Taxability on telecommunication services under Finance Act, 1994

2011

INDIRECT TAX

ABHISHT HELA
Roll. No.- 07
Shailja Sachan
8th
Submitted to:-

Semester
Mr. U.P.Singh

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Taxability on telecommunication services under Finance Act, 1994

2011

Acknowledgement

The present project on the said subject is able to get its final shape with the support and help
of people from various quarters. our sincere thanks go to all the members without whom the
study could not have come to its present state. We proud to acknowledge gratitude to the
individuals and institutes during my study and without whom the study may not be
completed. We have taken this opportunity to thank those who genuinely helped us.

With immense pleasure, we express our deepest sense of gratitude to sirs /maam to assign
and help us in our project. We are also thankful to the whole Ram Manohar Lohiya National
Law University family that provided us all the material we required for the project.
Last but not least we would like to thank Almighty whose blessing helped us to complete the
project.

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Taxability on telecommunication services under Finance Act, 1994

CONTENTS

Introduction
Section 65(109a): Telecommunication services
Section 65(105) zzzx: Telecommunication services
Scope of Telecommunication services
Persons liable to pay service tax
Inclusions
Exclusions
Sim card facility: BSNL v. UOI
Service tax and sales tax whether alternatives?
Chargeability of double taxation
Conclusion
bibliography

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Taxability on telecommunication services under Finance Act, 1994

2011

INTRODUCTION
Mobile Connectivity have reached more than 4 billion mobile users around the globe via their
mobile operator infrastructure, which is daily used by her clients for their services. Mobile
Connectivity is pure specialized in handling the transit with or without billing. With this
enormous reach the clients of Mobile Connectivity can fully focus on boosting their services
all over the world.1
This connectivity is basically by SIM Card which provide service to the user and this will
only be our topic for analysis that whether 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?
A subscriber identity module or subscriber identification module (SIM) is an integrated
circuit that securely stores the International Mobile Subscriber Identity (IMSI) and the related
key used to identify and authenticate subscriber on mobile telephony devices (such as mobile
phones and computers).
A SIM is held on a removable SIM card, which can be transferred between different mobile
devices. SIM cards were first made the same size as a credit card (85.60 mm 53.98 mm
0.76 mm). The development of physically smaller mobile devices prompted the development
of a smaller SIM card, the mini-SIM card. Mini-SIM cards have the same thickness as fullsize cards, but their length and width are reduced to 25 mm 15 mm.
A SIM card contains its unique serial number (ICCID), internationally unique number of the
mobile user (IMSI), security authentication and ciphering information, temporary information
related to the local network, a list of the services the user has access to and two passwords
(PIN for usual use and PUK for PIN unlocking).2
The word tele in Greek means far or at a distance. Telecommunication systems in a
general sense are devices and techniques employed for the transmission of signs, signals,
1

http://www.mobileconnectivity.com/Coverage/62/, last visited on 11th nov.

http://en.wikipedia.org/wiki/Subscriber_Identity_Module, last visited on 11th nov.

