By TIOL News Service

MUMBAI, NOV 08, 2018: ACTING on intelligence that Appellants have evaded Service Tax on the amount received by them on supply of SIM cards in the course of rendering services under the category of telecommunication services, an investigation was undertaken.

From the scrutiny of records and statements recorded during the investigation, it transpired that -

i.  Appellants failed to correctly discharge service tax for services rendered in form of sale of SIM card under category of Telecommunication Services for the period from 1.04.2007 to 31.03.2012;

ii.  During period prior to 1 st December 2010, they were paying Service Tax only on the talk time contained in the SIM Card and not on its total value. Thereafter, the talk time was segregated from the value of SIM card value and only VAT was paid on the value of SIM Card transactions;

iii.  These facts were suppressed from the service Tax department.

iv.  Appellants had suppressed the correct nature of service in form of sale of SIM card provided by them which fall within the category of "Telecommunication Service" with intention to evade payment of Service Tax.

v.  They failed to declare the correct value of SIM card transactions which is an integral part of "Telecommunication Service" provided by them during the period from 01.04.2007 to 31.03.2012 with intent to evade payment of Service Tax.

SCNs were issued proposing recovery of Service tax allegedly not paid of Rs.27,97,57,680/- for the period 01.04.2007 to 31.03.2012 & 01.04.2012 to 31.03.2013. The demands were confirmed after appropriating the amount paid of Rs.3.17 crores (approx.) and penalties and interest were also imposed.

The order has been challenged in appeal before the CESTAT. It needs mention that the impugned order has been passed in de novo adjudication after the case was remanded by the Tribunal by its order 03.09.2012.

The appellant inter alia submits that -

+ The basic foundation that SIM card is a part of 'service' is erroneous, since the SIM card is being sold by them as 'goods" as per the Apex Court decision in case of BSNL - 2006-TIOL-15-SC-CT-LB.

+ Dominant nature test applied is not relevant as the transaction of sale of SIM card is totally separate from the transaction of providing the taxable "telecommunication service".

+ Even if the value of SIM cards is to be included in the value of taxable services provided by them, then also they should be allowed the benefit of Notification No 12/2003-ST (upto 30 June 2012) and inclusion of trading of goods in negative list (from 1 st July 2012) should be allowed.

+ Quantification of demand is erroneous. ?

+ Extended period has been wrongly invoked as the?matter was in knowledge of the department through out.

The AR inter alia submitted that the issue with regards to inclusion of value of SIM cards in the value of taxable service provided by the mobile companies has been settled by the Apex Court in case of Idea Mobile Communications Ltd vs. CCE - 2011-TIOL-71-SC-ST. Furthermore, so long as the subscriber has no option to use same SIM again and again for receipt of telecommunication service from any provider and right to transfer it for use to any other person, it is only permissive use and no sale; that in case the consumer ports the number to any other operator, he has to use another SIM of new operator; that the claim that SIM card once sold is not taken back also corroborate the position that it has no value for subscriber unless coupled with the agreement to provide service; that it is not the claim of the appellant that the dominant intention of the parties (subscriber and operator) is to sell SIM rather than provide Telecom Service; that the issue with regards to leviability of Service Tax has been adjudicated by the Apex Court in the case of BSNL in the year 2006 - 2006-TIOL-15-SC-CT-LB and hence any misinterpretation of the same cannot be claimed to interpretational issue or a bonafide belief.

The Bench considered the submissions and observed that the issues for consideration were -

i. Whether the value of SIM sold by the Appellants as an independent commodity be included in the assessable value of the taxable service under Section 65 (105)(zzzx) of the Finance Act, 1994 for the purpose of levy of service tax?

ii.  Whether the extended period of limitation can be invoked for confirming the service tax demand in the facts of the present case?

iii.  Whether penalty can be imposed on the Appellants in the facts the present case?

The CESTAT further observed -

On Merits:

++ It is crystal clear that the SIM Cards purchased by the Appellants from the vendors/ suppliers/ manufacturers of SIM card and those supplied by them are distinct. The ones procured by them are not mapped to their network and are capable of being programmed and mapped to any network. However, the SIM's provided by the Appellant are programmed and mapped to their network. Thus these SIM cards are now the part of the telecommunication network of the appellants and after activation are for the purpose of identifying the subscriber on their network so that he can make or receive the call through their network. Thus the claim of the appellant that the sale of SIM card by the appellant is an independent transaction of sale of goods simpliciter is not tenable, because the same SIM cannot be used for any other purpose other than identifying the consumer on appellants network for provision of telecommunication services.

