2008 (2) TMI 47 - AT - Service Tax

Tribunal rules SIM cards not subject to service tax, only activation charges taxable.

The Tribunal ruled in favor of the cellular phone service providers, holding that service tax should not be imposed on the value of SIM cards as they were ... Service tax leviable on services only and not on goods - Characterisation of SIM cards as goods - Effect of payment of sales tax and customs duty on classification - Activation charges constitute taxable serviceService tax leviable on services only and not on goods - Characterisation of SIM cards as goods - Effect of payment of sales tax and customs duty on classification - Activation charges constitute taxable service - Whether service tax was leviable on the value of SIM cards sold and activated during the specified periods or only on activation charges. - HELD THAT: - The Tribunal applied the principle from the Apex Court's decision in BSNL's case that service tax is leviable only on services and not on goods on which sales tax has been lawfully levied. The appellants had imported SIM cards assessed to and cleared on payment of Customs duty and had sold those SIM cards to subscribers on which sales tax was paid and not challenged; these facts indicate that the SIM cards were accepted and treated as 'goods' under the Customs and Sale of Goods definitions. Having been treated and taxed as goods, the value of the SIM cards could not be included in the service tax base. The taxable service arose from activation of the SIM cards (the provision of telephone connection), and service tax was correctly paid on the activation charges. Applying the ratio in BSNL's case and the Tribunal's earlier ruling in BPL Mobile, the demand for service tax on the value of the SIM cards was unsustainable. [Paras 3, 4]Demand of service tax on the value of SIM cards set aside; service tax was leviable only on activation charges, which were paid.Final Conclusion: Impugned orders sustaining service tax demand on the value of SIM cards for the periods July 1995 to December 1997, January 1998 to March 1999 and April 1999 to September 1999 are set aside and the appeals are allowed. Issues:Service tax liability on the value of SIM cards sold by cellular phone service providers.Analysis:The case involved cellular phone service providers who imported SIM cards, sold them to customers, and activated them, providing connection services. The department claimed that the value of SIM cards should be included in the service tax calculation. Three show-cause notices were issued for recovery of differential tax. The original and appellate authorities upheld the demand, leading to the appeals.The appellants argued that since SIM cards were recognized as 'goods' by customs and sales tax authorities, service tax should not apply to their value. They contended that service tax was only applicable to activation charges, which they had paid. Citing precedents like BPL Mobile Communications Ltd. and Bharat Sanchar Nigam Ltd., the appellants asserted that the issue was settled in their favor.The Tribunal analyzed the Apex Court's judgment in BSNL's case, which clarified that service tax is leviable only on services, not on goods already subject to sales tax. Referring to the BPL Mobile Communications Ltd. case, where the assessee had voluntarily paid sales tax on SIM cards, the Tribunal concluded that service tax should not be imposed on the value of SIM cards. The fact that the SIM cards were assessed for customs duty further supported the view that they were considered 'goods.' Consequently, the Tribunal ruled in favor of the appellants, stating that service tax was only applicable to activation charges, as the taxable service of telephone connection was rendered through SIM card activation.In conclusion, the Tribunal set aside the impugned orders, allowing the appeals in favor of the cellular phone service providers. The decision was pronounced in open court on 20-2-2008.