CASE NO.:
Writ Petition (civil) 183 of 2003
PETITIONER:
Bharat Sanchar Nigam Ltd. & Anr.
RESPONDENT:
Union of India & Ors.
DATE OF JUDGMENT: 02/03/2006
BENCH:
Ruma Pal & Dalveer Bhandari
JUDGMENT:
J U D G M E N T
WITH
CA.N.2408/2002,3329-30/02
WP (C) NOS.227,223, 372, 450/03,468/05
C.A.Nos.5337-38/01,4278-88/02, WP.(C) No.144-45/04
WP (C) No.149/04, 162/05, CA Nos.6323-25/99, 2517-
18/04, 3086/04, 2471/05
RUMA PAL, J.
The principal question to be decided in these matters
is the nature of the transaction by which mobile phone
connections are enjoyed. Is it a sale or is it a service or is it
both? If it is a sale then the States are legislatively
competent to levy sales tax on the transaction under Entry
54 List II of the Seventh Schedule to the Constitution. If it
is a service then the Central Government alone can levy
service tax under Entry 97 of List I (or Entry 92C of List I
after 2003). And if the nature of the transaction partakes of
the character of both sale and service, then the moot
question would be whether both legislative authorities could
levy their separate taxes together or only one of them.
The contenders are the service providers on the one
hand and the States on the other. It is the case of the
service providers (who are for the purposes of convenience
referred to in this judgment as petitioners irrespective of
the capacity in which they are arraigned in the several
matters before us) that there is no sale transaction involved
and that the attempt of the several States to levy tax on the
provision of mobile phone facilities by them to subscribers
was constitutionally incompetent. It is their case that the
transaction in question was merely a service and that the
Union Government alone was competent to levy tax thereon.
They are supported in their stand by the Union
Government.
The States (who are correspondingly referred to as
the respondents) contention is that the transaction was a
deemed sale under Article 366 (29A)(d) of the Constitution
read with the charging sections in their various sales tax
enactments and therefore they are competent to levy sales
tax on the transactions. These are the contentions which
are only briefly indicated at this stage to introduce the
circumstances under which the issue has been raised
before us.
The High Courts of Allahabad , Andhra Pradesh , and
Punjab & Haryana all held that there was no sale of goods
under the State Sales Tax Acts justifying the levy of sales
tax on rentals charged by service providers to its
subscribers. All three decisions were overruled by this
Court in State of U.P. vs. Union of India (2003) 3 SCC
239. In the meanwhile the High Court of Kerala took a
different view from the view expressed by the High Courts of
Allahabad, Andhra Pradesh and Punjab & Haryana in
Escotel Mobile Communications vs. Union of India
(2002) 126 STC 475 (Ker.) The Division Bench of the
Kerala High Court considered a situation where the State
Sales Tax Authorities sought to include the value of
activation charges in the sale price of the SIM (Subscribers
Identification Module) Card on the sale of which sales tax
was admittedly payable and had been paid. At the same
time the Central Government sought to include the cost of
the SIM Card in the service tax which was also admittedly
payable and had been paid by the service provider for the
service of activation of the SIM Card. The High Court held
that the transaction of sale of a SIM Card included its
activation and that therefore the activation charges formed
part of the consideration and could be subjected to sales tax
under the Kerala General Sales Tax Act. At the same time
the selling of the SIM Card and the process of activation
were both services provided by the Mobile Cellular
Telephone Companies to the subscribers and fell within the
definition of taxable services as defined in sections 65(72)(b)
of the Finance Act, 1994. In other words the Kerala High
Court answered all three questions framed by us in the
opening paragraph of this judgment, in the affirmative and
in favour of the Revenue.
The service providers who were the writ petitioners
before the Kerala High Court have questioned the
correctness of the decision in appeals filed by them which
are also disposed of by this judgment. Most of the other
petitioners have however approached this Court by way of
writ petitions under Article 32. When the Civil Appeals and
writ petitions were listed before two learned Judges, an
order was passed on 25th September, 2003 referring the
matter to a larger Bench as the nature of the questions
raised is important.
The State respondents have raised a preliminary
objection and contended that the plea of BSNL and the
other petitioners including the Union of India is barred by
res judicata because the issue has been decided by this
Court inter partes in State of U.P. vs. Union of India :
(2003) 3 SCC 239 .
The plea has been resisted by the petitioners on three
grounds viz., (i) that the issue of the legislative competence
of States to impose sales tax under Entry 54 of List II on
transactions which are purely rendition of services, was not
raised in that case. (ii) that the decision was without
jurisdiction because of Article 131 of the Constitution, and
(iii) that every assessment year gave rise to a fresh cause of
action. According to the petitioners in any event the
decision requires reconsideration.
In State of U.P. v. Union of India and Anr. the two
learned Judges of this Court had construed the definition of
business, dealer, goods and sale under Sections 2(aa),
(c), (d) and (h) of the U.P. Trade Tax Act respectively to come
to the conclusion that the DoT was a dealer under the U.P.
Act. This Court also held that a telephone communication
and other accessories which gave access to the telephone
exchange with or without instruments were goods and that
transferring the right to use the telephone
instrument/apparatus and the whole system fell within the
extended meaning of sale under clause (h) of Section 2 of
the U.P. Act.
A consideration of the correctness of this conclusion
would arise only if we reject the preliminary objection of the
State of U.P. that we are precluded from reopening the
issues so concluded by reason of the principles of res
judicata. Several decisions have been cited in support of
their contention.
In Amalgamated Coalfields Ltd., Vs. Janapada
Sabha 1962 (1) SCR 10 tax was claimed in respect of coal
by the respondents therein. Notices of demand were sent to
the appellant. The validity of these notices was challenged
by the appellant by filing a writ petition before this Court.
The writ petition was dismissed and it was held that the
notices served on the appellant were valid. Notices of
demand were again served on the appellant in respect of a
subsequent period. The appellant filed another writ petition
this time before the High Court, challenging the validity of
these notices. The High Court held that the appellants
claims were barred by res judicata by reason of the earlier
decision of this Court. Challenging the decision of the High
Court the appellants approached this Court under Article
136. In Amalgamated Coalfields Ltd., Vs. Janapada
Sabha (1963) Supp.1 SCR 172 (referred to hereafter as
Amalgamated Coalfields No.(2)), the issue was whether the
doctrine of res judicata applied to writ petitions filed under
Article 226 or to petitions under Article 32. The Court
noted that the judicial view was that even petitions filed
under Article 32 were subject to the general principle of res
judicata. The Court then considered whether the principle
would apply to tax cases when the earlier decision was in
respect of a different period and said:-
In a sense, the liability to pay tax from year to
year is a separate and distinct liability; it is
based on a different cause of action from year to
year, and if any points of fact or law are
considered in determining the liability for a given
year, they can generally be deemed to have been
considered and decided in a collateral and
incidental way.
After considering various earlier authorities on the
issue, it was held that:-
If for instance, the validity of a taxing statute is
impeached by an assessee who is called upon to
pay a tax for a particular year and the matter is
taken to the High Court or brought before this
Court and it is held that the taxing statute is
valid, it may not be easy to hold that the decision
on this basic and material issue would not
operate as res judicata against the assessee for a
subsequent year. That, however, is a matter on
which it is unnecessary for us to pronounce a
definite opinion in the present case. In this
connection, it would be relevant to add that even
if a direct decision of this Court on a point of law
does not operate as res judicata in a dispute for
a subsequent year, such a decision would, under
Art. 141, have a binding effect not only on the
parties to it, but also on all courts in India as a
precedent in which the law is declared by this
Court. The question about the applicability of res
judicata to such a decision would thus be a
matter of merely academic significance.
(Emphasis ours)
After refraining from expressing any final opinion on
the applicability of res judicata to assessment orders for
successive years, the Court was quite unequivocal in
expressing an opinion on the applicability of the principles
of constructive res judicata.
