Whether the selling of SIM card to the subscriber is also a part of the

PJ/CASE STUDY/ 2012-13/21

01 September 2012

CASE STUDY

Introduction:

Telecommunication Service – Assessee charged sales tax,/VAT and service tax on activation charges for providing telephone service while clearing SIM card to their dealers. Transaction of selling of SIM card to subscriber is also a part of service rendered by service provider to the subscriber as per Section 65(105)(zzzzb) of Finance Act, 1994. Statement that the amount paid as sales tax be considered as sufficient compliance of Section 35F of Central Excise Act, 1944 is not tenable as the Tribunal has no power to adjust the payment of sales tax against service tax since the same is created under the special Act i.e. Customs Act, Finance Act and Central Excise Act.

VODAFONE ESSAR LTD. v/s COMMISSIONER OF SERVICE TAX, MUMBAI [2012 (27) STR 286 (Tri.-Mumbai)]

Relevant Legal Provisions:

(1) SECTION 35F. Deposit, pending appeal, of duty demanded or penalty levied.-
Where in any appeal under this Chapter, the decision or order appealed against relates to any duty demanded in respect of goods which are not under the control of Central Excise authorities or any penalty levied under this Act, the person desirous of appealing against such decision or order shall, pending the appeal, deposit  with  the  adjudicating  authority  the duty  demanded  or  the  penalty levied :
Provided that where in any particular case, the Commissioner (Appeals) or the Appellate Tribunal is of opinion that the deposit of duty demanded or penalty levied would cause undue hardship to such person, the Commissioner (Appeals) or, as the case may be, the Appellate Tribunal, may dispense with such deposit subject to such conditions as he or it may deem fit to impose so as to safeguard the interests of revenue.
Provided further that where an application is filed before the Commissioner (Appeals) for dispensing with the deposit of duty demanded or penalty levied under the first proviso, the Commissioner (Appeals) shall, where it is possible to do so, decide such application within thirty days from the date of its filing.
Explanation. — For the purposes of this section ‘‘duty demanded’’ shall include, —
(i)     amount determined under section 11D;
(ii)    amount of erroneous Cenvat credit taken;
(iii)   amount payable under rule 57CC of Central Excise Rules, 1944;
(iv)   amount payable under rule 6 of Cenvat Credit Rules, 2001 or Cenvat Credit Rules, 2002 or       Cenvat Credit Rules, 2004;
(v)    interest payable under the provisions of this Act or the rules made thereunder.

(2) Section 65(15)(zzzzb)of Finance Act, 1994:-

“Taxable Service” means any service provided or to be provided to any person, by any other person in relation to development and supply of content for use in telecommunication services, advertising agency services and on-line information and database access or retrieval services.
Brief Facts:

*The appellant is a service provider under the category of telecommunication service and providing mobile phone services. To perform this activity the applicant provides SIM cards to their customers through their dealers. When an appellant is clearing SIM cards to their dealers, which are charged to sales tax/VAT and for providing telephone services/mobile services they charge activation charges on which they are paying service tax.
*The revenue is of the view that SIM card is an instrument which provides services only for activation of mobile phone without which the mobile phone cannot function. Therefore, the sale of SIM card is a part of service. Thus, a show cause notice was issued to the applicant to include the value of the SIM card in the assessable value of the service tax. Periodical show cause notices were issued and the impugned demand was confirmed, following the decision of Idea Mobile Communication Ltd. v. CCE & C, Cochin reported in 2011 (23) STR 433 (SC).
*The appellant is seeking for waiver of pre-deposit of Rs. 61810184/- of the service tax confirmed against them along with interest and various penalties u8nder the Finance Act, 1994 by the Commissioner of Service Tax, Mumbai.
*The revenue in contravention of the present appeal pleaded that the issue has taken finality in the case of Idea Mobile Communication Ltd., cited (supra) wherein the Hon’ble Apex Court was of the view that the SIM card having no intrinsic sale value and is supplied to customers for providing mobile service to the customers. It was also held by them that the sale of SIM card is merely incidental to the service being provided and only facility is identification of the subscribers, their credit and other details, it would not be assessable to sales tax. Therefore the appellant be asked to make full pre-deposit for consideration of the appeal. Hence, the appellant is before CESTAT.

