Idea Mobile Communication Ltd vs C.C.E.& C.,Cochin

C.C.E. & C., COCHIN ....Respondent(s)

JUDGMENT

Dr. MUKUNDAKAM SHARMA, J.

1. Leave granted.

2. The 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 14 3. The 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.

4. The 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

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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.

5. Being 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.

6. Aggrieved 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

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appellant did not challenge the levy of sales tax as the same was

already paid.

7. The 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.

8. Aggrieved 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.

9. The 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

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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.

10.The 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.

11.We 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 the parties.

Page 5 of 14 12. 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. 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

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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.

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47. 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."

13. It would be appropriate to mention that later on the said Escotel

Mobile Communications Ltd. merged with the appellant company i.e.

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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

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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."

14. In paragraph 88 this Court observed that no one denies the

legislative competence of the States to levy sales tax on sales provided

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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.

15. As 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.

Page 10 of 14 16. Being 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.

17. The 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.

18. 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

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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.

19. 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

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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.

20. That 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.

...........................................J.

[Dr. Mukundakam Sharma]

............................................J.

[ Anil R. Dave ]

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New Delhi,

August 4, 2011.

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