TMI Blog2023 (5) TMI 768X X X X Extracts X X X X X X X X Extracts X X X X ..... ovider, only if the quantum of traffic used by the other internet service providers through the appellant port (outgoing traffic) is less than 5 times the traffic used by the appellant on other internet service providers networks (incoming traffic). The Commissioner bifurcated an inserverable activity of peering into two parts namely, out-traffic and in-traffic as independent transactions leviable to be taxed separately. Admittedly, peering is a multilateral agreement and is generally settlement free. It is a business relationship where internet service providers provide access on a reciprocal basis to the customers. In fact, without giving access to each other's network and the data contained therein, internet cannot function. It is, therefore, because of a technical requirement that internet service providers provide access to each other's network. An activity has to be seen from a commercial stand point and cannot be artificially split. The dominant intent test/substance of the transaction has to be seen and in this connection reference can be made to the decision of the Supreme Court in THE STATE OF PUNJAB VERSUS ASSOCIATED HOTELS OF INDIA LTD. [ 1972 (1) TMI 80 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e two members of the division bench, while hearing this appeal that has been filed to assail the order dated 20.08.2015 passed by the Commissioner of Central Excise and Service Tax, Large Taxpayer Unit, New Delhi [the Commissioner], have referred the following issues for opinion of a third member: 1. As held by the Member Judicial that the appellant is not liable to pay service tax on their invoice raised on NIXI, as the NIXI is not the ISP and hence, neither the service provider nor the service receiver, hence not liable to pay service tax under the Finance Act, 1994. OR 2. As held by the Member Technical that the appellant is liable to pay service tax on the services provided to the other ISPs through NIXI, and they have raised invoice for such services provided, on NIXI, and have also admitted to pay service tax. 2. Mahanagar Telephone Nigam Limited, Delhi [the appellant] is a public sector unit of the Government of India in the Ministry of Communications Information Technology. It is engaged in the business of telecom and information technology related services, including internet telecommunication service'. 3. Intelligence was gathered by the officers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of administratively separate for the purpose of exchanging traffic between the customers of each network. The pure definition of peering is settlement-free or sender keeps all, meaning that neither party pays the other for the exchanged traffic. Peering requires physical interconnection of the networks, an exchange of information through the (BGP) routing protocol and is often accompanied by peering agreements of varying formality. Peering involves two networks coming together to exchange traffic with each other freely, and for mutual benefit. This mutual benefit' is most often motivation behind peering. 4.1 Peering requires the exchange and updating of information between the peered ISPs, typically using the Border Gateway Protocol. Peering parties interconnect at network focal points such as the network access points (NAP) and at regional switching points. Initially, peering arrangements did not include an exchange of money. More recently, however, some large ISPs have charged smaller ISPs for peering. Each major ISP generally develops a peering policy that states the terms and conditions under which it will peer with other networks for various types of traffic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... affic exchange at NIXI node between internet service provider A and internet service provider B , B will have to pay A through NIXI a pre-determined amount per Giga Byte into (traffic from A to B traffic from B to A ). 9. The Membership Agreement dated 14.11.2005 entered into between the appellant and NIXI needs to be examined and it is as follows: a) NIXI is established to be a neutral Internet Exchange facilitating the ISPs to interconnect with each other for efficient routing of domestic traffic; b) MTNL as the Member is an ISP duty licensed by the Government of India; c) NIXI shall: i. Provide and maintain the physical connection of the peering router of ISP to the NIXI shared medium; ii. Provide rack space to MTNL at its site; iii. Allow access to the core area only to authorized personnel of member under supervision of NIXI staff; iv. Provide 24 X 7 watch of MTNL's equipment; v. Provide installation and support services; vi. Provide network management related services; vii. Provide any other services as declared by the NIXI Board. d) The member i.e. MTNL shall: i. Make payments to NIXI as per the determined Schedul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h NIXI is the output service provided by M/s MTNL-D on which service tax is payable. The value of such services appeared to be determined under the provisions of Section 67 of the Finance Act, 1994 read with Rule 3(a) of the Service tax (Determination of Value) Rules, 2006. Thus the taxable value for M/s MTNL appeared to be fixed as out-traffic (in GB) multiplied by Rate per GB, which is applicable rate in ordinary course of business. M/s MTNL-D had submitted data of out traffic in GB, rate per GB, value of services determined as above for the period: 01.04.2008 to 30.06.2012, vide their letter dated 19th August 2013. The value of services for April, 2008 has been excluded, and the rest value so determined has been considered as total taxable value for determining tax liability since M/s MTNL did not provide data separately w.e.f. 16.05.2008. 9.4 Prior to 01.04.2011, the ST was payable on recipient basis, and thereafter (i.e. since 01.04.2011), ST is payable on Invoice basis in terms of the POT-R. In the instant case, since the amounts paid or payable by M/s NIXI to M/s MTNL-D is the settlement amount, i.e. after adjustment or deduction of amounts payable by M/s MTNL, then it ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;service recipient' through whom services are being provided to other ISPs; and service being provided by the MTNL to NIXI is providing transit to internet traffic of other ISPs by MTNL to other service providers (ISPs) through NIXI' . ***** 17.8 Since peering is nothing but an arrangement for carrying and transiting/transmitting internet traffic on each other's backbone, and since MTNL has entered into such arrangement with other ISPs through NIXI, the said services squarely fall under the provisions of Section 65(105(zzzu) read with Section 65(56b) and Section 65(57a) with effect from 16.05.2008 supra and are thus, taxable services for the purpose of levy of Service Tax. 18.1 Requester Pays implies that for traffic exchange at a NIXI node between ISP 'A' and ISP 'B', 'B' will pay to 'A' (through NIXI) a pre-determined amount per Giga byte x [traffic from 'A' to 'B' - traffic from 'B' to 'A']. Thus, the requested traffic from ISP 'A' to ISP 'B' is measured and subtracted from the requested traffic from ISP 'B' to ISP 'A'. 