By TIOL News Service

MUMBAI, DEC 23, 2014: THIS is a Revenue appeal against the order passed by the CST, Mumbai dropping the Service Tax demands raised in the SCN.

The facts are that the respondents are engaged in providing telephone connection service. They 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.

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.

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.

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, paid service tax on the said amount during the period March, 2003 to March, 2004.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.

The DGCEI dialled the respondent and consequently a SCN dt. 12/07/2007 came to be issued seeking to recover service tax amounting to Rs.69,14,87,724/- for the period March, 2003 to March, 2004towards '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 CST, Mumbai termed the DGCEI call as a wrong number and 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.

However, he held that the respondent is liable to pay the ST of Rs.70,76,975/- on account of fixed wireless services; the amount paid along with interest of Rs.6,81,661/- was appropriated. He refrained from imposing any penalty on the ground that the respondent had no mala fide intention to evade any tax.

The DGCEI is not amused and, therefore, the Department is in appeal before the CESTAT.

The services of a Special Counsel were requisitioned by the department for fighting the 69 crore case.

After considering the elaborate submissions made by both sides the Bench observed as below -

+ 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/-.

+ We further find that the appellant is paying Rs.14,400/- 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, infact 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.

++ These schemes (Dhirubhai Ambani Pioneer Offer, DAPO-Normal & DAPO-Finance) have neither been provided by the respondent nor is the respondent responsible for the scheme as any remuneration towards the scheme were not received by the respondent.

++ From the provisions (of s.65 defining the terms 'respondent', 'taxable service', 'subscriber', 'telegraph authority), 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.

++ Therefore, any service provided to a subscriber by a telephone authority is taxable services 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. It is very much clear that any service which has not been provided by telegraph authority and that have no relationship with connecting telephone apparatus is not covered under telephone connection service.

++ 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.

++ 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' 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.

++ 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 of 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.

++ The law(s.67 of FA, 1994) lays down that the value of the taxable service is the gross value charged for the service provided by the service provider.

++ 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 service as the agent deemed fit and offer composite schemes to the subscribers. The agents were also allowed to collect the charges relating to 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.

++ There is no dispute that only the respondents 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. The 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 the respondent shall definitely violate the language of Section 67 of the Act .

++ The Apex Court has in Bharat Sanchar Nigam Ltd. - 2006-TIOL-15-SC-CT-LB 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; that price of the goods cannot be added to the value of services. The inference drawn by Revenue about the ratio of the decision in the case of Bharat Sanchar Nigam Limited is fallacious.

++ 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 ruling of the Supreme Court in the case of State of Madras Vs. Gannon Dunkerley& Co. (Madras) Ltd. - 2002-TIOL-493-SC-CT-LB expounds the law on the issue.

Holding that there is no infirmity in the order passed by the CST, the Bench held that the respondents are not liable to include the value of club membership and club privilege charges in the taxable service relating to telephone connection service.

On the second ground raised in the Revenue appeal regarding imposition of penalty on account of non-payment of service tax on outstanding dues adjusted from security deposits of subscribers, the CESTAT observed that when this mistake was pointed out to the respondent, they immediately paid the same with interest before issuance of SCN and in view of the Karnataka High Court decision in Adecco Flexione Workforce Solutions Ltd. - 2011-TIOL-635-HC-KAR-ST, penalty is not imposable.

The appeal filed by the Revenue was dismissed.

(See 2014-TIOL-2601-CESTAT-MUM)