In our opinion, constructive res judicata which is
a special and artificial form of res judicata
enacted by S. 11 of the Civil Procedure Code
should not generally be applied to writ petitions
filed under Art.32 or Art.226. We would be
reluctant to apply this principle to the present
appeals all the more because we are dealing with
cases where the impugned tax liability is for
different years.
It was held that in any event:
.the appellants cannot be precluded from
raising the new contentions on which their
challenge against the validity of the notices is
based.
The question in M/s. Radhasoami Satsang Vs.
Commissioner of Income Tax 1992(1) SCC 659 (also
cited by the State of U.P.) was whether the Tribunal was
bound by an earlier decision in respect of an earlier
assessment year that the income derived by the
Radhasoami Satsang, a religious institution, was entitled to
exemption under Sections 11 and 12 of the Income Tax Act,
1961. The Court said:-
We are aware of the fact that strictly speaking
res judicata does not apply to income tax
proceedings. Again, each assessment year being
a unit, what is decided in one year may not apply
in the following year but where a fundamental
aspect permeating through the different
assessment years has been found as a fact one
way or the other and parties have allowed that
position to be sustained by not challenging the
order, it would not be at all appropriate to allow
the position to be changed in a subsequent year,
unless there was any material change justifying
the Revenue to take a different view of the
matter.
Amalgamated Coalfields case No.2 (supra) was
distinguished in the case of Devi Lal Modi Vs. Sales Tax
Officer 1965 (1) SCR 86 in which the challenge was to
assessment proceedings under the Madhya Bharat Sales
Tax Act, 1950. The writ petition was dismissed by the High
Court. The special leave petition was also dismissed. The
same order of assessment was challenged by filing a second
writ petition before the High Court. This was also
dismissed by the High Court. The question, before this
Court was whether it was open to the appellant to challenge
the validity of the same order of assessment twice by two
consecutive writ petitions under Article 226. The Court
acknowledged that in regard to the orders of assessment for
different years, the position may be different and said:-
Even if the said orders are passed under the
same provisions of law, it may theoretically be
open to the party to contend that the liability
being recurring from year to year, the cause of
action is not the same; and so, even if a citizens
petition challenging the order of assessment
passed against him for one year is rejected, it
may be open to him to challenge a similar
assessment order passed for the next year. In
that case, the court may ultimately adopt the
same view which had been adopted on the earlier
occasion; but if a new ground is urged, the court
may have to consider it on the merits, because,
strictly speaking the principle of res judicata may
not apply to such a case. That, in fact, is the
effect of the decision of this Court in the
Amalgamated Coalfields Ltd. and Anr. V. The
Janapada Sabha, Chhindwara (1963) Supp.1
SCR.172..In our opinion, the said
general observations must be read in the light of
the important fact that the order which was
challenged in the second writ petition was in
relation to a different period and not for the same
period as was covered by the earlier petition.
But as far as a challenge to the same assessment
order is concerned, it was held:-
that if constructive res judicata is not applied to
such proceedings a party can file as many writ
petitions as he likes and take one or two points
every time. That clearly is opposed to
considerations of public policy on which res
judicata is based and would mean harassment
and hardship to the opponent. Besides, if such a
course is allowed to be adopted, the doctrine of
finality of judgments pronounced by this Court
would also be materially affected. We are,
therefore, satisfied that the second writ petition
filed by the appellant in the present case is
barred by constructive res judicata.
Rupa Ashok Hurra vs. Ashok Hurra (2002) 4 SCC
388 considered whether this Court can set aside its earlier
decision inter partes under Article 32. In paragraph 14, the
Court said:
On the analysis of the ratio laid down in the
aforementioned cases, we reaffirm our considered
view that a final judgment/order passed by this
Court cannot be assailed in an application under
Article 32 of the
Constitution of India by an aggrieved person,
whether he was a party to the case or not.
Nevertheless, we think that a petitioner is entitled
to relief ex debito justitiae if he establishes (1)
violation of the principles of natural justice in that
he was not a party to the lis but the judgment
adversely affected his interests or, if he was a
party to the lis, he was not served with notice of
the proceedings and the matter proceeded as if he
had notice, and (2) where in the proceedings a
learned Judge failed to disclose his connection
with the subject-matter or the parties giving scope
for an apprehension of bias and the judgment
adversely affects the petitioner.
To a similar effect is the case of Junior Telecom
Officers Forum and Ors. vs. Union of India & Ors (1993)
Supp. 4 SCC 693 where the appellants had intervened in
earlier proceedings. After the controversy was decided in
those proceedings the appellants sought to reagitate the
same issues in respect of the same matter contending that
they had no opportunity of being heard. The submission
was rejected and it was held that the second round was
impermissible.
The decisions cited have uniformly held that res
judicata does not apply in matters pertaining to tax for
different assessment years because res judicata applies to
debar Courts from entertaining issues on the same cause of
action whereas the cause of action for each assessment year
is distinct. The Courts will generally adopt an earlier
pronouncement of the law or a conclusion of fact unless
there is a new ground urged or a material change in the
factual position. The reason why Courts have held parties to
the opinion expressed in a decision in one assessment year
to the same opinion in a subsequent year is not because of
any principle of res judicata but because of the theory of
precedent or the precedential value of the earlier
pronouncement. Where facts and law in a subsequent
assessment year are the same, no authority whether quasi
judicial or judicial can generally be permitted to take a
different view. This mandate is subject only to the usual
gateways of distinguishing the earlier decision or where the
earlier decision is per incuriam. However, these are fetters
only on a coordinate bench which, failing the possibility of
availing of either of these gateways, may yet differ with the
view expressed and refer the matter to a bench of superior
strength or in some cases to a bench of superior
jurisdiction.
In our opinion, the preliminary objection raised by the
State of U.P. therefore, rests on a faulty premise. The
contention of the petitioners/appellants in these matters is
not that the decision in State of U.P. vs. U.O.I (supra) for
that assessment year should be set aside, but that it should
be overruled as an authority or precedent. Therefore, the
decisions in Devi Lal Modi vs. Sales Tax Officer (supra)
and in Hurra vs Hurra (supra) are not germane.
A decision can be set aside in the same lis on a prayer
for review or an application for recall or Under Art. 32 in the
peculiar circumstances mentioned in Hurra vs. Hurra. As
we have said overruling of a decision takes place in a
subsequent lis where the precedential value of the decision
is called in question. No one can dispute that in our
judicial system it is open to a Court of superior jurisdiction
or strength before which a decision of a Bench of lower
strength is cited as an authority, to overrule it. This
overruling would not operate to upset the binding nature of
the decision on the parties to an earlier lis in that lis, for
whom the principle of res judicata would continue to
operate. But in tax cases relating to a subsequent year
involving the same issue as an earlier year, the court can
differ from the view expressed if the case is distinguishable
or per incuriam. The decision in State of U.P. vs. Union of
India related to the year 1988. Admittedly, the present
dispute relates to a subsequent period. Here a coordinate
Bench has referred the matter to a Larger Bench. This
Bench being of superior strength, we can, if we so find,
declare that the earlier decision does not represent the law.
None of the decisions cited by the State of U.P. are
authorities for the proposition that we cannot, in the
circumstances of this case, do so. This preliminary
objection of the State of U.P. is therefore rejected.
Coming now to the merits of the case, the petitioners
contended that the service providers are licencees under
Section 4 of the Telegraph Act, 1885 and provide
telecommunication services as provided under Section 2(k)
under the Telecom Regulatory Authority of India Act, 1997.
Service tax is imposed on them under the Finance Act, 1994
on the basis of the tariff realised from the subscribers.
They further contended that in providing such service there
is in fact no sales effected by the service providers and that
the States do not have the legislative competence to impose
sales tax on the rendition of telecommunication services.
Article 366 (29A) which extended the definition of sale in
the Constitution did not apply to the transaction in
question. Clause (d) of Article 366(29-A) relied upon by the
respondents contemplates a transfer of a legal right to use
goods. According to the petitioners there is no transfer of
any legal right by the service providers nor any delivery of
any goods which may be covered under the Telegraph Act,
1885 as the same is barred and prohibited in terms of the
licence granted to service providers under Section 4 of that
Act. It is submitted without a delivery of goods, there could
be no transfer of any right to use those goods as
contemplated under Article 366(29-A)(d). It is the
petitioners case that the decision in State of U.P. Vs.
