CESTAT: Service Tax Cannot be Levied unless Service Provider Provides Lease and is a ‘Telegraph Authority’

CESTAT: Service Tax Cannot be Levied unless Service Provider Provides Lease and is a ‘Telegraph Authority’

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad, by its division member comprising of Anil Choudhary (Judicial Member) and P.V. Subba Rao (Technical Member) observed, that service tax cannot be levied unless service provider should be both a ‘Telegraph Authority’ under the Indian Telegraph Act, 1885 and have the principal business of receiving deposits and lending.

In the present case, the appellant/assessee- M/s Qualcomm India Pvt ltd, is a subsidiary of Qualcomm Inc. USA. The said Qualcomm Inc USA has entered into a Master Service Agreement with a group entity ‘Verizon Inc’ located outside India for providing telecom bandwidth and telephone related services for all its affiliated entities across the globe.

The Appellant being one of the group entities of Qualcomm Inc USA, avails telecom bandwidth and telephone services from Verizon Inc, as per the terms of the agreement. Verizon Inc raises invoice directly on the Appellant on a monthly basis. The said services received by the Appellant was used by them in provision of their taxable output services for the period under dispute October 2006 to July 2009.

The Revenue was of the view that the services availed by the Appellant from Verizon Inc, USA merits classification under ‘Internet Telecommunication Service’ and demanded service tax.

The Appellant contended that the services availed by them from Verizon Inc are not in the nature of Internet Telecommunication service and at best should be classified as ‘Leased Circuit Service’ until 31 May, 2007 and from 1 June, 2007 such services at best would merit classification as ‘Telecommunication service’.

However, under both these categories, there is a requirement under the law that the service provider should qualify as ‘Telegraph authority’ i.e., the person licensed under Indian Telegraph Act, 1885. Since Verizon Inc, USA did not have such a license granted under the Indian Telegraph Act, 1885, the services availed from Verizon Inc, USA would not be liable to service tax.

Ignoring the above submissions, the Ld. Adjudicating Authority confirmed service tax demand along with interest, penalties including mandatory penalty vide Order-in-Original dated 28 March, 2012.

Being aggrieved the appellant filed appeal before the CESTAT.

The issue involved in the appeal was whether the services availed by the Appellant from Verizon Inc (located outside India) were liable to service tax as ‘Internet Telecommunication Service’ or were classifiable as ‘Leased Circuit Service’ (up to 31 May 2007) and there after ‘Telecommunication Service’, having been provided by an entity not qualifying to be a Telegraph Authority, whether liable to service tax?

The bench noted that the issue herein was squarely covered by the precent ruling of this Tribunal, co-ordinate bench in TCS E-Serve Ltd vs. Commissioner of Service Tax, Mumbai (2014). The Tribunal had held that service tax liability does not arise under Section 66A of the Finance Act, if service is not specified under Section 65(105) of the Finance Act.

Furthermore, the CESTAT also relied on the ruling of Andhra Pradesh High Court in Karvy Consultants Limited (2006), wherein the question involved was levy on service of banking and financial transaction under taken by Karvy Consultants Ltd, which was registered as NBFC, but their principal business was not of receiving deposit/lending. The High Court held that the service provider should be both a company and with principal business of receiving deposit/lending. Mere registration as a Non-Banking Financial Company (NBFC) was not enough under the provision of service tax for levy.

Applying the aforesaid ratio, the CESTAT, held that it is not enough that the service provider provides lease services but it should also be a ‘Telegraph Authority’ as defined in the Act. Unless both the conditions are cumulative satisfied, service tax levy is not attracted.

In view of the same, the CESTAT allowed the appeal and set aside the impugned order.