CESTAT, NEW DELHI BENCH
Commissioner of Central Excise, Lucknow
FINAL ORDER Nos.ST/A/684-687/2012-CUS
Appeal Nos. ST/ 7, 198 & 1200 of 2011 & 540 of 2012
NOVEMBER 6, 2012
Mathew John, Technical Member
In this proceeding four appeals are being decided together because all these appeals involve the same issue.
2. The appellants are distributors of sim cards needed to enable telecommunication service provided by BSNL through mobile telephone. They also market recharge coupons which enables additional duration of time for which such service is allowed to the customers of BSNL. BSNL supplies these cards with fixed Maximum Retail Price (MRP) to the appellants. They collect the value of the cards and remit the value to BSNL. BSNL pays service tax on the full value of the cards. For doing these services BSNL pays commission to the appellants. The service tax demand involved in these cases is the tax demanded on such commission paid by BSNL to the appellants.
3. The Counsel for appellants submits that the demand for service tax from the distributor, on a value on which service tax has been already paid by BSML, amounts to double taxation of the same value and hence the demand is not maintainable.
4. The Counsel for appellants submits that question whether service tax is payable on the commission paid by BSNL out of value of services for which BSNL has already paid service tax has been under dispute before the Tribunal in the past and the Tribunal has held that demand for tax on commission’ paid by BSNL is not maintainable, Some of these decisions are the following:
(i) Chetan Traders v. CCE  17 STT 318 (New Delhi-CESTAT)
(ii) Hindustan Associated Traders v. CCE [Final order Nos. 673 & 674 of 2007, dated 7-6-2007]
(iii) South East Corpn.v. CCE& ST  22 STT 446 (Bang.-CESTAT)
(iv) Karakattu Communications v. CCE  21 STT 384 (Bang.-CESTAT)
5. The Ld A. R, for Revenue submits that activities of the appellants as seen from the contract clearly brings out that service in the nature of business auxiliary service is being rendered by appellants to BSNL. He draws attention to some clauses from the agreement showing General Obligations of the Franchisee and Responsibilities of the Franchisees and procedure for payment of commission/rewards/marketing expenses as given in the agreement are reproduced below :-
“(a) The BSNL is desirous of appointing Distributors with a view to do marketing and distribution of its Cellular Mobile Telephone Services (CMTS) under its brand name for which the BSNL has been licensed to provide cellular mobile service.
(b) The Distributor has approached the BSNL for authorising it to act as such an authorised Distributor for marketing and distribution of cellular mobile services subject to the terms and conditions hereinafter appearing.
(c) The Distributor has given an unconditional Bank guarantee (as per annexure D of Rs. 5,00,000/-(Rupees Five lakh only) which shall be refundable for the due fulfilment of the said agreement.”
“1-6 Agent/Sales Executive/Sales force: In the interest of increasing the customer base, the Distributor can appoint retailer solely for the purpose of booking new prepaid cellular mobile connections’”
“1.9 Customer Counsellors; In the office a sale – person who receives walk-in-customers, understands their requirement, demonstrates the service and tries to close the order, have been appointed by the Noticee. Also he attends to telephonic enquiries and pursue the same,
1-10 Customer Care Executives: These are trained persons who guide/solve the problems of the subscribers regarding the usage of the service/handset and interact with the customer care centre for complaint handling. “
“5. Scope of Marketing & Distribution: The distributor shall provide cellular mobile services to walk-in customers. It shall also establish, through its sales force, direct contract with prospective customers and register as many new cellphone customers as possible subject to a minimum number fixed by BSNL Distributors shall also distribute prepaid products and services to its retailers.”
“8.1 The BSNL will grant to the Distributor right for the marketing and distribution of products and services in the territory as described in Annexure- F from the Dealer outlet(s) for which the BSNL will compensate the distributor as described,”
“9. General Obligation of the Distributor:
9.1 The Distributor shall maintain a suitable organisation for the marketing and distributor of products and services in the allocated territory from his outlet(s).
9.2 The BSNL may from time to time require the distributor to carry out customer satisfaction surveys as decided by the BSNL, the cost thereof if any will be borne by the distributor.”