Appellant’s Contention:

*Appellant contended that during the pendency of the stay application, the department has already recovered Rs. 3.8 crores and they have already paid Rs. 4.00 crores as sales tax/VAT for the sale of the SIM card. Therefore, the same may be treated as sufficient in compliance to the provisions of Section 35F of the Central Excise Act,1944 read with Section 83 of the Finance Act, 1994. To Support his contention, he relied on the decision of Essar Telecom Infrastructure Pvt. Ltd. v. UOI reported in 2012 (25) STR 16 (Kar.)=2012 (275) ELT 167 (Kar.), K.G. Khosla & Co. Ltd. reported in 1979 (43) STC 457 and Bharat Heavy Electricals Ltd. v. UOI reported in 1996 (102) STC 373.

*Further he submitted that in their own case for the earlier period, this Tribunal has allowed their appeal holding that on the amount on sale of SIM card, service tax is not leviable reported in 2008 (12) STR 373 (Tri.-Del.). Further, the said decision is pending under challenge before the Hon’ble High Court of Bombay in appeal filed by the revenue.

Issue Involved:

The Following issue was involved in this case:-
Whether the selling of SIM card to the subscriber is also a part of the "service" rendered by the service provider and value of SIM card are to be includable in the same?
Order of CESTAT: -
The Hon’ble CESTAT held that in the case of Idea Mobile Communications Ltd., cited (supra), the Hon'ble Apex Court has confirmed the view taken by the Hon'ble Kerala High Court wherein 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. They also are not convinced with the contention of the appellant that the amount paid as sales tax be considered as sufficient compliance of Section 35F of the Central Excise Act, read with Section 83 of the Finance Act. As they have no power to adjust such payments as the same is created under the Special Act i.e., Customs Act, Finance Act and Central Excise Act. Therefore, they have no power to adjust the payment of sales tax against service tax. As discussed, the appellant have failed to make out a case for 100% waiver of pre-deposit. Following the decision of Idea Mobile Communication Ltd. (supra), they direct the applicant to make pre-deposit of balance amount of service tax adjudged within twelve weeks and report compliance on 5-6-2012. On such compliance, the interest and various penalties under the Finance Act shall remain stayed during the pendency of the appeal.

Decision:
The stay was partly allowed.
Conclusion:
This decision is very important and it brings the controversy whether a transaction is sale of goods or a service. This controversy is prevailing in many areas like software, service of mandap keeper along with food, outdoor cartering, works contract in construction, repairing or installation or commissioning, job work where material is also added etc. Under these, whether the service tax is to be paid or the sales tax is to be paid. If both are to be charged there then on what percentage, service tax is to be paid as well as VAT is to be paid. This controversy is going on. Even if the percentage is fixed then also, there is no consensus in Centre and state. They prescribe different percentage. If you total them then it is more than 100%. This means you are paying both the taxes on certain part.

This controversy is so typical that many big manufacturers or service providers are paying both service tax and Vat at full rate. The logic behind is that it is indirect taxation and has to be charged from client. If the same is not charged, the client will be benefited and litigation will be on head of unit. Thus the ultimate loser is client.

Even in the negative list, they have come with solution of “Dominant nature test”. If the dominant is service, then service tax is payable but if the dominant is sale then sale tax is payable. They are following Apex Court decision in case of BSNL. But this is not acceptable to State. They have prescribed separate set of rules for the same. Hence, there is again scope of litigation. Therefore the best policy is to pay and smile.

We hope that the solution will come in form of GST. But we have seen negative list regime is a step towards GST. The negative list regime and reverse charge mechanism has already creating havoc to all the law abiding citizens. If the GST will be like that only GOD should save us from the same.

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PJ/CASE STUDY/ 2012-13/21
01 September 2012

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