REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.  6319 OF 2011 [Arising out of SLP(C) No. 24690 of 2009]

IDEA MOBILE COMMUNICATION LTD.       ....Appellant (s)

VERSUS

C.C.E. & C., COCHIN                   ....Respondent(s)

JUDGMENT

Dr. MUKUNDAKAM SHARMA, J.

1. Leave granted.

2. The present appeal  is  filed against  the judgment and order dated  

04.09.2008  passed  by  the  Kerala  High  Court  whereby  and  

whereunder,  the  High  Court  allowed  the  appeal  filed  by  the  

Commissioner of Central Excise & Customs, Cochin.    

Page 1 of 14

3. The  issue  which  arises  for  our  consideration  in  this  appeal  is  

whether the value of SIM cards sold by the appellant herein to their  

mobile subscribers is to be included in taxable service under Section  

65 (105) zzzx of the Finance Act, 1994, which provides for levy of  

service tax on telecommunication service OR whether it is taxable as  

sale of goods under the Sales Tax Act.

4. The facts leading to the filing of the present case are that during the  

relevant assessment years, i.e., 1997-1999, the appellant was selling  

the SIM cards to its franchisees and was paying the sales tax to the  

State and activating the SIM card in the hands of its subscribers on  

a  valuable  consideration  and  paying  service  tax  only  on  the  

activation charges.  The Department  of  Sales  Tax,  State  of  Kerala,  

included the activation charges as part of the sale consideration of  

SIM  cards  on  the  ground  that  activation  is  nothing  but  a  value  

addition  of  the  “goods”  and  thus  comes  under  the  definition  of  

“goods” under the Kerala General Sales Tax Act, 1963 (hereinafter  

referred  to  as  “KGST  Act”)  and  accordingly  levied  sales  tax  on  

activation charges. The Department of Central Excise, Eranakulum  

(Service  Tax  Department)  observed that  a  mere SIM card  without  

Page 2 of 14

activation is of no use and held that the appellant is liable to pay  

service tax on the value of SIM card also. In both the cases interest  

and penalty were levied.

5. Being  aggrieved,  the  appellant  filed  appeal  before  the  respective  

appellate authorities under the KGST Act and Central Excise Act,  

1944.  There  were  consequential  recovery  proceedings  against  the  

appellant  and  the  appellant  filed  Writ  Petition  O.P.  No.  4973  of  

2001(P) in the High Court of Kerala challenging the levy of service tax  

on the sale price of SIM cards and also challenging the levy of sales  

tax on the amounts recovered by the appellant by way of activation  

charges from its customers which was dismissed vide order dated  

15.02.2002.  

6. Aggrieved thereby, the appellant filed Civil Appeal No. 2408 of 2002  

before this Court. Based on the judgment of the High Court dated  

15.02.2002, the appellant also filed appeal before the Commissioner  

(Appeals),  Customs and Central  Excise  which  was  dismissed  vide  

order dated 08.04.2003. The appellant preferred appeal u/s 35B of  

Central Excise Act, 1944 before the Central Excise and Service Tax  

Tribunal  (hereinafter  referred  to  as  “TRIBUNAL”)  viz.  Appeal  No.  

ST/18/03  against  the  order  dated  08.04.2003,  in  which  the  

Page 3 of 14

appellant did not challenge the levy of sales tax as the same was  

already paid.

7. The aforesaid Civil Appeal No. 2408 of 2002 before this Court was  

heard and decided with appeals and Writ Petitions of several other  

telecom  operators,  including  BSNL,  BPL  etc.  and  vide  judgment  

reported as BSNL vs. Union of India reported in (2006) 3 SCC 1, the  

matter  was  remanded to  the  Sales  Tax  Authorities  concerned  for  

determination of  issue relating  to SIM cards.  The Tribunal  in the  

pending Appeal  No.  ST/18/03,  vide  order  dated  25.05.2006,  held  

that the levy of service tax in the case is not sustainable.  