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writing, images, sounds or date of any nature by wire, radio, or other electromagnetic
equipment. It is generally a communication by cable, telegraph, telephone, broadcasting or
any specifically electronic means. Service Tax has been imposed on Telecommunication
Services by the Finance Act, 2007 as a separate taxable service with effect from 1st June
2007 vide Notification No. 23 / 2007-ST dated 22-05-2007.
The gross amount charged by or gross consideration received by any person being service
provider from any other person in relation to such telecommunication services shall be
chargeable to service tax.
[ Section 65 (109a) ] : Telecommunication Service
Telecommunication Service has been defined under Sec 65 (109a) of Finance Act, 1994 as
follows : Telecommunication Service means service of any description provided by means of any
transmission, emission or reception of signs, signals, writing, images and sounds or
intelligence or information of any nature, by wire, radio, optical, visual or other
electromagnetic means or systems, including the related transfer or assignment of the right to
use capacity for such transmission, emission or reception by a person who has been granted
a license under the Indian Telegraph Act, 1885 and includes :(i) voice mail, data services, audio text services, video text services, radio paging;
(ii) fixed telephone services including provision of access to and use of the public switched
telephone network for the transmission and switching of voice; data and video, inbound and
outbound telephone service to an from national and international destinations;
(iii) cellular mobile telephone services including provision of access to and use of switched
or non-switched networks for the transmission of voice, data and video, inbound and
outbound roaming service to and from national and international destinations;
(iv)Carrier services including provision of wired or wireless facilities to originate, terminate
or transit calls, charging for interconnections, settlement or termination of domestic or
international calls, charging for jointly used facilities including pole attachments, charging
for the exclusive use of circuits, a leased circuit or a dedicated link including a speech
circuit, data circuit or a telegraph circuit;
(v) Provision of call management services for a fee including call waiting, call forwarding,
caller identification, three-way calling, call display, call return, call screen, call blocking,
automatic call back, call answer, voice mail, voice menus and video conferencing.
(vi) Private network services including provision of wired or wireless facilities and services
specifically designed for efficient transmission of data; and
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(vii) Communication through facsimile, pager, telegraph and telex, but does not include
service provided by
a. Any person in relation to on-line information and database access or retrieval or both
referred to in sub-clause (zh) of clause (105);
b. A broadcasting agency or organization in relation to broadcasting referred to in subclause (zk) of clause (105); and
c. And any person in relation to internet [telecommunication service ] referred to in subclause (zzzu) of clause (105).
[ Section 65 (105) (zzzx) ] : Telecommunication Service
Any service provided or to be provided to any person, by the telegraph authority in relation
to telecommunication services.
Services provided by the telegraph authority to any person in relation to telecommunication
are covered under this service. It may be noted that the present condition, namely, recipient of
service needs to be subscriber, under telecommunication related services has been changed
under the proposed Telecommunication Service. Telecommunication Service includes
services provided to any person and not confined only to subscriber.
For a service to be a taxable service under the category or telecommunication service,
following are the essential ingredients
a) Service should be in relation to telecommunication services
b) Service may be provided to any person, not confined to only subscriber, i.e., Service
receiver many be a subscriber or any other person.
c) Service should be provided by telegraph authority or any person licensed under Indian
Telegraph Act, 1885.
d) Services should not relate to specified exclusions.
Telecommunication Services Scope
Telecommunication related services, which are presently specified as separate taxable
services, namely:
(i) Telephone connection [sub-clause (b) of section 65(105)]
(ii) Pager [sub-clause (c) of section 65(105)]
(iii) Leased circuit [sub-clause (zd) of section 65(105)]
(iv) Communication through telegraph [sub-clause (ze) of section 65(105)]
V) Communication through telex [sub-clause (zf) of section 65(105)]
vi) Facsimile communication[sub-clause (zg) of section 65(105)] are being merged under the
proposed telecommunication service [sub-clause (zzzx) of section 65(105)], and the term
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telecommunication service [section 65(109a)] is being defined comprehensively. Specific

inclusion and exclusion of telecom services may be seen in the definition.
Services provided by the telegraph authority to any person in relation to telecommunication
are covered under this service. It may be noted that the present condition namely, recipient of
service needs to be a subscriber, under telecommunication related services has been changed
under the proposed Telecommunication service.
Person Liable to pay Service Tax
Telegraph authority or any person licensed under Telegraph Act, 1885 providing
telecommunication Services to any other person shall be person liable to pay Service Tax.
Various individual services are now substituted by Telecommunication Service w.e.f. 01-062007 vide Notification No. 27 / 2007-ST and 28/2007-ST, both dated 22.05.2007 in
pursuance of amendments made in Notification No. 36/2004-ST dated 31.12.2004 and rule
2(1)(d)(i) of Service Tax Rules, 1994.
INCLUSIONS :The definition in section 65 (109a) covers all telegraph and telecommunication services, viz.,
service of any description provided by means of any transmission, emission or reception of
signs, signals, writing, images and sounds or intelligence or information of any nature, by
wire, radio, optical, visual or other electro-magnetic means or systems, including the related
transfer or assignment of the right to use capacity for such transmission, emission or
reception by a person who has been granted a license under the Indian Telegraph Act, 1885
and includes :i. voice mail, data services, audio text services, video text services, radio paging;
ii. fixed telephone services including provision of access to and use of the public switched
telephone network for the transmission and switching of voice; data and video, inbound and
outbound telephone service to an from national and international destinations;
iii. cellular mobile telephone services including provision of access to and use of switched or
non-switched networks for the transmission of voice, data and video, inbound and outbound
roaming service to and from national and international destinations;
iv. Carrier services including provision of wired or wireless facilities to originate, terminate
or transit calls, charging for interconnections, settlement or termination of domestic or
international calls, charging for jointly used facilities including pole attachments, charging for
theexclusive use of circuits, a leased circuit or a dedicated link including a
speech circuit, data circuit or a telegraph circuit;
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v. Provision of call management services for a fee including call waiting, call forwarding,
caller identification, three-way calling, call display, call return, call screen, call blocking,
automatic call back, call answer, voice mail, voice menus and video conferencing.
vi. Private network services including provision of wired or wireless telecommunication link
between specified points for the exclusive use of the client; Data transmission services
including provision of access to wired or wireless facilities and services specifically designed
for efficient transmission of data; and
viii. Communication through facsimile, pager, telegraph and telex, but does not include
service provided by any person in relation to on-line information and database access or
retrieval or both, a broadcasting agency or organization in relation to broadcasting and any
person in relation to internet telecommunication.
EXCLUSIONS :Telecommunication services shall exclude :a) online information and database access or retrieval or both [section 65
(105)(zh)]
b) broadcasting services [Section 65(105)(zk)]
c) internet telecommunication services [section 65(105)(zzzu)]
Sim Card :

