Communication Ltd. Vs. C.C.E. & C., Cochin
present appeal is filed against the judgment and order dated 04.09.2008 passed by
the Kerala High Court whereby and whereunder, the High Court allowed the appeal
filed by the Commissioner of Central Excise & Customs, Cochin. Page 1 of
issue which arises for our consideration in this appeal is whether the value of
SIM cards sold by the appellant herein to their mobile subscribers is to be
included in taxable service under Section 65 (105) zzzx of the Finance Act, 1994,
which provides for levy of service tax on telecommunication service OR whether
it is taxable as sale of goods under the Sales Tax Act.
facts leading to the filing of the present case are that during the relevant
assessment years, i.e., 1997-1999, the appellant was selling the SIM cards to
its franchisees and was paying the sales tax to the State and activating the
SIM card in the hands of its subscribers on a valuable consideration and paying
service tax only on the activation charges. The Department of Sales Tax, State of
Kerala, included the activation charges as part of the sale consideration of SIM
cards on the ground that activation is nothing but a value addition of the "goods"
and thus comes under the definition of "goods" under the Kerala General
Sales Tax Act, 1963 (hereinafter referred to as "KGST Act") and accordingly
levied sales tax on activation charges. The Department of Central Excise, Eranakulum
(Service Tax Department) observed that a mere SIM card without activation is of
no use and held that the appellant is liable to pay service tax on the value of
SIM card also. In both the cases interest and penalty were levied.
aggrieved, the appellant filed appeal before the respective appellate authorities
under the KGST Act and Central Excise Act, 1944. There were consequential recovery
proceedings against the appellant and the appellant filed Writ Petition O.P. No.
4973 of 2001(P) in the High Court of Kerala challenging the levy of service tax
on the sale price of SIM cards and also challenging the levy of sales tax on
the amounts recovered by the appellant by way of activation charges from its customers
which was dismissed vide order dated 15.02.2002.
thereby, the appellant filed Civil Appeal No. 2408 of 2002 before this Court. Based
on the judgment of the High Court dated 15.02.2002, the appellant also filed
appeal before the Commissioner (Appeals), Customs and Central Excise which was dismissed
vide order dated 08.04.2003. The appellant preferred appeal u/s 35B of Central Excise
Act, 1944 before the Central Excise and Service Tax Tribunal (hereinafter referred
to as "TRIBUNAL") viz. Appeal No. ST/18/03 against the order dated 08.04.2003,
in which the appellant did not challenge the levy of sales tax as the same was already
aforesaid Civil Appeal No. 2408 of 2002 before this Court was heard and decided
with appeals and Writ Petitions of several other telecom operators, including BSNL,
BPL etc. and vide judgment reported as BSNL vs. Union of India reported in
(2006) 3 SCC 1, the matter was remanded to the Sales Tax Authorities concerned for
determination of issue relating to SIM cards. The Tribunal in the pending Appeal
No. ST/18/03, vide order dated 25.05.2006, held that the levy of service tax in
the case is not sustainable.
thereby, the respondent challenged the order of the Tribunal dated 25.05.2006
before the High Court of Kerala by way of Appeal being CE Appeal No. 20 of
2006. The High Court vide order dated 04.09.2008 allowed the appeal of the
respondent - department against which this appeal has been filed, upon which,
we heard the learned counsel appearing for the parties.
counsel appearing for the appellant submitted that the appellant was charging
from its subscribers Rs. 1,000/- towards sales tax and Rs. 1,200/- as service
tax upon activation of the SIM Card and that since they were selling the SIM Cards,
therefore, at that point of time, they were charging Rs. 1000/- towards sales tax
and for activating the SIM Card they were charging Rs. 1200/- as service tax.
Counsel also drew our attention to the earlier judgment rendered by the Kerala High
Court as against which the Supreme Court pronounced the Judgment being BSNL vs.
Union of India reported in (2006) 3 SCC 1.
counsel appearing for the respondent on the other hand submitted that SIM Card has
no intrinsic sale value and it is supplied to customers to provide telephone service.