8. Aggrieved  thereby,  the   respondent  challenged  the  order  of  the  

Tribunal dated 25.05.2006 before the High Court of Kerala by way of  

Appeal being CE Appeal No. 20 of 2006.  The High Court vide order  

dated 04.09.2008 allowed the appeal of the respondent – department  

against which this appeal has been filed, upon which, we heard the  

learned counsel appearing for the parties.

9. The counsel appearing for the appellant submitted that the appellant  

was charging from its subscribers Rs. 1,000/- towards sales tax and  

Rs. 1,200/- as service tax upon activation of the SIM Card and that  

Page 4 of 14

since  they  were  selling  the  SIM Cards,  therefore,  at  that  point  of  

time,  they  were  charging  Rs.  1000/-  towards  sales  tax  and  for  

activating the SIM Card they were charging Rs. 1200/- as service  

tax. Counsel also drew our attention to the earlier judgment rendered  

by  the  Kerala  High  Court  as  against  which  the  Supreme  Court  

pronounced the Judgment being BSNL vs.  Union of India reported  

in (2006) 3 SCC 1.   

10.The  counsel  appearing  for  the  respondent  on  the  other  hand  

submitted  that  SIM  Card  has  no  intrinsic  sale  value  and  it  is  

supplied  to  customers  to  provide  telephone  service.   It  is  also  

submitted  by  the  counsel  that  selling  of  the  SIM  Card  and  the  

process of activation are “services” provided by the mobile cellular  

telephone companies to the subscriber.  He further submitted that  

the decision of the Supreme Court has clearly stated that if the sale  

of a SIM Card is merely incidental to the service being provided and  

it only facilitates the identification of the subscribers, their credit and  

other details, it would be assessable to service tax.

11.We have examined the materials on record in the light of the facts  

placed before us and also the decisions referred to and relied upon  

by the counsel appearing for the parties.   

Page 5 of 14

12. A SIM Card or Subscriber Identity Module is a portable memory chip  

used in cellular telephones.  It is a tiny encoded circuit board which  

is fitted into cell phones at the time of signing on as a subscriber.  

The SIM Card holds the details of the subscriber, security data and  

memory to store personal numbers and it stores information which  

helps the network service provider to recognize the caller.  As stated  

hereinbefore the Kerala High Court had occasion to deal  with the  

aforesaid issue and in that context in its Judgment pronounced on  

15th February, 2002 in  Escotel Mobile Communications Ltd.  vs.  

Union of India and Others,  reported in (2002) Vol. 126 STC 475  

(Kerala),  it was stated in paragraph 36 that a transaction of selling  

of SIM Card to the subscriber is also a part of the “service” rendered  

by the service provider to the subscriber.   The Kerala High Court in  

the facts and circumstances of the case observed at paras 36 and 47  

as under: -

“36. With this perspective in mind, if  we analyse the   transaction that takes place, it appears to us that there   is no difficulty in correctly understanding its facts. The  transaction of selling the SIM. card to the subscriber is   also  a  part  of  the  "service"  rendered  by  the  service  provider  to  the  subscriber,  Hence,  while  the  State   Legislature is competent to impose tax on "sale" by a  legislation  relatable  to  entry  54 of  List  II  of  Seventh  Schedule, the tax on the aspect of "services" rendered  not being relatable to any entry in the State List, would  

Page 6 of 14

be  within  the  legislative  competence  of  Parliament   under  Article  248 read with  entry  97 of  List  I  of  the  Seventh  Schedule  to  the  Constitution.  We  are,   therefore,  unable  to  accept  the  contention  of  Mr.   Ravindranatha Menon that  there is any possibility  of   constitutional  invalidity  arising  due  to  legislative   incompetence by taking the view that "sale" of SIM card  is  simultaneously  exigible  to  sales  tax  as  well  as  service tax. Once the "aspect theory" is kept in focus, it   would  be  clear  that  the  same  transaction  could  be  exigible to different taxes in its different aspects. Thus,   we  see  no  reason  to  read  down  the  legislation  as   suggested by Mr. Menon.

Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

47. Conclusions:

(a) The transaction of sale of SIM Card is without  doubt exigible to sales tax under the KGST Act.  The  activation  charges paid are in the nature of  deferred  payment of consideration for the original sale, or in the   nature of value addition, and, therefore, also amount to   parts  of  the  sale  and  become  exigible  to  sales  tax   under the KGST Act.

