Sale of SIM cards is part of value for taxable service – Service Tax leviable; Supreme Court

By TIOL News Service
NEW DELHI, AUG 05, 2011: THE present appeal is filed against the judgment and order dated 04.09.2008 (2009-TIOL-318-H.C-KERALA-ST) passed by the Kerala High Court whereby and whereunder, the High Court allowed the appeal filed by the Commissioner of Central Excise & Customs, Cochin.
The issue which arises 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.
The facts: 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 ("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 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 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 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.
Aggrieved thereby, the appellant filed Civil Appeal No. 2408 of 2002 before the Supreme 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 CESTAT, in which the appellant did not challenge the levy of sales tax as the same was already paid.
The aforesaid Civil Appeal No. 2408 of 2002 before the Supreme 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-TIOL-15-SC-CT-LB, 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 (2006-TIOL-857-CESTAT-BANG), vide order dated 25.05.2006, held that the levy of service tax in the case is not sustainable.
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 in the Supreme Court.
Supreme Court's Findings :
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. 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 2003-TIOL-132-HC-KERALA-ST , 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.
Escotel Mobile Communications Ltd. merged with the appellant company i.e. M/s. Idea Mobile Communication Ltd. The decision of the Kerala High Court was under challenge in the Supreme Court in the case of BSNL vs. Union of India reported in 2006-TIOL-15-SC-CT-LB. 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 paragraph 88, this Court observed that no one denies the legislative competence of the States to levy sales tax on sales 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 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.
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.
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.

That being the position, the appeal has no merit and the same is dismissed.