Education

On sale of SIM card

MOHAN R. LAVI | Updated on August 19, 2011

A headache for the taxmen and taxpayers.

As a SIM card is a tangible and physical substance, the normal reaction would be to regard it as a sale of goods thereby VATable. However, the service provider also provides a phone number with the SIM card and activates the number which has all the elements of service embedded in it.

In the 1994 Budget speech, while introducing Service tax to the nation, the then Finance Minister had stated that he was making a modest effort to tax services which at that time was contributing 40 per cent to the gross domestic product (GDP). Service tax filled in the missing frame in the taxation picture-postcard where manufacture, sales and income had their fixed places. With the efflux of time, the modest effort turned out to be a money-spinner encouraging the law-makers to levy the tax on transactions that had a tinge of service to them, but which were essentially goods. The perceived clear distinction between sales and services became a blur. With the law not clarifying matters, service providers ended up double-taxing the same transaction.

Sale/service?

Subscriber Identity Module (SIM) cards, whose measurements could be as small as 15mm X 12mm, have created large headaches for the tax administrators and tax payers. As a SIM card is a tangible and physical substance, the normal reaction would be to regard it as a sale of goods thereby VATable. However, the service provider also provides a phone number with the SIM card and activates the number which has all the elements of service embedded in it. CESTAT benches and High Courts across the country researched on this and gave differing judgements which inevitably brought the apex court into the picture. In Union of India vs State of Uttar Pradesh, the apex court held that there could be certain transactions which have a flavour of both a sale and a service implying that double taxation can occur. Pending legislation on the same topic provided an opportunity for the apex court to look at the vexing issue again in Idea Mobile Communication Ltd vs Commissioner of Central Excise and Customs, Cochin ( 2011-TIOL-71SC-ST)

SC decision

The apex court dissected the decision of the Kerala High Court in Escotel Mobile Communications Ltd. vs. Union of India and Others, reported in (2002) Vol. 126 STC 475 (Kerala). The Kerala High Court was of the view that the transaction of sale of SIM card is without doubt exigible to sales tax under the KGST Act and 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.

Without generalising the ruling, the apex court held that 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 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 at all. Thus, it established from the records and facts of the case that the value of SIM cards forms part of the activation charges as no activation is possible without a valid functioning of SIM card and the value of the taxable service is calculated on the gross total amount received by the operator from the subscribers. As the activation paid a predominant role in the entire transaction, VAT could not be charged on the SIM card per se.

Dissecting contracts

Normally, a person who needs a mobile number purchases a SIM card and not vice-versa. It needs to be seen if the logic of the decision of the apex court can be used by other composite service providers — instances such as software supplied in a CD wherein the CD is incidental to the software, a contract for design and development of a tool wherein the design is the primary activity.

Notification No 12/2003 still remains despite the notification-clean-up drive done by the Rastogi Committee. Service providers have the choice to exempt the value of materials in case there is documentary proof for the same. A host of legal decisions after Daelim Industrial Company permit artificial bifurcation of composite contracts with 70:30 evolving into an unwritten rule. A service provider is at liberty to choose the most tax-efficient structure. It remains to be seen if Central GST is enunciated on the same lines.

(The author is a Bangalore-based chartered accountant).

Published on August 13, 2011

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