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

[Dr. Sanjiv Agarwal]

Taxable Service

Section 65(105)(zh) defines ‘taxable service’ as under —

“taxable services” means any service provided or to be provided to any person, by any person, in relation to online information and database access/retrieval or both in electronic form through computer network, in any manner.

Service in respect of online information and database access or retrieval or both in electronic form through computer network are taxable. Such services should be provided by any commercial concern to a customer. If such services are not provided by a commercial concern or to a customer, it will not be a taxable service. However, Finance Act, 2006 has substituted ‘any person’ for ‘a commercial concern’ and as such, it shall not be a condition for a service provider to be a commercial concern any more. These services should relate to—

-  on-line information.

- database access and/or

- database retrieval

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.

‘On-line’ means communications that provide a real time connection. A facility or capability available directly on a computer. A peripheral such as a printer or modem when it is directly connected to a computer and ready to operate. A computer connected to another remote computer in a network through a modem link.

‘On-line’ means communications that provide a real time connection. A facility or capability available directly on a computer. A peripheral such as a printer or modem when it is directly connected to a computer and ready to operate. A computer connected to another remote computer in a network through a modem link.

‘On-line service’ is a service that provides an online connection via modem for access to various services. Online services fall into four main groups:

(1) Commercial Services such asAmericaOnline (AOL) and Compu. Serve. Many services charge a fee.

(2) The Internet is a world-wide network of computer systems located at government, commercial and educational institutions. Internet opens up a floodgate of information. The main problem for casual users is that there is not central listing of everything that is available.

(3) Specific databases meant for scholars and researchers can be accessed through specialized online services such as Dow Jones News.

(4) Local Bulletin boards often run from private homes, local PC Users Groups, or local schools.

‘Database’ is a collection of related objects, including tables, forms, reports, queries, and scripts, created organized and maintained by a database management system. A database can contain information of any type ranging from say personal data like a magazine subscription list, to a huge organizational data like payrolls etc. It also includes collections of graphical images and pieces of video etc.

‘Computer database’ is a representation of information, knowledge, facts, concepts or instructions in text, image, audio, video that are being prepared or have been prepared in a formalized manner or have been produced by a computer, computer system or computer network and are intended for use in a computer, computer system or computer network.

‘Access’ is reaching (especially to retrieve data from) a hard disk; To log in to a computer system or network. It is gaining entry into, instructing or communicating with the logical, arithmetical, or memory function resources of a computer, computer system or computer network.

‘Data Retrieval’ is any transaction that retrieves a specific data from a database.

It is felt that services provided by on-line, B2B websites, paid services of portals and internet banking and e-commerce (for providing on-line data on payment) would be covered under this service. Similarly, the business of electronic data management, services provided by registrars and transfer agents, issue house processing, computer based job works etc. relating to on-line information and data base access or retrieval shall be covered under the tax net.

In the context of this service, it may be relevant to point out the manner in which on-line information and database access/retrieval is generally made available. First, the function of what is commonly known as Internet Service Providers (ISPs). The ISPs provide telecommunication network or gateways necessary to access messages and databases and other information holdings of content providers. The second element is on-line information provision services which includes database services, provision of information on websites, provision of on-line data retrieval services from data bases and other information, to all or limited number of users and provision of on-line information by content providers.

Internet Service Providers (ISPs) provide access to the websites through the computer network and the websites. Websites, in turn, provide the database or information. Some of the well-known ISPs operating in India are VSNL, MTNL, BSNL, Satyam online, Bharti, Tata, RPG, HCL, Wipro, BPL, Mantra online, Dishnet etc. They normally charge the customers on the basis of usage of time (hours). They also provide dedicated lease lines on lumpsum payment basis. Clearly ISPs provide service in relation to on-line information and database access or retrieval. They are an integral part of the internet operations and without their service, the data or information can neither be accessed nor retrieved. They are, therefore, liable to pay service tax on the amount charged from the customers whether on usage time basis or on lease line basis.

As regards paid websites, a few examples of Indian dotcom companies are, indiainfoline.com, taxindiaonline.com, laws4india.com, legalpundits.com, indiacorproateadvisor.com, texite.com etc. who charge the customer for certain specific information contained in their website either in advance or credit basis. They shall also be liable to pay service tax on the paid services provided by them. It is obvious that where the information is supplied free of charge, no service tax is payable.

Content Development

It may be noted that content development for websites or online access or retrieval is not taxable under this category. Finance Act, 2007 has introduced a new category of taxable services — ‘development and supply of content’ wherein development and supply of content for use in online information and database access or retrieval services shall be liable to service tax.

Departmental Clarification

Departmental clarifications on on-line information and database access/retrieval services as per Letter No. F. No. B.11/1/2001-TRU, dated 9-7-2001 are as follows:

On whether e-commerce transactions (other than providing online information and data) are covered in the ambit of service tax, it has been clarified that in e-commerce transactions, no service of online information and database access/retrieval is involved. Therefore, e-commerce transactions will not ordinarily be covered under the service tax net. Normally, the web sites do not charge the surfers for information on sale of goods or services offered by them. If at all they do, service tax will be payable on the amount charged for providing the information.

