2017 (1) TMI 336 - HC - VAT and Sales Tax

VAT or service tax - activity in the nature of service or sale - SIM replacement charges - lease line revenue - Vires of Sec.2(u) and 2(v) of the MP VAT Act, 2002 - whether the SIM replacement and lease line is selling of goods or providing of services? - Held 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, as the SIM cards are never sold as goods independent from service provided. They are considered to be part and parcel of the services provided and dominant position of the transaction is to provide services and not to sell the material ie., the SIM cards which on its own, but without the services, would hardly have any value at all. Even in the case of replacement of SIM Card, the value of replacement in respect 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 taxable service is calculated on the gross amount received from the operator from the subscriber and, therefore, once it has been held that no sales tax can be charged for providing a SIM, the question of charging it on replacement of a SIM, does not arise. Lease line charges - Held that - similar issue was decided in the case of Bharti Infratel Ltd., Vs. State of Madhya Pradesh and others 2015 (8) TMI 1289 - MADHYA PRADESH HIGH COURT , wherein the Division Bench of this Court while deciding the issue of infrastructure charges received in respect of mobile towers has held that such charges are of the nature of service charges and are not liable for VAT since the mobile towers all along remain in control and possession of the Company and hence there is no sale. In the case of lease line charges also this very principle applies since a subscriber of a lease line does not become the owner of the line either by control or by possession and hence such charges are only for services rendered and there is no element of sale therein - service tax leviable. Sec.2(u) and 2(v) of the MP VAT Act, 2002 is ultra-vires and void, in so far as it relates to imposition of VAT on SIM replacement charges and lease line revenue, which are merely services - petition allowed - decided in favor of petitioner-assessee.

Summary

Issues Involved:
1. Levy of VAT on SIM replacement charges.
2. Levy of VAT on lease line charges.

Issue-wise Detailed Analysis:

1. Levy of VAT on SIM Replacement Charges:

The petitioner, a telecom service provider, challenged the levy of VAT by the State on SIM replacement charges, arguing that such charges are service-related and fall under the purview of service tax as per the Finance Act, 1994. The petitioner contended that the SIM card is merely a device to access telecom services and not a standalone product sold to customers. The Supreme Court, in the case of IDEA Mobile Communication Ltd. v. C.C.E. & C., Cochin, held that SIM cards are part of the service provided and not independent goods, thus service tax applies, not sales tax. The court emphasized that the dominant intention of the transaction is to provide services, and the value of the SIM card forms part of the activation charges. The Madhya Pradesh High Court aligned with this view, stating that the SIM card is not sold separately but is incidental to the service, and hence, VAT cannot be levied on SIM replacement charges.

2. Levy of VAT on Lease Line Charges:

The petitioner also challenged the levy of VAT on lease line charges, arguing that these charges are for services rendered and not for the sale of goods. The court referred to the judgment in Bharti Infratel Ltd. v. State of Madhya Pradesh, where it was held that infrastructure charges for mobile towers are service charges and not liable for VAT since the company retains control and possession of the towers. Applying the same principle, the court held that lease line charges are also service charges as the subscriber does not gain ownership or control over the line. Therefore, VAT cannot be imposed on lease line charges.

Conclusion:

The court quashed the impugned order and notices regarding the levy of VAT on SIM replacement charges and lease line charges, declaring them ultra-vires to the Constitution. The judgment emphasized that both charges are service-related and fall under the service tax regime, thereby excluding them from VAT. The writ petitions were allowed, and the assessment orders were set aside with no order as to costs.