Custom, Excise & Service Tax Tribunal
Commissioner Of Service Tax, Mumbai vs Reliance Infocomm Ltd on 9 October, 2014
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL WEST ZONAL BENCH AT MUMBAI COURT NO. Appeal No. ST/199/2008-Mum. (Arising out of Order-in-Original No.03/STC/RICL/08-09/dtd. 13/06/2008 passed by the Commissioner of Service Tax, Mumbai ) For approval and signature: Honble Mr. Ashok Jindal, Member (Judicial) Honble Mr. P.S. Pruthi, Member (Technical) ============================================================
1. Whether Press Reporters may be allowed to see :
the Order for publication as per Rule 27 of the
CESTAT (Procedure) Rules, 1982?
2. Whether it should be released under Rule 27 of the :
CESTAT (Procedure) Rules, 1982 for publication
in any authoritative report or not?
3. Whether Their Lordships wish to see the fair copy :
of the Order?
4. Whether Order is to be circulated to the Departmental :
authorities?
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Commissioner of Service Tax, Mumbai
:
Appellant
VS
Reliance Infocomm Ltd.
:
Respondent
Appearance
Shri K.M. Mondal. Spl. Counsel for Appellant
Shri V.S. Nankani, Sr. Advocate with
Shri Gopal Mundra, C.A. for respondent
CORAM:
Mr. Ashok Jindal, Member (Judicial)
Mr. P.S. Pruthi, Member (Technical)
Date of hearing : 9/10/2014
Date of decision : /11/2014
ORDER NO.
Per : Ashok Jindal
The Revenue is in appeal against the impugned order wherein the Ld. adjudicating authority has set aside the demands sought to be confirmed by issuing show cause notice to the respondent and also dropped the penalty against the respondents.
2. The brief facts of the case are that the respondents are engaged in providing telephone connection service covered under Section 65(105)(b) of the Finance Act, 1994. The respondent appointed M/s. Reliance Industries Ltd. (RIL) as an agent to market the TRAI approved Tariff Plans with respect to telephone connections services provided by it by means of various schemes floated by the agent in this regard. These services were provided through Code Division Multiple Access (CDMA) technology and could be availed by the subscribers only on a handset specially programmed and designed.
2.1. While marketing the Tariff Plans in relation to the telephone connection services to be provided by the respondent, the agent of the respondent (i.e. M/s. RIL) was allowed to combine certain products, services and privileges offered by it. The agent introduced certain schemes while selling the services of the respondent. The subscribers of the respondent under those schemes had to become members of a club called Dhirubhai Ambani Pioneer Club (DAPC). The agent floated a scheme called Dhirubhai Ambani Pioneer Offer. There were two limbs of this scheme, namely, DAPO Normal and DAPO-Finance. The details of the Offer are as under :
(I) DAPO-Normal:- Customer pays Rs. 21,000/- upfront. The charges collected were for :-
i. Rs. 3,000/-as one time club membership charges.
ii. Rs. 14,400/- as rental & usage charges for telephone service (for 36 months @ Rs. 400/- P.M. Out of Rs. 400/-, Rs. 240/- were for rental charges and Rs. 160/- were for usage charges).
iii. Rs. 3,600/- as Club Privilege charges (36 months @ of Rs. 100/- p.m.).
(II) DAPO-Finance:- Customer pays Rs. 3,000/- upfront, as club membership charges and 12 postdated cheques, each of Rs. 1,800/- per quarter for three years (aggregating to Rs. 24,600/-) for following purposes:
i. Rs. 14,400/- as rental & usage charges for telephone service (for 36 months @ Rs. 400/- P.M. Out of Rs.
400/-, Rs. 240/- were for rental charges and Rs. 160/- were for usage charges).
ii. Rs. 3,600/- as Club Privilege charges (for 36 months @ of Rs. 100/- p.m.) iii. Rs. 3,600/- as Finance Charges (for 36 months @ of Rs. 100/- p.m.).