Free downloading of information, data, software etc. from websites would not fall within the meaning of taxable services as free services does not have any taxable value. 

Another point raised relates to applicability of service tax on inter-connectivity services provided by one ISP to another and the charges recovered for such services. It is understood that this is done to inter connect various networks so as to reach the server where the information is stored. It is informed that interconnection of one ISP to another is a commercial and technical arrangement under which service providers connect their equipment, networks and services to enable their customers to have access to the data or information. Through this arrangement, it is the customer of an ISP who ultimately receives on-line information and database access and/or retrieval service. Service tax on the amount charged from him is payable. Therefore, interconnection charges paid by one ISP to another ISP are not liable to service tax.

On whether the cyber cafes will be subject to service tax, it has been clarified that the cyber cafes provide only the infrastructure such as computer terminals and internet connection. It is the ISP or web-sites who provide on-line access or retrieval of information. Therefore, cyber cafes are not liable to pay service tax. Service provided by ISP to cyber cafe are taxable and the ISP will pay the tax on charges realised from the cyber cafe.

It may be noted that internet cafes are taxable under a separate taxable services category.

In Software Technology Park v. CCE, Trivandrum [2005 -TMI - 92215 - CESTAT, BANGALORE], where service provider was only providing online leasing service to clients for starting IT related services and had not given any consultation services except letting out their premises, it was Q held that no service tax was payable and stay was granted.

In United Telecom Ltd v. CCT [2008 -TMI - 32659 - CESTAT, BANGALORE] where assessee had entered into a contract with State government to build, own and operate a wide area network (WAN) established by State government for better interface between State and district headquarters and where assessee was only to supply equipments and see that network functions properly, it was held that such service could not be classified as online information and database access or retrieval services.

In Dew soft Overseas Pvt. Ltd v CST, New Delhi [2008 -TMI - 31292 - CESTAT NEW DELHI], it was held that online computer training through interactive process is not covered under the scope of online information and database access or retrieval services.

Value of Taxable Service

ISPs provide service in relation to on-line information and database access or retrieval. They normally charge the customers on the basis of usage of time. They also provide dedicated lease lines on lump sum payment basis. ISP’s are, therefore, liable to pay service tax on the amount charged from the customers whether on usage time basis or on lease line basis. Paid websites charge the customers for certain specific information contained in their websites either in advance or on credit basis. They shall be also liable to pay service tax on the paid services provided by them. Where this type of information is supplied without any charge, no service tax would be payable.

E-commerce transactions are covered in the ambit of service tax. In e-commerce, no service of on-line information and data base access/retrieval is involved. Thus, such transactions will not be covered under the service tax net. Generally, websites do not charge surfers for information on sale of goods or services offered by them. If they charge, service tax will be payable on such amount charged.

Inter-connection of one ISP to another is a commercial and technical arrangement under which service providers connect their equipment’s, networks and services to enable their customers to have access to the data or information. By this arrangement, it is the customer of an ISP who ultimately receives on-line information and data base access or retrieval service. Amount charged from him is liable to service tax. Therefore, inter connection charges paid by one ISP to another ISP are not liable to service tax.

Cyber cafes provide only the infrastructure such as computer terminals and internet connection. It is the ISP or websites who provide on-line access or retrieval of information. Thus, cyber cafes are not liable to pay service tax. Services provided by ISP to cyber cafe. As such, cyber cafes will not be required to pay service tax. This has been clarified by Department also.

Charges recovered by newsletter publishing companies owning websites from subscribers for accessing information from websites shall be chargeable to service tax.

Call Centre services may involve the database access and providing of information using computer network, thus these services will be liable to service tax.

Exemption to News Agencies

Vide Notification No. 13/2010-ST dated 22.2.2010, exemption has been provided to online information and database access or retrieval service provided by Indian news agencies from whole of service tax w.e.f. 27.2.2010. The exemption is however, subject to certain conditions, viz—

(a) Exemption is available to Indian news agency.

(b) Such news agency is notified as a news agency set up in India solely for collection and distribution of news.

(c) Exemption shall be available to news agency specified u/s 10 (zzb) of Income Tax Act, 1961.

(d) News agency applies its income or accumulates it for collection of and distribution of news, and

(e) News agency does not distribute its income in any manner to its members.

Specific Exemption

Exemption from service tax has been provided to notified Indian news agencies for collection and distribution of news provided that the news agency does not distribute its income to its members vide Notification No 13/2010-ST dated 27.2.2010.

Person Liable

Any person rendering such service to any person including ISPs and paid websites are liable to pay service tax and shall be treated as an assessee for service tax purposes. Cyber cafes are not liable to pay service tax under this category of taxable service. 

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