Escotal Mobile Communications Ltd. vs. Union of India and ors. (Kerala H.C.) Citation- 2006 [2] S.T.R.

567. Quorum- (2 Judges) - B.N. Srikrishna, C.J., M. Ramachandran, J. Facts of the caseThe petitioner in the instant case was engaged in cellular telephone business within Kerala and also provided other services like selling cellular telephone instruments, SIM cards and other accessories. It purchased these accessories from States outside Kerala by paying Central sales tax. For selling the products within the State of Kerala, it paid sales tax under the Kerala General Sales Tax (KGST) Act, 1963. According to the petitioner, the sale of the instrument and the SIM card to its customers was only a sale pure and simple liable only to sales tax under the KGST Act. The petitioner also rendered activation services on which it paid service tax (activation is a process by which the details of the customer are manually fed into computer to provide a database which can provide access for the customer to use the net work). It was the stand of the petitioner that activation neither increases nor decreases the value of SIM card, since it was not a process carried out on the SIM card, but only on the computer in the petitioners office. The petitioner was duly paying the sales tax for sales of SIM cards and service tax on the activation charges. However, the respondent subsequently asked the petitioner to show cause as to why the value of SIM cards was not to be included in the taxable service for the purpose of computing service tax. The petitioner, in his reply, 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 was also paying service tax on activation charges. Finally, by an order made after one month; the respondent demanded service tax payable on the value of SIM cards and also imposed penalties upon the petitioner under various provisions of the Finance Act, 1984.

JudgmentThe Kerala High Court held that: The transaction of sale of SIM card was liable to sales tax under the KGST Act. The activation charges paid were also liable to sales tax under the same Act. The selling of the SIM card and the process of activation are services provided to the customer and fall within the definition of taxable service as defined in s. 65(72)(b) of the Finance Act. They are also liable to service tax under the Finance Act.

Case AnalysisThere were four main contentions which arose from the facts mentioned above: (a). Whether the supply of SIM cards is sale as defined under KGST Act? (b). If yes; whether the activation charges are a part of sale as defined under KGST Act and thus liable to sales tax? (c). Can the combined value of sale of SIM and activation charges be taxed under both sales tax and service tax? (d). Is the sale of SIM cards taxable service under s.65 (72) (b) of the Finance Act? (a). The petitioner disputed all elements of definition of sale under s. 2(xxi) r.w. Explanation 3B of the KGST Act. It argued that firstly; in order to fall within the meaning of the word sale as defined in Section 2(xxi), there has to be a transfer of the property in the goods for cash or other valuable consideration. A SIM card by itself has no value. It is only a key to enter the service provider's facility and use his services. It is only after activation that it has some value. Since activation is a service; the petitioners are only chargeable to service tax for activation charges and not sales tax either for activation or for the SIM under KGST Act. The petitioner relied upon PSI Data Systems Ltd vs. Collector of Central Excise in which the Supreme Court held that a computer may not be capable of effective functioning unless loaded with software such as discs, floppies etc. but that does not mean that these are a part of the computer for the purpose of taxation. Their value does not form part of the taxable value of the computer for the purposes of excise duty. The petitioner tried to link this with the facts of the present case and asserted that even though a handset will not work without a SIM; even after it is added; the handset is useless unless it is activated. The insertion of a SIM card does act as value addition to the taxable

amount and it is only after activation that value of the handset increases. Thus, it is only logical that only the amount of activation should be assessed to tax. The respondent, on the other hand; argued that sales tax under KGST Act is to be levied on both sales of SIM and activation charges. It proved that the definition of sale has become wider in scope by insertion of explanation 3B to KGST Act in 1984. Thus, tax on sale or purchase of goods now also includes a transfer of right to use any goods for any purpose for any valuable consideration. So even if SIM card has itself no value (as the petitioner argued); it definitely represents a transfer of right to use the service of the cellular telephone service provider for a specified period upon payment of valuable consideration. Hence, the sale of SIM card will also be taxable as tax on sale of goods under s. 2(xxi) r.w. exp. 3B of the KGST Act. The petitioner tried to refute the above argument by contesting that even if it is accepted that the there is a transfer of right to use the SIM card to the customers; SIM card is not goods as defined under the said section. This was because according to him; (as in Associated Cements case) whenever an intangible benefit passes to the customer, it can never amount to anything other than service and thus liable only to service tax. In order to amount to sale under the KGST Act, what is transferred must be a tangible benefit in a movable property. And in the present case, there was nothing tangible transferred to the customers but only a right to use service (which was intangible property). Thus, if they are not goods; the right to use them (as urged by the respondent) would also not come under the purview of goods; as s. 2(xii) of the KGST Act would not apply to intangible property. The petitioner was however; was not able to prove that sale of a copy right or a patent right, though sale of intangible property would not attract sales tax (as in Vikas Sales Corporation v. Commissioner of Commercial Taxes; in which it was held by apex court that even an intangible property, i.e. the right to use transfer of REP licenses for valuable consideration amounted to sale under different State Sales Tax Acts). This would mean that even the transfer of an intangible right in a movable property also came under the purview of sale as defined under the KGST Act.

