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2017 (1) TMI 336 - MADHYA PRADESH HIGH COURT

2017 (1) TMI 336 - MADHYA PRADESH HIGH COURT - TMI - VAT or service tax - activity in the nature of service or sale - SIM replacement charges - lease line revenue - Vires of Sec.2(u) and 2(v) of the MP VAT Act, 2002 - whether the SIM replacement and lease line is selling of goods or providing of services? - Held that: - the amount received by the cellular telephone company from its subscribers towards SIM card will form part of the taxable value for levy of service tax, as the SIM cards are neve .....

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f SIM card and the value of taxable service is calculated on the gross amount received from the operator from the subscriber and, therefore, once it has been held that no sales tax can be charged for providing a SIM, the question of charging it on replacement of a SIM, does not arise. - Lease line charges - Held that: - similar issue was decided in the case of Bharti Infratel Ltd., Vs. State of Madhya Pradesh and others [2015 (8) TMI 1289 - MADHYA PRADESH HIGH COURT], wherein the Division Be .....

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rges are only for services rendered and there is no element of sale therein - service tax leviable. - Sec.2(u) and 2(v) of the MP VAT Act, 2002 is ultra-vires and void, in so far as it relates to imposition of VAT on SIM replacement charges and lease line revenue, which are merely services - petition allowed - decided in favor of petitioner-assessee. - WRIT PETITION No. 7631 / 2014, WRIT PETITION No. 3767 / 2015, WRIT PETITION No. 363 / 2016, WRIT PETITION No. 2320 / 2016 - Dated:- 3-1-2017 .....

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4 read with demand notice dated 31/7/2014 under Form 28 (Rule 40) of the M.P. VAT Act, 2002. It has been stated in the Writ Petition that the petitioner Company has been granted a Unified Access Services Licences (hereinafter referred to as, 'the UASL') by the Central Government for providing telecom services, inter-alia, for the Telecom Circle which is contiguous with the State of Madhya Pradesh and State of Chattisgarh. The petitioner Company provides various kinds of services ie., Cel .....

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he petitioner Company. The contention of the petitioner is that the respondents have no authority under the Constitution of India to levy service tax on the services rendered by the petitioner and the same cannot be recovered under the provisions of the M.P. VAT Act, 2002. It has been further stated by the petitioner Company that levy of service tax on the service rendered by providing SIM Replacement Charges and the Lease Line Revenue and simultaneously levy of VAT by the State of Madhya Prades .....

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VAT on consideration received for providing logistic charges and warranty claims received by the petitioner Company. The contention of the petitioner is that Central Government by Finance Act of 1994 has imposed Service tax on the said service of the petitioners and the petitioners are being assessed to the said tax and the petitioner is paying the requisite tax w.e.f. May 14, 2004. It is further contended on behalf of the petitioner - service provider that the use/utility of the SIM card remain .....

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n is the same and again the charges remain the charges for reactivation and cannot be treated as a sale price. It is submitted by the learned counsel for the petitioner that a Subscriber Identification Module (SIM) card contains a computer chip with prerecorded instructions. It is a device which helps the service provider to identify the subscriber. It also enables the subscriber to access the service provider's network by means of electro-magnetic waves. The SIM card is merely a key to ente .....

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of sale, sales tax can be levied thereon. If the sale of a SIM card is incidental to the service being provided, and merely facilitates identification of the subscribers, their credit and other details, it would not be assessable to sales tax. On the same analogy the SIM replacement charges are also not liable to be taxed since these again are in the form of service charges and do not represent sale price. The learned counsel for the petitioner submits that SIM cards are included under the defin .....

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mp; C., Cochin reported in (2011) 19 STJ 2301 (SC) wherein the question which arose for consideration, in IDEA Mobile, was whether the value of SIM cards, sold by the service provider to their mobile subscribers, should be included as taxable service under Section 65(105) zzzx of the Finance Act, 1994, (which provides for levy of service tax on telecommunication service), or whether it is taxable as sale of goods under the Sales Tax Act. The Hon'ble Supreme Court held that the charges paid b .....

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transaction is to provide services, and not to sell the material i.e.; SIM Cards which, on its own but without the service, would hardly have any value; the value of the SIM card forms part of the activation charges as no activation is possible without a valid functioning of the SIM card; the value of the taxable service is calculated on the gross total amount received by the operator from the subscribers; and no element of sale is involved in the transaction. In view of the law laid down by the .....