Union of India (supra) was erroneous not only because it
held that the telephone connection and all other accessories
which gives access to the telephone exchange with or
without instruments are goods but also because there was
in fact no transfer of any of these equipment to a
subscriber. The predominant element and intention in the
transaction was one of service and not of sale. It is
submitted that taxing telecommunication services as a
deemed sale under Entry 54 of List II would be violative of
Article 286 of the Constitution as the same involves
connecting subscribers throughout the territories of India
without any regard to State boundaries.
On the interpretation of Article 366(29A) it was
submitted that the fiction in one clause could not be read in
to the other. It is said that the disintegration of composite
transactions has to be specifically enabled by the
Constitution and that it was not within the competence of
State legislation to divide a composite transaction
otherwise. It is also submitted that the language of clause
(d) was distinct from the language used in clause (b) of
Clause 29A of Article 366. Our attention was drawn to the
absence of the use of the word involved in the former sub
clause. It is emphasized that there must be goods of which
the right to transfer is covered by sub clause (d) of clause
29A of Article 366. It is contended that there was no
transfer of any right to use any goods and the parties never
intended for such transfer. It is submitted that the court
should apply the standard of the ordinary man for deciding
whether the transaction in question was a contract for
service or for transfer of a right to use deemed goods. The
obligation of the service provider is merely to transmit voice
and the subscriber was not interested in stipulating as to
how the voice/data is to be conveyed to the other end. It is
for the service provider to choose the medium as it thinks
fit. The SIM card was not goods it merely enables
activation.
According to the petitioners prior to the 46th
amendment composite contracts were not exigible to States
sales tax under Entry 54, List II. The legal fiction created in
Article 366(29A) provided for specific composite contracts to
be subjected to sales tax. Therefore, even after the 46th
amendment other transactions had been held not to be
sales. Reliance has been placed on the Everest Copiers vs.
State of Tamil Nadu (1996) 5 SCC 390, Rainbow vs,
State of Madhya Pradesh (2000) 2 SCC 385 and
Hindustan Aeronautics vs. State of Karnataka (1984) 1
SCC 707. It was contended in addition that the restrictions
regarding the States inability to tax interstate sales would
continue to apply. Furthermore, the activity of providing
the connection involved the use of instruments embedded to
the earth or attached to what is embedded in the earth and
therefore was immoveable property and outside the scope of
sales tax. Thus there were no goods nor any transfer of any
goods involved in the activity.
It is pointed out that none of the States could contend
that telecommunication was not a service. It was submitted
that the service did not allow for transfer of right to use
goods. There was no transfer of control or equipments at
any stage. It is submitted that what the service providers
provide was a means of communication and what was
transferred was the sounds of the message or signals which
were generated by the subscribers themselves. It is further
submitted that the SIM card was merely an identification
device for granting access and was a means to access
services.
The service providers in the appeal from the decision of
Kerala High Court have submitted that the High Court had
not appreciated the facts . The service providers had
imported the SIM cards and sold them to franchises who
then sold them to the subscribers. It is submitted that the
authorities had wrongly proceeded on the basis that there
was a sale of SIM cards by the service providers to the
subscribers. It is pointed out that the sale was factually
and legally distinct from the activity of giving the connection
or activation of the SIM cards. The decision of the Kerala
High Court has also been impugned on the ground that it
overlooked inter alia questions of competence raised by the
petitioners, the explanation to the definition of turnover as
well as the ratio of Gannon Dunkerley and misapplied the
aspect theory.
As we have noted earlier, the Union of India has
supported the service providers and contended that the
transaction in question was only service.
It has been argued on behalf of the State of Uttar
Pradesh that the writ petition had been filed by BSNL
challenging Sections 2(h) and 3F of the U.P. Trade Tax Act,
1948. The challenge was expressly given up and therefore
the petition was not maintainable. It was also submitted
that there were different factual scenarios as a result of
which the possible outcome of a particular assessment
could not be predicted and it was not appropriate to
intervene under Article 32. According to the State, no
fundamental right was allegedly infringed. It is contended
that the Central Government has the exclusive monopoly
over telegraphs under the Telegraph Act, 1985. A
telegraph as defined in that Act would cover the
transactions in question. In granting permission to the
service providers by the issue of licence, there was transfer
of the right to use the telegraph which right was further
given to the subscribers in a transaction which would be
covered by Article 366(29A)(d). On the interpretation of
Article 366(29A) it has been submitted that prior to the
introduction of 92C in List I, the residuary entry could not
be relied upon in view of the specific entry in Entry 54 of
List II. It has been submitted inter alia that delivery of the
goods was not necessary for the purpose of transferring the
right to use and this had been held in the decision of this
Court in 20th Century Finance Corporation Ltd. and Anr.
v. State of Maharashtra (2000) 6 SCC 12. It is submitted
that in any event different aspects of a given transaction
can fall within the legislative competence of two legislatures
and both would have the power to tax that aspect. It is
submitted that the question whether the goods were
moveable or immoveable property as well as the question
whether the tax was being levied on inter state sales or not
were all matters of assessment and that the judgment in
State of U.P. vs. Union of India should be affirmed.
In addition, it has been submitted for the respondents
that the expression telephone and telephony do not
necessarily include the factor of service. A subscriber makes
use of the telephone system as a matter of right and is
capable of asserting that right even against the
Government. The subscribers right to use his telephone
line is to the exclusion of every other person and to that
extent the right of the Government/service providers stands
denuded. The right is based on contract and is in addition
to the right to the service provided by the service providers.
The SIM Card operates as key for access to the telephone
system or network and symbolizes the right of participation
by a subscriber in the telephone system. These are two
distinct transactions, one as the transferree of the legal
right to use the telephone and the other of a contract of
service. These are two different aspects, each attracting a
different tax. Service is only one of the purposes for which
the transfer or deemed sale is made by the Government.
The Government may among other rights also allow the
licencee to give telephone connection as its agent or act as a
service provider for the establishment, maintenance and
working of the telephone system. The use of the words any
goods in sub-clause (d) of (29A) of Article 366 according to
the respondents showed that the goods need not necessarily
have been transferred by the transferor. No delivery was in
fact required under sub-clause (d). It is further emphasised
that sub-clause (d) also use the words for any purpose.
This could include the purpose of service. In any event, it is
submitted, the meaning and scope of sub-clause (d) in
Article 366 (29A) cannot be limited on account of the fact
that a transaction may have been described as a service in
any legislative enactment or contract or licence. Similarly,
the expression goods had a very wide and comprehensive
meaning and assuming delivery is necessary would include
the entire telephone system as well as telephone appliances,
instruments, materials, towers, exchanges, etc. The means,
namely the electrical or electro magnetic means of energy
will also form parts of the goods. It is further submitted that
whether in any particular case the telephone system
included machines or apparatus fixed to the ground was a
question of fact to be decided in an individual case during
the assessment proceedings. Countering the submission
that the sales would be inter state sales, it is submitted that
the situs of the taxable event under the Sales Tax Act would
be where the transfer of the right takes place between the
service providers and the subscribers. This was also a
question which would vary from case to case and would
have to be ultimately factually decided by an assessment
authority. According to the respondents, apart from the
transfer aspect of the transaction being isolated as an
independent taxable event from the aspect of service,
ultimately the question whether there was any splitting up
of a composite transaction was also to be determined
during assessment proceedings.
It was submitted that the mere fact that the Union was
levying tax on certain taxable services could not be used to
deny the States powers to tax the objects/provisions in the
service. Therefore, the States powers must be read
harmoniously with the Unions power and it is only when
such reconciliation is impossible that the primacy should be
given to the non obstante clause under Article 248(1).