(b)  Both the selling of the SIM Card and the process of   activation are “services” provided by the mobile cellular  telephone  companies  to  the  subscriber,  and squarely  fall within the definition of “taxable service” as defined  in section 65(72)(b) of the Finance Act.  They are also   exigible to service tax on the value of “taxable service”   as defined in Section 67 of the Finance Act.”   

13. It  would be appropriate  to mention that later  on the said Escotel  

Mobile Communications Ltd. merged with the appellant company i.e.  

Page 7 of 14

M/s. Idea Mobile Communication Ltd.   The aforesaid decision of the  

Kerala High Court was under challenge in this Court in the case of  

BSNL vs. Union of India     reported in (2006) 3 SCC 1.  The Supreme  

Court  has  framed  the  principal  question  to  be  decided  in  those  

appeals  as  to  the  nature  of  transaction  by  which  mobile  phone  

connections are enjoyed.  The question framed was, is it a sale or is  

it a service or is it both. In paragraphs 86 and 87 of the Judgment  

the Supreme Court has held thus: -

86. In that  case Escotel  was admittedly engaged in  selling  cellular  telephone  instruments,  SIM  cards  and  other accessories and was also paying Central sales tax   and sales tax under the Kerala General Sales Tax Act,  1963  as  applicable.  The  question  was  one  of  the   valuation of these goods. The State Sales Tax Authorities   had sought to include the activation charges in the cost of   the  SIM  card.  It  was  contended  by  Escotel  that  the   activation  was part of  the service on which service tax   was  being  paid  and  could  not  be  included  within  the   purview of  the  sale.  The Kerala  High Court  also  dealt   with  the  case  of  BPL,  a  service provider.  According  to   BPL,  it  did  not  sell  cellular  telephones.  As far as  SIM  cards were concerned, it was submitted that they had no  sale value.  A SIM card merely represented a means of   the access and identified the subscribers. This was part   of  the  service  of  a  telephone  connection.  The  Court   rejected this submission finding that the SIM card was   “goods”  within  the  definition  of  the  word  in  the  State   Sales Tax Act.

87. It is not possible for this Court to opine finally on the   issue.  What  a  SIM  card  represents  is  ultimately  a  

Page 8 of 14

question of fact, as has been correctly submitted by the  States. In determining the issue, however the assessing  authorities  will  have  to  keep  in  mind  the  following  principles: 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. There is insufficient   material on the basis of which we can reach a decision.   However we emphasise that if the sale of a SIM card is  merely incidental to the service being provided and only  facilitates the identification of the subscribers, their credit   and  other  details,  it  would  not  be assessable  to  sales  tax.  In  our  opinion  the  High  Court  ought  not  to  have  finally determined the issue. In any event, the High Court  erred in including the cost of the service in the value of   the SIM card by relying on the “aspects” doctrine. That  doctrine merely deals with legislative competence. As has  been  succinctly  stated  in  Federation  of  Hotel  &  Restaurant  Assn.  of  India  v.  Union of  India:  (SCC pp.   652-53, paras 30-31)

“  ‘…  subjects  which  in  one  aspect  and  for  one  purpose  fall  within  the  power  of  a  particular   legislature may in another aspect and for another   purpose fall within another legislative power’. * * * There  might  be  overlapping;  but  the  overlapping   must be in law. The same transaction may involve  two or more taxable events in its different aspects.   But  the  fact  that  there  is  overlapping  does  not  detract from the distinctiveness of the aspects.”

14. In  paragraph 88 this  Court  observed that  no  one  denies  the  

legislative competence of the States to levy sales tax on sales provided  

Page 9 of 14

that the necessary concomitants of a sale are present in the transaction  

and the sale is distinctly discernible in the transaction but that would  

not in any manner allow the State to entrench upon the Union List and  

tax services by including the cost of such service in the value of the  

goods.   It was also held that for the same reason the Centre cannot  

include the value of the SIM cards, if they are found ultimately to be  

goods, in the cost of the service. Consequently, the Supreme Court after  

allowing the appeals filed by  Bharat Sanchar Nigam Ltd  and Escotel  

remanded  the  matter  to  the  Sales  Tax  Authorities  concerned  for  

determination of  the  issue  relating to  SIM Cards in  the  light  of  the  

observations contained in that judgment.