2.2. On becoming a member of the DAP club, the member was entitled to :
a. A sleek, feature rich digital handset (MRP Rs. 10,500/-) absolutely free or a colour screen handset (MRP Rs. 25,500/-) at a highly discounted rate of Rs. 15,000/- with 1 year warranty and 3 years insurance.
b. 400 minutes of outgoing calls per month @ 40 paise per minute.
c. Free incoming calls, free unlimited SMS, free CLIP & call waiting services.
d. Free subscription to R world.
e. Eligible to GSM handset exchange scheme.
f. 25% discounts on Web World membership.
g. Discount coupon worth Rs. 1,00,000/- on wide range of commonly used products and services.
2.3. Other than an amount of Rs. 14,400/- per subscriber, which was for rental and usage charges of telephone connection service, all other charges collected by the agent from the subscribers of the respondent were retained by the agent as club membership and club privileges charges.
2.4. The respondent to whom an amount of Rs. 14,400/- per subscriber was remitted by its agent as rental and usage charges of telephone connection service, has paid service tax on the said amount during the period March, 2003 to March, 2004.
(III) In addition to the above services provided through CDMA technology, the respondent was also providing fixed wireless services, for which it charged Rs. 1,800/- (Rs. 800/- towards installation charges and Rs. 1,000/- towards deposit which was refundable only under certain conditions). The respondent adjusted certain outstanding dues of the subscribers from the aforesaid deposit but no service tax was paid on the same during the period June, 2003 to November, 2005.
2.5. Based on an intelligence that the respondent was not paying due service tax on certain amounts collected from its subscribers, the respondent was investigated by the DGCEI followed by a Show cause notice dtd. 12/7/2007 alleging that the amounts collected from its subscribers towards club membership and club privileges charges ought to have formed value of taxable services provided by it to its subscribers. The service tax is payable on such services. The show cause notice, therefore, proposed to include the value of club membership and club privileges charges in the value of the services provided by the respondent mainly on the following grounds :
(i) these charges are only incidental to the service of telephone connection, (ii) the services provided by the agent are covered under the term any service in the definition of the service of telephone connection, (iii) the handsets provided under the schemes were specifically designed to receive service from the respondent alone and without those handsets receipt of the service was not possible, (iv) the schemes were devised to defraud the revenue as the arrangement made between the respondent and its agent was to allow the agent to sell their products and services to the subscribers of the respondent, whereas the subscribers were led to believe that they were making payments for the services rendered by the respondent and other products and services were made available to them free of cost, (v) respondent was liable to pay service tax on the value of Club membership and club privileges charges as the term assessee includes agent of the respondent.
2.6. The show cause notice alleged that the respondent had failed to declare to the appropriate revenue authority about the appointment of its agent in the course of providing telephone services and also the actual gross receipts for the services rendered in its periodical returns submitted to the service tax authorities and this suppression of vital facts had facilitated the service tax evasion by the respondent. The show cause notice also alleged that the respondent was liable to pay service tax on the gross receipts for the services provided by it to their subscribers. Accordingly, the respondent was charged with violations of the provisions of Sections 68 & 70 of the Finance Act, 1994 and Rules 6 & 7 of the Service Tax Rules, 1994. The show cause notice, therefore, sought to recover service tax amounting to Rs. 69,14,87,724/- for the period March, 2003 to March, 2004 towards club membership and club privileges charges and Rs. 75,92,541/- for the period June, 2003 to November, 2005 towards non-payment of service tax for the services provided in respect of fixed wireless phones. It was also proposed to appropriate the amount of Rs. 70, 76,975/- paid in relation to the said fixed wireless telephone services. The show cause notice also proposed to impose penalties on the respondent under Sections 76, 77 & 78 and interest under Section 75 of the said Finance Act, 1994.
2.7. In adjudication of the aforesaid show cause notice, the Commissioner vide his order dtd. 13/6/2008 has dropped the demand of Rs. 69,14,87,724/- raised on club membership and club privileges charges both on merits as well as on limitation. The Commissioner has, however, held that the respontent is liable to pay a sum of Rs.70,76,975/- on account of fixed wireless services. Accordingly, the Commissioner has appropriated the said amount together with the amount of Rs. 6,81,661/- as interest which were paid earlier by the respondent. The Commissioner has not imposed any penalty under Sections 76, 77 and 78 of the Act on the ground that the respondent had no mala fide intention to evade any tax. In this connection, the Commissioner has also observed that even otherwise, he is competent to waive penalty on the respondent under Section 80 of the Act. Aggrieved by this order of the Commissioner, the Department has come in appeal.