18.2 It is als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iability upon the service provider, i.e. MTNL and hence, MTNL cannot shy away with the said burden/responsibility on the pretext that the amount has not been received from M/s NIXI as already discussed in para 18 to 18.10 above. (emphasis supplied) 19. The learned Member (Technical) confirmed the demand of service tax, but set aside the penalty imposed under section 78 of the Finance Act for the following reasons: 5. A perusal of the above definition of taxable service under the category of Internet Telecommunication Service qua the admitted facts make it very clear that the service provided by the appellant in the form of pearing arrangement' is squarely covered by the above mentioned definition under section 65(57(a) of the Finance Act, 1994. The appellant has not denied this very fact. We find that the appellant have issued an invoice on M/s. NIXI on 09.10.2013 after initiation of investigation by the DGCEI. It has been the contention of the appellant all along that amount of Rs.7,44,19,477/- for which the invoice has been issued to M/s. NIXI also includes service tax element of Rs.70,93,529/-. Thus in a way, the appellant had admitted their service tax liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he first issue that has been framed by the division bench is whether the appellant is not liable to pay service tax on their invoice raised on NIXI, as the NIXI is not the ISP (internet service provider) and hence neither the service provider nor the service receiver, hence not liable to pay service tax . This question arose because of the views expressed by the learned Member (Judicial). 22. The second issue arises for consideration is whether the appellant is liable to pay service tax on the services provided to the other ISPs (internet service providers) through NIXI, and they have raised invoice for such services provided, on NIXI, and have also admitted to pay service tax . This question has arisen because of the views expressed by the learned Member (Technical). 23. To appreciate the two issues raised in this appeal, it would be appropriate to first refer to the required statutory definitions. 24. Internet' has been defined under section 65(56b) of the Finance Act as follows: 65(56b) internet means a global information system which is logically linked together by a globally unique address, based on Internet Protocol or its subsequent enhancements or up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... travel of traffic from (A) MTNL to (B) Airtel means Airtel user had sought some data from the server of MTNL. 29. As noticed above, internet peering by NIXI is a case of multilateral peering and that ordinarily no amount is charged by one internet service provider from another for exchange of traffic between internet service providers. The Department set up a case that the appellant is in receipt of income from NIXI for the services provided by the appellant to NIXI. The appellant has been treated as a service provider and NIXI as the service receiver. The computation of value has been done under section 67 of the Finance Act read with rule 3 of the Service Tax (Determination of Value) Rules, 2006 [2006 Valuation Rules], which at the relevant time provided for valuation of taxable service where the value was not wholly or partially consisting of money. 30. The show cause notice proposed that the said value shall be the out-traffic (in GB) multiplied by the rate per GB, which according to the show cause notice is the rate in ordinary course of business. For this purpose the Department had sought information from the appellant regarding the out-traffic and the ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e internet service providers provide access on a reciprocal basis to the customers. In fact, without giving access to each other's network and the data contained therein, internet cannot function. It is, therefore, because of a technical requirement that internet service providers provide access to each other's network. An activity has to be seen from a commercial stand point and cannot be artificially split. The dominant intent test/substance of the transaction has to be seen and in this connection reference can be made to the decision of the Supreme Court in The State of Punjab vs. M/s. Associated Hotels of India Ltd [Civil Appeal No. 1207 of 1968 decided on 04.01.1972]. The observations of the Supreme Court are as follows: 12. ***** In every case the Court would have to find out what was the primary object of the transaction and the intention of the parties whole entering into it. ***** 14. The transaction in question is essentially one and indivisible, namely, one of receiving a customer in the hotel to stay. Even if the transaction is to be disintegrated, there is no question of the supply of meals during such stay constituting a separate contract of sale, since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es annual membership fee of ₹1000/- and registration of second and third level domain names at ₹500/- and ₹250/-. The finding of the ITAT and the High Court are that NIXI's objects and functioning are by way of general public utility and thus it is a GPU category charity. 210. Having regard to the findings on record and the materials placed by the parties, it is evident that NIXI carries on the essential crucial purpose of promoting internet services and more importantly, regulating domain name registration which is extremely essential for internet users in India. A country's need to have a domestic internet exchange, rather than depend on an international one, cannot be overemphasized. The Union Government's object of setting up of internet exchange is part of its essential function as a government to regulate certain segment of the communication networks. In the absence of a single entity authorized to register .in domain names, there is bound to be chaos or confusion. 211 . In view of the foregoing discussion, this Court is of the opinion that the revenue's contention that NIXI does not merely carry-on public purpose of regulatory ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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