Alternatively it was submitted that the theory of aspect
would apply so that what was service in one aspect was a
sale in the other. It was also submitted that because in sub-
clauses (b) and (f) of Clause (29A) of Article 366 the tax on a
component in a transaction of works is permissible, it
cannot be assumed that in sub-clause (d) tax could not be
imposed on an element of the sale component of that
transaction. The sub-clause has no words or limitations
and must be read as broadly as the language permitted. It
was submitted that the test of dominant object of a
composite works contract was no longer relevant after the
46th Constitutional Amendment. It was submitted that the
service providers transfer the right to use radio frequency
channel to a subscriber for a specific duration and thus
have effected a deemed sale of goods under Article 366 (29A)
(d).
These broadly speaking are the respective contentions
and in our 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.
Before taking up the issues for decision seriatim, it is
necessary for us to deal with the two further preliminary
objections raised by the respondents on the merits.
Regarding the first of such objections that the writ petitions
have become infructuous - it may be true that in relation to
the U.P. Trade Tax Act,1948, the challenge to Section 2(h)
and 3F which have basically re-produced Article 366(29A)
has not been pressed by the petitioners. What has been
argued however, is for a construction of Article 366(29A)
particularly, clause (d) thereof. That construction, if
accepted by the Court, would be sufficient to grant the
petitioners the relief claimed. The issue of interpretation of
Article 366(29A) is, therefore, a live one.
The second objection was that the writ petitions under
Article 32 were not maintainable. The writ petitions raised
questions relating to the competence of the States to levy
sales tax on telecommunication service. This is not an
issue which could have been raised and decided by the
assessing authorities. If the State Legislatures are
incompetent to levy the tax, it would not only be an
arbitrary exercise of power by the State authorities in
violation of Article 14, it would also constitute an
unreasonable restriction upon the right of the service
providers to carry on trade under Article 19(1)(g). (See
Bengal Immunity Company V. State of Bihar 1955 (2)
SCR 603; Himmatlal Harilal Mehta V. State of Madras
1954 SCR 1122.) We are consequently unable to accept
either of these contentions of the respondents.
To answer the questions formulated by us, it is
necessary to delve briefly into the legal history of Art. 366
(29A). Prior to the 46th Amendment, composite contracts
such as works contracts, hire-purchase contacts and
catering contracts were not assessable as contracts for sale
of goods. The locus classicus holding the field was State
of Madras V. Gannon Dunkerley & Co. IX STC 353 (SC).
There this Court held that the words sale of goods in
Entry 48 of List II, Schedule VII to the Government of India
Act, 1935 did not cover the sale sought to be taxed by the
State Government under the Madras General Sales Tax Act,
1939. The classical concept of sale was held to apply to the
entry in the legislative list in that there had to be three
essential components to constitute a transaction of sale--
namely, (i) an agreement to transfer title (ii) supported by
consideration, and (iii) an actual transfer of title in the
goods. In the absence of any one of these elements it was
held that there was no sale. Therefore, a contract under
which a contractor agreed to set up a building would not be
a contract for sale. It was one contract, entire and
indivisible and there was no separate agreement for sale of
goods justifying the levy of sales tax by the provincial
legislatures. Under the law, therefore, there cannot be an
agreement relating to one kind of property and a sale as
regards another. Parties could have provided for two
independent agreements, one relating to the labour and
work involved in the execution of the work and erection of
the building and the second relating to the sale of the
material used in the building in which case the latter would
be an agreement to sell and the supply of materials
thereunder, a sale. Where there was no such separation,
the contract was a composite one. It was not classifiable as
a sale. The Court accepted the submission of the assessee
that the expression sale of goods was, at the time when
the Government of India Act, 1935 was enacted, a term of
well recognized legal import in the general law relating to
sale of goods and must be interpreted in Entry 48 in List II
of Schedule VII of the 1935 Act as having the same
meaning as in the Sale of Goods Act, 1930. According to
this decision if the words sale of goods have to be
interpreted in their legal sense, that sense can only be what
it has in the law relating to sale of goods. To use the
language of the Court:
To sum up, the expression sale of goods in
Entry 48 is a nomen juris, its essential
ingredients being an agreement to sell movables
for a price and property passing therein pursuant
to that agreement. In a building contract which is,
as in the present case, one, entire and indivisible
- and that is its norm, there is no sale of goods,
and it is not within the competence of the
Provincial Legislature under Entry 48 to impose a
tax on the supply of the materials used in such a
contract treating it as a sale.
Following the ratio in Gannon Dunkerley, that sale
in Entry 48 must be construed as having the same meaning
which it has in the Sale of Goods Act, 1930, this Court as
well as the High Courts held that several composite
transactions in which there was an element of sale were not
liable to sales tax.
Thus in the State of Punjab V. M/s. Associated
Hotels of India Ltd. (1972) 1 SCC 472 the question was
whether the meals served at hotels to the residents were
subject to sales tax. The Court held that if the difference is
not distinct, the Revenue would not be entitled to split up
the contract, estimate approximately the charges for such
materials and treat them as chargeable on the mere ground
that the transaction involved transfer of goods, whose value
must have been taken into consideration while fixing
charges for the service.
In 1967 the Madras High Court in A.V. Meiyappan vs.
Commissioner of Commercial Taxes, Board of Revenue,
Madras and Anr. (1967) XX STC 115 had to consider a
situation where the Sales Tax Authorities had held that
though the transaction was described as a lease for 49
years, the assessee had effected a sale of the negative print
of a picture for a consideration and therefore the
transaction was liable to sales tax under the Madras
General Sales Tax Act, 1959. The Court set aside the
demand holding that the transaction did not connote a sale
at all and it was therefore not liable to sales tax.
The problem relating to the power of States to levy tax
on the sale of goods was then referred to the Law
Commission by the Government of India. The Law
Commission submitted its report in 1974 on a
consideration of the scope of the levy of sales tax by State
Governments in respect of works contracts, hire purchase
transactions and also the transfer of controlled
commodities by virtue of statutory orders. The Law
Commission noted that these transactions resembled sales
in substance and suggested three drafting devices for
conferring the power of taxing these transactions on the
States viz.
(a) amending State List, entry 54, or
(b) adding a fresh entry in the State List, or
(c) inserting in article 366 a wide definition of
sale so as to include works contracts.
The Commission preferred the last alternative.
Recommendation (c) of the Law Commission to amend
Article 366 by expanding the definition of sale to include the
transactions negatived by Courts, was accepted by the
Government. The Constitution (46th Amendment) Bill 1981,
which was subsequently enacted as the Constitution 46th
Amendment Act 1982 set out the background in which the
amendment to Article 366 (29A) of the Constitution was
amended. Having noted the various decisions of the
Supreme Court as well as of the High Courts excluding
certain transactions from the scope of sale for the purpose
of levy of sales tax, it was said that the position had
resulted in scope for avoidance of tax in various ways. In
the circumstances, it was considered desirable to put the
matter beyond any doubt. Article 366 was therefore
amended by inserting a definition of tax on the sale or
purchase of goods in Clause (29A). The definition reads:
[(29-A) tax on the sale or purchase of
goods includes
(a) a tax on the transfer, otherwise
than in pursuance of a contract,
of property in any goods for
cash, deferred payment or
other valuable consideration;
(b) a tax on the transfer of property
in goods (whether as goods or
in some other form) involved in
the execution of a works
contract;
(c) a tax on the delivery of goods
on hire-purchase or any system
of payment by instalments;
(d) a tax on the transfer of the right
to use any goods for any
purpose (whether or not for a
specified period) for cash,
deferred payment or other
valuable consideration;
(e) a tax on the supply of goods by
any unincorporated association
or body of persons to a member
thereof for cash, deferred
payment or other valuable
consideration;
(f) a tax on the supply, by way of
or as part of any service or in
any other manner whatsoever,
of goods, being food or any
other article for human
consumption or any drink
(whether or not intoxicating),
where such supply or service, is
for cash, deferred payment or
other valuable consideration,
and such transfer, delivery or supply of
any goods shall be deemed to be a sale of
those goods by the person making the
transfer, delivery or supply and a purchase
of those goods by the person to whom such
transfer, delivery or supply is made;
Clause (a) covers a situation where the consensual
element is lacking. This normally takes place in an
involuntary sale. Clause (b) covers cases relating to works
contracts. This was the particular fact situation which the
Court was faced with in Gannon Dunkerley and which the
Court had held was not a sale. The effect in law of a transfer
of property in goods involved in the execution of the works
contract was by this amendment deemed to be a sale. To
that extent the decision in Gannon Dunkerley was directly
overcome. Clause (c) deals with hire purchase where the
title to the goods is not transferred. Yet by fiction of law, it
is treated as a sale. Similarly the title to the goods under
Clause (d) remains with the transferor who only transfers
the right to use the goods to the purchaser. In other words,
contrary to A.V. Meiyappans decision a lease of a negative
print of a picture would be a sale. Clause (e) covers cases
which in law may not have amounted to sale because the
member of an incorporated association would have in a
sense begun both the supplier and the recipient of the
supply of goods. Now such transactions are deemed sales.
