2002 (2) TMI 5 - HC - Service Tax

SIM card sales subject to service tax: Court dismisses challenge, affirms Parliament's competence.

ESCOTAL MOBILE COMMUNICATIONS LTD. Versus UNION OF INDIA

The court upheld the levy of service tax on the value of SIM cards and activation charges, ruling that both activities constitute taxable services under ... Service Tax-Process of activation and sale of SIM card to subscriber(1) Taxable service (2) Legislative competence (3) Sale of SIM cards under KGST Act (4) Double Taxation (5) Constitutional validity Issues Involved:1. Levy of service tax on the value of SIM cards.2. Levy of sales tax on the value of SIM cards and activation charges.3. Legislative competence of Parliament to levy service tax on the sale of SIM cards.4. Double taxation implications of levying both sales tax and service tax on the same transaction.5. Validity of reassessment and penalty proceedings.Issue-wise Analysis:1. Levy of Service Tax on the Value of SIM Cards:The court examined whether the service rendered by mobile service providers, including the sale of SIM cards, falls within the definition of 'taxable service' under Section 65(72)(b) of the Finance Act. It was determined that both the sale of SIM cards and the activation process are services provided by the mobile cellular telephone companies to the subscriber and fall within the definition of 'taxable service.' Therefore, they are exigible to service tax on the value of 'taxable service' as defined in Section 67 of the Finance Act.2. Levy of Sales Tax on the Value of SIM Cards and Activation Charges:The court held that the sale of SIM cards amounts to a 'sale' within the meaning of Section 2(xxi) of the KGST Act, as there is a transfer of property in the goods (SIM cards) for valuable consideration. The activation charges were considered a deferred payment of consideration for the original sale or value addition, making them part of the sale and exigible to sales tax under the KGST Act.3. Legislative Competence of Parliament to Levy Service Tax on the Sale of SIM Cards:The petitioner contended that the levy of service tax on the sale of SIM cards was beyond the legislative competence of Parliament, as it fell under Entry 54 of List II of Schedule VII, which is within the State Legislature's domain. The court, however, upheld the legislative competence of Parliament, stating that the transaction of selling the SIM card is also part of the 'service' rendered by the service provider to the subscriber. The tax on the aspect of 'services' rendered is within the legislative competence of Parliament under Article 248, read with Entry 97 of List I of Schedule VII to the Constitution.4. Double Taxation Implications:The court addressed the contention that levying both sales tax and service tax on the same transaction would amount to double taxation, which is constitutionally impermissible. It was clarified that double taxation is not bad unless expressly forbidden by the Constitution. The court explained that every transaction might have different aspects, and it is permissible for different legislatures to impose a tax on different aspects of the same transaction within their legislative competence. Therefore, the same transaction could be exigible to different taxes in its different aspects without resulting in unconstitutional double taxation.5. Validity of Reassessment and Penalty Proceedings:The petitioner challenged the reassessment proceedings as time-barred and the penalty and levy of penal interest. The court did not delve into the correctness of the penalty proceedings and departmental assessment but decided only on the exigibility to tax on different aspects of the transaction. The court allowed the petitioner to apply to the respective departmental authority for a stay of recovery proceedings pending the hearing of each of the proceedings and granted a temporary stay for fifteen days to enable the petitioner to file such applications.Conclusion:The court concluded that the transaction of sale of SIM cards is exigible to sales tax under the KGST Act, and the activation charges are also part of the sale and exigible to sales tax. Both the sale of the SIM card and the activation process are 'services' provided by the mobile cellular telephone companies and are exigible to service tax under the Finance Act. The petitions were dismissed, and the court granted a certificate for leave to appeal to the Supreme Court under Article 134A(b), read with Article 133(1)(a) of the Constitution, considering the substantial questions of law involved.