Plaitiff held entitled to pay & refund service tax liabilty, HC

Facts in Brief:

1. The petitioner is engaged in cellular telephone business within the State of Kerala. Apart from providing cellular telephone services to its subscribers, it is also engaged in selling Cellular Telephone Instruments, Subscriber Identification Module (hereinafter referred to as SIM) cards and other accessories.

2. The petitioner purchases the cellular telephones, SIM cards and other accessories from States outside Kerala by paying Central sales tax. For selling the products within the State of Kerala, it pays 12 per cent sales tax under the Kerala General Sales Tax Act (hereinafter referred to as "the KGST Act"). According to the petitioner, the sale of the instrument and the SIM card to its customers is only a sale pure and simple exigible to sales tax under the KGST Act.

3. One peculiar service it renders is activation, on which service tax is leviable. Activation is a process by which the subscriber form details, scheme/plan details, deposits, etc., brought in by the sales team are manually fed through computer into the Customer Administration & Billing System (hereinafter referred to as the CABS) so that the system has a data base which can provide access for the customer to use the net work. Activation provides the customer a slot in the CABS system with an account ID by which his monthly bills/bill details, credit limits, plan of usage, etc., would all be kept in the data base.

4. This enables the petitioner to provide/change any or all service/s, or temporarily or permanently disconnect the customer by making suitable changes in the system. It is the stand of the petitioner that activation neither increases nor decreases the value of SIM card, since it is not a process carried out on the SIM card, but only on the computer and the CABS system installed on the computer in the petitioner’s office.

5. The petitioner is engaged in cellular telephone business within the State of Kerala. Apart from providing cellular telephone services to its subscribers, it is also engaged in selling Cellular Telephone Instruments, Subscriber Identification Module (hereinafter referred to as SIM) cards and other accessories.

6. The petitioner purchases the cellular telephones, SIM cards and other accessories from States outside Kerala by paying Central sales tax. For selling the products within the State of Kerala, it pays 12 per cent sales tax under the Kerala General Sales Tax Act (hereinafter referred to as "the KGST Act"). According to the petitioner, the sale of the instrument and the SIM card to its customers is only a sale pure and simple exigible to sales tax under the KGST Act.

7. One peculiar service it renders is activation, on which service tax is leviable. Activation is a process by which the subscriber form details, scheme/plan details, deposits, etc., brought in by the sales team are manually fed through computer into the Customer Administration & Billing System (hereinafter referred to as the CABS) so that the system has a data base which can provide access for the customer to use the network. Activation provides the customer a slot in the CABS system with an account ID by which his monthly bills/bill details, credit limits, plan of usage, etc., would all be kept in the data base.

8. This enables the petitioner to provide/change any or all service/s, or temporarily or permanently disconnect the customer by making suitable changes in the system. It is the stand of the petitioner that activation neither increases nor decreases the value of SIM card, since it is not a process carried out on the SIM card, but only on the computer and the CABS system installed on the computer in the petitioner’s office.

On appeal HC held as under,

9. The Supreme Court, in All India Federation of Tax Practitioners v. Union of India, (2007) 7 SCC 527, speaking about the nature of service tax liability, held that:

" Service tax is an indirect tax levied on certain services provided by certain categories of person including companies, associations, firms, body of individuals, etc., Service sector contributes about 64% to GDP. "Services" constitute a heterogeneous spectrum of economic activities. Today services cover wide range of activities such as management, banking insurance, hospitality, consultancy, communication, administration, entertainment, research and development activities forming part of retailing sector. Service sector is today occupying the centre stage of the Indian economy. It has become an Industry by itself. In the contemporary world, development of service sector has become synonymous with the advancement of the economy. Economics hold the view that there is no distinction between the consumption of goods and consumption of services as both satisfy the human needs.

10. In late seventies, Government of India initiated an exercise to explore alternative revenue sources due to resource constraints. The primary sources of revenue are direct and indirect taxes. Central excise duty is a tax on the goods produced in India whereas customs duty is the tax on imports. The word "goods" has to be understood in contradistinction to the word "services". Customs and excise duty constitute two major sources of indirect taxes in India. Both are consumption specific in the sense that they do not constitute a charge on the business but on the client..."

11. Similarly, in All India Taxpayers Welfare Association v. Union of India & Ors., (2006) (4) STR

It was held that:

"The provider of service is an assessee under s.65 of the Finance Act, 1994 and he has to collect service tax from the users of service as contemplated under ss. 12A and 12B of the central Excise Act. In this context, it is necessary to refer that s. 12A of the Central Excise Act contemplates that notwithstanding anything contained in this Act or any other law for the time being in force, every person who is liable to pay duty of excise on any goods shall, at the time of clearance of the goods, prominently indicate in all the documents relating assessment, sales invoice, and other like documents, the amount of such duty which will form part of the price at which such goods are to be sold. Sec. 12B of the Central Excise Act contemplates that every person who has paid the duty of excise on any goods under this Act, shall, unless the contrary is proved by him, be deemed to CS (OS) 1016/2008, CS (OS) 1018/2008 Page 6 have passed on the full incidence of such duty to the buyer of such goods. Thus, the provider of service only being an assessee according to s. 65 of finance Act is to collect service-tax from the users of service as contemplated under ss. all bills the details including service tax which is payable by the users".