15. As against the order passed by the adjudicating authority, the  

appellant  assessee  took  up  the  matter  in  appeal  before  the  

Commissioner of Central Excise & Customs, Cochin.   The appellate  

authority  upheld  the  findings  of  the  adjudicating  authority.  The  

assessee  took  up  the  matter  before  the  CESTAT,  Bangalore.    The  

CESTAT vide its order dated 25.05.2006 held that the levy of service tax  

as demanded is not sustainable for the reason that the assessee had  

already paid the sales tax and therefore it follows that service tax is not  

leviable on the item on which sales tax has been collected.

Page 10 of 14

16. Being  aggrieved  by  the  aforesaid  order  dated  25.05.2006,  an  

appeal was filed before the Kerala High Court by the department, which  

was disposed of by the impugned order dated 04.09.2009.

17. The  High  Court  has  given  cogent  reasons  for  coming  to  the  

conclusion that service tax is payable inasmuch as SIM Card has no  

intrinsic sale value and it is supplied to the customers for providing  

mobile service to them.  It should also be noted at this stage that after  

the  remand  of  the  matter  by  the  Supreme  Court  to  the  Sales  Tax  

authorities the assessing authority under the Sales Tax Act dropped the  

proceedings after conceding the position that SIM Card has no intrinsic  

sale value and it is supplied to the customers for providing telephone  

service  to  the  customers.  This  aforesaid  stand  of  the  Sales  Tax  

authority  is  practically  the  end  of  the  matter  and  signifies  the  

conclusion.

18. The sales tax authorities have themselves conceded the position  

before the High Court that no assessment of sales tax would be made  

on the sale value of the SIM Card supplied by the appellant to their  

customers irrespective of the fact whether they have filed returns and  

remitted tax or not.  It also cannot be disputed that even if sales tax is  

Page 11 of 14

wrongly  remitted  and  paid  that  would  not  absolve  them  from  the  

responsibility of payment of service tax, if otherwise there is a liability  

to pay the same. If the article is not susceptible to tax under the Sales  

Tax Act, the amount of tax paid by the assessee could be refunded as  

the  case  may  be  or,  the  assessee  has  to  follow the  law  as  may  be  

applicable. But we cannot accept a position in law that even if tax is  

wrongly remitted that would absolve the parties from paying the service  

tax if the same is otherwise found payable and a liability accrues on the  

assessee.  The charges paid by the subscribers for  procuring a SIM  

Card are generally processing charges for activating the cellular phone  

and consequently the same would necessarily be included in the value  

of the SIM Card.   

19. There cannot be any dispute to the aforesaid position as the  

appellant itself subsequently has been paying service tax for the entire  

collection  as  processing  charges  for  activating  cellular  phone  and  

paying the service tax on the activation. The appellant also accepts the  

position  that  activation  is  a  taxable  service.  The  position  in  law  is  

therefore  clear  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, for the SIM Cards are never sold as  

Page 12 of 14

goods independent  from services  provided.  They  are  considered part  

and parcel of the services provided and the dominant position of the  

transaction is to provide services and not to sell the material i.e. SIM  

Cards which on its own but without the service would hardly have any  

value at all.  Thus, it is established from the records and facts of this  

case that the value 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  the  taxable  service  is  calculated  on the gross total  amount  

received by the operator from the subscribers. The Sales Tax authority  

understood the aforesaid position that no element of sale is involved in  

the present transaction.  

20. That being the position, we find no infirmity with the findings  

and reasoning in the Judgment and Order passed by the High Court  

and  therefore  the  appeal  has  no  merit  and  the  same  is  dismissed.  

There will be no order as to costs.

.......………….........……………J.                 [Dr. Mukundakam Sharma]

….....................………………..J.                        [ Anil R. Dave ]

Page 13 of 14

New Delhi, August 4, 2011.

Page 14 of 14