Whether service tax will be attracted in case of sale of sim cards even if VAT is paid on that sale and whether cenvat credit be allowable if Rule 9(2) of Cenvat Credit Rules, 2004 is not followed ?

PJ/Case Law/2016-17/3346

Case-BHARTI AIRTEL LTD. Versus COMMISSIONER OF CENTRAL EXCISE, PANCHKULA

Citation- 2016 (43) S.T.R. 400 (Tri. - Del.)

Brief Facts- M/s. Bharti Tele-Ventures Ltd, Ambala is before us contesting Order-in-Original No. 05/Commr/PKL/2008, dated 19th September, 2008 of Commissioner of Central Excise, Panchkula, which has confirmed tax of ` 71,49,132/- as being amount not paid on the value of SIM cards while rendering ‘telecommunication services’ between September, 2002 and March, 2006 and an amount of ` 25,52,987/- on charges collected from foreign service providers for facilitating their customers in usage of roaming services during their stay in India, has disallowed CENVAT credit of ` 10,20,380/- availed against invoices pertaining to receipt of services by others and from outside the State of Haryana and credit of ` 3,496/- availed in excess of entitlement, interest thereon and also imposed penalties under Section 78 of Finance Act, 1994.

Appellant’s Contention- The appellant’s contention in the grounds of appeal is that discharge of VAT obligation to the State Government will relieve them of tax liability under Finance Act, 1994. In relation to tax on the value of SIM cards, the appellant had submitted before the original authority - and cited as ground of appeal - the decision of the Hon’ble Supreme Court in Bharat Sanchar Nigam Ltd. v. Union of India [2006 (2)S.T.R.161 (S.C.)] while asserting that the discharge of VAT/sales tax on the value of the SIM card renders it outside the pale of taxability under a Central Act.

Respondent’s Contention- The Hon’ble Supreme Court has since settled the issue in Idea Mobile Communications Ltd. v. Commissioner of Central Excise & Customs, Cochin [2011 (23)S.T.R.433 (S.C.)] by holding that SIM cards do not have a function other than as a service unextricably linked to the activation thereof which is itself acknowledged as a taxable service. The relevant extract of the decision is as below :
The High Court has given cogent reasons for coming to the conclusion that service tax is payable in asmuch 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.
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 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.
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.”

Reasoning of Judgement- The original authority has disallowed CENVAT credit on the ground that credit availed relates to invoices that do not pertain to the appellant. He has relied upon Rule 4A of Service Tax Rules, 1994 which is required to be complied with, as per Rule 9(2) of Cenvat Credit Rules, 2004, and lays down the contents that documents should contain. The adjudicating authority, on scrutiny of sample invoices, has concluded that a majority of them relate to M/s. Bharti Cellular Services Ltd. It is the contention of the appellant that the wrong address was printed by a clerical error and has since been clarified by the five service providers. It was also submitted that the names detailed in the invoices are the names of the erstwhile entities that were merged with that of the appellant. Certificate of Amalgamation of the transferor, M/s. Bharti Cellular Services Ltd. with the appellant dated 9th June, 2005 was produced by the Learned Counsel for appellant. He has also cited the decisions of this Tribunal in Showa India (P) Ltd. v. Commissioner of Central Excise, Faridabad [2012 (275)E.L.T.128 (Tri.-Del.) = 2012 (25)S.T.R.152 (T)], Lanco Industries Ltd. v. Commissioner of Central Excise, Tirupati [2008 (223)E.L.T.550 (Tri.-Bang.)], Commissioner of Central Excise, Meerut-II v. Flex Laminators [2000 (120)E.L.T.114 (Tri.-Del.)], Joja Chemicals Pvt. Ltd. v. Commissioner of Central Excise & Service Tax, Mangalore [2014 (302)E.L.T.312 (Tri.-Bang.)], Commissioner of Central Excise v. Aditi Foams (P) Ltd. [2004 (175)E.L.T.351 (Tri.-Del.)] and AMA India Enterprises P. Ltd. v. Commissioner of Central Excise & Service tax, Ludhiana [2015 (316)E.L.T.268 (Tri.-Del.)]. Learned Authorized Representative drew attention to the Rules cited in the impugned order which do not allow for any flexibility in relation to certain material particulars. Undoubtedly, the amalgamated entity comprised many erstwhile units which may have accumulated credit in the course of their earlier existence. Nevertheless, the onus vests on the claimant of credit to evidence the receipt of such services at such premises as are pertinent to the taxable services being rendered. Goods permit a certain ease of ascertainability by the tax officer; services are not easily amenable to such authentication and mere evidence of amalgamation of an entity with appellant will not suffice for the purpose of Rule 9(2) of Cenvat Credit Rules, 2004 without evincing place of receipt of input service as the place pertinent to supply of output service. The claim of the appellant fails, rendering the order of the original authority unassailable on this count. Service tax is payable in as much as SIM Card has no intrinsic sale value and it is supplied to the customers for providing mobile service to them whether or not VAT is paid on it.

Decision- Appeal disposed.

Comment-As per the facts and circumstances of the case Service tax was payable on sale of sim card as activation of sim card is a taxable service and 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 whether or not VAT was paid on such sale. Cenvat credit was also disallowed as invoices do not pertain to the assessee which is a requirement of Rule 9(2) of Cenvat Credit Rules, 2004.

Prepared by- Akshit Bhandari

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PJ/Case Law/2016-17/3346

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