12. It would also be necessary to notice here that Sections 12-A of the Central Excise Act, which are also made applicable by virtue of Section 83 of the Service Tax Act, prescribe that the provider of goods (in this case, service) has the obligation to indicate the quantum of tax, on the goods or services, sold or offered, for sale. The said provisions are as follows:

"12A. PRICE OF GOODS TO INDICATE THE AMOUNT OF DUTY PAID THEREON.

13. Notwithstanding anything contained in this Act or any other law for the time being in force, every person who is liable to pay duty of excise on any goods shall, at the time of clearance of the goods, prominently indicate in all the documents relating to assessment, sales invoice, and other like documents, the amount of such duty which will form part of the price at which such goods are to be sold...."

14. It is true, that the contracts entered into between the parties in this case, spoke of the plaintiff lessor's liability to pay municipal, local and other taxes, in at least two places. The Court, however, is not unmindful of the circumstance that service tax is a species of levy which the parties clearly did not envision, while entering into their arrangement. It is not denied that leasing, and renting premises was included as a "service" and made exigible to service tax, by an amendment; the rate of tax to be collected, is not denied. If the overall objective of the levy - as explained by the Supreme Court, were to be taken into consideration, it is the service which is taxed, and the levy is an indirect one, which necessarily means that the user has to bear it. The rationale why this logic has to be accepted is that the ultimate consumer has contact with the user; it is from them that the levy would eventually be realized, by including the amount of tax in the cost of the service (or goods).

15. It would be noteworthy to recollect Section 64-A of the Sale of Goods Act, 1930, which visualizes and provides for situations where levies of tax are imposed after the contract (for sale of goods) is entered into. The provision prescribes that:

"64-A. In contracts of sale, amount of increased or decreased taxes to be added or deducted. - (1) Unless a different intention appears from the terms of the contract, in the event of any tax of the nature described in sub-section (2) being imposed, increased, CS (OS) 1016/2008, CS (OS) 1018/2008 Page 7 decreased or remitted in respect of any goods after the making of any contract for the sale or purchase of such goods without stipulation as to the payment of tax where tax was not chargeable at the time of the making of the contract, or for the sale or purchase of such goods tax-paid where tax was chargeable at that time, -

(a) if such imposition or increase so takes effect that the tax or increased tax, as the case may be, or any part of such tax is paid or is payable, the seller may add so much to the contract price as will be equivalent to the amount paid or payable in respect of such tax or increase of tax, and he shall be entitled to be paid and to sue for and recover such addition; and

(b) if such decrease or remission so takes effect that the decreased tax only, or no tax, as the case may be, is paid or is payable, the buyer may deduct so much from the contract price as will be equivalent to the decrease of tax or remitted tax, and he shall not be liable to pay, or be sued for, or in respect of, such deduction.

(2) The provisions of sub-section (1) apply to the following taxes, namely; -

(a) any duty of customs or excise on goods;

(b) any tax on the sale or purchase of goods."

17. The above provision also clearly says that unless a different intention appears from the terms of the contract, in case of the imposition or increase in the tax after the making of a contract, the party shall be entitled to be paid such tax or such increase. Although there is no explicit provision to that effect, enabling lessors such as the plaintiff, to the service tax component, this Court is of the view that there is sufficient internal indication in the Act, through Section 83 read with Section 12-A and Section 12-B suggesting that the levy is an indirect tax, which can be collected from the user (in this case, the lessee). This issue, is therefore, answered in the plaintiff's favour, and against the defendant.

18. The plaintiff seeks a decree for declaration in both the suits, and consequential injunction, to the effect that the extent of service tax liability has to be borne by Satya Developers; money decrees are also sought; in Suit No. 1016/2008, a decree for ` 3,55, 270/- is claimed; in Suit No. 1018/2008, a decree for ` 24,720/- is claimed. The plaintiff has placed on record documents showing that these amounts were paid towards service tax liability for the period 01.06.2007 to 31.03.2008, in respect of the two agreements (i.e. for lease and Maintenance) dated 09.10.2006 CS (OS) 1016/2008, CS (OS) 1018/2008 Page 8 and 16.10.2006. The levy had, apparently been held to be Unconstitutional during the pendency of the suit. However, parties had stated that the judgment is now pending consideration in appeal, and the present judgment may determine the liability, which would be subject to the final outcome of the appeal.

19. In view of the findings on issue No. 1, this Court is of the opinion that the plaintiff is entitled the declaration and injunctions claimed against the defendant, to the effect that the latter is liable to pay and refund the service tax liability. The plaintiff is also entitled to the amounts claimed. The second issue is answered accordingly. 

Case Reference - Escotal Mobile Communications ... vs Union Of India .