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e impugned demand notice are liable to be set aside. Learned counsel for petitioner further contended that the petitioner who is covered by the provisions of the Finance Act, 1994 as amended from time to time, is required to pay Service Tax on the service activity to the Central Government under Section 696 of the said Act. The petitioner has paid Service Tax on the entire amount received towards the SIM replacement. Therefore, any attempt on the part of the State Government to levy sales tax on .....

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The Apex Court in para 83 of its decision has noted the definition of subscriber as defined under the Finance Act enacted by the Parliament which includes a person to whom any service of a leased circuit has been provided. The Apex Court further in paragraph 84 thereof observed that a telephone service is nothing but a service; that there is no sale element apart from any hand set or other accessory supplied. It has been further contended that in the light of the categorical conclusion arrived a .....

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mmissioner of Commercial Taxes reported in 2009 (2) SCC 614 wherein it has been categorically held that service tax and VAT is not payable on the same amount as both taxes are mutually exclusive. Learned counsel has submitted that the impugned order seeking to confirm demand of VAT on a transaction which is taxed as a service and on which service tax has been paid under the Finance Act, 1994 is improper and liable to be set aside. The respondents have filed a detailed and exhaustive return and t .....

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rightly been charged. Learned counsel for the respondent - State has drawn attention of this Court towards the provision of Section 2 (u) and 2 (v) and from its perusal it is clear that charges taken by the petitioner Company virtually falls within the purview of section 2 (u) and 2 (v) as initially the SIM is the property of the petitioner Company and no consideration is charged but later at the time of SIM replacement, may be because of damage, the petitioner Company is charging certain amoun .....

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d in the judgment delivered by the Hon'ble Supreme Court in the case of Idea Mobile Communication Ltd., Vs. Commissioner of Central Excise & Customs reported in (2011) 19 STJ 201 (SC) and, therefore, the judgment relied upon by the respondents is of no help to the respondents. It has been stated that the concept of valuable consideration and sale price u/s 2 (u) or 2 (v) would apply only if the amount charged is qua goods and not when the amount charged is qua services . It has been stat .....

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e time of issuance of original SIM as well as its replacement. The process itself shows that this activity is nothing but a service. It has been contended that in a case of a driving licence/high court bar license, the card itself does not have any value. It only enables the holder to drive/practice. If the driving licence is lost, for a new one some charges are levied which again are part of service. Same is the case of a SIM card. Replacement charges are only service charges on which service t .....

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lacement to customers and Lease Line Charges received from the customers. A SIM Card which is a short form of 'Subscriber Identification Module' contains a Computer Chip with pre-recorded instructions. It is a device which helps the service provider to identify the subscriber. It also enables the subscriber to access the service provider's network by means of electro-magnetic waves. SIM is merely a key to enter service provider's facility and use their services. The process of ac .....

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dental to the services being provided and merely facilitates identification of the subscribers, their credit and other details, it would not be accessible to sales tax. On the same analogy the SIM replacement charges are also not liable to tax since these again are in the form of service charges and do not represent sale price. SIM cards are included under the definition of 'Telecommunication Services' which are liable for service tax under Sec. 65(109a) of the Finance Act, 2002. A SIM c .....

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card no VAT is being levied and for replacement VAT is being levied. The matter relating to levy of VAT Taxes has been considered by the Hon'ble Supreme Court in various judgments. In the case of Bharat Sanchar Nigam Ltd., and another Vs. Union of India and others reported in (2006) 3 SCC 1, the apex Court in paragraph 87, 88, 89 and 90 has held as under : 87. What a SIM card represents is ultimately a question of fact as has been correctly submitted by the States. In determining the issue, .....

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insufficient material on the basis of which we can reach a decision. However we emphasise that if the sale of a SIM card is merely incidental to the service being provided and only facilitates the identification of the subscribers, their credit and other details, it would not be assessable to sales tax. In our opinion the High Court ought not to have finally determined the issue. In any event, the High Court erred in including the cost of the service in the value of the SIM card by relying on t .....

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re taxable events in its different aspects. But the fact that there is overlapping does not detract from the distinctiveness of the aspects". 88. No one denies the legislative competence of States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernible in the transaction. This does not however allow State to entrench upon the Union list and tax services by including the cost of such service in the va .....

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blishment which is relatable to supply of materials involved in the execution of the works contract only can be included in the value of the goods". 89. For the same reason the Centre cannot include the value of the SIM cards, if they are found ultimately to be goods, in the cost of the service. As was held by us in Gujarat Ambuja Cements Ltd. Vs. Union of India (2005) 4 SCC 214,228. "This mutual exclusivity which has been reflected in Article 246(1) means that taxing entries must be c .....

