The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Mumbai Bench has held that satellite transponder capacity obtained from foreign satellite service providers for providing international long-distance, enterprise data and internet services could not be classified as Business Support Services (BSS) for levy of service tax.
The bench of S.K. Mohanty (Judicial Member) and M.M. Parthiban (Technical Member) observed that the disputed services were essentially in the nature of telecommunication services and that the foreign satellite service providers were not “telegraph authorities” within the meaning of the erstwhile Finance Act, 1994 read with the Indian Telegraph Act.
The appellant/assessee was engaged, among other activities, in providing International Long Distance, Enterprise Data and Internet services. For providing connectivity services to its customers, the company used capacity on satellite transponders on a lease basis in the form of frequency bandwidth obtained from Foreign Satellite Service Providers (FSSPs).
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The arrangement involved the use of satellite infrastructure through which signals were transmitted to satellites and routed to Land Earth Stations at the desired destination, facilitating connectivity with terrestrial networks. Tata Communications treated the services received from the foreign providers as telecommunication services.
The Department, however, took a different view. According to the Revenue, the transponder capacity services constituted Business Support Services, more specifically infrastructural support services, under Section 65(104c) of the Finance Act, 1994.
On this basis, the Department initiated proceedings seeking recovery of service tax, interest and penalties from Tata Communications.
The first Show Cause Notice dated October 20, 2011 covered the period from 2006-07 to 2010-11 and proposed a service tax demand of ₹21,68,41,780.
A subsequent Show Cause Notice dated August 17, 2012, covering 2011-12, proposed an additional service tax demand of ₹1,16,80,200, along with applicable interest and penalties. The aggregate tax demand involved in the proceedings was therefore approximately ₹22.85 crore.
The adjudicating Commissioner examined the matter and ultimately dropped the proceedings through a common order dated January 6, 2017.
The principal question before the Tribunal was whether the capacity of satellite transponders obtained on a lease basis from Foreign Satellite Service Providers constituted a taxable service under the Finance Act, 1994.
The Tribunal framed two principal issues: whether the transponder capacity services received by Tata Communications were liable to service tax and whether the dropping of the Show Cause proceedings by the adjudicating authority was legally sustainable.
The classification of the service was critical because the Revenue sought to bring the transaction within the taxable category of Business Support Services, whereas Tata Communications maintained that the transaction represented telecommunication services obtained from foreign providers.
Appearing for the Revenue, the Department argued that the provision of transponder capacity constituted infrastructural support and was therefore appropriately classifiable as BSS.
According to the Department, the service received from the FSSPs was taxable under the reverse charge mechanism under Section 66A of the Finance Act, 1994.
The Revenue relied upon the Tribunal’s decision in Ushodaya Enterprises Private Limited, contending that the disputed services were liable to be treated as Business Support Services and that Tata Communications was consequently required to discharge the service tax liability under reverse charge.
Tata Communications disputed the Revenue’s classification.
The company pointed out that it had entered into agreements with foreign satellite service providers including Inmarsat Global Limited, Intelsat and Thaicom Public Company Limited for obtaining telecommunication services through the “Space Segment”, comprising satellite and associated infrastructure owned, leased or operated by those service providers.
According to Tata Communications, the agreements did not provide the company with the underlying infrastructure itself. Rather, the foreign providers supplied telecommunication services through their own satellite infrastructure.
Therefore, the transaction could not properly be described as infrastructural support or BSS.
The company further argued that BSS was a generic category and ordinarily covered support activities such as office facilities, secretarial services, customer relationship management, transaction processing and similar business support functions.
By contrast, the disputed service involved highly technical satellite bandwidth and connectivity arrangements and was specifically covered by the statutory concept of telecommunication services.
A significant part of assessee’s argument concerned the classification principle under Section 65A of the Finance Act, 1994.
The company contended that where a service could potentially fall under more than one taxable category, the more specific description must be preferred over a general description.
The Tribunal considered this principle while analysing whether the Department could classify a technically specific telecommunication arrangement as the more general category of Business Support Services.
The Tribunal ultimately found the Revenue’s classification approach unpersuasive.
The Tribunal observed that Tata Communications used transponder bandwidth to provide long-distance, enterprise data and internet services.
