SIM card is exigible to sales tax under KGST Act, HC

Facts in Brief:

1. 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 (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, 1963 (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 is manually fed through computer into the Customer Administration and Billing System (hereinafter referred to as "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.

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. With this understanding, the petitioner was duly paying the sales tax on items exigible to sales tax and service tax on the activation charges. By a notice dated May 18, 1999 (vide exhibit P1), the Superintendent of Central Excise, Service Tax Range, Ernakulam II Division, called upon the petitioner to furnish information as to whether the value of SIM card/cash card was included in the "taxable service" for the purpose of computing service tax. He also sought details of the total value of such cards from January 1997 to April 31, 1999.

6. By a reply dated June 15, 1999 (vide exhibit P2), the petitioner contended that the SIM card is merely a plastic computer chip which were inserted in a handset makes the handset operational. It is a part of the handset, as, in its absence, the subscriber would not be able to communicate on the cellular phone. It was pointed out that the SIM card was subject to customs duty and also to sales tax laws in various States, as it is a commodity capable of being bought and sold.

7. However, 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 duly paying service tax on activation charges.

HC held s under,

8. With greatest respect, we are unable to accept the above reasoning in the face of the definition of Section 5-E(a) of the A.P. Act and our own definition under the KGST Act in Section 2(xxi) with explanation (3B). In our view, the judgment could be rested on the surer foundation on the first proposition, viz., that the right to use lockers or the facility on the telephone exchange would not be a right to use movable property.

9. Both Mr. Hidayathulla and Mr. Menon contended that the principle enunciated in these judgments would be equally applicable in the case of mobile cellular telephone service providers, because what is offered by them is the transfer of the right to use the mobile services, albeit, by wireless telephone, and that their instruments installed in their office are really immovable property. This contention cannot be accepted, as there is no material placed before us to support this. We, therefore, decline to express any opinion thereupon. As requested by the learned counsel, we keep open the question as to whether the right to use the petitioners' services for valuable consideration would be a right to use "movable property" or "goods" within the meaning of expression "sale" as defined in Section 2(xxi) read with explanation (3B) of the KGST Act to be decided by the statutory authority upon material being produced. We are deciding the issue on the footing that it is movable property and hence, it would amount to sale.

10. Mr. Menon also placed reliance on the judgment of the Punjab and Haryana High Court in Union of India v. State of Haryana [2001] 123 STC 539 with which we have already dealt. Mr. Menon referred to the judgment of the Supreme Court in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax [1954] 26 ITR 765, at page 773, where the Supreme Court held that, no general principle could be laid down which would be applicable to all cases and that each case must be decided on its own circumstances according to ordinary common sense principles. In our view, if the field were open to us, it may be possible to decide it with a common sense principle. But, when the aspect theory of legislation, as approved by the Supreme Court is to be considered, it has to be considered in accordance with established principles of interpreting fiscal statutes.

11. Mr. Menon vehemently contended that the same transaction cannot be "service" and "sale" for different statutes and for taxation by different authorities. We have already held that this contention has no merit. [See in this connection the decision in Federation of Hotel and Restaurant Association of India [1989] 74 STC 102 (SC) ; (1989) 3 SCC 634 and Western India Theatres Ltd. v. Cantonment Board AIR 1959 SC 582.

12. Though Mr. Hidayathulla contended that authorities in Maharashtra were not treating the activation charges as liable to sales tax, the learned Special Government Pleader produced before us an order of the TRAI and a Trade Circular dated April 16, 2001. At item 7, it shows that 7 per cent sales tax has been imposed on SIM card on the ground that it amounts to sale of incorporeal and intangible goods. It is also pointed out by the learned Government Pleader that BPL had actually collected the sales tax on the activation charges for the year 1997-98, but had not submitted it, which has resulted in the penalty proceedings.

Conclusions :

(a) The transaction of sale of SIM card is without doubt exigible to sales tax under the KGST Act. The activation charges paid are in the nature of deferred payment of consideration for the original sale, or in the nature of value addition, and, therefore, also amount to parts of the sale and become exigible to sales tax under the KGST Act.

(b) 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.

We find no substance in the petitions. The original petitions are accordingly dismissed. No order as to costs. 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 arguments 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 petitioner has challenged the reassessment proceedings as time barred as well as penalty and levy of penal interest before the appellate authority contemplated under the Finance Act regarding service tax. Petitioner has also filed an appeal before the Sales Tax Appellate Tribunal challenging the levy of sales tax. An application is made before us that all these proceedings may be kept pending till the disposal of respective proceedings before the departmental authorities. In our view, it would not be proper to grant such a blanket order. The petitioner is at liberty to apply to the respective departmental authority for stay of recovery proceedings pending the hearing of each of the proceedings. There shall be a stay of the recovery proceedings for a period of fifteen days from today, to enable the petitioner to file such applications. If such applications are filed within the time stipulated by us, then the stay will continue till the respective authorities hear and dispose of the applications for stay. The penalty orders passed against the petitioner were also challenged in these writ petitions. We have declined to interfere with them in these writ petitions and left them to be decided by the statutory authorities. Learned counsel for the petitioners does not dispute that those orders are capable of being challenged by revision applications under the provisions of the KGST Act. We, therefore, see no reason why this Court should be concerned with it. However, there shall be stay of recovery for a period of fifteen days from today to enable the petitioner to file revision applications and obtain appropriate orders from the concerned departmental authority. If such revision applications and stay applications are filed within fifteen days, the stay granted by us will continue .

13. till the applications for stay filed are heard and disposed of by the departmental authorities.

14. In all the three writ petitions, the counsel orally applied for leave to appeal to the Supreme Court under Article 134A(b) read with Article 133(1)(a) and 133(1)(b) of the Constitution of India. These cases involve substantial questions of law of general importance likely to affect a large number of people which are not decided by the Supreme Court. Hence, we grant the certificate as prayed for under Article 134A(b) read with Article 133(1)(a) of the Constitution. 

Case Reference - Escotal Mobile Communications ... vs Union Of India (Uoi) And Ors.