2.8. At the outset, relevant provisions of the Finance Act, 1994 may be noticed:
(I) As per Section 65(7), respondent means a person liable to pay the service tax and includes his agent.
(II) As per Section 65(105)(b), taxable service means any service provided or to be provided to a subscriber by the telegraph authority in relation to a telephone connection.
(III) As per Section 65(104), subscriber means a person to whom any service of a telephone connection or a facsimile (FAX) or a leased circuit or a pager or a telegraph or a telex has been provided by the telegraphic authority.
(IV) As per Section 65(111). telegraph authority has the meaning assigned to it in clause (6) of Section 3 of the Indian Telegraph Act, 1885 and includes a person who has been granted a licence under the first proviso to sub-section (1) of Section 4 of that Act.
3. The Ld. Spl. Counsel appearing on behalf of the Revenue submits that the respondents have provided the service being telegraph authority duly registered under Indian Telegraph Act, 1985 and provided telephone connection services to its subscribers through its marketing agent M/s. RIL under various schemes. Vide its letter dtd. 18/9/2006 to DGCEI, M/s. RIL had explained and clarified that Dhirubhai Ambani Pioneer Offer was a self-contained scheme. There was no separate entity like club independent of the scheme of Dhirubhai Pioneer Offer. All subscribers to the scheme became eligible for the privileges as noted in the offer. The scheme laid down that subscribers would be eligible for free handsets and other privileges like insurance of handset and financing in case of deferred payment option. The money collected was utilized for providing the said privileges to the subscribers. As per Section 65(7) of the Act. The Assessee means a person liable to pay the service and includes his agent. The marketing agent of the Respondent was providing the telephone connection services including provision of free handsets and other privileges to the subscribers of the respondent. Therefore, the gross amount collected by M/s. RIL was collected on behalf of the respondent only and the same ought to be the taxable value for the purpose of payment of service tax by the respondent. The attempts made by the respondent to isolate the amount collected from the subscribers towards DAP club charges from the purview of service tax would not be legally tenable, more so, as the DAP club charges are integral part of the DAPO scheme which was floated only to garner the subscribers for the taxable services rendered by the respondent. Therefore, the DAP club membership charges and DAP club privilege charges are the part of taxable value of the service provided by the respondent. From the perusal of the DAPO scheme clearly shows that it is a composite scheme of service and supply of free handsets provided to the subscribers of the respondent. Therefore, there was no sale of handsets and the value of DAP club membership charges and DAP club privilege charges could not be isolated from the value of other taxable services provided by the respondent to its subscribers. It is further submitted CDMA phones provided to the subscribers of the respondent were programmed to respond only to the services provided by the respondent and the same could not be used to avail of the services of any other telephone operators. Therefore, the supply of free handsets to the subscribers was merely incidental to the services provided by the respondent. Therefore, the respondents are liable to pay service tax on the gross amount charged by their agent from the subscribers.
4. With regard to the other issue fixed wireless phones it is submitted that the respondent paid the service tax on outstanding dues of the subscribers after adjusting from the deposit amounts. On pointing by the department, if the investigation could not have been done, the said evasion of payment of service tax could have not been detected. Therefore, the respondents are required to be penalized for the said amount.
5. On limitation, he submits that the respondent has collected club membership and club privilege charges from its subscribers under the DAPO scheme and the same has not been included in the value of taxable services. Therefore, the extended period of limitation has rightly invoked. With regard to the penalty, he submits that the respondent adopted a scheme and the same has not been disclosed to the department for valuation of the service provided by them and also adjusted outstanding dues from the fixed deposit and not informed to the department. In these circumstances, penalties are required to be imposed on the respondent. In these terms, it is prayed that the impugned order be set aside and the appeal be allowed.
