Sales Tax would not be applicable on Sale of Sim Card : Legal Analysis

We are discussing the reportable  judgment of Supreme court in case of Idea Mobile Communication Vs C.CE &C, Cochin, dated 4^th Aug 2011 which is a land mark judgment among all telecom operators engaged in the sale of Sim cards while facing demand of sales tax from the Commissioner Excise & Customs.

Hon’ble Supreme Court has said in its verdict that:

“There cannot be any dispute to the aforesaid position as the appellant itself subsequently has been paying service tax for the entire collection as processing charges for activating cellular phone and 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 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 is established from the records and facts of this 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. The Sales Tax authority understood the aforesaid position that no element of sale is involved in the present transaction.”

This  Civil appeal was filed by M/s Idea against the order of High Court, Kerala where the appeal of the Excise department was allowed. The order passed on the question of levy of service tax on telecommunication service OR whether it is taxable as sale of goods under the Sales Tax Act. The appellant M/s Idea was paying service tax only on the activation charges and not on the value of SIM or amount collected from the subscriber for ‘sale of SIM’.  The department had imposed sales tax on the activation charges considering the sale of SIM as sale of goods. The whole disputed revolved around that the department was including the ‘Activation charge” sale value while operator has objected on this and asked to include the ‘Activation charge’ in the ‘Taxable services’ defined under Finance Act.

Supreme court has given finding in this case that ‘The charges paid by the subscribers for procuring a SIM Card are generally processing charges for activating the cellular phone and consequently the same would necessarily be included in the value of the SIM Card.” It is acceptable to telecom operator that ‘service tax’ is payable on activation of SIM card which inherently includes the value of SIM.

Practically, this judgment end of the all similar matters and it signifies the conclusion.