Unlike a conventional dedicated private connection between two points on earth, the arrangement in question involved transponders facilitating communication through satellite relays.
Nevertheless, the Tribunal found that, in substance, the service remained a telecommunication service between points on earth.
The Tribunal placed considerable reliance on the Board’s clarification concerning the taxability of telecommunication services provided by foreign service providers.
Under the service-tax regime applicable during the relevant period, telecommunication services were taxable only where supplied by a person falling within the statutory definition of a “telegraph authority.”
The Tribunal noted that a telecommunication service was taxable under Section 65(105)(zzzx) only when provided by a person granted the requisite licence under the first proviso to Section 4(1) of the Indian Telegraph Act.
Foreign satellite service providers did not fall within that definition under Indian law.
Accordingly, the Tribunal found that the relevant foreign providers were outside the statutory taxability clause applicable to telecommunication services.
The Tribunal also considered an important clarification issued by the Central Board of Excise & Customs.
An earlier CBEC communication dated July 15, 2011 had taken the view that International Private Leased Circuit services received from abroad could attract service tax under BSS.
However, the Board subsequently re-examined the matter and issued a clarification dated December 19, 2011, correcting that position.
The corrected clarification specifically recognised IPLC as a telecommunication service and stated that such services were taxable only where supplied by a person holding the requisite licence under the Indian Telegraph Act.
Most importantly, the Board clarified that the earlier view that a service otherwise constituting telecommunication service could be treated as Business Support Service was erroneous.
The CESTAT considered this clarification directly relevant to the dispute involving Tata Communications.
After examining the factual arrangement and the statutory provisions, the Tribunal concluded that Tata Communications had received only the specified transponder bandwidth service for use in providing its own long-distance, enterprise data and internet services.
It had not received the type of business support activities contemplated within the BSS category.
The Tribunal therefore held that there was no basis for bringing the disputed services within the taxable category of Business Support Services.
The Tribunal found that the issue was already covered by earlier decisions of coordinate and other benches.
In Vedic Broadcasting Limited, the Tribunal had examined satellite transponder capacity and observed that the essential transaction involved securing dedicated bandwidth from the satellite transponder. The Tribunal in that case had rejected the Department’s attempt to treat transmission-related activity as a separate taxable service where the underlying transaction involved a non-taxable service.
The Mumbai Bench in the Tata Communications case relied upon this reasoning while examining the nature of the satellite capacity arrangement.
The Tribunal also referred to the decision in Bharti Teleport Limited, where transponder services supplied by Intelsat were treated as telecommunication services and the attempt to classify them as BSS was rejected.
The coordinate bench had found that Intelsat was not covered by the definition of a telegraph authority under the Telegraph Act and, consequently, its services were not taxable under the relevant telecommunication service provision.
The Tribunal noted that different proceedings had seen the Department attempt to classify similar transponder services under different taxable categories.
In one case, the Department had sought to classify the services as Business Support Services, while in another matter the same type of services had been treated as broadcasting services.
The Tribunal observed that divergent views on classification supported the conclusion that the assessee could not be accused of fraud or suppression merely for adopting its classification position.
The Tribunal further noted that even if service tax had been payable under BSS, the assessee would have been entitled to credit of the tax as an input service used for providing output services. This supported the view that the situation was revenue neutral and weakened the basis for invoking an extended limitation period.
The Tribunal specifically distinguished the decision relied upon by the Revenue in Ushodaya Enterprises Private Limited.
According to the Mumbai Bench, that decision did not examine the taxability of the disputed transaction specifically in the context of telecommunication services in the manner required in the present case.
The Tribunal noted that the Ushodaya decision had ultimately set aside the demand on limitation grounds and therefore could not be treated as controlling authority for the classification question arising in Tata Communications’ case.
After considering the statutory framework, CBEC clarifications, contractual arrangements and earlier Tribunal decisions, the CESTAT concluded that the alleged service tax liability under Business Support Services was not sustainable.
The Bench further held that, in view of decisions of coordinate benches on the same issue, it could not take a different view without compelling reasons.
The Tribunal found no reason to interfere with the adjudication order that had dropped the Show Cause Notices issued against Tata Communications.
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