SERVICE TAX LIABILITY ON ‘PCO’ CHARGES

[Mr. M. GOVINDARAJAN]

Section 65 (104) of the Finance Act, 1994 (‘Act’) defines the term ‘subscriber’ as a person to whom any service of a telephone connection or a facsimile (FAX) or a leased circuit or a pager or a telegraph or a telex has been provided by the telegraph authority.

Section 65 (105)(b) defines the expression ‘taxable service’ as any service provided to a subscriber by the telegraph authority in relation to a telephone connection.

After 01.06.2007 changes have been made in the Finance Act.  Section 65(105) (zzzx) defines the expression ‘taxable service’ as any service provided or to be provided to any person, by the telegraph authority in relation to telecommunication service.

After 01.06.2007 the words ‘services provided to a subscriber’ has been substituted by the words ‘to any person’.  This is because the telecommunication service is not only provided to the subscriber but also to the public through Public Call Offices.

The Public Call Offices are being handled by the Public Call Operators who make agreement with the service providers to offer telecom services to the public at large.  The PCO operators collect commission from the service providers for the services rendered by them on behalf of the service provider.  The service tax is levied by the service provider on the calls made through PCOs including commission and paid to the credit of the Central Government.

BSNL, one of the service providers, also appointed PCO operators for this purpose.  Prior to 01.06.2008 the call from PCOs was charged uniformly at the rate of Re.1 per Metered Call Unit (MCU) i.e., per minute with a 60 seconds pulse.  The charge of Re.1 peer metered call consisting of three components-

• Revenue share for BSNL;
• Commission for the PCO operators; and
• The service tax to the Government.

The rate of ₹ 1 is cum tax value.   Out of Re.1 charged for a call, Re.0.11 was the service tax payable and the remaining Re.0.89 was for both revenue share of BSNL and the commission payable to the PCO operators.  Thus BSNL  has paid service tax on gross call charges inclusive of the commission paid to the PCO operators.

With effect from 01.06.2008 BSNL revised their policy and introduced the principal-to-principal basis.  In this methodology BSNL is the principal and the PCO operator is also a Principal.  In the earlier period BSNL is the principal and the PCO operator is the agent for BSNL who got commission for the calls made through their PCOs.   In this method the service provider charged the PCO operators at the defined rates on the basis of the volume of metered calls along with service tax and cess payable thereon.  The PCO operator is at liberty to charge any rate from the defined rate but not exceed Re.1 per call.    For example, if the defined rate for a call at Re.1 is ₹ 0.60 then the service operator will charge Re.0.60 with applicable service tax and cess.   The PCO operator may charge up to Re.1 from the public.  The PCO operator is only liable to pay to the service provider the defined rate per call and applicable service tax and not the entire amount collected from the public for the calls emanated from his PCO.

The Department was of the view that while arriving at the taxable value for discharge of service tax o the bills raised on PCO operators, BSNL did not take into the differential amount collected by the PCO operator and treated it as discount and the taxable value has to be arrived by including such discount.  The non inclusion of amount of discount given to the PCO operators resulted in short payment of service tax by the service provider.

The Department issued show cause notices for different units.  The Department did not accept the contentions of the service provider of Madurai Unit which were confirmed by the Commissioner.  Equal penalty was also imposed by Commissioner, Madurai against Madurai Unit. But the Commissioner dropped the proposal to impose penalty under section 76.  The Madurai Unit of BSNL filed appeal against the confirmation of service tax and penalty before CESTAT, Chennai Bench and obtained a stay order.  The Department also filed appeal before CESTAT for non imposition of penalty under section 76.

The show cause notices in other units such as Karaikudi, Virudhunagar and Tirunelveli were confirmed by the Assistant Commissioner against which appeals were filed by the respective units before Commissioner (Appeals).  The Commissioner (Appeals) dropped the demand, interest and penalties relying on the judgment in ‘Bharti Infotel Limited V. Commissioner of Central Excise, Bhopal’ – 2005 (7) TMI 3 - CESTAT, New Delhi.   The Department filed appeal against the order of the Commissioner (Appeals) before CESTAT, Chennai.

The Tribunal heard all the appeals filed by BSNL Madurai Unit and the Department in the above said four cases and disposed all the cases by a common order dated 13.03.2018.     The service provider put forth the following submissions before the Tribunal-

• The main question that arises for determination in these appeals is whether BSNL is liable to pay service tax on the entire amount realized by the PCO operators from the customers;
• The said issue is decided in ‘Bharti Infotel Limited V. CCE, Bhopal’ (supra).The Commissioner (Appeals) has followed the said decision and set aside the demand.
• The demand confirmed by the Commissioner for Madurai Unit should also be set aside on the basis of the above said judgment.

The Department put forth the following before the Tribunal-

• The decision in ‘Bharti Infotel Limited’ (supra) is not applicable for the period post 01.06.2007;
• The amendment has nothing to do with the issue under consideration or the ratio laid down in the decision;
• The assessee is providing services only to PCO operator who is granted licence to run the PCO.
• When the calls are made by the customer by using the PCO, the service provider is providing services to the caller and not to PCO.
• The assessee is liable to pay service tax on the entire amount collected by the PCO.
• Explanation to Rule 5(1) of the Service tax (Determination of Value) Rules, 2006 was inserted with effect from 01.03.2011.
• The said explanation clarified that for the services specified in section 65 (105) (zzzx) the value of the taxable service shall be the gross amount paid by the person to whom telecom service is provided by the telegraph authority.
• The above said clarification made it clear that BSNL is liable to pay service tax;
• The PCO operator is only a franchisee of BSNL and telecommunication service is provided to the ultimate consumer of the PCO by BSNL.

The Tribunal heard both sides.  The dispute is whether the assessee has to pay service tax on the entire amount collected by the PCO operator from the PCO customer.  The Tribunal analyzed the provisions of the Act related to Telecommunication services.

The Tribunal held that-

• Prior to 01.06.2008 the appellant was discharging service tax on the basis of metered calls of the PCO recorded in the exchange;
• The PCO operators were allowed to charge Re.1 per MCU and this Re. 1 comprised of Re.0.11 towards service tax and balance Re.0.89 towards commission payable to operators and revenue share of the appellant;
• After 01.06.2008 though Re.1 per MCU remained the same, the nature of payment to PCO operate was changed by providing a slab basis/defined rates
• Thus for Re.1 collected by PCO operator, he retained Re.0.30 and Re.0.40 and paid Re.0.70 and Re.0.60 to BSNL upon which BSNL discharged the service tax.
• In ‘Bharti Infotel’ (supra) it was decided that such commission/discount cannot be included in the value for levy of service tax.The said decision was followed by the Tribunal in ‘BSNL, Bijapur, Karnataka’ – CESTAT-Bang.
• The argument of the Department that after the amendment to section 65 (105) (zzzx) the said decision will not apply is not correct since the amendment dated 01.03.2011 is prospective effect and not retrospective effect.
• The period involved in the present case is prior to 01.03.2011.
• Therefore the demand of differential amount of service tax alleging that entire amount collected by the PCO operator is subject to levy of service tax cannot sustain.

The Tribunal allowed the appeal filed by the Madurai Unit of BSNL and dismissed the appeals filed by the Department.