IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 18TH DAY OF SEPTEMBER 2012 PRESENT THE HON'BLE MR. JUSTICE K.

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1 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE BETWEEN : DATED THIS THE 18TH DAY OF SEPTEMBER 2012 PRESENT THE HON'BLE MR. JUSTICE K.SREEDHAR RAO AND THE HON'BLE MR. JUSTICE B.MANOHAR STA No.112/2009 M/S BHARTI TELEVENTURES LTD., REPRESENTED BY ITS OFFICER-LEGAL, SRI.PRASHANTH.N, NO.56,DIVYASHREE TOWERS, BANNERGHATTA ROAD, BANGALORE APPELLANT (BY SRI.K.HEMAKUMAR, ADV) AND: THE STATE OF KARNATAKA THROUGH THE COMMISSIONER OF COMMERCIAL TAXES, VANIJYA THERIGE KARYALAYA, IST MAIN ROAD, GANDHINAGAR, BANGALORE RESPONDENT (BY SRI.K.M.SHIVAJOGI SWAMY, AGA) STA FILED U/S 66(1) OF THE KST ACT, AGAINST THE REVISION ORDER DATED: PASSED IN NO.ZAC- 1/B.Div/SMR-20/08-09 ON THE FILE OF THE ADDL. COMMISSIONER OF COMMERCIAL TAXES,ZONE-I, BANGALORE, RESTORING THE ORDER OF PENALTY AND SETTING ASIDE THE ORDER OF APPEAL AS IT IS PREJUDICIAL

2 2 TO THE INTEREST OF REVENUE AND ACCORDINGLY CONCLUDING THE REVISION PROCEEDINGS. THIS STA HAVING BEEN HEARD AND RESERVED AND COMING ON FOR PRONOUNCEMENT OF JUDGEMENT THIS DAY, B.MANOHAR J., DELIVERED THE FOLLOWING: J U D G M E N T The appellant has filed this appeal, being aggrieved by the suomotu revisional order bearing No.ZAC-1/B.Div/SMR-20/ dated passed by Addl. Commissioner of Commercial Taxes, Zone-I, Bangalore setting aside the order dated passed by the Joint Commissioner of Commercials Taxes (Appeals), Bangalore (hereinafter referred to as Appellate Authority). 2. Appellant is the Public Limited Company and also registered under the provisions of Karnataka Value Added Tax Act, 2003 (hereinafter referred to as KVAT Act ) engaged in the activity of rendering services of Cellular Mobile Telephones to its subscribers, as per the license granted by the Department of Telecommunication, Government of India. As per the said license, the appellant is permitted to maintain and operate Cellular Mobile Telephone services upto the subscriber s terminal connection in the State of Karnataka. In the course of its business, the appellant has dispatched a consignment of Recharge Cards, Recharge Pins and Recharge Double Scratch, to its distributors for supply to the customers.

3 3 The consideration received by the distributors will be for the purposes of the service rendered to them and the provisions of the Service Tax Act being applicable to the transaction, the same is collected and remitted to the Government of India. The Recharge Cards were transported through the courier service. The goods vehicle was intercepted by the Commercial Tax Officer, Mysore Road Check-Post, near Kengeri on The said document has been seized and notice has been issued on proposing to levy penalty on the ground that the goods was not accompanied with the valid documents as prescribed under Section 53(2) (b) of the Act. The appellant has filed objections to the said proposition notice and contended that the goods such as Recharge Cards, Recharge Pins, Recharge Double Scratch cannot be taxed and they were not taxable goods. Hence, no penalty can be imposed under Section 53(12)(a) (ii) of the Act. Further the goods vehicle was accompanied with the letterheads and delivery challans. Since the appellant is liable to pay the service tax, the same cannot be treated as goods and the Act is not applicable. The question of furnishing the documents as contemplated under Section 53(2)(b) does not arise. However, Check-post Authority levied penalty of Rs.1,53,984/- as per levy order dated Being aggrieved by the said levy of penalty, the appellant preferred an appeal before the Joint Commissioner for Commercial Taxes (Appeals),

4 4 Bangalore. The Appellate Authority by its order dated allowed the appeal and held that the goods under movement being not taxable under the Sales Tax Act, the question of levying tax under the KVAT Act does not arise. Recharge Cards, Recharge Pins and Recharge Double Scratch are not the goods. However, the revisional authority on verification of the records found that the order passed by the Appellate Authority is erroneous and prejudice to the interest of the revenue. Accordingly issued notice under Section 64(1) of the Act. The appellant filed detailed objections to the said notice. The Revisional Authority, without taking into consideration the objections filed by the appellant by its order dated set aside the order passed by the Appellate Authority and restored the penalty imposed by the Checkpost Authority and held that the appellant is liable to pay the tax on the recharge related cards and SIM cards as per the judgment reported in 2006(145) STC 91 (BHARAT SAMACHAR NIGAM AND OTHERS v/s UNION OF INDIA). Being aggrieved by the order passed by the revisional authority, the appellant has preferred this appeal. 4. Sri.K.Hemakumar, learned counsel appearing for the appellant contended that the order passed by the Revisional Authority is contrary to law. The recharge coupons such as Recharge Cards, Recharge Pins and Recharge Double Scratch are not the goods taxable under the Act. The

