreement with them to avail internet band with through radio connectivity and have requested them to install radio at its site for connectivity. The agreement is for a period of three years subject to the condition that their client shall avail internet band with for a minimum period of one year. The client holds the equipment as bailee/ trusty of appellant, and is obliged at all times to protect the appellant for its absolute ownership right over the equipment. The client cannot transfer / sell or sublet the equipment. Equipment remains the exclusive property of appellant. On the cessation of services from appellant, client shall promptly return the equipment to appellant. Client is required to pay initial set up fee of Rs. 30,000/- for connection of 512 KVPS. Further, the client has to pay additional set up fee as may be specified by appellant, for upgrading the internet bandwith. In case of default by the client, appellant is entitled to stop the service of internet bandwith and also have the right to retain the possession of the equipment. Further, appellant have got the right to inspect during continuation of the agreement inspect the premises where the equipment is kept, for satisfying all the conditions and maintenance of the equipment.

15.3 Thus, from the aforementioned stipulation in the agreement, it is evident that charges under the agreement relate to “internet data services”, as well as separately for router rental. Therefore, a dominant character of the service under this agreement had a particular speed classifiable under leased circuit service upto 01.06.2007 and telecommunication service thereafter. The router rental is only an incidental part of the service.

15.4 As regards the demand on rental/ lease charges “interconnectivity charges” received by the appellant for providing internet optical cable to Indian customers or ISP, the learned Authorised Representative urges-

The Fascel Ltd. case related to the period 2001 to 2005, while the Reliance Telecom case just followed the ratio of the Fascel case and the period was also prior to 01.06.2007, when the leased Circuit service got merged into telecommunication service, and a new and different definition of taxable service came into effect. In the new definition, the word ^„subscriber‟ was replaced by the word ^„person‟. The Fascel case judgment of this Hon‟ble Tribunal laid the ratio that one Telegraph authority cannot be a subscriber to another Telegraph authority, in the context of the old definition of leased circuit service. Hence, the case law is not relevant to the portion of demand made for the period 01.06.2007 to 31.03.2012. Since the party has not taken any ground other than the above case laws to challenge the demand for this transaction, the demand may be sustained for the period 01.06.2007 to 31.03.2012.

15.5. Further, the argument of the appellant that by virtue of exclusion clause in definition of telecommunication service, no internet related activity can be classified as telecommunication service. He submits that telecommunication service includes data transmission services under sub-clause (vii) of Section 65(109a) includes the provision of access to wire or wireless facilities and service specifically designed for efficient transmission of data. The exclusion clause only covers internet telecommunication which was earlier internet telephony as defined under Section 65(105) (zzzu). Thus, what is exempt is only internet telephony, not other services.

15.6 So far the demand with respect to sale of domain name is concerned, a domain name is required to give an address to a website on the internet, as no data transaction can take place without having a website address. Providing of its domain name is also related to ^„assess the computer network‟, as domain name is to be linked to internet address by writing computer code. Thus, domain name has integral connection or nexus with data transcribed and thus forms part of OIDAR service.

15.7 Learned Authorised Representative further urges that extended period of limitation have been rightly invoked in the facts and circumstances of the case. Alternatively, he states in any case demand for normal period may be upheld.

16. Having considered the rival contentions and after perusal of the record, we hold as follows:

(i) So far the first issue of levy of service tax on the monthly rentals charged by the foreign internet service provider for procuring band with, under reverse charge mechanism, we hold that such foreign internet service provider are not Telegraph authority, which is a condition precedent for levy of service tax. Admittedly, the provider of such service is not a Telegraph authority under the Indian Telegraph Act. Accordingly, we hold that no taxable service is rendered by the foreign service provider and accordingly no amount of tax is payable.

(ii) The next issue is regarding service tax on rental charge by the appellant from its customers/ subscribers towards rent of its wireless routers/ radio. Admittedly, this activity qualify as deemed sale of goods as the said activity tantamount to ^„transfer of right to use these goods‟. Admittedly, in the transaction, the goods in question were delivered by the appellant and the effective possession and control of the goods have been given. Thus, the said activity amounts to sale, on which admittedly appellant have paid VAT / sale. Accordingly, no service tax is payable by the appellant on the rental of wireless/ router or radio.

(iii) So far the demand based on rental / lease charges (Interconnectivity charges) received by the appellant from other ISP for providing use of its optical fiber cable is concerned, it is a service provided by one Telegraph authority to another. Service Tax under the provisions of lease circuit service or telecommunication service is exigible only when service is provided by a Telegraph authority to a subscriber. This has also been clarified by the CBEC vide Circular No. B/11/1/2001-TRU and such view have also been taken by the Coordinate bench of this Tribunal in the case of Reliance Telecom (supra).

(iv) So far the demand for sale of domain name is concerned, the issue stands decided in favour of the appellant in the case of Tata Sons Limited (supra) wherein it has been held that transaction in domain name is a transaction in property in the goods and amounts to transaction of sale of goods. Domain name are akin to trade mark, making them the property of the person who owns it.

17. To sum up we have allowed the appeal of the appellant on all the four issues. Accordingly, the impugned order is set aside. The appellant is entitled to consequential benefits, in accordance with law. As we have decided the appeal on merits, we leave the question of limitation open.

(Order pronounced on 05.08.2019).