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L in Civil Appeal Nos. 3329-30 of 2002 and Escotel in Civil Appeal No.2408 of 2002 and remand the matter to the Sales Tax Authorities concerned for determination of the issue relating to SIM Cards in the light of the observations contained in this judgment. The Division Bench of this Court in the case of M.P. Reliance Telecom Ltd., Indore Vs. Commissioner of Commercial Tax, reported in (2007) 11 STJ 795, in paragraph 2 to 7 has held as under : 2. Learned Counsel for the appellant does not disput .....

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ax which was assailed by the appellant. 3. Learned Counsel submits that insofar as the supply of hand set to the subscribers was concerned, it was not the main business of the appellant who was liable to pay only service tax under the provisions of Finance Act, 1994 with the result the appellant was not required to get itself registered as a 'Dealer' under the Commercial Tax Act, 1994 but on account of some mis-conception, application was made to the Department and a registration as ' .....

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espondents on the said Cellular hand sets. 4. The Board, in considering the said contention, has referred to the decision of the Supreme Court in Anand Commercial Agencies v. Commercial Tax Officer STC Vol. 107 1997 Page 586. 5. Apropos the first contention of the learned Counsel that supplying of the hand set to the subscribers was only an ancillary activity and not the main activity, suffice would be to say that service rendered by the appellant Company would be meaningless unless the receiver .....

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h constituted part of the package. In Anand Commercial Agencies (supra) the Apex Court considered a situation where bottles were supplied free of charge on understanding that they would be returned to the 'Dealer' with a stipulation that the amount of advance deposited would stand forfeited if the bottles were not returned within the prescribed period. This amount was treated as forming sale price and charged appropriately to tax. The decisions relied upon by the learned Counsel for the .....

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to levy sales tax thereon. 6. From the orders passed by the Sales-Tax Authorities we find that the Authorities have been discerning enough between the Sim Card supplied free of charge and the Sim Card substituted on payment of charges. It is only the Sim Card which is substituted on account of damage etc. and for which extra charge is made that the Authorities are charging commercial tax. However, the situation with regard to the supply of hand set is entirely different from the one present bef .....

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the decision in Board of Trustees (supra) also does not further the case of the appellant. 7. In view of the above discussion, we do not find that these appeals give rise to any question of law, much less substantial, for decision in the appeal under Section 53(2) of the VAT Act. The Division Bench of Kerala High Court in the case of Commissioner of Central Excise & Customs Vs. Idea Mobile Communication Ltd., reported in (2009) 15 STJ 337 (Kerala), in paragraph 3 has held as under : 3. In th .....

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nswers the description of telegraph authority defined under s. 65(111) of Finance Act, 1994 and they are registered for the payment of service-tax and they are in fact remitting tax on activation charges. The exclusion claimed by them is only on the value of SIM cards, that too only on the ground that they are free to supply SIM cards as sale of goods and remitted sales-tax thereon. In order to consider whether the value of SIM card constitutes taxable service, we have to examine the functioning .....

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ords, it is an integral part required to provide mobile service to the customer. Customer cannot get service without SIM card and it is an essential part of the service. SIM card has no intrinsic value or purpose other than use in mobile phone for receiving mobile telephone service from the service provider. Therefore, in our view, the stand taken by the BSNL and BPL mobile services that it is not goods sold or intended to be sold to the customer but supplied as part of service is absolutely ten .....

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ncoded circuit board which is fitted into cell phones at the time of signing on as a subscriber. The SIM Card holds the details of the subscriber, security data and memory to store personal numbers and it stores information which helps the network service provider to recognize the caller. As stated hereinbefore the Kerala High Court had occasion to deal with the aforesaid issue and in that context in its Judgment pronounced on 15th February, 2002 in Escotel Mobile Communications Ltd. vs. Union o .....

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y understanding its facts. The transaction of selling the SIM. card to the subscriber is also a part of the "service" rendered by the service provider to the subscriber, Hence, while the State Legislature is competent to impose tax on "sale" by a legislation relatable to entry 54 of List II of Seventh Schedule, the tax on the aspect of "services" rendered not being relatable to any entry in the State List, would be within the legislative competence of Parliament und .....

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different taxes in its different aspects. Thus, we see no reason to read down the legislation as suggested by Mr. Menon. Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 47. 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 b .....

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nt reasons for coming to the conclusion that service tax is payable inasmuch as SIM Card has no intrinsic sale value and it is supplied to the customers for providing mobile service to them. It should also be noted at this stage that after the remand of the matter by the Supreme Court to the Sales Tax authorities the assessing authority under the Sales Tax Act dropped the proceedings after conceding the position that SIM Card has no intrinsic sale value and it is supplied to the customers for pr .....

