2002 (2) TMI 5 - HC - Service Tax

SIM card sale versus activation service: treated as separate taxable events; sale excluded u/s65(72), activation taxed.

Whether supply of a SIM card and its activation constitute distinct taxable events was the dominant issue. The HC held that a SIM card, once sold, is a ... Liability to pay service tax - items exigible to sales tax and service tax on the activation charges - Whether the service rendered by mobile cell phone service providers is 'taxable service' within the meaning of the definition given in the Finance Act ? - HELD THAT:- The petitioner was recovering sales tax over the installation charges and remitting it to the Sales Tax authorities. Once the SIM card is sold to the subscriber, the mobile cellular phone service provider loses his claim over the property, nor can he claim any right in it. Thus, the petitioner made a distinction between sale of the SIM Card for which it charged consideration, and the activation charges which according to it was not a 'sale', but a mere service. The petitioner pointed out that, as far as the sale part was concerned, it was paying sales tax and it will be duly paying service tax on activation charges. The contention is that, the words 'any service', if not restrictedly read down, would render the levy of service tax unconstitutional and beyond the competence of Parliament. The contention, therefore, is that the expression, 'taxable service', under Section 65(72) of the Finance Act must be understood as excluding the sale of SIM card, the tax on which is within the exclusive province of the State. For these reasons, it is contended that while activation of SIM card and subsequent service alone can be taxed by Parliament, the sale of SIM card alone can be taxed by the State Legislature. Apart from contending that providing of SIM cards or MOTS cards does not result in a transaction exigible to Sales Tax under the KGST Act, because it is a pure and simple service exigible to service tax under the Finance Act, the petitioner has also impugned the reopening of the assessment and the penalty proceed­ings on several other grounds. The SIM card is a card containing computer chips with pre-recorded instructions which would enable the customer access to the service of cellular telephone company by means of electro-magnetic waves. Even after purchasing a SIM card and putting it in the handset, the customer does not get access to the service of the cellular telephone service provider till the SIM card is activated. The process of activation consists of putting information in the computer maintained by the cellular phone service provider, giving it the particulars of amount charged, the I.D. of the subscriber, etc. Once this process of activation is complete, the subscriber gets access to the service provided by the cellular telephone company. For the purpose of activation, the subscriber is required to pay a fee called activation charges, which are over and above the amount charged for supplying the SIM card. In the case of pre-paid cards, the cost of the card as well as the activation charge is included in the price on the pre-paid SIM card, purchased by the customer off the shelf. In the case of non-pre-paid SIM cards, the customer is billed periodically for user and has to pay the charges. The activation charges are collected separately. We have not gone into the question of correctness of the penalty proceedings and departmental assessment. But we have decided only the question of exigibility to tax on different aspects of the transaction. We have also left open the issue as to whether sale of SIM card represents the transfer of right to use 'immovable property', as the argument before us proceeded on the assumption that it was transfer of the right to use a movable property. The departmental authorities are free to decide this issue in accordance with the evidence, which may be produced before them. The Original Petitions are, accordingly, dismissed. Issues: (i) Whether the sale of SIM cards and activation charges are exigible to sales tax under the KGST Act; (ii) Whether the selling of SIM cards and the activation process are 'taxable service(s)' exigible to service tax under the Finance Act, 1994; (iii) Whether both State sales tax and Central service tax can validly be levied on different aspects of the same transaction (constitutionality / double taxation issue).Issue (i): Whether the sale of SIM cards and activation charges are exigible to sales tax under the KGST Act.Analysis: The Court examined the definition of 'sale' in Section 2(xxi) of the KGST Act including Explanation 3B and Explanation 3D, the definition of 'goods' in Section 2(xii), and authorities construing transfer of rights and intangible movable property. The Court held that transfer of the SIM card (including the right represented thereby) falls within the scope of 'sale' as defined and that activation charges represent deferred consideration or value addition to the SIM card, thus forming part of the sale price for sales tax purposes.Conclusion: The sale of SIM cards and the activation charges are exigible to sales tax under the KGST Act (in favour of Revenue).Issue (ii): Whether the selling of SIM cards and the activation process are 'taxable service(s)' exigible to service tax under the Finance Act, 1994.Analysis: The Court analysed the Finance Act definitions, particularly Section 65(72)(b) (taxable service) and related telegraph/telephone provisions, and observed that providing SIM cards and activation enabling access to cellular network constitute services rendered to the subscriber. The Court found that both the sale aspect and the activation process fall within the definition of 'taxable service' and that the value of such services is taxable under Section 67 as the gross amount charged for the service.Conclusion: Both the sale of SIM cards and the activation process are 'taxable service(s)' and are exigible to service tax under the Finance Act, 1994 (in favour of Revenue).Issue (iii): Whether both State sales tax and Central service tax can validly be levied on different aspects of the same transaction (challenge on constitutionality / double taxation).Analysis: The Court applied the 'aspect theory' of legislation, noting that the same transaction may have different aspects taxable by different legislatures within their competence. The Court considered constitutional distribution of powers (Entries in Lists I and II) and precedent on overlapping taxes, concluding that taxing different aspects does not amount to unconstitutional double taxation where each tax is within the respective legislature's competence.Conclusion: It is constitutionally permissible for State sales tax and Central service tax to be levied on different aspects of the same transaction; there is no constitutional bar to the impugned levies (in favour of Revenue).Final Conclusion: The writ petitions challenging exigibility of sales tax and service tax on SIM cards and activation charges are without merit; both the sale/activation aspects are taxable under the respective statutes and the petitions are dismissed.Ratio Decidendi: Where a single transaction has distinguishable aspects, the State may tax the aspect of 'sale' under its entry and the Union may tax the aspect of 'service' under its entries; transfer of SIM cards (including the right represented) and activation charges fall within the definitions of 'sale' under the KGST Act and 'taxable service' under the Finance Act, 1994, and both levies are valid.