9.7 (a) That the Distributor shall not have any authority to store, sell or transfer or in anyway dispose of the merchandise except as provided in this Agreement (b) that the BSNL shall be liable to the quality and genuineness of the goods sold by the Distributor,”
“10.2 The BSNL may provide the marketing material to the Distributor. This may include but not limited to, information brochures, poster, inserts special giveaways, mailers (target-segment-specific) sales kits, folders, subscription forms, receipt books, stickers etc.
10.3 The BSNL will endeavour to activate a cellular connection within 24 hours of receipt of documents indicating completion of booking formalities and realization of booking account,”
“19. Payment terms:
Basic Commission : The basic commission payable is as per Annexure B, BSNL reserves the right to change the target and commission aiong with commission structure at anytime during the period of agreement. Target will be fixed on stat of operation on per month basis.”
6. The ld. A.R. points out the tax paid by BSNL is for telecommunication service provided by BSNL to customers and the tax demanded in the present appeals is for Business Auxiliary Service provided by the distributors to BSNL and there is no double taxation of the same service.
7. In the matter of decisions of the Tribunal relied upon by the appellant the ld. A.R. points out that the decisions consider the transactions to be in the nature of purchase and sale of sim cards. The question whether the so-called “sale” of sim cards by mobile telephone operators, needed to enable mobile telephone connection, is actually a sale or a part of the service of providing telecommunication service was disputed before the Apex Court in the case of Idea Mobile Communications Ltd. v. CCE  32 STT 262. Apex Court has held that it is a case of providing telecommunication service and not sale. Therefore he submits that the decisions of the Tribunal are no longer reliable.
8. He further points out that M/s BSNL, Taxation Section, New Delhi has issued Circular No. 1001/26/2002/Taxation/BSNL/568 dated 25.5.07 wherein directions have been given to their field formations to issue directions to ail franchisees/agents for taking service tax registration and discharging their service tax liability. The extracts from the said letter as appearing in para 1.7 of the impugned order relating to GR Movers as under:
“3. Hence in this connection, it is directed to issue the necessary instructions to all agents/distributor of BSNL entitled for commission to take necessary action as follows immediately.
(i) Get registration from the service tax department if applicable,
(ii) Raise bills/challans on BSNL for commission as prescribed in Rule 4A (1) of the Service Tax Rules, 1994. If bills raised are not as per the said rule, service tax amount charged in those bills will not be paid by BSNL,
(iii) For the agents/distributors coming under the threshold limit and opting to avail the exemption, the present practice of commission payable may continue.
(iv) For compliance of the service tax provisions/rules agents/distributor shall be solely responsible,”
9. In view of the above position the ld. A. R. for Revenue submits that the adjudication orders are passed in accordance with law and are maintainable.
10. We have considered arguments on both sides,
11. From the above clauses it is clear that the appellants were promoting and marketing the services of BSNL and receiving commission. Consequently the appellants were providing business auxiliary service as defined in section 65(19) (ii) of Finance Act, 1994 to BSNL.
12. The Hon. Apex Court held in the case of Idea Mobile Communication Ltd. (supra) that the transaction is one of providing service and not of sale of sim cards. Sale of recharge coupons also is under dispute in this case. In the case of recharge coupons the scope for dispute on this issue is much less because there is hardly any material involved in the transaction. Nevertheless for sake of convenience such transactions is being referred to as “sale” in this order as referred to by the appellants because the transaction has a colour of sale. Nothing about taxability is to be inferred by use of this word in the remaining part of this order.
13. The question as to what will be the nature of transaction when a distributor sells sim cards to customer can still be a matter of dispute because distributor is not providing any telecommunication service to the customer. This issue can come up in two different types of transactions depending on the business model of the telecom operator. In some cases the distributor gets his consideration from customer at the time of sale of sim cards through the margin in price. In some cases the distributor gets their consideration from the telecom operator by way of commission on the transaction normally called as sale. In the case before us the second type of situation exists.
14. The questions to be decided now is whether the demand of tax from the distributors is warranted in view of the fact that the tax on full value of service is being paid by BSNL keeping in view the decisions of the Tribunal given in the past in the matter.