6. On the other hand, the Ld. Counsel appearing on behalf of the respondent supports that the impugned order and submits that the appellant being a provider of telephone connection service have charged sum of Rs.14,400/- as telephone connection charges and appointed the agent M/s. RIL for marketing of their product. The agent was free to market the product with other schemes to get better results from the market. The agent launched the scheme of DAP club and DAP privilege scheme that schemes were not the part of the service provided by the respondent. Moreover, the respondent charges were fixed by TRAI and the respondent was not entitled to charge the any amount over and above, the charges were fixed by the TRAI. It is further submitted that the DAP club membership, the agent has provided free handset and on the same he has paid VAT on the notional amount of free handset and as per the decision of Bharat Sanchar Nigam Ltd. Vs. Union of India reported in 2006 (2) STR 161 (S.C.). The Honble Apex Court has examined the nature of transaction involved in providing telephone connection and thereafter made clear that providing of handset by service provider to telephone connection service is the supply of goods and thereby have right to use the goods in providing service telephone connection, the Honble Court held that the nature of transaction involved in providing telephone connection may be a composite contract of service and sale and it was held that price of goods cannot be added to the value of service. In these circumstances, the adjudicating authority has rightly held that the scheme launched by the agent i.e. DAP club and DAP privilege scheme are not the part of taxable service of telephone connection provided by the respondent. In these circumstances, it is prayed that on this ground impugned order is to be upheld. It is further submitted that although, the respondent failed to make the payment of outstanding dues adjusted from security deposit of the subscriber to which on pointing out by the department and resulting their mistake, they paid entire amount of service tax along with interest. In these circumstances, there is no intention by the respondent not to pay service tax accordingly, the penalty on the respondent is not imposable. With these terms, it is prayed that the impugned order is required to be upheld.
7. Heard both sides and considered the submissions in detail.
8. We find that in this case the respondent is engaged in providing telephone connection services and the tariff plans were fixed by Telecom Regulatory Authority of India i.e. 14,400/-. They entered into an agreement with their agent M/s. RIL for marketing of their services namely telephone connection service. They allowed their agent to market this service along with another service for which the respondent was not receiving any consideration in any kind from their agent. We further find that the appellant is paying Rs.1440/- as commission to their agent for rendering business auxiliary service to the respondent on which service tax has been duly paid and adjudicated. In this case, in fact the respondent is receiving the service of their agent and is required to pay service tax on the services provided by agent to the respondent. We, further, find that the agent launched a scheme and as per scheme subscriber of respondent has to become a member of DAP club and the agent has floated scheme called DAPO scheme. The details of the scheme are as under:
While marketing the Tariff Plans in relation to the telephone connection services to be provided by the respondent, the agent of the respondent (i.e. M/s. RIL) was allowed to combine certain products, services and privileges offered by it. The agent introduced certain schemes while selling the services of the respondent. The subscribers of the respondent under those schemes had to become members of a club called Dhirubhai Ambani Pioneer Club (DAPC). The agent floated a scheme called Dhirubhai Ambani Pioneer Offer. There were two limbs of this scheme, namely, DAPO Normal and DAPO-Finance. The details of the Offer are as under :
(I) DAPO-Normal:- Customer pays Rs. 21,000/- upfront. The charges collected were for :-
i. Rs. 3,000/-as one time club membership charges.
ii. Rs. 14,400/- as rental & usage charges for telephone service (for 36 months @ Rs. 400/- P.M. Out of Rs. 400/-, Rs. 240/- were for rental charges and Rs. 160/- were for usage charges).
iii. Rs. 3,600/- as Club Privilege charges (36 months @ of Rs. 100/- p.m.).
(II) DAPO-Finance:- Customer pays Rs. 3,000/- upfront, as club membership charges and 12 postdated cheques, each of Rs. 1,800/- per quarter for three years (aggregating to Rs. 24,600/-) for following purposes:
i. Rs. 14,400/- as rental & usage charges for telephone service (for 36 months @ Rs. 400/- P.M. Out of Rs.