Clause (f) pertains to contracts which had been held not to
amount to sale in State of Punjab vs. M/s. Associated
Hotels of India Ltd. (supra). That decision has by this
clause been effectively legislatively invalidated.
All the clauses of Article 366 (29A) serve to bring
transactions where one or more of the essential ingredients
of a sale as defined in the Sale of Goods Act 1930 are
absent, within the ambit of purchase and sales for the
purposes of levy of sales tax. To this extent only is the
principle enunciated in Gannon Dunkerly limited. The
amendment especially allows specific composite contracts
viz. works contracts (Clause (b)), hire purchase contracts
(Clause (c)), catering contracts (Clause (e)) by legal fiction to
be divisible contracts where the sale element could be
isolated and be subjected to sales tax.
Gannon Dunkerley survived the 46th Constitutional
Amendment in two respects. First with regard to the
definition of sale for the purposes of the Constitution in
general and for the purposes of Entry 54 of List II in
particular except to the extent that the clauses in
Art.366(29A) operate. By introducing separate categories of
deemed sales, the meaning of the word goods was not
altered. Thus the definitions of the composite elements of
a sale such as intention of the parties, goods, delivery etc.
would continue to be defined according to known legal
connotations. This does not mean that the content of the
concepts remain static. Courts must move with the times.
But the 46th Amendment does not give a licence for
example to assume that a transaction is a sale and then to
look around for what could be the goods. The word goods
has not been altered by the 46th Amendment. That
ingredient of a sale continues to have the same definition.
The second respect in which Gannon Dunkerley has
survived is with reference to the dominant nature test to be
applied to a composite transaction not covered by Article
366(29A). Transactions which are mutant sales are limited
to the clauses of Article 366(29A). All other transactions
would have to qualify as sales within the meaning of Sales
of Goods Act 1930 for the purpose of levy of sales tax.
Of all the different kinds of composite transactions the
drafters of the 46th Amendment chose three specific
situations, a works contract, a hire purchase contract and a
catering contract to bring within the fiction of a deemed
sale. Of these three, the first and third involve a kind of
service and sale at the same time. Apart from these two
cases where splitting of the service and supply has been
Constitutionally permitted in clauses (b) and (g) of Clause
29A of Art. 366, there is no other service which has been
permitted to be so split. For example the clauses of Art.
366(29A) do not cover hospital services. Therefore, if during
the treatment of a patient in a hospital, he or she is given a
pill, can the sales tax authorities tax the transaction as a
sale? Doctors, lawyers and other professionals render
service in the course of which can it be said that there is a
sale of goods when a doctor writes out and hands over a
prescription or a lawyer drafts a document and delivers it to
his/her client? Strictly speaking with the payment of fees,
consideration does pass from the patient or client to the
doctor or lawyer for the documents in both cases.
The reason why these services do not involve a sale for
the purposes of Entry 54 of List II is, as we see it, for
reasons ultimately attributable to the principles enunciated
in Gannon Dunkerleys case, namely, if there is an
instrument of contract which may be composite in form in
any case other than the exceptions in Article 366(29-A),
unless the transaction in truth represents two distinct and
separate contracts and is discernible as such, then the
State would not have the power to separate the agreement
to sell from the agreement to render service, and impose tax
on the sale. The test therefore for composite contracts other
than those mentioned in Article 366 (29A) continues to be -
did the parties have in mind or intend separate rights
arising out of the sale of goods. If there was no such
intention there is no sale even if the contract could be
disintegrated. The test for deciding whether a contract falls
into one category or the other is to as what is the substance
of the contract . We will, for the want of a better phrase, call
this the dominant nature test.
In Rainbow Colour Lab & Anr. vs. State of M.P. &
Ors. (2000) 2 SCC 385, the question involved was whether
the job rendered by the photographer in taking
photographs, developing and printing films would amount
to a work contract as contemplated under Article 366
(29A) (b) of the Constitution read with Section 2(n) of the
M.P. General Sales Tax Act for the purpose of levy of sales
tax on the business turnover of the photographers.
The Court answered the questions in the negative
because, according to the Court:-
Prior to the amendment of Article 366, in
view of the judgment of this Court in State
of Madras v. Gannon Dunkerley & Co.
(Madras) Ltd. (1958) 9 STC 353: AIR
1958 SC 560 the States could not levy
sales tax on sale of goods involved in a
works contract because the contract was
indivisible. All that has happened in law
after the 46th Amendment and the
judgment of this Court in Builders case
(1989) 2 SCC 645 is that it is now open to
the States to divide the works contract into
two separate contracts by a legal fiction: (i)
contract for sale of goods involved in the
said works contract, and (ii) for supply of
labour and service. This division of
contract under the amended law can be
made only if the works contract involved a
dominant intention to transfer the property
in goods and not in contracts where the
transfer in property takes place as an
incident of contract of
service..What is pertinent to
ascertain in this connection is what was
the dominant intention of the
contractOn facts as we have noticed
that the work done by the photographer
which as held by this Court in STO vs.
B.C. Kame (1977) 1 SCC 634 is only in
the nature of a service contract not
involving any sale of goods, we are of the
opinion that the stand taken by the
respondent State cannot be sustained.
This conclusion was doubted in Associated Cement
Companies Ltd. Vs. Commissioner of Customs (2001) 4
SCC 593 saying :-
The conclusion arrived at in Rainbow Colour
Lab case [(2000) 2 SCC 385)], in our opinion,
runs counter to the express provision contained in
Article 366(29-A) as also of the Constitution
Bench decision of this Court in Builders Assn. of
India vs. Union of India (1989) 2 SCC 645.
We agree. After the 46th Amendment, the sale element
of those contracts which are covered by the six sub-clauses
of clause (29A) of Article 366 are separable and may be
subjected to sales tax by the States under Entry 54 of List II
and there is no question of the dominant nature test
applying. Therefore when in 2005, C.K. Jidheesh vs.
Union of India (2005) 8 SCALE 784 held that the
aforesaid observations in Associated Cement (supra) were
merely obiter and that Rainbow Colour Lab (supra) was
still good law, it was not correct. It is necessary to note
that Associated Cement did not say that in all cases of
composite transactions the 46th Amendment would apply.
What are the goods in a sales transaction, therefore,
remains primarily a matter of contract and intention. The
seller and such purchaser would have to be ad idem as to
the subject matter of sale or purchase. The Court would
have to arrive at the conclusion as to what the parties had
intended when they entered into a particular transaction of
sale, as being the subject matter of sale or purchase. In
arriving at a conclusion the Court would have to approach
the matter from the point of view of a reasonable person of
average intelligence.
Article 366(12) has defined the word goods for the
purpose of the Constitution as including all materials,
commodities, and articles. The word goods has also been
defined in Section 2(7) of the Sales of Goods Act, 1930 as
meaning every kind of movable property other than
actionable claims and money; and includes stock and
shares, growing crops, grass, and things attached to or
forming part of the land which are agreed to be severed
before sale or under the contract of sale. The U.P. Trade
Tax defines goods as meaning:
every kind or class of movable property and
includes all material commodities and articles
involved in the execution of a works contract, and
growing crops, grass, trees and things attached
to or fastened to anything permanently attached
to the earth which under the contract of sale are
agreed to be severed but does not include
actionable claims, stocks, shares, securities or
postal stationery sold by the Postal Department.
