Earlier articles in this column have discussed the chargeability of several telecommunication services under either the service tax law or the sales tax law or both. One such telecommunication service has been with regard to provision of SIM cards which are sold by telecommunication operators to their subscribers and which need to be activated by such operators (the service in question), in order for the mobile phones to become operational. The challenge of double taxation of the transactions relating to such SIM cards has been a longstanding one and had been earlier addressed by the Supreme Court in its decision in BSNL vs. UOI (2006) 3 SCC 1. Very recently, in a judgement rendered late last week, the Supreme Court has again addressed the issue of the chargeability of such transactions to the appropriate indirect tax, i.e, the service tax or sales tax/VAT.
In this decision in Idea Mobile Communication Ltd. Vs. Commissioner of Central Excise (2011-VIL-17-SC) , the Supreme Court had to deal with the issue of whether the value of the SIM cards sold by the appellants was to be charged to service tax under the relevant provisions of the Finance Act 1994, as telecommunication services, or whether such transactions were taxable as sale of goods under the sales tax/VAT law. The facts of the case were that during the relevant period, the appellants were selling the SIM cards to their customers and paying the sales tax on such sales to the State authorities and paying the service tax to the Central Government on the activation charges in regard to such cards.
The sales tax authorities included the activation charges as part of the sale consideration of the SIM cards on the ground that such activation was nothing but a value addition of the goods and thus covered under the definition of ‘goods’ under the relevant sales tax law. On the other hand, the service tax authorities proceeded on the basis that a mere SIM card, without activation, was of no use and consequently held that the appellants were liable to pay service tax on the value of the SIM cards as well. Thus, both the sales tax and the service tax authorities proceeded to charge their respective taxes on the entire value of the transaction relative to SIM cards, including the activation charges. Thereafter, several parallel stages of appellate proceedings took place with respect to each such tax demand and in relation to the sales tax proceedings, the matter had reached the Supreme Court on an earlier occasion and this appeal, together with similar matters of other telecom operators, was heard by the Supreme Court and was disposed off vide its landmark judgement in the BSNL case (supra). The Supreme Court held that the question as to what a SIM card actually represented was a question of fact and in determining the issue, the principle to be kept in mind was as to what was the intention of the parties regarding the SIM card transaction. If the parties intended that the SIM card would be a separate object of sale, it will be open to the sales tax authorities to levy the tax. However, if the sale of the SIM card was merely incidental to the services being provided and only facilitated the identification of the subscriber and other details, it would not be assessable to the sales tax. Consequently, the Supreme Court held that both taxes could not possibly apply to the transaction in question and based on the above determination of intent, only one or the other tax would apply. Accordingly, the Supreme Court remanded the matter in the above decision in the BSNL case to the sales tax authorities. Since M/s. Idea Mobile case was also part of the remand order, their case was duly taken up by the sales tax authorities who, after determining that the SIM cards had no intrinsic sale value, dropped the proceedings against the appellants. Thus, the transactions relating to SIM cards were held not taxable to the sales tax and these proceedings stood concluded.
In the meanwhile, the parallel appellate proceedings on the service tax took a convoluted route wherein the Central Excise and Service Tax Tribunal (Tribunal) set aside the imposition of the service tax which decision was, in turn, set aside by the Kerala High Court, which reinstated the original service tax demand.
It was the appeal against the above High Court order which has been decided in the case in point by the Supreme Court. It noted that the SIM card was a tiny electronic device fitted on the mobile phone at the time that the subscriber signed on as such. The card held details of the subscriber, security data and other relevant information, all of such assisted the network service provider to recognize the caller. The charges paid by the subscriber for the SIM card were to be treated as processing charges for activation of the cellular phone and hence such activation charges would necessarily need to include the value of the SIM card.
The Court concluded that the amount received by the telecom company from its subscriber towards the SIM card would form part of the taxable value for the levy of service tax in relation to the activation charges, which were undeniably in the nature of a service, since the SIM card was never sold independent from the above service and was hence considered part and parcel of such service. The dominant intent of the transaction was clearly to provide services and not to sell any goods. It was thus established from the facts and record of the case that the value of the SIM card formed part of the activation charges since no activation was possible without a valid functioning SIM card. The Supreme Court opined that it was precisely for this reason that the sales tax authorities had withdrawn their attempt to tax such services to the sales tax. Consequently, it held that the sale and supply of SIM cards to subscribers, including the activation charges, was indeed intended and dealt with by both parties as services and not as sale of goods. Therefore, the charge of service tax in this regard was upheld by the Court.
This judgement of the Supreme Court settles the point that the transactions relating to supply of SIM cards between telecom operators and the subscribers would be charged to just the one tax i.e. the service tax and not the sales tax. Accordingly, there could be no double taxation in regard to such transactions. This is indeed a good augury for the telecom sector, ahead of the introduction of the impending GST.
The author is Executive Director, PricewaterhouseCoopers Pvt. Ltd. pwctls.nd@in.pwc.com