It is also submitted by the counsel that selling of the SIM Card and the process
of activation are "services" provided by the mobile cellular telephone
companies to the subscriber. He further submitted that the decision of the
Supreme Court has clearly stated that if the sale of a SIM Card is merely
incidental to the service being provided and it only facilitates the
identification of the subscribers, their credit and other details, it would be
assessable to service tax.
have examined the materials on record in the light of the facts placed before us
and also the decisions referred to and relied upon by the counsel appearing for
SIM Card or Subscriber Identity Module is a portable memory chip used in
cellular telephones. It is a tiny encoded circuit board which is fitted into cell
phones at the time of signing on as a subscriber. The SIM Card holds the
details of the subscriber, security data and memory to store personal numbers and
it stores information which helps the network service provider to recognize the
caller. As stated hereinbefore the Kerala High Court had occasion to deal with the
aforesaid issue and in that context in its Judgment pronounced on 15th February,
2002 in Escotel Mobile Communications Ltd. vs. Union of India and Others, reported
in (2002) Vol. 126 STC 475 (Kerala), it was stated in paragraph 36 that a
transaction of selling of SIM Card to the subscriber is also a part of the
"service" rendered by the service provider to the subscriber.
The Kerala High Court
in the facts and circumstances of the case observed at paras 36 and 47 as
under: - "36. With this perspective in mind, if we analyse the transaction
that takes place, it appears to us that there is no difficulty in correctly
understanding its facts. The transaction of selling the SIM. card to the
subscriber is also a part of the "service" rendered by the service provider
to the subscriber, Hence, while the State Legislature is competent to impose tax
on "sale" by a legislation relatable to entry 54 of List II of Seventh
Schedule, the tax on the aspect of "services" rendered not being
relatable to any entry in the State List, would be within the legislative competence
of Parliament under Article 248 read with entry 97 of List I of the Seventh Schedule
to the Constitution.
We are, therefore, unable
to accept the contention of Mr. Ravindranatha Menon that there is any possibility
of constitutional invalidity arising due to legislative incompetence by taking
the view that "sale" of SIM card is simultaneously exigible to sales tax
as well as service tax. Once the "aspect theory" is kept in focus, it
would be clear that the same transaction could be exigible to different taxes
in its different aspects. Thus, we see no reason to read down the legislation as
suggested by Mr. Menon. Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Conclusions:
(a) The transaction of
sale of SIM Card is without doubt exigible to sales tax under the KGST Act. The
activation charges paid are in the nature of deferred payment of consideration
for the original sale, or in the nature of value addition, and, therefore, also
amount to parts of the sale and become exigible to sales tax under the KGST
Act. (b) Both the selling of the SIM Card and the process of activation are
"services" provided by the mobile cellular telephone companies to the
subscriber, and squarely fall within the definition of "taxable
service" as defined in section 65(72)(b) of the Finance Act. They are also
exigible to service tax on the value of "taxable service" as defined
in Section 67 of the Finance Act."
would be appropriate to mention that later on the said Escotel Mobile
Communications Ltd. merged with the appellant company i.e. M/s. Idea Mobile
Communication Ltd. The aforesaid decision of the Kerala High Court was under
challenge in this Court in the case of BSNL vs. Union of India reported in
(2006) 3 SCC 1. The Supreme Court has framed the principal question to be decided
in those appeals as to the nature of transaction by which mobile phone connections
are enjoyed. The question framed was, is it a sale or is it a service or is it
both. In paragraphs 86 and 87 of the Judgment the Supreme Court has held thus:
- 86. In that case Escotel was admittedly engaged in selling cellular telephone
instruments, SIM cards and other accessories and was also paying Central sales
tax and sales tax under the Kerala General Sales Tax Act, 1963 as applicable.
The question was one of
the valuation of these goods. The State Sales Tax Authorities had sought to
include the activation charges in the cost of the SIM card. It was contended by
Escotel that the activation was part of the service on which service tax was being
paid and could not be included within the purview of the sale. The Kerala High Court
also dealt with the case of BPL, a service provider. According to BPL, it did not
sell cellular telephones. As far as SIM cards were concerned, it was submitted
that they had no sale value.
A SIM card merely represented
a means of the access and identified the subscribers. This was part of the service
of a telephone connection. The Court rejected this submission finding that the SIM
card was "goods" within the definition of the word in the State Sales
Tax Act. 87. It is not possible for this Court to opine finally on the issue. What
a SIM card represents is ultimately a question of fact, as has been correctly submitted
by the States. In determining the issue, however the assessing authorities will
have to keep in mind the following principles: if the SIM card is not sold by
the assessee to the subscribers but is merely part of the services rendered by the
service providers, then a SIM card cannot be charged separately to sales tax. It
would depend ultimately upon the intention of the parties. If the parties intended
that the SIM card would be a separate object of sale, it would be open to the Sales
Tax Authorities to levy sales tax thereon.
