May-2015

providers against supply of telephone instruments, batteries,
accumulators etc., as disguised form of consideration
either for their sale or transfer of right to use. The High
Court held that they form part of sale consideration subject
to VAT.
Refundable deposit collected by Telecom service providers
from post paid subscribers as security deposit for
provision of STD or ISD facilities do not fall within the
ambit of sale of goods and not liable to tax under the Act.
Place of Provision of Services Rules, 2012
The Place of Provision of Services Rules, 2012 was also
introduced which defines the taxable territory. According
to these provisions if a service provider is within the
taxable territory he is liable to levy and pay service tax.
The telecom operators in India receive services from foreign
operators located outside India as well as the telecom
operators in India rendered to foreign operators
located outside India, the following services:
• International out roaming services;
• International private leased circuit;
• Multi protocol label switching services;
• International usage connectivity services;
• International long distance services.
The taxability of the above services is covered under
the Place of Provision of Services Rules, 2012. The telecom
operators in India receiving services from foreign
operators are liable for the payment of service tax as the
recipient of service. In respect of the services offered by
Indian Operators to foreign operators are not liable to
pay service tax since the same are rendered outside the
taxable territory.
Payment of service tax
In respect of telecommunication services two types are
available; one is pre paid and the other is post paid. There
would be no problem in pre paid because the amount is
being collected initially and there would be no problem
in payment of service tax. In respect of post paid services
the charges are claimed in arrears. Before 01.04.2011
the service tax is payable by the service provider on receipt
basis. As such it had not been a problem for the
service provider till 01.04.2011.
After the introduction of Point of Taxation Rules, 2011
the impact is high. The service tax is payable as that of
the procedure in payment of central excise. The service
provider has to pay the service tax for the bills raised. If
any cancellation of the bills is there the same may be deducted.
As such the work burden is more for the service
providers in having constant checks and reconciliations
etc., The new rules, however, create an anomaly in light
of the corresponding amendment made in the Service
Tax Valuation Rules, which specifically mandate Telecom
companies to discharge service tax on the entire amount
collected from the subscribers.
Service tax V. VAT
This is the major problem faced by the service providers.
The sale of SIM card is considered as Sales of goods by
the State Governments and began to levy VAT on the sale
of SIM card. Utter confusion prevailed in those days in
interpreting whether the sale of SIM is a service or sales.
The following case laws discusses about the various problems
arised in interpreting whether the telecom products
are service or sales:
In ‘BSNL V. Union of India’ – 2006 (2) STR 161 (SC)
the Supreme Court decided the principal question on
the nature of transactions by which the mobile phone
connections are enjoyed. Whether it is a sale or is a service
or is both? The Supreme Court held that the same
transaction may involve two or more taxable events in
difference aspects. However this does not allow the state
to entrench upon Union list and tax services by including
cost of such service in value of goods. Even in composite
contracts which are by legal fiction deemed to be
divisible under Article 366 (29-A) of the Constitution
of India, value of goods involved in execution of whole
transaction cannot be assessed to sales tax.
In ‘Bharti Airtel Limited V. State of Karnataka’
– 2012 (25) STR 514 (Kar) it was held that artificially
created light energy (ACLE) was a form of electromagnetic
wave used by telecom service provider as carrier of
data or information in optical fibre broadband line. It was
not marketable. It was not abstracted or consumed or
delivered or stored or possessed. It was a case of conversion
and not abstraction. It was not something available
in abundance of which service provider abstracted a provision.
It was not something manufactured or generated
by service provider. It did not satisfy test of consumption
as neither subscriber nor recipient of message of data, consumed
any portion of ACLE. The service provider consumed
as a tool to render service. It did not satisfy the test
of delivery as subscriber sent and recipient received only
data etc., and not any portion of ACLE. The essence of
these networks was transfer of information and not energy
transfer, which was only minimal. In that view it did not
satisfy the tests prescribed to constitute ‘goods’ as defined
in Section 2(15) of Karnataka VAT Act, 2003.
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MAY 2015 the MANAGEMENT ACCOUNTANT 49