5 5 consideration received from the customers and sale of these recharge cards will be for the purpose of service rendered by the distributors, as such the appellant is paying service tax to the Government of India. Hence, the Act is not applicable. The pricing-cum-delivery challans, accompanied with the goods vehicle was a proper document, which falls within the documents that are prescribed under Section 53(2)(b) of the Act. The delivery challan contains date, code and prescription of the goods, quantity and cost of the goods and the amount of service tax particulars etc. Hence there is no violation of provisions of the Act. He also relied upon the judgment reported in 2012 (72) KLJ 65 (SC) (IDEA MOBILE COMMUNICATION LIMITED v/s COMMISSIONER OF CENTRAL EXCISE AND CUSTOMS, COCHIN) in paras 17, 18 and 19 contending that the amount received by the Cellular Telephone company from its subscribers towards the SIM cards will form part of the taxable value for levy of service tax and the SIM cards are never sold as goods independent from service provided. They are considered as part and parcel of the service provided and the dominant position of the transaction is to provide service and not to sell materials. The SIM card has no value, it is only for identification of a person and SIM card has been provided at free of cost. On recharging through the recharge coupon, subscriber can make a call, for which service tax is being paid. Hence, sought for setting aside the revisional order by allowing this appeal.

6 6 5. On the other hand, Sri.K.M.Shivayogiswamy, learned counsel appearing for the respondent argued in support of the order passed by the revisional authority and contended that 12 boxes of recharge cards, pins and scratch cards were transporting to Mysore without any valid documents. The Check-post authority on verification of the goods found that it was being transported without any valid documents as prescribed under Section 53(2)(b) of the Act. Accordingly, proposition notice has been issued for levying penalty. The respondent has filed objections. After verification of the objections found that the recharge cards will be sold for its face value, hence, they are liable to pay tax under the Act. Further, the Hon'ble Supreme Court in a judgment reported in 2006(145) STC 91 cited supra, has also dealt with the same issue and sought for dismissal of the appeal. 6. We have carefully considered the arguments addressed by the learned counsel for the parties and perused the orders impugned in the above appeal. 7. This appeal was admitted to consider the following substantial questions of the law. i) Whether on the facts and in the circumstances of the appellant s case, can it be held that the order dated passed by the First Appellate

7 7 Authority in VAT.Ap.No.57/05-06 under Section 62(6) of the Act, was erroneous and prejudicial to the interests of the revenue for the Revisional Authority to have invoked the extra-ordinary revisional powers conferred under Section 64(1) of the Act? ii) iii) iv) Whether on the facts and in the circumstances of the appellant s case, can it be held that the order dated passed by the Revisional Authority in SMR.NO.20/08-09 under section 64(1) of the Act is valid in law especially in view of the fact that the said order has been passed in gross violation of the principles of natural justice in as much as no opportunity of personal hearing was granted to the appellant? Whether on the facts and in the circumstances of the appellant s case, can it be held that the order dated passed by the Revisional Authority in SMR.NO.20/08-09 under Section 64(1) of the Act, is valid especially in view of the fact that the Revisional Authority has been chosen to deviate from the law laid down by the Hon'ble Supreme Court in M/s. BSNL case, wherein, the Hon'ble Supreme Court has held that Sim Cards cannot be said to be goods under the provisions of the Sales Tax Act? Whether on the facts and in the circumstances of the appellant s case, can it be held that the Revisional Authority was right in law in setting aside the order dated and restoring the order of penalty dated passed by the Checkpost Authority especially in the background of the fact that the transaction in question did not attract tax under the provisions of the Act? 8. The issue, whether the SIM cards, recharge cards are liable to tax is fully considered by the Hon'ble Supreme Court in a judgment reported in

8 8 2012(72)KLJ 65 cited supra. Paragraphs 17, 18 and 19 of the said judgment reads under: 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 the 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 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

9 cellular phone and consequently the same would necessarily be included in the value of the SIM Card 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 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 form 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 the SIM card and the value of the taxable service is calculated on the gross total amount received by the operator from the subscribes. The Sales Tax authority understood the aforesaid position that no element of sale is involved in the present transaction. 9. In view of the finding of the Hon'ble Supreme Court in the BSNL case referred to above, the substantial questions of the law are to be held in favour of the assessee and the order passed by the Revisional Authority is liable to be set aside and the order passed by the First Appellate Authority is to be upheld.

10 Accordingly, we pass the following ORDER The appeal is allowed. The order passed by the Revisional Authority is set aside and the order passed by the First Appellate Authority is upheld. Sd/- JUDGE Sd/- JUDGE mpk/-*