By TIOL News Service

MUMBAI, SEPT 28, 2014: THE issues before the Bench are - Whether airtime charges and license fees charged to customers who have purchased pager devices from the assessee can be considered as part of such sales price and whether sales tax can be restricted only to the sales transaction of hardware and not to the services attached to it. And the verdict goes in favour of the assessee.

Facts of the case

The assessee is a registered dealer under Bombay Sales Tax Act, 1959 having its registered office in the State of Karnataka, Bengaluru. The assessee is an importer and reseller of hardware in general and radio pagers in particular. The assessee used to charge airtime charges and license fees from its customers, besides the price of the radio pagers. However, the general turnover of sales was determined including tax collection and collection of other charges such as license fees, airtime charges and service tax. It was the contention of the Revenue that the dealer could not explain the difference between the sales as per annual returns and sales disclosed in the statement. During the course of verification of the sales bills the applicant found that the dealer had charged separately for pagers with Sales tax and separate charges were levied for license fees and airtime charges with service tax. The Revenue noted that no sales tax was collected from the customers on the account of license fees and airtime charges, which also constitutes a part of the gross sales consideration. The Revenue proceeded on the argument that it is immaterial to enquire as to how the amount of consideration is made up, whether it included excise duty or sales tax or freight. The only relevant fact to be ascertained is as to what amount is payable by the purchaser to the dealer as consideration for the sale. On appeal before the Commissioner of Sales Tax (A), the assessee received partial relief as the quantum of tax was reduced. However, on further appeal, the Sales Tax Tribunal held that such airtime charges and license fees did not constitute a part of the sales consideration. Hence aggrieved, the present application was moved by the Revenue before the High Court.

The counsel of the assessee submitted that there were distinct agreements for airtime charges and license fees and one should not include them in the sales price of the pagers, which is a standalone transaction covered by a distinct agreement.

However, the DR contended that there cannot be separate agreement for each of them and the pager is of no use if it is not equipped with the facility of service. Once the pager is sold, the purchaser becomes a permanent customer for future service. Later on the purchaser pays only for service

Having heard the parties, the High Court held that,

++ when a subscriber purchased pager unit it would be of no use to him unless there was corresponding paging service. The Respondent dealer was running such services and it was but natural that the subscriber would enroll for the pager service. The airtime charges was thus collected as part of the service. The license fees in question could be two fold, i.e. license fees payable by the Respondent dealer to the Competent Authorities or the pro-rata license fees payable by the subscriber in order to avail of the paging service. The cost of the hardware is thus separate from the cost of airtime and the cost of license fees;

++ if after purchasing the pager, the subscriber were to lose pager after paying airtime costs and license fees in order to continue to avail of services, the subscriber would need to purchase new pager unit. When he does so, the consideration charged would only be the cost of the pager unit and would not include the cost of license fees or airtime charges. This would establish that the sale price of the pager would not include license fees or airtime charges. We are therefore unable to agree with Mr. Sonpal and even without the concessions that he has made, we are of the view that airtime charges and license fees cannot form part of the expression "Sale Price";

++ in the case of Imagic Creative Pvt. Ltd. the Supreme Court found that those who provide service i.e. service providers, are assessable to the service tax and a distinction can be made in between an indivisible contract and a composite contract. The purport and object for which the constitution had to be amended and clause (29A) had to be inserted in Article 366, must be borne in mind;

++ furthermore, it may be noticed that in Sales Tax Appeal No.5 of 2011 a Division Bench of this Court had an occasion to consider whether the Maharashtra Sales Tax Tribunal was correct in setting aside the tax on the handling charges or service charges for registration of motor-cycles and interest thereon. It is held that the goods which form part of the subject matter of the contract between the Respondent and its buyer were in a specific and deliverable state. The transfer of property in the goods in pursuance of the sale contract takes place against the payment of the price of goods. In conclusion, therefore, we are of the opinion that sale price in the facts of the present case will be restricted to that of the hardware, namely, pager units and will not include the cost of airtime and license fees.

(See 2014-TIOL-1697-HC-MUM-CT)