The State Sales Tax legislations have, subject to minor
variations, adopted substantially a similar definition of
goods for the purpose of their Sales Tax Acts. There have
been several decisions of this Court on the interpretation of
the word goods in the context of different State sales tax
enactments. One of the such decisions was the case of
Anraj V. Government of Tamil Nadu (1986) 1 SCC 414 in
which the question was whether sale of a lottery ticket was
a sale of goods for the purpose of Entry 54 of List II. This
Court held that the sale of a lottery ticket confers on the
purchaser thereof two rights, (a) right to participate in the
draw and, (b) a right to claim a prize contingent upon his
being successful in the draw. It was held that the first was
a right in praesenti and the second a contingent right. It
was concluded that of these two rights the right to
participate in a draw was goods for the purpose of levying
sales tax. The decision was followed by a Bench of three
Judges in the case of Vikas Sales Corporation V.
Commissioner of Commercial Tax (1996) 4 SCC 733 to
hold that REP licences/Exim scrips were goods on the sale
of which sales tax could be levied. Both the decisions were
doubted in the case of Sunrise Associates V. Government
of NCT of New Delhi (2000) 10 SCC 420 In that case, the
Court formed a prima facie opinion that the decision in
Anraj required re-consideration on the view that the only
right of the purchaser of a lottery ticket is to take a chance
of winning the prize and that there was no good reason to
split the transaction of the sale of a lottery ticket into the
acquisition of (i) the right to participate in the lottery draw
and (ii) right to win the prize depending on chance.
The judgment in that decision is awaited. For the time
being, we will assume that an incorporeal right is goods,
In fact the question whether goods for the purpose of
sales tax may be intangible or incorporeal need not detain
us. In Associated Cement Companies Ltd. Vs.
Commissioner of Customs (2001)4 SCC 593, the value of
drawings was added to their cost since they contained and
formed part of the technical know-how which was part of a
technical collaboration between the importer of the
drawings and their exporter. It was recognized knowledge in
the abstract may not come within the definition of goods in
Section 2(22) of the Customs Act.
This view was adopted in Tata Consultancy Services
Vs. State of Andhra Pradesh (supra) for the purposes of
levy of sales tax on computer software. It was held:-
A goods may be a tangible property or
an intangible one. It would become goods
provided it has the attributes thereof
having regard to (a) its utility; (b) capable
of being bought and sold; and (c) capable
of being transmitted, transferred,
delivered, stored and possessed. If a
software whether customized or non-
customised satisfies these attributes, the
same would be goods.
This in our opinion, is the correct approach to the
question as to what are goods for the purposes of sales
tax. We respectfully adopt the same.
The State respondents in their submissions had
initially differed as to what constituted goods in
telecommunication. Ultimately, the consensus among the
respondents appeared to be that the goods element in
telecommunication were the electromagnetic waves by
which data generated by the subscriber was transmitted to
the desired destination. The inspiration for the argument
has been derived from the provisions of the Indian
Telegraph Act, 1885 which defines telegraph as meaning:
telegraph means any appliance, instrument,
material or apparatus used or capable of use for
transmission or reception of signs, signals,
writings, images and sound or intelligence of any
nature by wire, visual or other electro-magnetic
emissions, Radio waves or Hertzian waves,
galvanic, electric or magnetic means.;
Explanation. Radio waves or Hertzian
waves means electro magnetic waves of
frequencies, lower than 3,000 giga-cycles per
sound propagated in space without artificial
guide.
What is also important are the definitions of the words
message and telegraph line in the 1885 Act which read:
message means any communication sent by
telegraph, or given to a telegraph officer to be sent
by telegraph or to be delivered.
telegraph line means a wire or wires used for
the purpose of a telegraph, with any casing,
coating, tube or pipe enclosing the same, and any
appliances and apparatus connected therewith
for the purpose of fixing or insulating the same.
Section 4 of the 1885 Act gives exclusive privilege in
respect of telecommunication and the power to grant
licences to the Central Government. Pursuant to such
power, licences have been granted to service providers.
According to the service providers in terms of their licence
no further transfer of the rights to use the telegraph could
be affected by them. Therefore, what was provided was a
service by the utilization of the telegraph licenced to the
service providers for the benefit of the subscribers.
We will proceed on the basis that incorporeal rights
may be goods for the purposes of levying sales tax.
Assuming it to be so, the question is whether these electro
magnetic waves can fulfill the criteria laid down in Tata
Consultancy for goods. In our opinion the question must
be answered in the negative. Electromagnetic waves have
been described in Telecommunications Law : David Gilles
& Roger Marshal: Butterworths:-
1.14. Electromagnetic waves travel through free
space from one point to another but can be
channeled through waveguides which may be
metallic cables, optical fibres or even simple
tubes. All electromagnetic waves are susceptible
to interference from one another and unrelated
electrical energy can distort or destroy the
information they carry. To reduce these problems
they have been organized within the spectrum
into bands of frequencies or wavelengths for the
transmission of particular types of services and
information
.
The process of sending a signal is as follows:-
Data is superimposed on a carrier current or
wave by means of a process called modulation.
Signal modulation can be done in either of two
main ways: analog and digital. In recent
years, digital modulation has been getting more
common, while analog modulation methods have
been used less and less. There are still plenty of
analog signals around, however, and they will
probably never become totally extinct.
Except for DC signals such as telegraph and
baseband, all signal carriers have a definable
frequency or frequencies. Signals also have a
property called wavelength, which is inversely
proportional to the frequency.(Encyclopedia of
Technology Terms of Techmedia)
It is clear, electromagnetic waves are neither
abstracted nor are they consumed in the sense that
they are not extinguished by their user. They are not
delivered, stored or possessed. Nor are they marketable.
They are merely the medium of communication. What
is transmitted is not an electromagnetic wave but the
signal through such means. The signals are generated by
the subscribers themselves. In telecommunication what is
transmitted is the message by means of the telegraph. No
part of the telegraph itself is transferable or deliverable
to the subscribers.
The second reason is more basic. A subscriber to a
telephone service could not reasonably be taken to have
intended to purchase or obtain any right to use
electromagnetic waves or radio frequencies when a
telephone connection is given. Nor does the subscriber
intend to use any portion of the wiring, the cable, the
satellite, the telephone exchange etc. At the most the
concept of the sale in a subscribers mind would be limited
to the handset that may have been purchased for the
purposes of getting a telephone connection. As far as the
subscriber is concerned, no right to the use of any other
goods, incorporeal or corporeal, is given to him or her with
the telephone connection.
We cannot anticipate what may be achieved by
scientific and technological advances in future. No one has
argued that at present electromagnetic waves are
abstractable or are capable of delivery. It would, therefore,
appear that an electro-magnetic wave (or radio frequency as
contended by one of the counsel for the respondents), does
not fulfill the parameters applied by the Supreme Court in
Tata Consultancy for determining whether they are goods,
right to use of which would be a sale for the purpose of
Article 366(29-A)(d).
The learned Judges in State of U.P. V. Union of India
(supra) held that telephone instruments and other
appliances including wiring, cable etc. are undoubtedly
goods within the definition of the word in Section 2(d) of
the U.P. Act. It was also held a telephone exchange being
housed in immovable properties would make no difference
because a tangible object like electricity which is generated
in projects and transmitted through sub-stations housed in
building has been held in CST V. M.P. Electricity Board
(1969) 1 SCC 200 and State of A.P. V. National Thermal
Power Corpn. Ltd. (2002) 5 SCC 203 to be goods.
