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Levy of VAT on SIM replacement and Lease line Charges are Ultra Vires to Constitution: Madhya Pradesh HC [Read Judgment]

Madhya Pradesh High Court struck down the Sections 2(u) and 2(v) of the Madhya Pradesh Value Added Tax Act, 2002.

The division bench of the Madhya Pradesh High Court held that VAT cannot be levied on SIM replacement and lease line charges. To this effect, the bench comprising Justice S.C. Sharma and Justice Rajeev Kumar Dubey struck down the provisions of Section 2(u) and 2(v) of the Madhya Pradesh VAT Act, 2002 by finding the same as ultra vires to the Constitution.

In the instant case, the assessee-petitioners, Idea Cellular Ltd and Bharti Airtel Ltd, were aggrieved by the order imposing sales taxon the activity of SIM replacement and the lease line charges which according to the petitioner are ultra vires to the Constitution.

The petitioners claim that the same is assessable under the Finance Act, 1994 and they have already remitted the service tax as per the law. On behalf of the Revenue, it was submitted that initially at the time of giving original SIM card no sale tax has been imposed but in the event when the customer comes before the service provider for issuance of new SIM or for replacement of damaged SIM the petitioner Company is charging valuable consideration for such replacement and, therefore, Sales Tax / VAT has rightly been charged.

The division bench observed that, “the State Government imposes sales tax on the petitioner company for providing SIM replacement to customers and Lease Line Charges received from the customers.In the opinion of the bench, the SIM card is not sold to the subscriber but merely forms part of the services rendered by the service provider which 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, then only sales tax can be levied thereon. If the sale of a SIM Card is incidental to the services being provided and merely facilitates identification of the subscribers, their credit and other details, it would not be accessible to sales tax. On the same analogy the SIM replacement charges are also not liable to tax since these again are in the form of service charges and do not represent sale price. SIM cards are included under the definition of ‘Telecommunication Services’ which are liable for service tax under Sec. 65(109a) of the Finance Act, 2002. A SIM card as such is only a card containing a Code which enables a person to use his mobile number. It is basically an identity which is then used for receiving the signals in mobile network. In case, for the first time, a SIM card is given, no VAT is imposed and the Assessing Officer has erroneously held that for the first time there is no sale, hence no VAT can be imposed, however, when the SIM is replaced on account of loss / damage then there is a sale, meaning thereby, for first issuance of a SIM card no VAT is being levied and for replacement VAT is being levied. The matter relating to levy of VAT Taxes has been considered by the Hon’bleSupreme Court in various judgments.”

Allowing the petition, the bench held 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, as the SIM cards are never sold as goods independent from service provided.Reliance was placed on the decision in Bharat Sanchar Nigam Ltd., and another Vs. Union of India and others, wherein the apex Court held that no sales tax can be charged for providing a SIM. Based on this, the bench noted that in such a situation, the question of charging it on replacement of a SIM, does not arise.Accordingly, the impugned orders were quashed.

With regard to the issue of imposing VAT on lease line charges, the bench said that it is squarely covered by the decision of the same Court in the case Bharti Infratel Ltd., Vs. State of Madhya Pradesh and others, wherein it was held that such charges are of the nature of service charges and are not liable for VAT since the mobile towers all along remain in control and possession of the Company and hence there is no sale. According to the bench, the same principle can be adopted in case of lease line charges since a subscriber of a lease line does not become the owner of the line either by control or by possession and hence such charges are only for services rendered and there is no element of sale therein.

Following the decision in Bharti Airtel, the bench struck down the provisions of Sec.2(u) and 2(v) of the MP VAT Act, 2002 on ground that it is ultra-vires and void, in so far as it relates to imposition of VAT on SIM replacement charges and lease line revenue, which are merely services.

Read the full text of the Judgment below.

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