400/-, Rs. 240/- were for rental charges and Rs. 160/- were for usage charges).
ii. Rs. 3,600/- as Club Privilege charges (for 36 months @ of Rs. 100/- p.m.) iii. Rs. 3,600/- as Finance Charges (for 36 months @ of Rs. 100/- p.m.). On becoming a member of this scheme the subscriber will be entitled as under:
a. A sleek, feature rich digital handset (MRP Rs. 10,500/-) absolutely free or a colour screen handset (MRP Rs. 25,500/-) at a highly discounted rate of Rs. 15,000/- with 1 year warranty and 3 years insurance.
b. 400 minutes of outgoing calls per month @ 40 paise per minute.
c. Free incoming calls, free unlimited SMS, free CLIP & call waiting services.
d. Free subscription to R world.
e. Eligible to GSM handset exchange scheme.
f. 25% discounts on Web World membership.
g. Discount coupon worth Rs. 1,00,000/- on wide range of commonly used products and services. These scheme has neither provided by the respondent nor the respondent is responsible for the scheme as any remuneration towards the scheme were not received by the respondent. We, further examined the various provisions of the Finance Act and the Indian Telegraph Act, to deal with the issue which are heard as under:-
(I) As per Section 65(7), respondent means a person liable to pay the service tax and includes his agent.
(II) As per Section 65(105)(b), taxable service means any service provided or to be provided to a subscriber by the telegraph authority in relation to a telephone connection.
(III) As per Section 65(104), subscriber means a person to whom any service of a telephone connection or a facsimile (FAX) or a leased circuit or a pager or a telegraph or a telex has been provided by the telegraphic authority.
(IV) As per Section 65(111). telegraph authority has the meaning assigned to it in clause (6) of Section 3 of the Indian Telegraph Act, 1885 and includes a person who has been granted a licence under the first proviso to sub-section (1) of Section 4 of that Act.
From the above provisions, it is clear that for a service to be a taxable service under the category of telephone service, it would be any service provided to a subscriber by a telegraph authority in relation to a telephone connection. In other words, only such services which are provided by telegraph authority in relation to telephone connection is taxable service. The term telephone connection has neither defined in the Finance Act nor under Indian Telegraph Act. Therefore, the telephone connection would in common parlance means connecting two telephone apparatus so as to enable the caller to avail the speech transmission facility with desired person as per the decision of the Honble High Court of Karnataka in the case of N. Krishna Devaraya and others Vs. Union of India AIRI 1996 Kant 189. Therefore, any service provided to a subscriber by a telephone authority is taxable service under the ambit of service of telephone connection if that service enables telephone connection of two telephone apparatus so as to enable the caller to avail the speech transmission with the desired person. From the above discussion, it is very much clear that any service which has not been provided by telegraph authority and that have no relation ship with connecting telephone apparatus is not covered under telephone connection service. In this case allegation against the respondent is that through their agent, they have provided additional service such as club membership and pioneer offer. The Revenue wants to include the value of club membership and club privilege charges in the value of service relating to telephone connection.
8.1. For taxing any service under the category of telephone connection service, the service should have been provided by a telegraph authority to the subscribers in relation to telephone connection. All the goods and services provided by the agents of the respondent are the goods and services that have been provided by a person other than the telegraph authority, hence one of the conditions of the definition of service of telephone connection is not fulfilled. On this ground alone the attempt to include the value of club membership and club privileges gets defeated. Further, admission to DAP Club and collection of charges for the membership of the club cannot have any connection with the service of telephone connection. The question of supply of handsets to the members of the DAP Club and inclusion of its value in the value of the telephone connection service has been dealt by the Ld. Commissioner in the impugned order. We further find that providing of handset is supply of goods and value of the goods cannot be included in the value of the service. The club privileges have been listed out in the para 8 hereinabove. These privileges at points (d) to (g) on their very face have no connection with the service of telephone connection hence there is no question of including their value in the value of service relating to telephone connection. The privilege at point (b) is one relating to the service of the telephone connection but its value had always been included in the value of the service provided by the respondent. The agents of the respondent were remitting Rs.14,400/- per subscriber to the respondent. This amount was towards rent and usage charge of Rs. 400/- per month for 36 months. Out of the amount Rs.400/-, an amount of Rs.240/- was the rent of the service provided by the respondent and Rs. 160/- was towards the usage charges. Showing a paid service as a privilege of the DAP Club could at the worst be an alluring and illusory advertisement. Such an advertisement cannot change the real character of the service. The privilege at point (iii) free incoming calls, free unlimited SMS, free CLIP & call waiting service was also the part of Tariff Plan of the respondent. The agents of the respondent had shown it separately as a privilege of the DAP Club but it was part of the approved Tariff Plan of the respondent. The remedy against the deceptive advertisements is not under the Act.