15. The question as to what is the taxable value when a telecom operator sells sim card of a specified MRP at a discounted price to distributors and the distributor sells the cards at MRP to customers was examined by the Tribunal in the case of BPL Mobiie Cellular Ltd. v. CCE  12 STT 442 (Chennai-CESTAT). The Tribunal held that the discounted MRP price realised by BPL Mobile Cellular Ltd. from distributors will be the value of service to be taxed in the hands of BPL Mobile Cellular Ltd. This decision is affirmed by the Apex Court as reported at Commissioner v. BPL Mobile Cellular Ltd. - 2011 (24) STR 175 (SC). Obviously in that case service tax got restricted to the tax on discounted price at which the mobile operator was “selling”‘ the card. In the present case of BSNL, tax on the full value of the card is paid undisputedly.
16. The facts of this case are being illustrated by considering sale of sim-cards for activation of mobile service with assumed value of Rs. 500/-. BSNL issues sim-cards costing Rs. 500/- plus service tax of Rs. 50/- to the distributor as per terms of an agreement against appropriate security. Distributor sells the card to the customer, collects Rs. 550 from customer by cheque in the name of BSNL and deposits it with BSNL. BSNL pays service tax of Rs. 50 to Govt. Out of the remaining Rs, 500 constituting the value of service rendered by BSNL, Rs, 15 is paid to the distributor. Revenue is asking service tax on this Rs. 15 from the distributor considering it as consideration for business auxiliary service rendered by distributor to BSNL in marketing the service of BSNL.
17. As explained above, BSNL is paying service on MRP of the cards and paying commission to distributors out of MRP realized. In such a situation, collecting service tax on MRP of sim card from BSNL and collecting service tax again on that part of the amount paid by BSNL to the distributor out of MRP realized, puts the parties to these transactions at a doubly disadvantageous position as compared to the value taxed in the case of BPL Mobile because BPL Mobile was paying tax only on the discounted price of the card and there is no evidence to show that the value of service rendered by those distributors was being subjected to tax.
18. Against the above background the prime arguments of the appellant-distributors in these case are the following,-
(i) The distributor is buying and selling sim cards and there is no service involved in the activity of the distributor,
(ii) BSNL has paid service tax on the entire value of Rs. 500 including Rs. 15 paid to the distributor. So there is no case for demanding service tax again on the amount of Rs. 15.
19. Some facts and relevant laws that are to be noted in this context are the following,-
(i) It is already held by the Apex Court that the essential nature of the transaction is one of providing service and not of sale of sim cards. In the case of sim-cards there is at least some material involved. In the case of re charge coupons there is no material involved and it is purely a case of marketing service. If distributors are buying sim cards from BSNL payment should be from distributor to BSNL. In the case before us tax is demanded on payments made from BSNL to distributor. In fact the source of information based on which demands are issued are Form 16A under Income Tax Act issued by BSNL to the distributors evidencing payment of commission to distributors. This is not a case where the distributors first paid for the value of the cards took possession and then sold the cards at a higher price. The argument that it is a case of buying and selling of cards appears to be raised only on the basis that there are MRPs for the cards and it is handed over to the customer against payment of such MRP. However the card by itself is of no use to the customer unless the service is activated by the Telecom Operator. So the cards have no value once it is dissociated from the service to be provided against payment made on MRP printed on the cards. So the transaction may have a colour of sale and may be referred to as “sale” by the parties to the transaction but this is essentially not a sale but a charge for service to be provided in future. Tax is demanded on services for which payments were made by BSNL to distributor,
(ii) BSNL is paying service tax for value of telecommunication service being provided by them to the customer. Revenue is demanding tax on the service provided by distributor to BSNL which is in the nature of marketing of the services of BSNL to its customers and tax is demanded under the head of “Business Auxiliary Service”. Under the scheme of levy and collection of service tax there is a liability on the distributors to pay service tax to the exchequer on the service rendered by them to BSNL.
20. In the past the Tribunal has dropped such demand both for the reason that it is a case of purchase and sale of cards and for the reason that the total value of service including the value of service rendered by distributor is subjected to tax in the hands of BSNL. The first argument may not be a good argument in view of the decision of the Apex Court in the case of Idea Mobile Communications Ltd (supra) and for the reason that the essential character of the transaction is not of sale.