Sim card has no inherent value or purpose other than use in mobile phone for receiving
telephone service from service provider and it is not goods sold or intended to be sold to
customers, but supplied as a part of service. Therefore, value of sim card supplied by mobile
telephone service provider forms part of taxable service on which service tax is payable.3
But in some of the cases it was previously that the value of sim card could not be added in the
taxable service.4 In BPL Mobile Communication Ltd. v. CCE, Mumbai, 2007 (7) STR 440
(Tri.-Mumbai),5 the Tribunal held that, providing SIM card is sale of goods and since the
appellants have paid sales tax thereon, the impugned transaction is of sale of goods and the
activity of providing SIM cards is not a Business Auxiliary service. So far so good, there was
no dispute, as value of SIM card was liable to sales tax and therefore, not liable to service tax.
3

Idea Mobile Communication Ltd. v. CCE&C (2009)20 STT 19 (Ker.)

Bharti Airtel Ltd Vs CCE Lucknow [2009] 16 STJ 418 (CESTAT, New Delhi) and also

refered in Hutchison Maz Telecom Pvt. Ltd v. CCE, Mumbai (2008) TIOL 1509
5

BPL Mobile Communication Ltd. v. CCE, Mumbai, 2007 (7) STR 440 (Tri.-Mumbai),

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Thus, there was no double taxation on amount received towards sale of SIM cards used in
mobile phones.
For a SIM card to be chargeable under sales act, it is needed to be a good where as for
charging service tax under finance act , it is needed to be a telecommunication service.
It was argued in BSNL v. UOI(2006) 6that it is contended on behalf of the petitioners
service providers that the use/utility of the SIM card remains the same in both prepaid and
postpaid connections; in the case of a pre-paid SIM card, service charge is collected mainly
for activating the connection; service tax is paid on this consideration as telecommunication
service; a SIM card is incidental to the rendering of telecommunication service; SIM cards
are not sold by the service provider to the subscribers, and are not chargeable to tax under
Section 4(1) of the A.P. VAT Act, 2005; even if it is held that SIM cards are goods and it is
sold, the price charged for the Starter Kit does not constitute the sale consideration; sales tax
is sought to be imposed even on the activation charges component of the value of a Starter
Kit though it does not amount to sale; activation charges in the Starter Kit, pertaining to
non-SIM/ROIM card based service (CDMA mobile instrument connection), is only a charge
for service; post-paid SIM card charges, which represent the call charges collected by the
petitioners from their subscribers, cannot be subjected to tax as there is no sale/deemed sale
of goods; and, in any event, the purchase price of the SIM card in the hands of the petitioner,
and a reasonable profit thereon, can alone be brought to tax under the Act.
On the other hand it is contended on behalf of the revenue that, while the SIM card enables
access to the cellular network, it can also store data of phone calls, contact numbers, games,
music etc; it is capable of being bought and sold; it has utility; it is capable of being
transferred, delivered and stored; SIM cards have all the attributes of goods, and can be
subjected to sale; pre-paid SIM cards are sold to customers, through distributors, for a
price; the charges collected from the subscriber are for the SIM card; they are not collected
for the service of activating the SIM card; SIM cards are not activated at the time of their sale
to the distributors; and the amounts collected for issue of prepaid SIM cards, and rentals for
postpaid SIM cards, represent the consideration for sale and deemed sale respectively.
It is essential, at the outset, to understand what a SIM card represents. A Subscriber
Identification Module (SIM) card contains a computer chip with pre-recorded instructions. It
6

Bharat Sanchar Nigam Ltd v. Union of India [(2006) 145 STC 91]

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is a device which helps the service provider identify the subscriber. It also enables the
subscriber access the service providers network by means of electro-magnetic waves. The
SIM card is merely a key to enter the service providers facility, and use their services. The
process of activation involves information being fed into the computer maintained by the
service provider, such as particulars of the amount charged, the identity of the subscriber, etc.
In determining the issue as to what a SIM card represents, the following principles should be
borne in mind. If the SIM card is not sold to the subscriber, but merely forms part of the
services rendered by the service provider, it cannot be charged separately to sales tax. It is
only if the parties intend that the SIM card should be a separate object of sale, can sales tax
be levied thereon. If the sale of a SIM card is incidental to the service being provided, and
merely facilitates identification of the subscribers, their credit and other details, it would not
be assessable to sales tax. Thus it was held by the SC that there is no such provision in the
Constitution that enables the Central Government to do so for the purpose of levying Service
Tax. Currently, the Service Tax provisions levy tax on the value of services rendered as
regards construction service, installation and commissioning service, etc. However, in view
of the fact that the said transactions are composite in nature, it is absolutely impermissible for
the Central Government to split the same and levy tax on the service element. In order to do
the same, a similar Constitutional amendment will have to be introduced, which expands the
definition of the phrase taxes on services to include services rendered in the execution of a
works contract. Currently however, there exists no such definition and thus the levy of
service tax on all works contract is clearly unconstitutional. It is hence reiterated that the
Central Government is not vested with the power to split a composite works contract and levy
service tax on the value of services rendered. Therefore, levy of service tax on all works
contract can be challenged under Article226 of the Constitution of India as unconstitutional.
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 Act. After consideration of all contentions and different applicable laws in
that case the Supreme Court elaborately discussed the issues raised and found and recorded
the fact that the BSNL have paid sales tax on sale price of SIM card.
Idea Mobile Communication Ltd. v. CCE&C (2009)20 STT 19 (Ker.).7
7

