2014 (2) TMI 531 - HC - Service Tax

Recovery of Service Tax and Income Tax - Levy of Service Tax on providing of services by telecom operators to various customers - Tax deduction at source on the commission/brokerage paid by the Telecom Service Providers to distributors and by distributors to retailers. - Held that - the services provided by cellular operators are chargeable to service tax; Pre 2012 and Post 2012; - the entire amount received by the cellular operators from the customer, including the price of SIM card, is the value of taxable service; - in the system in which the prepaid vouchers are sold, either physically or electronically, the price of such vouchers would include processing charges or administration fee, Service Tax and the price of talk time or activation charges, as the case may be; - if the break-up is not given, the entire price should be deemed as gross value inclusive of Service Tax; see Section 67(2) - sale of vouchers, i.e. plan vouchers, top up vouchers or special tariff vouchers, either sold physically or electronically, are not counted properly and there is no provision either in the TRAI Regulations or in the Service Tax to ensure that the entire sale of vouchers is accounted for the purposes of levy of Service Tax The Service Tax Department needs to look at the above aspect in respect of all cellular operators to ensure that Service Tax is assessed and levied on all schemes, transactions and plans by whatever name called and under whatever schemes as long as they result in providing of service by Cellular operator to the consumer. Regarding TDS - The commission paid by Cellular Service Providers to the distributors or retailers is thus commission from which the tax is required to be deducted at source under the provisions of Section 194 of the Income Tax Act. - Whether tax is deducted at source on such amount or not is not clear and whether such TDS is reflected in the accounts of cellular operators as well as distributors, needs to be seen. - When the commission is paid by way of additional talk time, how the same has to be treated for the purposes of tax is another angle which needs to be looked into by the Income-Tax Authorities. It the issues which have been highlighted before the Court by the amicus curiae as noted above, would require a closer application of mind and investigation both by the Service Tax authorities and by the concerned Income Tax authorities. - a response both of the Service Tax and Income Tax authorities to the issues which have been raised before the Court would be warranted.

Summary

Issues Involved:
- Levy of Service Tax on providing services by telecom operators to various customers.
- Tax deduction at source on the commission/brokerage paid by Telecom Service Providers to distributors and by distributors to retailers.

Detailed Analysis:

1. Levy of Service Tax on Telecom Services:

The Public Interest Litigation (PIL) focuses on the recovery of taxes specifically related to prepaid cellular connections. Postpaid connections are not under scrutiny as the Service Tax is recovered through billing. The entities involved in prepaid services include service providers, distributors, retailers, and customers. The service providers distribute talk time through vouchers or electronic recharge, and the charges paid by consumers include the gross amount for the service provided.

Distributors receive commissions, sometimes in the form of additional talk time, which is not always accounted for Service Tax. The process of electronic recharge involves a system where additional talk time is provided without cash consideration, leading to potential evasion of Service Tax. There is no comprehensive system to account for all talk time sold by cellular operators for Service Tax assessment.

To ensure accurate assessment, all vouchers (physical or electronic) should be recorded, and their sale should be matched with the actual services provided. The Telecom Consumers' Protection Regulations, 2012, mandate detailed information on voucher charges, including tax deductions, but gaps remain in accounting for additional talk time.

The Service Tax regime before and after the Finance Act, 2012, is examined. Pre-2012, Section 66 of the Finance Act, 1994, charged Service Tax on taxable services, with valuation under Section 67. Telecommunication services were taxable under Section 65(105)(zzzx) and Section 65(109a). Post-2012, Section 66B charges Service Tax on all services except those in the negative list under Section 66D, which does not include telecommunication services. The valuation of services remains under Section 67.

The court emphasizes that cellular operators' services are taxable, and the entire amount received, including SIM card price, is the value of taxable service. If the price breakdown is not provided, the entire price is deemed inclusive of Service Tax. The Service Tax Department must ensure that all schemes and transactions by cellular operators are assessed for Service Tax.

2. Tax Deduction at Source (TDS):

Chapter XVII of the Income Tax Act, 1961, covers tax collection and recovery, with Sections 192 to 195 dealing with TDS. Section 194H mandates TDS on commission/brokerage payments at 5%. The commission paid by cellular operators to distributors/retailers is subject to TDS under Section 194H. The court notes that it is unclear whether TDS is deducted and reflected in the accounts of cellular operators and distributors.

Additionally, when the commission is paid as talk time, its tax treatment needs examination by the Income Tax Authorities.

Further Investigation:

An affidavit by the Assistant Commissioner of Service Tax indicates that investigations have not confirmed any Service Tax evasion. However, the issues raised require further investigation by Service Tax and Income Tax authorities. The court expects responses from these authorities within six weeks and adjourns further proceedings to 25 September 2013.