2011 (9) TMI 216 - HC - Service Tax

Levy of VAT - Goods - Article 366(12) of the Constitution of India and Section 2(16) of the Act. - SIM cards, recharge coupon vouchers, mobile telephone rentals on post paid connections, value added services such as ring tones, music down loads, wall papers etc. - Held that - SIM cards, recharge coupon vouchers, mobile telephone rentals on post paid connections, value added services such as ring tones, music down loads, wall papers etc., and proceeds received on sharing of infrastructure cannot be subjected to tax either under Section 4(1) or Section 4(8) of the A.P. VAT Act, 2005. Telephone instruments, mobile handsets, modems and Caller ID instruments are goods both under Article 366(12) of the Constitution of India and Section 2(16) of the Act. - In case these goods are sold or supplied to the subscribers by the service providers such sale or the transfer of the right to use these goods would be liable to tax either under Section 4(1) or Section 4(8) of the Act. - However, if, these goods are procured by the subscribers from suppliers, other than the service providers or their distributors/franchisees, the monthly charges, which the subscriber is called upon to pay by the service provider, would fall within telecommunication service and cannot be made liable to tax under the Act. If non-refundable deposits are collected, by the service providers from their distributors, as security deposit for supply of SIM cards, recharge voucher coupons and the like, such deposits would not fall within the ambit of goods and cannot be brought to tax under the provisions of the Act. - If, on the other hand, the non-refundable deposit is received against supply of telephone instruments, batteries, accumulators etc., and it is established that the said deposit is a disguised form of consideration either for the sale or for the transfer of right to use such goods, then these deposits would form part of the sale consideration and be subject to tax under the provisions of the Act. - Likewise, if refundable deposits are collected from post paid subscribers as security for payment of dues towards STD or ISTD facilities provided by the service provider, then such deposits, not being goods , cannot be brought to tax under the Act. - If, however, the refundable deposits are for supply of telephone instrument, hand set etc., which are goods and it is established that the deposits are a disguised form of sale consideration, then these refundable deposits may also form part of the sale consideration under Section 2(29)(b) of the Act, and would be chargeable to tax under Section 4 thereof.

Issues Involved:
1. Taxation on SIM cards.
2. Taxation on recharge coupons/vouchers.
3. Taxation on mobile telephone rentals.
4. Taxation on value-added services.
5. Taxation on sharing of infrastructure.
6. Taxation on telephone instruments, modems, and mobile handsets.
7. Taxation on caller ID instruments.
8. Taxation on non-refundable deposits.
9. Taxation on refundable deposits.

Detailed Analysis:

SIM Cards:
The court examined whether SIM cards (pre-paid and post-paid) are subject to tax under the A.P. VAT Act, 2005. It was argued by the petitioners that SIM cards are incidental to telecommunication services and not sold independently. The revenue contended that SIM cards have the attributes of "goods" and can be sold. The court determined that SIM cards are not "goods" and the value of the SIM card forms part of the activation charges, hence only service tax can be levied, not sales tax.

Recharge Coupons/Vouchers:
The court evaluated if recharge coupons/vouchers are taxable. Petitioners argued that these are incidental to telecommunication services and do not constitute "goods." The revenue claimed that they are tangible and have value. The court held that recharge coupons are not "goods" and cannot be taxed under the Act, as they are merely a means for accessing the service provider's network.

Mobile Telephone Rentals:
The court analyzed the taxation of monthly rentals for post-paid SIM cards. Petitioners argued that these rentals are for telecommunication services, not for the transfer of the right to use SIM cards. The revenue contended otherwise. The court concluded that monthly rentals are for telecommunication services and cannot be taxed under the Act.

Value Added Services:
The court considered whether value-added services like ring tones, music downloads, etc., are taxable. Petitioners argued these are part of telecommunication services and not "goods." The revenue claimed they are intangible goods. The court held that value-added services are not "goods" as they are not recorded in a physical medium before being marketed and are transmitted through electromagnetic waves.

Sharing of Infrastructure:
The court examined if proceeds from sharing infrastructure are taxable. Petitioners argued that infrastructure like towers is immovable property and not "goods." The revenue contended that shared equipment constitutes a transfer of the right to use goods. The court held that telecommunication towers are immovable property and sharing infrastructure does not involve the transfer of the right to use goods.

Telephone Instruments, Modems, and Mobile Handsets:
The court analyzed if these items are taxable when provided by service providers. Petitioners argued they are provided free of charge as part of telecommunication services. The revenue contended they are "goods" and taxable. The court held that these items are "goods" and if sold or supplied, the transaction is taxable. However, if procured from other suppliers, they are not taxable under the Act.

Caller ID Instruments:
The court considered if caller ID instruments are taxable. Petitioners argued they are part of telecommunication services. The revenue contended they are "goods" and taxable. The court held that caller ID instruments are "goods" and taxable if sold or supplied by the service provider.

Non-Refundable Deposits:
The court examined if non-refundable deposits are taxable. Petitioners argued these are security deposits for services. The revenue claimed they are disguised consideration for goods. The court held that if deposits are for SIM cards and recharge coupons, they are not taxable. If for telephone instruments and batteries, they may be taxable.

Refundable Deposits:
The court analyzed if refundable deposits are taxable. Petitioners argued these are security for services like STD/ISD. The revenue contended they are disguised consideration for goods. The court held that if deposits are for services, they are not taxable. If for telephone instruments and batteries, they may be taxable.

Conclusion:
1. SIM cards, recharge coupons, mobile telephone rentals, value-added services, and proceeds from sharing infrastructure are not taxable under the Act.
2. Telephone instruments, mobile handsets, modems, and caller ID instruments are "goods" and taxable if sold or supplied by service providers.
3. Non-refundable and refundable deposits are taxable if they are disguised consideration for goods.
4. The impugned orders are set aside, and authorities are directed to pass fresh orders in light of these observations after giving notice and hearing to the petitioners.

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