Idea Mobile Communication Ltd. v. CCE&C (2009)20 STT 19 (Ker.).

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SIM card is a computer chip having its own SIM no. on which telephone no. could be
activated, and through it customers get connection from mobile tower. Unless it is The high
court held that SIM card is a computer chip having its own SIM no. on which telephone no.
could be activated, and through it customers get connection from mobile tower. Unless it is
activated, service provider can not provide service connection to the customers. Therefore
SIM card is an integral part of providing mobile services to customers. Hence sale of SIM
card is not goods sold, rather it forms part of taxable services provided by the service
provider, and so service tax is payable. activated, service provider can not provide service
connection to the customers. Therefore SIM card is an integral part of providing mobile
services to customers. Hence sale of SIM card is not goods sold, rather it forms part of
taxable services provided by the service provider, and so service tax is payable.

Is the levy of Service Tax and Sales Tax alternative to each other ?
It is generally felt that once a sales tax or deemed Sales Tax (like Works Contract Tax) is
attracted, there can be no levy of Service Tax. This need not be true in all cases. In case of
Works Contract Tax, there can definitely be a levy of Service Tax to the extent of the service
component. 8Even in case of Sales Tax levy, the Courts are hesitant in favouring the challenge
against constitutionality. In fact, there is a judicial trend to view a transaction in different
aspects consisting of sale as well as a service. This aspect theory has been elaborated by the
Kerala High Court in the case of Escotel Mobile 9.
In this case of mobile service provider, also selling SIM cards to the subscribers. An amount
was charged for the sale of SIM cards and a further amount was charged as activation
charges. A SIM card is a computer-based chip (hardware) inserted in a mobile phone. The
Kerala High Court held that the entire amount of sale as well as activation charges were liable
to Kerala General Sales Tax. The entire amount was also held to be liable to Service Tax as
all these amounts were in relation to the telephone services rendered by the company. Even
the sale of SIM cards had an aspect of service embedded within itself.
Chargeability of doubled taxation

http://www.bcasonline.org/articles/artin.asp?432, last visited on 6th oct.

Escotel Mobile Communications vs. Union of India (2002) 126 STC 475 (Ker.)

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The challenge of double taxation of the transactions relating to such SIM cards has been a
longstanding one and had been earlier addressed by the Supreme Court in its decision in
BSNL vs. UOI (2006) 3 SCC 1.
The Supreme Court held that the question as to what a SIM card actually represented was a
question of fact and in determining the issue, the principle to be kept in mind was as to what
was the intention of the parties regarding the SIM card transaction. If the parties intended that
the SIM card would be a separate object of sale, it will be open to the sales tax authorities to
levy the tax. However, if the sale of the SIM card was merely incidental to the services being
provided and only facilitated the identification of the subscriber and other details, it would
not be assessable to the sales tax. Consequently, the Supreme Court held that both taxes could
not possibly apply to the transaction in question and based on the above determination of
intent, only one or the other tax would apply. This judgement of the Supreme Court settles the
point that the transactions relating to supply of SIM cards between telecom operators and the
subscribers would be charged to just the one tax i.e. the service tax and not the sales tax.
Accordingly, there could be no double taxation in regard to such transactions.

CONCLUSION
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 Sales tax. The position in law is
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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 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.

BIBLIOGRAPHY
1) http://gstindia.com
2) http://gst4india.com
3) http://www.iamwire.com/2012/03/goods-and-services-tax-for-ecommerce-in-indiaby-august-2012/
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4) http://profit.ndtv.com/news/economy/article-goods-and-service-tax-one-step-closerto-final-approval-310651
5) http://logistics.about.com/b/2012/09/10/single-gst-for-india.html
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i=g1&aql=&oq=&gs_rfai=&fp=f78c295bb727fd66
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8) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1596522
9) business-standard.com Home Economy & Policy
10) www.iica.in/images/GST%20Single%20National%20Market.pdf

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