The last contention of the petitioner in this regard was that the usage services by the customer of mobile phone was through wireless techniques, made possible through instruments placed in their office which were immovable property. But to qualify as sale under the KGST Act, there had to be a transfer of right to use movable property. The court rejected this argument since no material was placed before it to decide this matter and left it open to the statutory authorities to decide whether those equipments installed in petitioners office were movable or immovable property based upon available evidence. In the absence of any evidence to that effect at that instant; it proceeded on the assumption that the instruments were movable property. Hence, with regard to the first contention; it was held that the transaction of sale of SIM card is without doubt liable to sales tax under the KGST Act. (b). The petitioner urged that firstly, there was sale and purchase of SIM card, on which sales tax could be legitimately imposed and then there was activation on which service tax could be legitimately imposed. In other words, both were exclusive and separate transactions liable to two different types of tax. Thus, the sale of SIM card was not liable to service tax; nor was the service provided by activation liable to sales tax. The respondent, on the other hand, correctly submitted that what was styled as activation charges were nothing but deferred consideration for the same sale. The transaction of the sale of SIM and activating it was a single transaction done in two steps. Firstly, there was transfer of SIM card on payment of certain charges; secondly, by the process of activation on payment of activation charges. In other words, it was a continuous process of sale, as it was a transfer of the right to use the facility of the mobile service provider in two steps, the consideration being paid in three installments and the transaction being a single transaction. (c). Thirdly, the petitioner contented that the sale of SIM cards was not a taxable service under s. 65(72)(b) of the Finance Act because it was measured by relating it to the value of taxable sale. The court, however, held that the petitioner was at error in not concentrating upon the taxable event. Merely because a tax was measured by relating it to the value of taxable sale, it did not cease to be a service tax, because the taxable event was the rendering of service and not the sale.

(d). The last contention of the petitioner was that the acceptance of the argument of the respondent would result in taxation of the same transaction under both sales tax and service tax; which would be impermissible since it would be impossible that the same transaction can be treated both as sale and as service. If that were to be done, then the legislation would be bad in law as it would result in double taxation. In reality, however, what was presented by the petitioner as two mutually exclusive transactions was a single transaction having two stages; each of which contained two aspects of sale and service. This theory, (known as theory of aspect legislation) the court held; was not new to taxing statutes and it was perfectly lawful to tax two or more aspects of the same transaction under different categories of tax. This would mean that different legislatures can impose tax on particular aspects of the same transaction. The justification for this theory is that subjects which in one aspect and for one purpose fall within the power of a particular Legislature may in another aspect and for another purpose fall within another legislative power. For example, in case of the annual letting value of a property in the occupation of a person for his own residence; one aspect is the levy of property tax under State law and another aspect is levy of Income Tax under Income Tax Act (by the Parliament). This is irrespective of the fact that the law with respect to a subject might incidentally affect another subject in some way. The same transaction may involve two or more taxable events in its different aspects. This is precisely what was done in the instant case since there was no separate transaction of sale and separate transaction of service. There was a single transaction (giving mobile connection to the consumer) completed in two stages or parts (sale of SIM and activation) and each of these stages had two aspects to them for the purpose of taxation (sale and service). The sale of SIM cards and activation were two stages to a single transaction and not mutually unconnected ones. In other words, they were to be taxed as a single transaction and not distinctly as taxation on sale of SIM and taxation on activation charges. It was a composite transaction made up of two correlated taxable events. The taxable event for sales tax was obviously the sale as understood in Section 2(xxi) under the KGST Act and the taxable event for levy of service tax was also taxable service under s. 65(72)(b) of the Finance Act. But the effect of this decision was that sale under state Act meant both sale of SIM and service of activation and taxable service under the

central legislation also included both. This was justified because ultimately both were part of a single transaction and taxed by state and union for different purposes. Another related fear expressed by the petitioner was that to tax the same transaction as both sales and services would amount to double taxation. The petitioner while mentioning this argument, however, overlooked the underlying principle of double taxation. Nothing can be termed as double taxation if it is not levied by the same authority or imposed for the same purpose. In the present case, while the State Legislature was 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; came within the legislative competence of Parliament under Article 248 r.w. entry 97 of List I of the Seventh Schedule to the Constitution. Thus, sales tax and service tax came under competence of different authorities, i.e. state legislature and Parliament respectively. So there was no question of double taxation. Once the aspect theory is kept in focus, it would be clear that the same transaction was liable to different taxes in its different aspects. Thus, the gist of the matter is that the pith and substance of the transaction is to be seen. Sales tax is different from service tax and same transaction may involve service and sales as its two aspects and it is not impermissible or illegal for two different legislatures to tax such aspects which fall within their individual competence. Seen in the light of the present facts, it was held that for the purpose of sales tax, sale of SIM cards was eligible for sales tax and service tax also (because the insertion of SIM card and its subsequent activation were two events linked together as a part of same transaction of providing the service of wireless communication to the consumer) and both events were complementary. Similarly, the process of activation was also liable to service tax under the Finance Act as well as sales tax under the state (KGST) Act.