8.2. Section 67 of the Act lays down the law relating to the valuation of taxable services for charging service tax. At the relevant time the main provisions of the said Section read as under:-
For the purposes of this Chapter, the value of any taxable service shall be the gross amount charged by a service provider for such service provided or to be provided by him.
The laws lays down that the value of the taxable service is the gross value charged for the service provided by the service provider.
8.3. The Marketing Agreement dated 26.12.2002 allowed the agents of the respondent to market the TRAI approved Tariff Plans of the respondent. The Agreement also permitted agents to bundle the Tariff Plans of the respondent with other products and services as the agents deemed fit and offer composite schemes to the subscribers. The agents were also allowed to collect the charges relating the Tariff Plans of the respondent. The agents were, however, not allowed to collect any amount from the subscribers for the services of the respondent other than the amount representing the amount of TRAI approved Tariff Plans of the respondent. The facts of the case clearly show the gross amount remitted by the agents of the respondent to the respondent in relation to the Tariff Plans of the respondent and value of club membership and club privileges charges retained by the agents of the respondent. There is no dispute that only the respondent are the service providers of the taxable service of telephone connection. According to the provisions of Section 67 of the Act only the gross amount charged by a service provider has to be taken as value of the taxable service. These notice proposes to include the value of the services and goods provided by the agents of the respondent in the taxable service of telephone connection on the ground that the term assessee includes his agent. Section 65(7) defines assessee, as person liable to pay service tax and includes his agent. The terms assessee, has not been defined as person providing service. The service provider and person liable to pay service tax could be different persons. Any proposal to include the value of the services of the agents of an assessee into the value of a taxable service, only on the ground that the term assessee includes the agents of an respondent shall definitely violate the language of Section 67 of the Act.
8.4. The Honble Supreme Court of India in the case of M/s. BSNL Vs. Union of India, 2006 (2) STR 161 (SC) has examined the nature of transactions involved in providing telephone connection. After examining the contentions of both sides, the Honble Court formulated five questions in paragraph 30 of the judgment which are reproduced below:
30. These broadly speaking are the respective contentions and in or opinion, the issues which arise for consideration in these matters are :-
(A) what are goods in telecommunication for the purposes of Article 366 (29A) (d)?
(B) is there any transfer of any right to use any goods by providing access or telephone connection by the telephone service provider to a subscriber?
(C) is the nature of the transaction involved in providing telephone connection a composite contract of service and sale? If so, is it possible for the states to tax the sale element?
(D) if the providing of a telephone connection involves sale, is such sale an inter state one?
(E) Would the aspect theory be applicable to the transaction enabling the States to levy sales tax on the same transaction in respect of which the Union Government levies service tax.
Thereafter the Honble Court examined the provisions of the law and various judicial pronouncements on these questions and in paragraph 85 has given the following answers to the aforesaid five questions.
85. For the reasons aforesaid, we answer the questions formulated by us earlier in the following manner:
(A) Goods do not include electromagnetic waves or radio frequencies for the purpose of Article 366 (29A) (d). The goods in telecommunication are limited to the handsets supplied by the service provider. As far as the SIM cards are concerned, the issue is left for determination by the assessing officer.
(B) There may be a transfer of right to use goods as defined in answer to the previous question by giving a telephone connection.
(C) The nature of the transaction involved in providing the telephone connection may be a composite contract of service and sale. It is possible for the States to tax the sale element provided there is discernible sale and only to the extent relatable to such sale.
(D) The issue is left answered.
(E) The aspect theory would not apply to enable the value of the services to be included in the sale of goods or the price of the goods in the value of the services.
