The Hindu Business Line : Taxman walks thru SIM card

You punch it when you're mad; you hug it when you're sad. What's that? Cell-phone? No, pillow, says one of the poems by S.I.M., whose `biography' on www.poemhunter.com reads simply, "Should It Matter".

It may perhaps matter to those who punch and hug cell-phones that SIM was the focus of a recent tax case. Not the poet SIM, but `Subscriber Identity Module'. It is "a smart card roughly the size of a postage stamp that securely stores the key identifying a mobile phone service subscriber, as well as subscription information, saved telephone numbers, preferences, text messages and other information," as Wikipedia explains.

"The SIM card is a tiny, rectangular card found in all GSM (Global System for Mobile Communications) cell-phones that acts as an ID card for your handset," says Kent German in `Ask the Editors' section on http://reviews.cnet.com. "Usually located behind the battery, a SIM card stores your phone number and is needed to activate a mobile for use. If the card is taken out of the handset, it stops working, and it is no longer associated with your phone number."

Service tax on SIM cards

Fine, what was the tax case? Bharati Hexacom Ltd vs Commissioner of Central Excise (CCE), Jaipur, that came up before the Customs, Excise and Service Tax Appellate Tribunal, New Delhi. BHL, the applicant, is a provider of cellular services. As part of those services, the company gave SIM cards. The taxman demanded service tax of Rs 86 lakh, and imposed `penalty of the like amount'.

The company's counsel argued that BHL had paid sales tax on the SIM cards. Also, that since the cards were goods, there was no question of imposing service tax thereon, he said. In support of his argument was a February decision of a Tribunal in Idea Mobile Communication Ltd vs CCE. There, it had been held that service tax was not leviable on the item on which sales tax was collected.

What about BHL's case? "It is not as if only the SIM cards were sold as goods," observed the Tribunal. BHL provided cellular services, and as a part of those cellular services it supplied SIM cards, which were shown as sold, noted the Tribunal. It then referred to the landmark judgment of the apex court in Bhart Sanchar Nigam Ltd, in March this year. "Goods do not include electromagnetic waves or radio frequencies," the court had said, but "as far as the SIM cards are concerned," it left the issue `for determination by the Assessing Authorities'.

Useless unless activated

When deciding BHL's appeal for stay, the Tribunal added `emphasis' to this snatch from the Supreme Court's verdict: "If the SIM card is not sold by the assessee to the subscribers but is merely part of the services rendered by the service providers, then a SIM card cannot be charged separately to sales tax; it would depend ultimately upon the intention of the parties. If the parties intended that the SIM card would be a separate object of sale, it would be open to the sales tax authorities to levy sales tax thereon."

Even if some amount is charged for SIM cards, BHL's SIM card was clearly relatable to the services provided by BHL, and therefore `ancillary' to the same, reasoned the Tribunal. "Such SIM card could not have been used for any other services. Moreover, unless activated it was useless, which showed that it was only a part of the services provided, and not goods separately sold," reads the text of the order dated August 8, and posted on www.taxindiaonline.com.

What about a SIM card manufacturer selling the product to other companies? Would that be goods or service? "If some company manufactured SIM cards for the purpose of selling them to a cellular service provider for his business, that may stand on the footing of SIM cards being sold as goods which had nothing to do with cellular service, which was not to be provided by the manufacturer of such SIM cards and was to be provided by the purchaser who was to provide cellular services for whom such tailor-made SIM cards were manufactured," said the Tribunal, recognising how SIM cards begin their lives as goods. "SIM cards were not sold as goods, independent from the services provided, but they were part and parcel of the services provided," stated Justice R. K. Abichandani, President of the Tribunal, and Dr T. V. Sairam, Member (Technical). "The dominant intent was to provide services and not to sell the material, namely, SIM card, which on its own without the service, would hardly have any value." The matter is covered by the decision of the Supreme Court, they added.

Not final

S. Sridharan, a Madurai-based chartered accountant and a service tax expert, points out that the Supreme Court had also stated that if SIM card were ultimately found to be goods, the cost could not be included in the value of service, based on the decision in the Gujarat Ambuja Cement Ltd case of 2005. "The observation of the Tribunal that service tax would be attracted on the value of SIM card is not a final conclusion, as the petition under consideration is for waiver of pre-deposit of tax demanded," opines Sridharan.

For the avid, there is another order of the Tribunal, dated April 24, relating to BHL, available on Taxindiaonline.com. "The authorities below have relied upon the Circular of the Board issued on 13.10.97 clarifying that SIM card was essentially an activation service necessary for operating the cellular phone and the amount received by the cellular telephone company from subscriber towards SIM cards will form part of the taxable value for levy of service tax," reads an excerpt from the order. However, a circular of that date doesn't seem to figure on www.servicetax.gov.in.

It may be a matter of time before clarity emerges on the SIM issue. To the worried SIM-users, here are a few sympathetic lines from `My Discovery', another poem of SIM: "I've recently discovered a hole. A hole that was put in my bowl... " Not something that should matter for the taxman, though.

Tailpiece:

"Are you sure they embed you with a SIM card in the ITO?"

"Yes, and they call it TIM, for Taxpayer Identity Module, to track you forever!"

http://Detaxification.blogspot.com

D. Murali

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