Had the learned Judges limited their observations to
the telephone instruments we could have had no quarrel
with the opinion stated. But they have in a subsequent
portion of their judgment clarified that there a telephone
connection along with all other accessories to the telephone
exchange with or without instruments are goods within the
meaning of Section 2(d) of the U.P. Act. The essence of the
goods therefore, according to the learned Judges, lay in the
entire system. To arrive at this conclusion, the reliance on
the two cited judgments was inapposite. It was the sale and
purchase of electricity which was being considered in those
cases. The goods was the electrical energy. What the
customers were being charged for was not the medium that
was being used to transfer the electricity, but the electrical
energy itself. In the case of telecommunications on the other
hand, if the decision in State of U.P. vs. Union of India
and the respondents submission are correct, the customers
are not to be charged for what is being transferred through
the medium but the use of the medium itself. Additionally
in the State of Andhra Pradesh V. National Thermal
Power Corporation (supra), the issue before the
Constitution Bench was not whether electricity was goods
for the purposes of sales tax but the situs of the sale of
electricity.
The learned Judges also in State of U.P. Vs. Union of
India drew support from the decision of the Supreme Court
of Wisconsin (USA) in McKinley Telephone Co. v.
Cumberland Telephone Co. 152 Wis 359: 140 NW 39:
1913 Wisc Lexis 77 which had held that the furnishing of
the telephone services might be classed as the supplying of
a commodity constituting a subject of commerce.
The decision in Mckinley Telephone, even if it were
to be held of persuasive value, is not really relevant. That
was a case where two competing telephone companies
contracted that one should confine its business to the city
and the other to rural lines out of the city. The rural
company had the option to buy the rural lines of the other.
Two questions fell for consideration. The first question was
whether the contract was specifically enforceable. This
question was also answered in the affirmative. The second
question was whether the contract was in violation of the
anti-trust laws. This was answered in the affirmative. It
was in that context that the Court opined that:
It is obvious that the statute is directed against
contracts which are violative of the public policy
of the state respecting restraints of trade and
competition in the supply of any commodity in
general use constituting a subject of commerce.
The furnishing of telephone services may be
classed within the general terms of the statute as
the supplying of a commodity constituting a
subject of commerce.
Apart from the fact that the context was wholly
different, the question whether a telephone service was
goods or not was not really in issue. Incidentally, the
decision in Mckinley Telephones has been distinguished
in several subsequent decisions of the United States. [See
Fleetway, Inc. Vs. Public Service Interstate Transport Co. 72
F.2d 761 (1934). State Broadcasting Co. Vs. United Press
Intern. Inc. 369 F 2d 268 (1966), Columbia Broadcasting
System, Inc. V. Amana Refrigeration Inc. 295 F.2d 375
(1961)]
For the reasons stated by us earlier we hold that the
electromagnetic waves are not goods within the meaning of
the word either in Art. 366(12) or in the State Legislations.
It is not in the circumstances necessary for us to determine
whether the telephone system including the telephone
exchange was not goods but immoveable property as
contended by some of the petitioners.
In the State of U.P. Vs. Union of India (supra) it was
also held:-
Handing over of possession is not sine qua non
of completing the transfer of the right to use any
goods, as was held by a Constitution Bench of
this Court in 20th Century Finance Corpn. Ltd.
V. State of Maharashtra (2000) 6 SCC 12.
Once DoT connects the telephone line of the
assigned number of the subscriber to the area
exchange, access to other telephones is
established. There cannot be denial of the fact
that giving such an access would complete the
transfer of the right to use the goods.
With respect, the decision in 20th Century Finance
Corporation Limited Vs. State of Maharashtra, cannot be
cited as authority for the proposition that delivery of
possession of the goods is not a necessary concomitant for
completing a transaction of sale for the purposes of Article
366 (29A) (d) of the Constitution. In that decision the Court
had to determine where the taxable event for the purposes
of sales tax took place in the context of sub-clause (d) of
Article 366 (29A). Some States had levied tax on the
transfer of the right to use goods on the location of goods at
the time of their use irrespective of the place where the
agreement for such transfer of right to use such goods was
made. Other States levied tax upon delivery of the goods in
the State pursuant to agreements of transfer while some
other States levied tax on deemed sales on the premise that
the agreement for transfer of the right to use had been
executed within that State (vide paragraph 2 of the
judgment as reported). This Court upheld the third view
namely merely that the transfer of the right to use took
place where the agreements were executed. In these
circumstances the Court said that:-
No authority of this Court has been shown on
behalf of respondents that there would be no
completed transfer of right to use goods unless the
goods are delivered. Thus, the delivery of goods
cannot constitute a basis for levy of tax on the
transfer of right to use any goods. We are,
therefore, of the view that where the goods are in
existence, the taxable event on the transfer of the
right to use goods occurs when a contract is
executed between the lessor and the lessee and
situs of sale of such a deemed sale would be the
place where the contract in respect thereof is
executed. Thus, where goods to be transferred are
available and a written contract, is executed
between the parties, it is at that point situs of
taxable event on the transfer of right to use goods
would occur and situs of sale of such a transaction
would be the place where the contract is executed.
(emphasis ours)
In determining the situs of the transfer of the right to
use the goods, the Court did not say that delivery of the
goods was inessential for the purposes of completing the
transfer of the right to use. The emphasized portions in the
quoted passage evidences that the goods must be available
when the transfer of the right to use the goods take place.
The Court also recognized that for oral contracts the situs of
the transfer may be where the goods are delivered (see para
26 of the judgment)
In our opinion, the essence of the right under Article
366 (29A) (d) is that it relates to user of goods. It may be
that the actual delivery of the goods is not necessary for
effecting the transfer of the right to use the goods but the
goods must be available at the time of transfer must be
deliverable and delivered at some stage. It is assumed, at
the time of execution of any agreement to transfer the right
to use, that the goods are available and deliverable. If the
goods, or what is claimed to be goods by the respondents,
are not deliverable at all by the service providers to the
subscribers, the question of the right to use those goods,
would not arise.
In State of of Andhra Pradesh and Anr. Vs. Rastriya
Ispat Nigam Ltd. (2003) 3 SCC 214, it was claimed by the
Sales Tax Authorities that the transaction by which the
owner of certain machinery had made them available to the
contractors was a sale. The Court rejected the submission
saying that:-
the transaction did not involve transfer of right
to use the machinery in favour of contractors.
The effective control of the machinery even while
the machinery was in use of the contractor was
that of the respondent Company; the contractor
was not free to make use of the machinery for the
works other than the project work of the
respondent or .(para 4 page 315)
But in the case of Agrawal Brothers Vs. State of
Haryana and Anr. (1999) 9 SCC 182 when the assessee
had hired shuttering to favour of contractors to use it in the
course of construction of buildings it was found that
possession of the shuttering materials was transferred by
the assessee to the customers for their use and therefore,
there was a deemed sale within the meaning of sub-clause
(d) of Clause 29-A of Article 366. What is noteworthy is that
in both the cases there were goods in existence which were
delivered to the contractors for their use. In one case there
was no intention to transfer the right to use while in the
other there was.
But if there are no deliverable goods in existence as in
this case, there is no transfer of user at all. Providing
access or telephone connection does not put the subscriber
in possession of the electromagnetic waves any more than a
toll collector puts a road or bridge into the possession of the
toll payer by lifting a toll gate. Ofcourse the toll payer will
use the road or bridge in one sense. But the distinction
with a sale of goods is that the user would be of the thing
or goods delivered. The delivery may not be simultaneous
with the transfer of the right to use. But the goods must be
in existence and deliverable when the right is sought to be
transferred.
Therefore whether goods are incorporeal or corporeal,
tangible or intangible, they must be deliverable. To the
extent that the decision in State of U.P. Vs. Union of India
held otherwise, it was, in our humble opinion erroneous.
It has been held in Builders Association of India Vs.