8.5. The Honble Apex Court has, made clear that providing of handset by a service provider in telecommunication service is supply of goods and there may be transfer of right to use the goods in providing the service telephone connection. Further, the Honble Apex Court has held the nature of transactions involved in providing the telephone connection may be a composite contract of services and sales. The Honble Apex Court also held that it is possible for the States of Union of India to tax the sale element provided there is discernible sale. Therefore, it was held that price of the goods cannot be added to the value of services.
8.6. The service relating to providing of the service of telephone connection is not only a transaction for providing a service but also involves sale of goods. The service of providing telephone connection is complete only when there is successful completion of installation and commission of certain tangible goods and flow of electromagnetic waves or radio frequencies through the telecommunication equipment including the handset which may have been provided by the service provider. There is nothing in the Notice or the documents relied upon the right to use the handset was not transferred to the subscribers. In paragraph 13.2 of the notice the allegation is that the transaction entered between the agents of the respondent and the subscribers of the respondent was with ulterior motive to camouflage the supply of handsets to the subscribers for commercial considerations despite the averments made to the subscribers that the handsets were being offered free of cost. The goods sold for commercial consideration are sold with the intention to transfer the right to use the goods. Any option given to the buyer to resell used goods to the seller on predetermined conditions in no way militates against the transfer the right to use the goods. In this case, the handsets were sold to the subscribers under various schemes deviced by the agents of the respondent . There was also transfer of right to use the goods. There is no doubt that the service of telephone connection cannot be availed by the subscribers unless they have handsets that are compatible with the service being provided by the service providers. It makes no difference if the handset is of landline connection or GSM service or CDMA service. The handset has to be compatible with the service being provided by the service provider. Simply because a handset is specifically designed to receive services from a particular service provider would not make it a part of the service rather than the goods involved in a composite transaction in providing the telephone connection. This is more so when the value of such handset is clearly distinguishable from the value of the service of telephone connection being provided by the service provider. The products and services sold by the agents at the time of the marketing the Tariff Plans of the respondent distinguishably showed the value of the Tariff Plans of the respondent and the value of other products and services of the agents. It is not the allegation in the Notice that the value of the telephone is not ascertainable. On the contrary, the allegation is that the handset is so designed that without it the service provided by the respondent could not have been be availed by their subscribers. The value of the telephone handset is discernable in this case and the sale tax has also been levied on such transactions. Inadequacy of the value on which the sale tax has been imposed cannot be the ground for inclusion of the value of goods in the value of the service.
8.7. It has been alleged in the Notice that supply of handset to the subscribers is merely incidental to the service being provided by the respondent hence as per the ratio of the decision of the Honble Supreme Court in the case of M/s. Bharat Sanchar Nigam Limited (supra) the value of the handset be included in the in value of the service provided by the respondent. It has also been alleged that the transaction cannot be vivisected to the advantage of the respondent and their agents when they have consciously taken the decision to provide the subscribers with free of cost handsets.
8.8. The conclusions reached by the Honble Supreme Court in the case of M/s. BSNL (supra) is that Providing of handset in telecommunication service is supply of goods. There is a transfer of right to use goods in the transaction of providing the telephone connection service. If the sale of goods is discernible, sales tax can be levied on such sale. It has also been held that the aspect theory cannot be applied to include the price of the goods in the value of the goods. The sale of goods is discernible in this case and goods have been assessed to sale tax in this case. The inference drawn in the respondnet about the ratio of the decision in the case of Bharat Sanchar Nigam Limited is fallacious.
8.9. The Honble Apex Court has also observed that the transaction relating to the providing of telephone connection can be a composite contract of service and sale. It has already been mentioned that there is a discernible sale in this case. If there is discernible sale, the transaction is vivisectable. The vivisectable nature of the contract is not determinable at the discretion of revenue authorities but is determinable by the terms of the contract under examination. The following ruling of the honourable Supreme Court in the case of State of Madras Vs. Gannon Dunkerley & Co. (Madras) Ltd. [1958] 9 STC 353 (SC), expounds the law on the issue.