++ In view of the decision of the Apex Court (BSNL- 2006-TIOL-15-SC-CT-LB), the SIM Cards as purchased by the Appellants from the suppliers/vendors etc. are distinct from the one's supplied by them to their consumers. While those purchased by them are liable to VAT/ Custom Duty/ Central Excise Duty, those provided by them through their network are incidental to the supply of services provided by them.

Adverting to the decision of the Apex Court in case of Idea Mobile Communication - 2011-TIOL-71-SC-ST, it is further observed -

"6.6 In view of above the distinction drawn by the appellants between their case and the case of other mobile operators is irrelevant. The real test laid down by the Apex Court is not vis-à-vis the transfer of SIM or the property in SIM, but the nature of use of the SIM. If the SIM is used for identification of the consumer on network of the mobile operator, then provisioning of SIM is incidental to the service being provided by the operator. Accordingly we do not find any merit in the submissions made by the Appellant in respect of non inclusion of the value of SIM in the services provided by them."

Notification 12/2003-ST:

As regards benefit claimed of notification No 12/2003-ST claimed, the Tribunal denied the same by observing thus -

"…The SIM as programmed and provided by the Appellant to the consumer is always the part of the telecommunication network of the appellant and has no other use other than to identify the consumer on the said network. Since the property in the said SIM in effect is not transferred to the consumer, and the said SIM is only used for activation, identification and provisioning of the telecommunication services to the consumer, the transaction in SIM cannot be said to be one of sale of goods. Apex Court has also in case of Idea Mobile Communication held that the intrinsic value of the SIM to consumer is zero, which implies that consumer would not purchase the SIM for a consideration other than the supply of services…"

Limitation:

+ The entire period under consideration is from 2007 onwards after the decision of the Apex Court in the matter (BSNL - 2006-TIOL-15-SC-CT-LB), the submission of the appellant in this respect cannot be accepted. There appears to be no interpretational issue left on basis of which appellants could have entertained the bonafide belief claimed by them. In fact appellants were only devising business plans and strategies to circumvent the law clearly laid down by the Apex Court.

+ The changes in the business plans and the marketing strategies, which resulted in the short payment of taxes were never brought to the knowledge of the department. This fact has been admitted by the Chief Financial Officer of the Appellants in his statement recorded during the investigations.

+ In fact non-disclosure of the relevant facts when required, when made to circumvent the payment of taxes due is an act of suppression with intent to evade payment of duty.

+ Even if it is taken into account that appellants were audited during the year 2009, then also the fact of suppression with the intent to evade payment of duty does not get altered. The changing practices adopted by the appellant during the period prior and after audit are listed in table below:

+ Thus when appellants have themselves been experimenting with the business practices and documents, and have never declared about the same to the department at the appropriate time, they cannot claim the benefit of knowledge of department.

+ Since on examination of facts in present case we find appellants have suppressed the true nature of transaction in SIM from the department, with intention to evade payment of taxes extended period of limitation has been rightly invoked for demanding service tax from them.

Penalty & Interest:

The imposition of penalty and interest were also upheld by the Tribunal by viewing that the same is a natural corollary when the demand is confirmed.

Quantification:

Insofar as the submission of the appellants that the demand for the period from April 2007 to November 2010 has been made by multiplying the number of startup kits (SUK) with MRP of SUK, disregarding the fact that till November 2010, they had discharged service tax on service value forming part of MRP of SUK; that the demand of service tax needs to be recomputed after taking into account the service tax already paid by them, the Bench agreed and remanded the matter to the said extent of re-quantification of demand.

Adjustment of VAT:

The appellant had also sought adjustment of the VAT paid towards the demand for Service Tax.

To this plea, the CESTAT viewed -

"…we are not in position to permit or allow for such adjustment or uphold such contention. VAT is levied under the State Act and Service Tax under the Central Act. Since both the authorities, under which Service Tax and VAT are levied are not the same, the tribunal being creature of the Central Act, would not be in position to determine such transfer and adjustment of VAT paid under State Act, towards the tax liability under a Central Act."

In fine, the impugned order was upheld on all counts except the portion remanded for re-quantifying the demand.

The appeals were disposed of.

(See 2018-TIOL-3371-CESTAT-MUM)