Union of India (1989) 2 SCC 645 that the clauses in
Article 366 (29A) do not amount to a separate entry in List
II of the 7th Schedule to the Constitution enabling the States
to levy tax on sales and purchase independent of Entry 54
thereof.(see also Larsen & Toubro Ltd. Vs. Union of India
(1993) 1 SCC 365, 383). Article 366 (29A) as introduced
by the 46th Amendment not being equivalent to a separate
entry in List II is subject to the same limitations as Entry 54
of that List. At the time of amending Article 366, Article 286
was also amended by the introduction of clause (3) which
reads as:-
(3) Any law of a State shall, in so far as it
imposes, or authorizes the imposition of:-
(a) a tax on the sale or purchase of goods
declared by Parliament by law to be of
special importance in inter-State trade or
commerce;
(b) a tax on the sale or purchase of goods, being
a tax of the nature referred to in sub-clause
(b), sub-clause (c) or sub-clause (d) of clause
(29A) of article 366, be subjected to such
restrictions and conditions in regard to the
system of levy, rates and other incidents of
the tax as Parliament may by law specify.
Therefore the deemed sales included in Entry 54 List
II would also be subject to the limitations of Art. 286, Art.
366(29-A).
Being aware of the dangers of allowing the residuary
powers Parliament under Entry 97 of List I to swamp the
legislative entries in the State list, we have interpreted
Entry 54, List II together with Article 366 (29A) without
whittling down the interpretation by referring to the
residuary provision. Having completed the exercise, we now
turn our attention to the latter.
In 1994, service tax was introduced by Parliament
under Chapter V of the Finance Act, 1994 with reference to
its residuary power under Entry 97 List I of the Seventh
Schedule to the Constitution. Under the 1994 Act, taxable
services which were subject to levy of service tax were
defined. Several different services were included in the
definition. Section 65(16)(b) included service provided to a
subscriber by the telegraph authority in relation to a
telephone connection with effect from the coming into force
of the 1994 as a taxable service. Under Section 66, tax was
imposed at the rate of five percent of the value of the
taxable services provided to any person by the person
responsible for collecting the service tax. The value of the
taxable service in relation to a telephone connection
provided to the subscribers, was to be the gross total
amount received by the telegraph authority from the
subscribers. The 1994 Act was amended from time to time
by extending the meaning of taxable service. We are
concerned with two amendments, one made in 2002 and
the other in 2003. By Section 149(90)(b) of the Finance Act,
2002, service to a subscriber by a telephone authority was
continued as a taxable service. Telegraph was defined in
Section 149(92) as having the same meaning assigned to it
in clause (1) of Section 3 of the Indian Telegraph Act, 1885.
Telegraph authority was defined incorporating the
definition of the phrase Section 3(6) of the 1885 Act and
included a person who has been granted a licence under
the first proviso in Section 4(1) of that Act. The liability of
service providers to service tax was continued under Section
159(105)(110) (b) and (111) of the Finance Act, 2003. The
definition of subscriber was added in sub section (104) as
meaning 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 telex has been provided by a telegraph
authority. Finally in 2003, List II of the Seventh Schedule
to the Constitution was amended by including taxes on
service under Entry 92C. By this time there were about 100
taxable services including the service of a telephone
connection. The question is - is the sale element is each of
these several services and in particular the service of a
telephone connection taxable by the States?
As we have said Art. 366(29A) has no doubt served to
extend the meaning of the word sale to the extent stated
but no further. We cannot presume that the Constitutional
Amendment was loosely drawn and must proceed on the
basis that the parameters of sale were carefully defined.
But having said that, it is sufficient for the purposes of this
judgment to find, as we do, that a telephone service is
nothing but a service. There is no sales element apart from
the obvious one relating to the hand set if any. That and
any other accessory supplied by the service provider in our
opinion remain to be taxed under the State Sales Tax Laws.
We have given the reasons earlier why we have reached this
conclusion.
This brings us to the decision of the Kerala High Court
in Escotel.
In that case Escotel was admittedly engaged in selling
cellular telephone instruments, SIM cards and other
accessories and was also paying Central Sales Tax and
Sales Tax under the Kerala General Sales Tax Act, 1963 as
applicable. The question was one of the valuation of these
goods. State Sales Tax Authorities had sought to include
the activation charges in the cost of the SIM card. It is
contended by Escotel that the activation was part of the
service on which service tax was being paid and could not
be included within the purview of the sale. The Kerala High
Court also dealt with the case of BPL, a service provider.
According to BPL, it did not sell cellular telephones. As far
as SIM cards were concerned, it was submitted that they
had no sale value. A SIM card merely represented a means
of the access and identified the subscribers. This was part
of the service of a telephone connection. The Court rejected
this submission finding that the SIM card was goods
within the definition of the word in the State Sales Tax Act.
It is not possible for this Court to opine finally on the
issue. What a SIM card represents is ultimately a question
of fact as has been correctly submitted by the States. In
determining the issue, however the Assessing Authorities
will have to keep in mind the following principles: If the
SIM Card is not sold by the assessee to the subscribers but
is merely part of the services rendered by the service
providers, then a SIM card cannot be charged separately to
sales tax. It would depend ultimately upon the intention of
the parties. If the parties intended that the SIM card would
be a separate object of sale, it would be open to the Sales
Tax Authorities to levy sales tax thereon. There is
insufficient material on the basis of which we can reach a
decision. However we emphasise that if the sale of a SIM
card is merely incidental to the service being provided and
only facilitates the identification of the subscribers, their
credit and other details, it would not be assessable to sales
tax. In our opinion the High Court ought not to have finally
determined the issue. In any event, the High Court erred in
including the cost of the service in the value of the SIM card
by relying on the aspects doctrine. That doctrine merely
deals with legislative competence. As has been succinctly
stated in Federation of Hotel & Restaurant Association
of India Vs. Union of India (1989) 3 SCC 634- subjects
which in one aspect and for one purpose fall within the
power of a particular legislature may in another aspect and
for another purpose fall within another legislative power.
They might be overlapping; but the overlapping must be in
law. The same transaction may involve two or more taxable
events in its different aspects. But the fact that there is
overlapping does not detract from the distinctiveness of the
aspects. No one denies the legislative competence of States
to levy sales tax on sales provided that the necessary
concomitants of a sale are present in the transaction and
the sale is distinctly discernible in the transaction.
This does not however allow State to entrench upon
the Union list and tax services by including the cost of such
service in the value of the goods. Even in those composite
contracts which are by legal fiction deemed to be divisible
under Art. 366(29A), the value of the goods involved in the
execution of the whole transaction cannot be assessed to
Sales Tax. As was said in Larsen & Toubro Vs. Union of
India(supra):-
The cost of establishment of the contractor which
is relatable to supply of labour and services
cannot be included in the value of the goods
involved in the execution of a contract and the
cost of establishment which is relatable to supply
of materials involved in the execution of the works
contract only can be included in the value of the
goods.
For the same reason the Centre cannot include the
value of the SIM cards, if they are found ultimately to be
goods, in the cost of the service. As was held by us in
Gujarat Ambuja Cements Ltd. Vs. Union of India (2005)
4 SCC 214,228.
This mutual exclusivity which has been
reflected in Article 246(1) means that
taxing entries must be construed so as to
maintain exclusivity. Although generally
speaking, a liberal interpretation must be
given to taxing entries, this would not
bring within its purview a tax on subject-
matter which a fair reading of the entry
does not cover. If in substance, the
statute is not referable to a field given to
the State, the Court will not by any
principle of interpretation allow a statute
not covered by it to intrude upon this
field.
We will therefore have to allow the appeals filed by
BPL in Civil Appeal Nos. 3329-30 of 2002 and Escotel in
Civil Appeal No.2408 of 2002 and remand the matter to the
Sales Tax Authorities concerned for determination of the
issue relating to SIM Cards in the light of the observations
contained in this judgment.
As far as the question whether providing of a telephone
connection involves interstate sales, now that it has been
clarified that electromagnetic waves or radio frequencies are
not goods, the issue is really academic.
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 Authorities.
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 State to tax the sale element
provided there is a discernible sale and only to
the extent relatable to such sale.
D) The issue is left unanswered.
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 goods in the value
of the service.
The writ petitions and appeals are disposed of
accordingly. No order as to costs.
