Value of SIM cards - whether service tax leviable or sales tax?

PJ/Case Laws/2011-12/1285

Case: Idea Mobile Communication Ltd v/s Commissioner of Central Excise & Customs, Cochin

Citation: 2011-TIOL-71-SC-ST

Issue:Whether value of SIM cards sold by assessee 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?

Brief Facts:- During the relevant assessment years, i.e., 1997-1999, the appellant was selling SIM cards to its franchisees and was paying sales tax to the State Exchequer and activating the SIM card in the hands of its subscribers on a valuable consideration and paying service tax only on the activation charges. 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 and accordingly levied sales tax on activation charges.

Central Excise Department contended 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.

Appellant filed appeal before the respective appellate authorities under the KGST Act and Central Excise Act, 1944. Recovery proceedings against the appellant were initiated. Appellant filed Writ Petition in the High Court 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. Writ Petition was dismissed vide order dated 15.02.2002. Appellant filed appeals before the Supreme Court.

Based on the judgment of the High Court dated 15.02.2002, the appellant also filed appeal before the Tribunal, which was dismissed vide order dated 08.04.2003. Appellant preferred appeal u/s 35B of Central Excise Act, 1944 before the Tribunal. Appeal against the order dated 08.04.2003, in which the appellant did not challenge the levy of sales tax as the same was already paid.

The aforesaid Civil Appeal before the High 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, thematter was remanded to the Sales Tax Authorities concerned for determination of issue relating to SIM cards.

The Tribunal in the pending Appeal, vide order dated 25.05.2006, held that the levy of service tax in the case is not sustainable.

Aggrieved thereby, the Revenue challenged the order of the Tribunal dated 25.05.2006 before the High Court. The High Court vide order dated 04.09.2008 allowed the appeal of the Revenue against which this appeal has been filed before the Supreme Court.

Appellant’s Contention: - Appellant submitted that they were 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. Appellant relied upon the earlier judgment rendered by the High Court as against which the Supreme Court pronounced the Judgment being BSNL vs. Union of India reported in (2006) 3 SCC 1.

Respondent’s Contention:- Revenue submitted that SIM Card has no intrinsic sale value and it is supplied to customers to provide telephone service. Selling of the SIM Card and the process of activation are "services" provided by the mobile cellular telephone companies to the subscriber.

Respondent 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.

Reasoning of the Judgment: - The Supreme Court observed that a 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. It was noted that the 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 held 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 High Court had held that on the aspect of “service” rendered, the Parliament was competent under Article 248 read with entry 97 of List-I of the Seventh Schedule to the Constitution to impose tax.

It was noted by the Supreme Court 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 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 Courthad held that it was required to be seen on facts that whether SIM card was sold as a separate entity or as part of the services rendered by the service provider. Reliance was placed on Federation of Hotel & Restaurant Assn. of India v/s Union of India [2002-TIOL-699-SC-MISC]. It was noted that the matter was remanded to the sales Tax Authorities for determining the issue relating to SIM cards in the light of the observations made in that judgment. It was noted that the matter was again before the Tribunal wherein it was 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.

In further appeal before the High Court by the Department, it was held 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. Cogent reasons were given for holding so.

It was noted that the 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 was noted that even if sales tax was paid by mistake or remitted wrongly, it would not absolve them from the responsibility of paying service tax if there is a liability to pay the same. It was held that 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.

It was held that there 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.

Decision:- Appeal dismissed.

Comments:- The above decision of supreme court must finally settle the issue that on the sale of sim card service tax is payable, since SIM Card has no intrinsic sale value and it is supplied to the customers for providing mobile service to them. Also, the dominant part of the transaction is providing service and not sale. This will have very high liability on all the mobile service provider as well as their distributors.

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PJ/Case Laws/2011-12/1285

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