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s tax is wrongly remitted and paid that would not absolve them from the responsibility of payment of service tax, if otherwise there is a liability to pay the same. If the article is not susceptible to tax under the Sales Tax Act, the amount of tax paid by the assessee could be refunded as the case may be or, the assessee has to follow the law as may be applicable. But we cannot accept a position in law that even if tax is wrongly remitted that would absolve the parties from paying the service t .....

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d paying the service tax on the activation. The appellant also accepts the position that activation is a taxable service. The position in law is therefore clear that the amount received by the cellular telephone company from its subscribers towards SIM Card will form part of the taxable value for levy of service tax, for the SIM Cards are never sold as goods independent from services provided. They are considered part and parcel of the services provided and the dominant position of the transacti .....

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ood the aforesaid position that no element of sale is involved in the present transaction. In the light of the aforesaid judgments delivered on the subject matter, the position of law is very clear that the amount received by the cellular telephone company from its subscribers towards SIM card will form part of the taxable value for levy of service tax, as the SIM cards are never sold as goods independent from service provided. As already held by the Hon'ble Supreme Court, they are considere .....

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s amount received from the operator from the subscriber and, therefore, once it has been held by the Hon'ble Supreme Court that no sales tax can be charged for providing a SIM, the question of charging it on replacement of a SIM, does not arise. The impugned order passed by the assessing authority dt. 31/7/2014 and the Notice dt. 31/7/2014 deserves to be quashed. The other issue in respect of of VAT on lease line charges is only in the present Writ Petition (WP No. 7631/2014) and is covered .....

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s no sale. In the case of lease line charges also this very principle applies since a subscriber of a lease line does not become the owner of the line either by control or by possession and hence such charges are only for services rendered and there is no element of sale therein. The Division Bench of this Court in the case of Bharti Infratel Ltd., Vs. State of Madhya Pradesh and others (W.P.No. 5340/2013, decided on 20/8/2015), in paragraph 35, 36, 37, 38, 39 and 40 has held as under : 35. We a .....

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t demonstrating the intention to part with the possession of the passive infrastructure. There is none in the present case. The passive infrastructure is an indispensable requirement for the proper functioning of the active infrastructure which is owned and operated by the sharing telecom operators. The passive infrastructure is shared by several telecom operators and that is why they are referred to as sharing telecom operators in the MSA. The MSA merely permits access to the sharing telecom op .....

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d maintenance etc. of the active infrastructure; the clause further states that the sharing operator does not have, nor shall it ever have, any right, title or interest over the site or the passive infrastructure. The Clause also takes care to declare that the sharing operator shall not be deemed to be the tenant of petitioner and no tenancy rights shall be deemed to exist over the site/passive infrastructure. Clause 2.1.8, presumably by way of abundant caution, states that it is expressly agree .....

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tives or properly authorise subcontractors of the sharing operator. Clause 1.8 of the Schedule 2 of the MSA has to be read along with the above clause. The tables set out in this schedule providing for payment of service credits by petitioner to the sharing operators for failure to achieve the uptime service levels and those prescribing payment of service credits by petitioner to the sharing operators for non-submission of the reports and providing for stiff penalties for any failure on the part .....

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the part of the petitioner to ensure uninterrupted and high quality service provided by the passive infrastructure, it is difficult to imagine how the petitioner could have intended to part with the possession of part of the infrastructure. That would have been a major impediment in the discharge of its responsibilities assumed under the MSA. The limited access made available to the sharing telecom operators is inconsistent with the notion of a right to use the passive infrastructure in the ful .....

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ed to them can only be regarded as a permissive use or a limited licence to use the same. The possession of the passive infrastructure always remained with the petitioner. The sharing telecom operators did not therefore, have any right to use the passive infrastructure. 38. A careful perusal of the judgment of the Karnataka (supra) shows that the following propositions were laid down:- a) No operation of the infrastructure is transferred tothe sharing telecom operator. The latter is only provide .....

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orities as a right to use the passive infrastructure ; d) There is no intention on the part of the Indus to transfer the right to use; it is only a licence or an authority granted to telecom operator as defined in Section 52 of the Easements Act, 1952. A licence cannot in law confer any right; it can only prevent an act from being unlawful which, but for the licence, would be unlawful. A licence can never convey by itself any interest in the property; e) The entire MSA has to be read as a whole .....

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