Sale of SIM cards is within the ambit of service tax

Dear All,

This is to inform you all that with reference to the decision passed by the Hon ble Supreme Court of India in the matter of Idea Mobile Communication Ltd. v. Commissioner of Central Excise &Customs, Cochin, wherein the Hon ble Supreme Court, has held that sale of SIM cards is a part of value of taxable service on which only service tax is leviable and that even if sales tax is wrongly remitted on such SIM cards, service tax will still be payable.

I hope you would find the same useful.

Regards,

RG

Please find below extracts from the case decided by Hon ble Supreme Court.

August, 2011

Supreme Court holds sale of SIM cards is a part of value of taxable service on which only service tax is leviable

Idea Mobile Communication Ltd. v. Commissioner of Central Excise & Customs, Cochin (Civil Appeal No. 6319 of 2011)

The Hon'ble Supreme Court of India vide its judgment dated August 4, 2011, in the case of Idea Mobile Communication Ltd. v. Commissioner of Central Excise & Customs, Cochin (Civil Appeal No. 6319 of 2011) while dismissing the Appellant's appeal held that the amount received by the cellular telephone company from its subscribers towards SIM cards will form part of the taxable value for levy of service tax as SIM cards are never intended to be sold as goods independent from the services provided and that even if sales tax is wrongly remitted on such SIM cards, service tax will still be payable.

Issue Involved:

The only issue involved in the present appeal was whether the value of SIM cards sold by the Appellant to their mobile subscribers was 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

Background:

During the period 1997-1999, the Appellant, Idea Mobile Communication Ltd. was selling SIM cards to its franchisees and was paying sales tax to the State and activating the SIM cards in the hands of its subscribers and paying service tax only on the activation charges.

The Department of Sales Tax, State of Kerala, included the activation charges as part of 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 ('KGST Act') and accordingly levied sales tax on the activation charges. Also, the Department of Central Excise, Ernakulum (Service Tax) 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.

Being aggrieved, the Appellant filed an appeal before the respective appellate authorities under the KGST Act and Central Excise Act, 1944. Consequent to the recovery proceedings against the Appellant, a writ petition was also filed before the Hon'ble High Court of Kerala, which was dismissed vide order dated February 15, 2002. Aggrieved by the order, the Appellant filed a Civil Appeal No. 2408 of 2002 before the Hon'ble Supreme Court of India. In the meantime, the Appellant based on the judgment of the Hon'ble High Court of Kerala dated February 15, 2002, filed an appeal before the Commissioner (Appeals), Customs and Central Excise against the adjudication order which was dismissed vide order dated April 08, 2003.

The Appellant further filed an appeal before the Hon'ble CESTAT against the order dated April 08, 2003 passed by Commissioner (Appeals) in which the Appellant did not challenge the levy of sales tax as the same was already paid.

Civil Appeal No 2408 of 2002 was heard before the Hon'ble Supreme Court and decided with appeals and Writ petitions of several other telecom operators and relying on the judgment of BSNL vs. Union of India (2006) 3 SCC 1, the matter was remanded to Sales Tax Authorities concerned for the issue related to SIM cards. The CESTAT in the pending appeal held that the levy of service tax in the case was not sustainable.

The Respondent being aggrieved by the order of the CESTAT dated May 25, 2006 challenged it before the High Court of Kerala by way of appeal No. 20 of 2006. The Hon'ble High Court of Kerala allowed the appeal of the Respondent against which this present appeal was filed before the Apex Court.

Judgment:

The Hon'ble Supreme Court after hearing the arguments put forward held that: A SIM card is a portable memory chip used in cellular telephones. It is a tiny encoded circuit board which is fitted into cells phones at the time of signing on as a subscriber. The Hon'ble Supreme Court relied on the judgment of Escotel Mobile Communications Ltd. vs. Union of India and Others (2002) Vol. 126 STC 475 (Kerala) wherein it had been held that a transaction of sale of SIM card to the subscriber is also a part of the 'service' rendered by the service provider to the subscriber.

Hon'ble Supreme Court relying on the abovementioned judgement observed that the legislative competence of the States to levy sales tax on sale exists 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 goods.

The order passed by the Hon'ble CESTAT upholding the findings of the adjudicating authority and non leviablity of Service tax as Sales tax was already paid by the Appellant, was challenged in the Kerala High Court. The findings of the Kerala High Court that service tax is payable inasmuch as SIM card has no intrinsic value and it is supplied to the customers to provide the mobile services to them, forms the basis of the judgment of the Hon'ble Supreme Court as well.

The amount received by the cellular telephone company from its subscribers towards SIM cards will form part of taxable value for levy of service tax as SIM cards are never sold as independent from the services provided. They form a part of the services provided and the dominant nature of the transaction is to provide services and not to sell SIM cards. Also, if sales tax has been paid (rightly or wrongly) on a transaction on which service tax is leviable, the liability to pay service tax will not be absolved. However, if the article is not susceptible to tax under Sales Tax Act, the amount of tax paid by the assessee could be refunded, as the case maybe.

The Hon'ble Supreme Court vide its judgment, has reiterated its earlier view wherein it had been held that the dominant intention of a transaction which involves the transfer of goods along with the rendering of services, has to be identified and that the assessee should not be burdened with tax on a transaction which does not fall within the ambit of the respective act.

Thanks

RG