There is insufficient
material on the basis of which we can reach a decision. However we emphasise that
if the sale of a SIM card is merely incidental to the service being provided
and only facilitates the identification of the subscribers, their credit and other
details, it would not be assessable to sales tax. In our opinion the High Court
ought not to have finally determined the issue. In any event, the High Court erred
in including the cost of the service in the value of the SIM card by relying on
the "aspects" doctrine. That doctrine merely deals with legislative
competence. As has been succinctly stated in Federation of Hotel & Restaurant
Assn. of India v. Union of India: (SCC pp. 652-53, paras 30-31) " `... subjects
which in one aspect and for one purpose fall within the power of a particular legislature
may in another aspect and for another purpose fall within another legislative
power'. * * * There might be overlapping; but the overlapping must be in law.
The same transaction may involve two or more taxable events in its different
aspects. But the fact that there is overlapping does not detract from the
distinctiveness of the aspects."
paragraph 88 this Court observed that no one denies the legislative competence
of the States to levy sales tax on sales provided that the necessary
concomitants of a sale are present in the transaction and the sale is
distinctly discernible in the transaction but that would not in any manner
allow the State to entrench upon the Union List and tax services by including the
cost of such service in the value of the goods. It was also held that for the same
reason the Centre cannot include the value of the SIM cards, if they are found ultimately
to be goods, in the cost of the service. Consequently, the Supreme Court after allowing
the appeals filed by Bharat Sanchar Nigam Ltd and Escotel remanded the matter to
the Sales Tax Authorities concerned for determination of the issue relating to SIM
Cards in the light of the observations contained in that judgment.
against the order passed by the adjudicating authority, the appellant assessee took
up the matter in appeal before the Commissioner of Central Excise & Customs,
Cochin. The appellate authority upheld the findings of the adjudicating authority.
The assessee took up the matter before the CESTAT, Bangalore. The CESTAT vide
its order dated 25.05.2006 held that the levy of service tax as demanded is not
sustainable for the reason that the assessee had already paid the sales tax and
therefore it follows that service tax is not leviable on the item on which
sales tax has been collected.
aggrieved by the aforesaid order dated 25.05.2006, an appeal was filed before
the Kerala High Court by the department, which was disposed of by the impugned
order dated 04.09.2009.
High Court has given cogent reasons for coming to the conclusion that service tax
is payable inasmuch as SIM Card has no intrinsic sale value and it is supplied to
the customers for providing mobile service to them. It should also be noted at
this stage that after the remand of the matter by the Supreme Court to the Sales
Tax authorities the assessing authority under the Sales Tax Act dropped the proceedings
after conceding the position that SIM Card has no intrinsic sale value and it is
supplied to the customers for providing telephone service to the customers. This
aforesaid stand of the Sales Tax authority is practically the end of the matter
and signifies the conclusion.
sales tax authorities have themselves conceded the position before the High
Court that no assessment of sales tax would be made on the sale value of the SIM
Card supplied by the appellant to their customers irrespective of the fact whether
they have filed returns and remitted tax or not. It also cannot be disputed
that even if sales tax is wrongly remitted and paid that would not absolve them
from the responsibility of payment of service tax, if otherwise there is a
liability to pay the same. If the article is not susceptible to tax under the
Sales Tax Act, the amount of tax paid by the assessee could be refunded as the case
may be or, the assessee has to follow the law as may be applicable. But we cannot
accept a position in law that even if tax is wrongly remitted that would
absolve the parties from paying the service tax if the same is otherwise found
payable and a liability accrues on the assessee. The charges paid by the subscribers
for procuring a SIM Card are generally processing charges for activating the
cellular phone and consequently the same would necessarily be included in the
value of the SIM Card.
cannot be any dispute to the aforesaid position as the appellant itself
subsequently has been paying service tax for the entire collection as processing
charges for activating cellular phone and paying the service tax on the
activation. The appellant also accepts the position that activation is a taxable
service. The position in law is therefore clear that the amount received by the
cellular telephone company from its subscribers towards SIM Card will form part
of the taxable value for levy of service tax, for the SIM Cards are never sold
as goods independent from services provided. They are considered part and parcel
of the services provided and the dominant position of the transaction is to provide
services and not to sell the material i.e. SIM Cards which on its own but
without the service would hardly have any value at all. Thus, it is established
from the records and facts of this case that the value of SIM cards forms part
of the activation charges as no activation is possible without a valid
functioning of SIM card and the value of the taxable service is calculated on the
gross total amount received by the operator from the subscribers. The Sales Tax
authority understood the aforesaid position that no element of sale is involved
in the present transaction.
being the position, we find no infirmity with the findings and reasoning in the
Judgment and Order passed by the High Court and therefore the appeal has no merit
and the same is dismissed. There will be no order as to costs.
[Dr. Mukundakam Sharma]
[Anil R. Dave]