In a regime where cloud computing is gaining popularity and the servers providing the facility of data storage at remote location, it becomes pertinent to assess whether such activity constitute “service” or “Goods” for taxation purpose. Although service tax law has gone through drastic change by introduction of negative list concept w.e.f. 01/07/2012, litigation still continues on old system of service tax law. It becomes necessary to discuss taxability in different scenarios in order to bring out the clear picture:
Service Tax prior to 01/07/2012
Prior to 01/07/2012, India had been following the concept of Positive List wherein the services were specifically notified by the government in order to levy service tax on them. During this regime it was necessary to classify an activity in the list of services which were notified by the government. And if any activity fails to classify under any head, no service tax could be charged. In case of online information, data access, data retrieval etc. a particular provision was introduced vide Notification No: 4/2001 dated 09.07.2001.
“ 65(105)(zh) ONLINE INFORMATION AND DATABASE ACCESS AND/OR RETRIEVAL SERVICES”
The terms used in the above amendment adopts the meaning as per Information Technology Act 2000. When the meaning is clear about the data access and retrieval services to be taxed, we are inclined to tax the data storage services as well because it forms the important constituent for data access and retrieval services. Merely renaming it does not change its nomenclature. Further it is to be noticed that all activities performed by the provider certainly falls either under the provisions of VAT (sale) or service tax. In case of data storage there is no component of “goods” involved and there is no point of possession or control which would bring it under the purview of VAT. Where there could be no question of possession or control the activity would not classify as sale. Therefore such an activity which facilitates data access and/or data retrieval shall fall under the ambit of service tax. In our opinion, if the service recipient is unable to store its data, there would arise no point of its access or retrieval and therefore data storage forming an integral part of the service, service tax should be collected on the same.
Further to decide jurisdiction for taxing data storage services it is necessary to establish that the said service is provided outside India for business and commercial purposes. As per rule 3(1)(iii) Export of Services Rules 2005, services mentioned under 65 (105) (zh) shall be deemed to be export of service if provided for business/commercial purposes and thus no service tax can be collected on such export. If the foreign entity has a permanent establishment in India, the services shall qualify as export only when the orders for provision of services are specifically received from outside India. Also it is necessary that the consideration should be received in convertible foreign exchange. In case the service had been provided in India by the Indian company to a foreign entity, service tax shall be levied and there would be no exemption.
Service Tax after 01/07/2012
Since India has adopted negative list concept for charging service tax on services i.e. all the services shall be chargeable to tax until specifically provided under negative list or exempted by the government. The services of data storage are neither mentioned under the negative list (Notification No: 25/2012) or specified under Mega Exemption Notification (Notification No: 26/2012), therefore under normal course the service shall be brought to tax. But in case of export of services The Place of Provision of Service Rules 2011 has to be referred. As per Rule 9 the place of provision of service shall be the location where the equipments are installed or the location of the service provider. Therefore in the case of data storage provided outside India by the service provider of India the service Tax shall be charged.
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