It is possible that the parties might enter into distinct and separate contracts, one for the transfer of materials for money consideration and the other for of remuneration for services and for work done. In such a case, there are really two agreements, though there is a single instrument embodying them and the power of the State to separate the agreement to sell from the agreement to do work and render service and to impose tax there on cannot be questioned and would stand untouched by the instance judgment.
In the present case, under a single contact the services to be provided by the respondent have been sold along with the products and services of the agents. The value of the services of the respondent on the one hand and the value of the services and the goods sold by the agents on the other hand are distinguishable. Service tax has been paid on the value of the services of the respondent. The value of the services of the agents and the value of the goods supplied is also distinctly discernible from the transaction. The agents have paid sale tax on the value declared by them in relation to the supply of goods. The remaining amounts are either for collection charges for financing of the scheme or for the privileges or services provided to the members of the DAP Club. In such a scenario, it is not correct to say that the transactions under which the agents sold the Tariff Plans along with their own goods and services cannot be vivisected and the entire value of such goods and services be added to the value of the services of the respondent. 8.10. From the above said observation, which are similar to the observation made by the adjudicating authority, in the impugned order we do not find that any infirmity with the same. Therefore, we do not want to interfere with the impugned order to the findings of the adjudicating authority . Accordingly we hold that respondent are not liable to include the value of club membership and club privilege charges in the taxable service relating to telephone connection service.
9. In this case the another issue is that whether the respondents are liable to pay penalty on account of due service tax collected from the subscriber on fixed wireless service by way of adjustment from the security deposits.
9.1. We find that when this mistake was pointed out to the respondent, the respondent immediately paid the entire amount of service tax along with interest. We further find that in the case of CCE & ST., LTU, Bangalore Vs. Adecco Flexione Workforce Solutions Ltd. reported in 2012 (26) STR 3 (Kar.), The Honble Karnataka High Court observed as under :
2.?Facts are not in dispute. The respondent has paid both the service tax and interest for delayed payments before issue of show cause notice under the Act. Sub-sec. (3) of Section 73 of the Finance Act, 1994 categorically states, after the payment of service tax and interest is made and the said information is furnished to the authorities, then the authorities shall not serve any notice under sub-sec. (1) in respect of the amount so paid. Therefore, authorities have no authority to initiate proceedings for recovery of penalty under Sec. 76 of the Act.
3.?Unfortunately the assessing authority as well as the appellate authority seem to think. If an respondent does not pay the tax within the stipulated time and regularly pays tax after the due date with interest. It is something which is not pardonable in law. Though the law does not say so, authorities working under the law seem to think otherwise and thus they are wasting that valuable time in proceeding against persons who are paying service tax with interest promptly. They are paid salary to act in accordance with law and to initiate proceedings against defaulters who have not paid service tax and interest in spite of service of notice calling upon them to make payment and certainly not to harass and initiate proceedings against persons who are paying tax with interest for delayed payment. It is high time, the authorities will change their attitude towards these tax payers, understanding the object with which this enactment is passed and also keep in mind the express provision as contained in sub-sec. (3) of Sec. 73. The Parliament has expressly stated that against persons who have paid tax with interest, no notice shall be served. If notices are issued contrary to the said Section, the person to be punished is the person who has issued notice and not the person to whom it is issued. We take that, in ignorance of law, the authorities are indulging in the extravaganza and wasting their precious time and also the time of the Tribunal and this Court. It is high time that the authorities shall issue appropriate directions to see that such tax payers are not harassed. If such instances are noticed by this Court hereafter, certainly it will be a case for taking proper action against those law breakers.
4.?In that view of the matter, we do not see any merit in these appeals. The appeals are dismissed. Therefore, following the decision of the Honble Karnataka High Court cited hereinabove, we hold that as entire amount of service tax and interest has been paid by the respondent before issuance of the show cause notice on pointing out by the revenue, the penalty are not imposable.
10. With these terms, we do not find any infirmity in the impugned order same is upheld. Appeal filed by the Revenue is dismissed.
(Pronounced court on /2014)
(P. S. Pruthi)
Member (Technical)
(Ashok Jindal)
Member (Judicial)
Sm
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