21. The second argument adopted was that demanding tax on a part of such value again in the hands of the distributor amounts to double taxation. The argument that tax should not be demanded in situations where somebody else has paid tax on the taxable value of a service is not an argument that can be accepted normally. If this argument is adopted, a taxpayer “X” in a VAT chain can argue that the next person “Y” who uses the service as input will be paying tax and X need not pay tax. In a VAT chain it is difficult to identify who is the ultimate consumer who is not paying further tax. Taking the case of telecommunication service if the customer is a person who does not pay service tax on any of his activities a telecom operator cannot adopt this argument. But if the customer is an industrialist he is eligible for credit of service tax to be paid by him. So a telecom operator can adopt the argument in respect of services rendered to such customers, Such logic will make any VAT system for collecting tax unworkable. During the initial phase of levying service tax when the Cenvat credit scheme was not extended to service tax, this concept that a sub-contractor need not pay tax if the main service provider was paying tax on the value inclusive of the value of service provided by the sub-contractor was initially supported by CBEC in circulars like the following:
(i) C.B.E. & C. Circular No. B-43/1/97-TRU, dated 6-6-1997
(ii) C.B.E. & C. Circular No. B-43/5/97-TRU, dated 2-7-1997
(iii) C.B.E. & C. Circular No. B-43/7/97-TRU, dated 11-7-1997
(iv) C.B.E. & C. Circular No. B-11/3/98-TRU, dated 7-10-1998
22. But this approach was changed with effect from 23-08-2007 when Circular No. 96/7/2007-S.T., dated 23-8-2007was issued. The relevant Extracts from this circular reads as under:
|999.03/ 23-8-07||A taxable service provider outsources a part of the work by engaging another service provider, generally known as sub-contractor.Service tax is paid by the service provider for the total work. In such cases, whether service tax is liable to be paid by the service provider known as sub-contractor who undertakes only part of the whole work.||A sub-contractor is essentially a taxable service provider. The fact that services provided by such sub-contractors are used by the main service provider for completion of his work does not in any way alter the fact of provision of taxable service by the sub-contractor.Services provided by sub-contractors are in the nature of input services. Service tax is, therefore, leviable on any ;taxable services provided, whether or not the services are provided by a person in his capacity as a sub-contractor and whether or not such services are used as input services. The fact that a given taxable service is intended for use as an input service by another service provider does not alter the taxability of the service provided.|
23. The argument of the distributors in the present case is not as unreasonable as illustrated in the example discussed above. The following aspects need to be noted in this regard. This is not a case where the distributor is doing a service, billing for it, collecting the charges for the service and then BSNL charging for the services to the customers through a separate process. On the contrary this is a case where BSNL sells the cards through the distributor and collects money from customers through the distributor and then pays to the distributor out of consideration received by them from their customers on which consideration service tax is first discharged by BSNL. That is to say the transactions of both the parties are essentially one and payment on the full value of service occurs earlier than payment of commission to the distributor. Further payment of tax on full value of service rendered by the principal, that is BSNL, is easily verifiable unlike in the case of services rendered by many other sub-contractors for other type of services.
24. Some services which are on similar footing as sale of sim cards or recharge coupons by distributors are services provided by,-
(a) sub-broker to a stockbroker;
(b) mutual fund agent to a mutual fund or asset management company;
(c) selling or marketing agent of lottery tickets to a distributer or a selling agent.
25. Interestingly the above services as also the services of selling agent or a distributor of SIM cards or recharge coupon vouchers have been exempted from service tax vide entry No. 29 in Notification 25/2012-ST dated 20-06-12. So the special nature of services in such cases is recognized though only recently.
26. Though the correct procedure for discharge of the service “tax liability by the two parties is that the distributors raise bills for commissions that is due to them along with service tax and BSNL takes Cenvat credit of tax paid by distributors for discharging liability on the telecommunication service provided by BSNL, such procedure dos not result in extra realization of Revenue. Considering the special nature of the impugned activities and the fact that it can be easily verified that full taxable value of the service provided by BSNL to customers is subjected to tax, we are of the view that there is no case to undo decisions already taken by the Tribunal in this regard. A contrary approach will result in a difference in value that is taxed for mobile telecom service according to the decision of the Apex Court in the case of Commissioner v. BPL Mobile Cellular Ltd. - 2011 (24) STR, 75. We also note that this issue has lost relevance for the future because of exemption under Notification 25/2012-ST-S. No. 29 for this type of service.
27. In view of analysis as above we set aside the impugned order and allow the appeals.