STATUS OF SIM CARDS UNDER THE PURVIEW OF INDIRECT TAXATION WITH SPECIAL REFERENCE TO IDEA MOBILE COMMUNICATION LTD

vs. CCE
Ishita Pant

1. INTRODUCTION
The chargeability of several telecommunication services under either the service tax law or the sales tax law or both has been a matter of contention over the years. The unsettled law in this regard has led to turbulence in the law in this respect. Yet, a 2011 decision of the Apex Court has tried to bring semblance of authority and made a stab at settling the legal stand on the point. It has tried to answer certain contentious points in the telecommunication sphere with respect to taxation and is a landmark judgment in its own right. The issue which arises for our consideration is whether the value of SIM cards sold by the 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.

2. FACTS AND ISSUE IN CONTENTION

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) 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 a 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. Aggrieved thereby, the appellant filed a civil appeal in the Supreme Court. Based on the judgment of the High Court the appellant also filed appeal before the Commissioner (Appeals), Customs and Central Excise which was dismissed. 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) in which the appellant did not challenge the levy of sales tax as the same was already paid. Aggrieved thereby, the respondent challenged the order of the Tribunal before the High Court of Kerala by way of Appeal. The High Court 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.

3. HISTORY OF CASES ON THE ISSUE AND THE FINAL VERDICT

SIM card is abbreviation of Subscribers Identity Module Card. SIM card is a portable memory chip used in cellular telephones. It has a tiny encoded circuit baord which it fitted into mobile phones at the time of signing on as a subscriber. SIM card is a device through which a customer gets connection from the mobile tower. In other words, unless it is activated, service provider cannot give service connection to the customer. Signals are transmitted and conveyed through towers and communication signals reach the customers mobile instrument through SIM card.

The Honble Supreme court in the case Escotel Mobile Communications Ltd v. Union of India and Ors had initially held that a transaction of sale of SIM card to the subscriber is also a part of a service rendered by the service provider to the customer. The Court stated in the instant case that: 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 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 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. 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. Yet, in the year 2006 The Bangalore Tribunal in Idea Mobile Communications Ltd. v. CCE, Trivandrum, imposable. The aforesaid decision of the Kerala High Court was under challenge in this Court in the case of BSNL vs. Union of India . 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 Court proferred the view that: It is not possible for this Court to opine finally on the issue. What a SIM card represents is ultimately a question of fact, as has been correctly submitted by the States. In determining held that imposition of service tax and sales tax were constitutionally mutually exclusive, and as sales tax was paid on the sale of SIM cards, service tax was not

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. The 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. 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. In BPL Mobile Communication Ltd. v. CCE, Mumbai, the Tribunal held that, providing SIM card is sale of goods and since the appellants have paid sales tax thereon, the impugned transaction is of sale of goods and the activity of providing SIM cards is not a Business Auxiliary service. In this decision in Idea Mobile Communication Ltd. Vs. Commissioner of Central Excise, 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 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 judgment in the BSNL case. 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.

4. CONCLUSION
The Supreme Court order is a step in right direction in as much it clearly lays down that in cases where the dominant intention is to provide services any incidental supply of goods does not change the dominant nature of the transaction as a service transaction. It is imperative to understand that the most prominent character of the transaction must be the basis of deciding whether the transaction is to be referred to the sales or service department. In the earlier decisions a convoluted approach was taken which resulted in more confusion regarding the status of SIM cards. The initial allowance by the Court of taxation on the basis of the aspects doctrine seemed anomalous since it went against the cornerstone of one tax system and also brought complexities by making the classification very subjective. By giving a ruling that allowed taxation on two fronts put the taxpayers on the line and hurt their interests by subjecting them to double taxation.

With progression of time the problem worsened as the Court refused to take a stand on the issue and made its decision case specific. Here again, the law was unsettled and no one clear demarcation could be made out. The recent 2011 decision has acted as a boon in this respect. It is a clear and identifiable ruling on how the law is to be seen on the issue. It also takes forward the ideology of one tax promulgated in the BSNL judgment that SIM cards are liable only for payment of service tax. This judgment 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. It is now expected that for telecom as well as other service sectors, all similar pending issues at various adjudication forums will now get expeditiously settled and the taxpayer will not face issues of multiple taxation both from the sales tax and service tax authorities.